economist on ipr in india and china

nov 10

apart from the little religious dig -- which shows the guy doesn't know his butt from his face -- this is not bad.

i have deleted a bunch of the content so as to avoid issues of copyright.

SURVEY: PATENTS AND TECHNOLOGY

Thinking for themselves

Oct 20th 2005
From The Economist print edition

India and China aim to challenge western tech firms through innovation, not just cheap labour

ON THE sixth floor of the sleek headquarters of Sasken Communication Technologies in Bangalore, India, a small cubicle serves as an office for the chief executive, Rajiv Mody. There, hanging on a wall beside a photograph of Mahatma Gandhi, is a plaque of patent number 5,072,402, for a "Routing System and Method for Integrated Circuits", granted to Mr Mody by America's patent office.

Sasken, a publicly traded firm with $55m in revenue and over 2,400 employees, writes the code that is embedded deep inside the hardware of telecoms equipment, from mobile phones to high-speed internet modems. The patent on the wall is a visible sign that the company, like India itself, is trying to shift from low-end work to more sophisticated technologies, complete with home-grown inventions. The same thing is happening in China. And both countries are using the intellectual-property system to stake out their turf.

For the moment, both are better known as places where intellectual property needs special protection. As a strategy for economic development, nabbing someone else's patents is nothing new. Immediately after America's declaration of independence, its government made it official policy to steal inventions from Europe, expediting the country's rise as an industrial power in the 19th century, notes Doron Ben-Atar of Fordham University in New York. Yet in India and China, the pressure for respecting intellectual property more is now beginning to come from domestic businesses.

It will be a long, uncomfortable process, but again there are precedents. Japan, Taiwan and South Korea, which started off by competing mainly on cheap labour, ended up challenging the West's biggest technology companies. Taiwan now makes the vast majority of the world's computer components, and its companies own a plethora of patents. South Korea's Samsung became one of the top ten recipients of patents granted by America's patent office in the 1990s, and still is. Japan earns the largest number of patents at the same office after America itself (although this is partly because Japanese firms traditionally file large numbers of patents with very narrow claims).

The rise of China and India has mainly been underwritten by foreign companies, not indigenous ones, though this is starting to change. Both countries have been good at persuading firms setting up operations there to invest in training locals. Today, nearly all the large IT firms have big research centres in both countries, and local companies understand the need to develop their own intellectual property. Local people who went to Silicon Valley to find fortune are now starting up their own businesses in their home countries. Foreign venture capital is pouring in.

Without home-grown technology, India and China have to depend on foreign firms, and they do not like it. China, in particular, has seen a surge in the royalties it is paying to foreign firms, and is trying to stem the flow. When Qualcomm's boss went to China in 2001 to negotiate royalty payments for his company's third-generation mobile-phone standard, he agreed to accept less than what he charges others. Within a year, China was working on developing its own 3G wireless standard. If it succeeds, Qualcomm will see its royalties shrink further.

China and India have more to offer than just low costs, although these are clearly important. They are also able to deploy huge numbers of people to work on a project. Being able to throw bodies at a problem is vital in IT. It allows firms to do things such as speed up development cycles or explore alternative approaches that would not be possible with a smaller labour force.

In short, China and India are not simply taking over western IT jobs, they are changing the very process of IT development. It is not about doing the same thing cheaper, but about doing things that simply could not be done before. In that endeavour, intellectual property is becoming increasingly important.

There are limits to the optimism about India and China. Both countries have a culture of keeping technology to themselves. The western concept of patents is fairly new to them, and has proved controversial for countries at their stage of development. Also, both nations have huge institutional and infrastructure obstacles to overcome. Capital markets are embryonic. Big companies are coddled by the state. India's government bureaucracy is stifling; China's is opaque and corrupt. The legal system is uneven in India and consistently inadequate in China. Both countries badly need more experienced managers.

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American technology executives with some experience of India and China are worried that the two are about to eat the rich world's lunch, but locals with deep knowledge of both countries think it will take at least a decade. Still, the overall trend is clear: the rise of China and India as centres of innovation will radically shake up the technology industry that is today based mainly in rich countries.

In 1905, the first light bulb in India was switched on in Bangalore. A century later, the city's technology industry still relies largely on innovation from elsewhere. The basis of the Indian IT miracle is software services. Indian firms hire thousands of software developers to work on behalf of mainly western clients attracted by the low costs. The average annual salary of a mid-level engineer in India is around $12,000 (rising by about 10% a year), compared with five or six times as much in the West. These service companies are doing increasingly sophisticated work as their clients come to trust them more. Besides, western firms are under so much competitive pressure that they have no choice but to do more outsourcing.

Inside job

A handful of small companies such as Sasken, Ittiam, i-flex and others are trying to break the mould of IT services and develop their own patents to license to others. However, whereas big technology companies in America and Europe are increasingly relying on intellectual property to provide streams of revenue, the large Indian software firms tend to hold on to their innovations for competitive advantage rather than open them up for licensing. This is partly because many of their innovations are in processes rather than in products. Their inventiveness is monetised in work done for clients, not as an income source in its own right.

One example is Infosys, a large IT-services firm. As part of a project for a large aerospace company, Infosys had to calculate and optimise a number of attributes of a part, a task that was expected to take around 30 days. Pressed for time, some of the engineers invented a tool to automate the process which cut the period to only four days. But rather than seek a patent or license it out, they are keeping the process secret for their own and their customers' benefit.

