Contract Research for Global Firms Creates Hotspots for IT, Telecom and BiotechPublished: November 21, 2005 in Knowledge@Wharton
Multinational companies (MNCs) seriously began to explore India's potential as a research destination more than a decade ago. In the late 1980s and early 1990s, some MNCs set up research labs in India. However, this early wave largely consisted of what is sometimes called "insourcing" -- MNCs opened research labs to serve their own local manufacturing operations.
These early efforts at R&D were prompted by the need to "localize" products. Many MNCs have manufacturing operations in India - driven partly by India's economic policies, which require local manufacture, and also by the fact that the Indian market is large enough to warrant local operations. On-site R&D to tweak products to local needs was the next logical step. Companies like Hindustan Lever, for example, a subsidiary of Unilever, established a research center to cater to local needs. In the early 1990s, some MNCs started setting up operations in India to cater to international markets. This trend has accelerated in the last five years.
The next logical question was, if you can insource, why not outsource? Research outsourcing, in principle, is not very different from any other business process outsourcing. A Frost and Sullivan study on Indian R&D points out that there are various models of contract research -- joint research, collaborative research and complete outsourcing. Joint research is when more than one entity works together; collaborative research is when a group of scientists work together representing diverse disciplines; complete outsourcing is when one entity undertakes research on behalf of another.
Encouraged by India's success in the "generic transaction processing" model of outsourcing, local Indian companies are now eyeing opportunities in research outsourcing. Some technology companies have already built sizeable contract research businesses; and in engineering, pharmaceuticals and biotech, there are signs of an outsourcing model emerging. While the market's overall size is still small, signs are that growth could explode in the future.
Advantage in India
Why outsource R&D to companies in India? More importantly, why outsource R&D at all? R&D, it appears, may no longer be the sacred cow that it once was, something companies would never share with other companies.
As Henry Chesbrough, author of Open Innovation: The New Imperative for Creating and Profiting from Technology, points out, companies increasingly are rethinking the ways in which they generate ideas and bring them to market. He contrasts Cisco with Lucent. Cisco has consistently sought to harness ideas from outside, while Lucent has tried to follow its age-old, self-reliant, from-the-ground-up research philosophy. Cisco -- with fewer resources -- has kept up with or surpassed competitors on innovation. There is a lesson in these kinds of examples, writes Chesbrough. Closed innovation may not be the right way any more.
The other big spender on R&D, the life sciences sector, is beginning to outsource as well. A UBS Warburg study found that of the $30 billion that the U.S. pharmaceutical industry invested in R&D in 2001, around 20% to 25% was spent on outsourcing. Big pharmaceutical companies in the U.S. and Europe are under immense pressure to cut R&D costs, which have ballooned to almost unmanageable levels. The Tufts Center for the Study of Drug Development estimated the cost of successfully getting a drug to market was around US$897 million in 2003. There is a growing feeling that this needs to be brought down.
An Economist Intelligence Unit (EIU) global survey in September 2004 found that companies are redistributing their product innovation setup across the globe. Some 70% of companies surveyed employed R&D people overseas. Fifty-two percent reported that increasing overseas R&D spending was a priority. Among likely centers for overseas investment, 39% of respondents cited China, 29% the U.S., followed by India at 28%. India is likely to be a large recipient of global R&D expenditures going forward. The EIU calls India an R&D "hotspot."
While much of the R&D coming India's way may remain "insourced", some of the investment is likely to be towards contract research. India already has a thriving business process outsourcing industry; this may help sell research process outsourcing.
Why does India rank close to China and the U.S. in terms attractiveness as an R&D center? EIU defines an R&D hotspot as: a place where companies can tap into existing networks of scientific and technical expertise; which has good links to academic research facilities; and provides an environment where innovation is supported and easy to commercialize. India has many of these qualities.
