India lags in product, technology innovation

Country is still primarily an offshore engineering site, experts say

Although India has emerged as a key offshore software development and chip design location for multinational companies, it still lags in home-grown products and technology innovation, according to some in the industry and analysts.

"It is not that we are running short of ideas, but our people are risk averse," said Vinay Deshpande, chairman of Encore Software Ltd., which is based in Bangalore, and a co-designer of the Simputer, a low-cost, Linux-based handheld computer.

The focus of most entrepreneurs in India is on lucrative, but low-risk, opportunities such as software development and business process outsourcing services, Deshpande added.

India is still primarily an offshore engineering site, a software factory where work can be done efficiently and cost effectively, according to Shashank Samant, president of managed strategic services at Ness Global Services Inc. in San Jose, California, which offers outsourced product development from India to small and medium-sized ISVs (independent software vendors) in the U.S. and Europe.

"In technology, India is still playing catch-up, and innovation is going to take a lot longer," Samant said.

Innovation is likely to increase in emerging economies like India because the large number of engineers that are being educated creates a capacity to invent, Craig Mundie told reporters in Bangalore earlier this month. "But it is always a challenge to commercialize those inventions," said Mundie, who is Microsoft Corp.'s chief technology officer and senior vice president for advanced strategies and policies.

While India has done a spectacular job producing capability in the software services market, the country has yet to see the emergence of software products businesses that address specific market requirements, said Mundie, adding that for innovation to grow, new models of capital formation and venture capital availability will have to rise to a higher level than they are today in India.

The education system in India also does not encourage engineers to be innovative and think creatively, but is focused on preparing students to work in software services companies where work is assigned to them by clients, Deshpande said.

Innovation may, however, be budding in some of the development subsidiaries of multinational technology companies such as Intel Corp., according to Siddharth Pai, a partner at sourcing consultancy firm, Technology Partners International Inc. (TPI) in Houston.

Indian subsidiaries of some multinational technology companies are taking greater responsibility for product development and engineering, Pai said.

"There is no doubt about it that the work being done at some of the Indian subsidiaries of multinational technology companies is innovation," said Marc Hebert, executive vice president of Sierra Atlantic Inc., a provider of outsourced IT services with an offshore software development center in Hyderabad in south India. Sierra Atlantic is based in Fremont, California. Down the line, some of these multinational technology companies may start getting their product ideas from their staff in India, he added.

Pressure from staff looking for more challenging work is helping drive this move up the value curve, according to Samant. Ness' staff in India already decide on product architecture for some customers, he said.

Although the innovation of Indian engineers is currently being utilized by multinational companies, some of these workers are likely to set up their own operations, Deshpande said. "It should take about three to four years" for that to happen, he said.

Before then, there have to be changes in the business environment, such as making funds more easily available for entrepreneurs planning to start technology and products companies, according to those in the industry.

Currently, venture capitalists in India are risk averse, and would prefer to invest in a call center than in a company that wants to commercialize a new technology or product, Deshpande said.

The Indian government also does not have programs to support home-spun innovation, Deshpande said. Technology industries in the U.S. were spawned by government-sponsored projects, he said.

Despite the odds, a number of Indian companies, including startups, are getting into product and technology development. Some of them are focused on the local market. Innoviti Embedded Solutions Pvt. Ltd. in Bangalore was set up last year by a group of experienced engineers to develop an adaptor for dial-up modems that allows users to make their laptops wireless. "We are targeting the local market, which is large," said Rajeev Agrawal, the company's chief executive officer.

Startups will have to initially focus on developing products for the Indian market, according to Deshpande. "The Indian market is large enough, we can understand the market better and our costs of marketing would also be far lower," Deshpande said. A lot of the products developed for India would be relevant to other emerging markets, he added.

Indian companies that have been building products under contract for ISVs (independent software vendors) in the U.S. are also looking at developing their own products. Pune-based Persistent Systems Pvt. Ltd. provides product development outsourcing services to ISVs and is focused on developing products that plug holes in its customers' product portfolio, said Anand Deshpande, managing director and chairman of the company.

Persistent sells the products through customers' channels to get around high branding and marketing costs involved in selling on its own, Anand Deshpande said. The company expects 25 percent of its revenue to come from its own products in the next three years, he added.

Indian entrepreneurs, who have been successful in the U.S., are also returning to India to set up innovative businesses in the country, according to Hebert. The key attraction is India's growing market, but products developed for the Indian market will also find a market abroad, he said.

Copyright © 2005 IDG Communications, Inc.

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