India's Smartphone Solution
The Chinese smartphone-manufacturer Xiaomi fancies itself a world-beater. Only four years old, the company has already cornered 30 percent of the Chinese smartphone market, the world’s largest. Until last week, Xiaomi looked ready to dominate the huge Indian market, too. But an order from the Delhi High Court delivered those hopes a body blow, forbidding the company from selling most of its devices in India at least until February. Its offense: infringing on patents owned by the more-established Ericsson.
The decision might seem surprising in a country that has long clashed with drugmakers over its generic knockoffs. Just last year, the Supreme Court declined to recognize Novartis’ patent on its breakthrough anti-cancer drug Glivec. The ruling allowed Indian companies to keep selling a copycat version for $150 per month, compared to the $2,000 per month charged for Glivec.
In that case, the courts were protecting the interests of seriously ill patients, who wouldn’t otherwise have been able to afford the life-saving drug. Smartphones are hardly so vital. Yet here, too, a case could be made that affordable technology is a public good in an emerging economy like India. Sophisticated communications technology can help compensate for the country’s woeful lack of physical infrastructure. By enabling online transactions, smartphones can make up for the paucity of bank branches. They can disseminate crucial information about weather patterns to farmers and can even be used to promote primary healthcare and education.
The problem is that the latest technology, whether in pharmaceuticals or phones, is hard to produce affordably without cutting some corners. To its credit, India has developed a patent regime more in line with global best standards than China’s. In the long run, enforcing those laws will serve the country better than the current system of picking and choosing which exceptions might serve the public.
Indian courts are already heading in this direction. Like Xiaomi, the two most dominant players in the smartphone market have also been hit with patent lawsuits. Micromax -- a local brand that makes its devices in China and is as cheap as Xiaomi -- has been forced to pay Ericsson royalties for using its technology; Xiaomi may ultimately have to do the same. The result will naturally be higher phone prices.
The only way to develop cheap, cutting-edge technology is to ramp up research and development domestically. India’s record on that front is surprisingly poor. It spends less than 1 percent of GDP on R&D. China spends almost 2 percent, the U.S. 2.8 percent, Japan 3.4 percent and Korea 4 percent. Presumably, as courts more consistently forbid the sale of copycat technologies, companies will have no choice but to increase their internal R&D budgets.
The government can help. It currently offers a 200 percent tax deduction on R&D spending conducted by manufacturers in-house. There’s a good argument for raising the deduction -- say, to 300 percent. It also makes sense to extend the deduction to include research that’s outsourced. Very few Indian companies have the capacity to do all their R&D themselves; there’s no reason to punish them when they hire others to do the work instead.
India is at least starting from a good base. The country already boasts globally competitive industries in sectors like information technology, pharmaceuticals and space technology. It can tap quality manpower at a fraction of the cost in advanced countries. It has a good university system -- the Indian Institutes of Technology are world-class -- and a network of government research laboratories. What’s needed is closer interaction between those research centers, industry and universities.
The potential rewards are huge. Nearly 700 million Indians remain poor and are eager for low-cost, yet sophisticated technology. The same products could easily find a market in other emerging economies in Africa and the Middle East. Even in developed nations, which are undergoing a lengthy slowdown, consumers are looking for high-quality bargains. There’s no reason Indian companies can’t be the ones to produce them.
(Clarifies GDP data in sixth paragraph.)
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