The EIU document notes, "India became a software hub in the 1990s. As a large Asian country where English is spoken, wages are modest and Western education is available, India has quickly grown as an R&D powerhouse." The cost advantage of having a large pool of inexpensive, English-speaking workers is a big part of India's attractiveness. The possible cost savings figures are quite arresting. For example, in the pharmaceutical sector, where the high cost of R&D is becoming a big issue in the west, companies claim India can offer substantial cost benefits.
"Getting research done from India would offer 30% to 50% cost savings," says Dr Swati Piramal, director of Nicholas Piramal, a leading Indian pharmaceutical company. A spokesperson for Ranbaxy, India's largest pharma company, is even more optimistic. "Cost of innovation in India is 1/5th or 1/7th of what it will be in Europe," he says.
The available talent is abundant and - at least some of it - of good quality. India has fairly decent educational institutes like the Indian Institutes of Technology, the Indian Institutes of Science, and regional engineering colleges. Also, there is a large network of government research labs. "India is richly endowed with research depth," says KV Subramaniam, senior executive vice president of Reliance Life Sciences. "There are [also] many Indian scientists working abroad willing to come to India to lead research teams."
Bala Manian, a consultant, believes that India can offer considerable skills and expertise in the area of life sciences: biotechnology and pharmaceuticals. Engineering, telecom-related areas like VLSI (very large scale integration chips), and embedded technologies are other potential areas of growth.
It is the technology sector -- IT and telecom -- which has the best results to show in outsourced R&D. India's leading technology companies -- Tata Consultancy Services, Wipro, Infosys, HCL Technologies -- and emerging companies like Ittiam and Sasken are beginning to build sustainable contract R&D businesses. Wipro, India's second-largest IT company, claims to be the largest "true" third-party R&D services provider in the world, with revenues of more than $270 million. A company document says Wipro works with nine of the top ten telecom equipment providers and with leading technology product companies.
Within the technology sector, semiconductor design or design of chips is an area where multinationals came to India a long time ago, and it remains a growth area for R&D outsourcing. India has 70 to 100 VLSI companies, with more than 5,000 engineers providing semiconductor design services according to C. P. Ravi Kumar, secretary, VLSI Society of India. Many big semiconductor companies, including Texas Instruments, National Semiconductors, Intel, Analog Devices, ST Microelectronics, Cadence, Synopsys, and Motorola have established research facilities in India, some of them in the early 1990s.
Indian IT companies such as Wipro and TCS have considerable numbers of engineers working in the areas of VLSI design and embedded systems. Applied Materials is the world's largest supplier of products and services to the global semiconductor industry. To support customers around the world, Applied Materials employs approximately 13,000 people. Interestingly, Applied Materials operates out of Bangalore, India as well.
While VLSI involves only the design of chips, the scope of embedded systems is much broader, involving chip design, software, signal processing and operating systems. Ittiam Systems, established in 2001, is actively engaged in developing digital signal processing based products. All of them are available as off the shelf components. Its research focus is in Wireline, Wireless, Speech and Audio systems. Ittiam systems counts Sony, Phillips, Nokia, Texas Instruments, Intel, Silicon Labs and ST Microelectronics among its customers. Sasken is an embedded telecom solutions company that helps businesses across the telecom value chain accelerate product development life cycles. Some of the global Fortune 500 customers like Nortel, Nokia, Motorola etc. are Sasken customers.
Indian companies have recently focused a lot on R&D in the pharmaceutical sector. Many companies now spend 8% or more of revenues on research. Many pharma companies are now actively targeting international companies for contract research and manufacturing (CRAM) deals. Medicinal chemistry, custom synthesis, and clinical studies are some areas in which Indian firms are pitching and winning new business. While current results from outsourced R&D in the pharma sector may be less than what technology companies have registered, this sector is poised for growth.
Ranbaxy, India's largest pharmaceutical company, has two ongoing collaborative research programs. An anti-malarial molecule, Rbx 11160, is being developed in collaboration with Medicines for Malaria Venture (MMV), Geneva. A collaborative research program with GlaxoSmithKline plc (GSK) is also doing well. The Nicholas Piramal company runs a clinical research division and also does contract synthesis. This involves lead optimization of compounds prepared in very minute amounts. Other large companies like Zydus Cadilla and Dr Reddy's all have either active programs or intentions in the area of CRAMs.
CRAMs are a vital area for some medium-sized pharma companies. For example, Shasun Chemicals and Drugs, an $80 million company, calls itself an "integrated research and manufacturing solutions provider." Divi's Laboratories, a similar sized pharmaceutical company, has been associated with innovative multinational companies for contract research and custom synthesis.
Besides these pharma firms, which are also into selling formulations and bulk drugs, there are specialized contract research organizations (CROs) in the pharma sector, which do just that-outsourced research. Some are international CROs, like Quintiles which came to India in 1997. It has facilities in Mumbai, Ahmedabad and Bangalore, with close to 900 people. It expects to double the number of workers in India by 2010.
Bullish on Biotech
Apart from pharmaceutical companies, a great deal of opportunity exists for biotech companies. Most biotech companies are built on a contract or collaborative research model. Syngene, a subsidiary of India's top biotech company Biocon, carries out contract research for drug discovery. A key customer for Syngene is Novartis, with which it has a three-year agreement to carry out research projects to support new drug discovery and development, primarily in the early stages and involving small molecules in the areas of oncology and cardiovascular disease.
Avesthagen, a recent startup headed by Viloo Morawala Patel, is trying to do something similar. Avesthagen calls itself an RPO - a research process outsourcing company. Its model is collaborative; it wants to share the intellectual property rights. Avesthagen is into agro research and medical research of plants and this covers the entire gamut of biotechnology - genomics, proteomics, sequencing, and metabolics.
Biocon's wholly owned subsidiary, Clingene, carries out clinical research. This could involve determining bioavailability and bio-equivalence of drug substitutes or the effectiveness of a new drug, as well as patient recruitment, preparing clinical databases, conducting clinical trials and so on. Estimates of clinical research opportunities for India run as high as US$1 billion by 2008.
Reliance Life Sciences does contract clinical research and chemistry and biology research. Reliance has 60 people working in contract clinical research services. Reliance is into research in biology and chemistry related contract services.
Engineering services are another outsourcing hotspot. Chemtex, for example, established in 1947 by ex-Dupont employees as Rayon Consultants and now a Mitsubishi subsidiary, has been providing engineering services (designing chemical plants) outside of India for the past three decades. B. B. Darak, VP-engineering, concedes that there is sometimes apprehension about quality and timeliness of delivery of engineering services out of India.
ICB, another engineering services company in the area of designing and commissioning plants, has increased its head count from 150 to 800 since it was taken over in 1996 by Technimont of Italy, with most work being done for its principal in Italy. Vignani is an engineering company that is trying to move up the chain, offering value engineering by adding innovation.
India's IT companies may be looking at targeting the engineering services area as well. For instance TCS is discussing a research initiative with an automotive major. The R&D work will be carried out at the Pune-based Tata Research Development and Design Centre. The U.S.-based software firm Amdocs is also planning to set up a high-end research and development center in Pune and plans to employ 400 people which could increase to 1,000 soon for doing high-end work. Infosys Technologies is planning to set up a research and development facility in Pune.
Indian academic institutions are looking at tapping global research opportunities, some of this for academic institutions abroad. While industrial research often has immediate application, research at academic institutions usually takes a long-term view, often involving change in technology rather than just the use of it, says Professor Chandorkar, IIT Bombay. Professor Khilar, dean of research & development, IIT Bombay, says that around 50 to 70 members of the faculty are involved in research for foreign organizations and universities. Areas include nanotechnology, computer science, and various avenues of molecular biology, structural engineering and product design. Apart from key universities, big corporations such as Boeing, Honeywell, Microsoft, Sun, Hitachi, Intel, UNDP, and IBM outsource research to IIT.