Other Indian IT-services companies have similar innovations. Wipro, another large firm, calls them "IP blocks"—reusable bits of software or processes that it can draw on to serve its clients better. The company has around 10,000 engineers working on higher-end design and development for big global technology firms, but a handful of bright people are assigned to working on Wipro's own R&D, not billable to clients. In a computer lab on its sprawling corporate campus in Bangalore, two twenty-something engineers proudly display the green and gold circuit board for a mobile phone they have designed, which runs the open-source Linux operating system. By developing the technology in-house, they can use the expertise thus acquired for many contracts, lowering the cost for everyone.

Wipro holds title to "four or five" patents—none of its executives is exactly sure how many. Yet they all happily report that last year it filed 28 innovation disclosures on behalf of clients, which is the first step towards those companies filing for patents. Wipro does not want to compete with its clients, and does not want to license patents to others.

At Infosys, it is a similar story. The firm filed for two American patents jointly with its clients. But like all things in modern India, this is changing fast. Infosys has seven applications pending at America's patent office, all filed in the past three years. Intellectual property is becoming more important because the IT work the firm is doing is becoming increasingly sophisticated, says "Kris" Gopalakrishnan, the chief operating officer.

One reason why big Indian firms have been slow to embrace intellectual property is the distinction they draw between services companies and product companies. As services companies, they fear that claiming patents would upset their clients, who might treat them as rivals and take their business elsewhere. "India does not have a software industry, it has a services industry," says one executive. "We do more D than R," confides another top manager about his company's research and development. Yet in modern IT the distinction seems artificial, particularly when it comes to intellectual property, which is intangible like a service yet increasingly sold as a product.

A raft of small start-ups may be more prepared to go down the intellectual-property route. Gaurav Dalmia, the boss of First Capital India, a venture fund, notes that the very success of the big software companies prevents them from evolving in this direction: they are not under pressure because they can already count on comfortable returns, and the stockmarket might penalise them for taking the risk. Meanwhile, though, the R&D centres of western firms operating in India are being granted a bundle of patents.

However, even small and nimble firms will have to overcome a latent cultural resistance to mixing business and science that may have a religious base. The Hindu goddess of wealth is Lakshmi, the goddess of knowledge is Saraswati. The two never appear together.

Chinese puzzles

In Shenzen, the boss of Netac Technology, Frank Deng, personally holds around 20 patents. The company, which makes USB memory devices and MP3 music players, has filed for over 200 patents globally, some of which have been granted. Instead of plaques of patents on the wall, as at Qualcomm or Sasken, Mr Deng keeps five of them in two drawers beside his desk.

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Finding out how to do that has been a long and difficult process. In 2003, Cisco Systems sued Huawei for copying its intellectual property, which eventually persuaded the Chinese firm to take the offending products off the market. Wiser after that and other experiences, Huawei now plans to use intellectual property to its advantage. It makes a point of taking part in standards groups and publishing research papers. "In many new technological fields, we will have our own contributions to the industry," says Mr Song.

The same sort of thing is happening at other large private Chinese firms that are reaching out to global markets, such as Datang Mobile and ZTE, makers of telecoms equipment, and SMIC, a big semiconductor firm. Some Chinese firms have even turned the tables and begun asserting their own patents. Netac, for instance, sued Sony Electronics, claiming that Sony's factory in Wuxi infringes Netac's patents.

Yet, as in India, it will probably be smaller companies that take forward the development of intellectual property, rather than the big firms or the state-owned enterprises that dominate the economy. "They are monopolies which have no need for IP," explains Joseph Cho, the boss of Pacific Epoch, a Shanghai firm that analyses technology markets. "They have all the market share already."

The number of patents applied for by Chinese inventors at America's patent office is small, but it increased sixfold in the 1990s. Taiwan, an island with 23m people, went from almost nothing in the 1980s to fourth in the number of patents granted, after America, Japan and Germany. "If their continental cousins have the same behaviour, I don't know how many millions of patents will fall on our heads in a couple of decades' time," says Dominique Guellec, chief economist of the European Patent Office.

Much of the new interest in patents is driven by Chinese government policy. The country is hoping to become less dependent on foreign companies by developing home-grown standards in areas such as 3G, DVDs and encryption technology for Wi-Fi, which provides wireless internet access. If it succeeds, foreign companies will have to pay royalties to Chinese firms in order to sell products on the Chinese market, rather than the other way round. "China realises that if it wants to move up the ladder in technology, the first thing it needs to do is fix the IP problem," says Qi Wang of UBS, an investment bank.

The start of something big

But is there sufficient incentive for India and China to innovate? Both countries will be able to exploit their labour-cost advantage for a long time to come yet. India will remain a centre of inexpensive software coding; China will remain a place for low-cost manufacturing. But both countries are so populous that they can do lots of things at once. They can keep doing the low-tech work and at the same time develop more high-tech activities, just as America watched its mid-western states become a rustbelt as Silicon Valley started to boom.

One important role for the big IT companies in India and China is to provide talented engineers with the opportunity to gain experience in management before they set up on their own. In America, Silicon Valley was built not so much by venture capitalists and inventors but by seasoned business executives who spent decades with leading IT companies before starting up on their own. This is just beginning to happen in India and China too.

This leads some critics to the conclusion that outsourcing IT work to China and India will prove to be unwise. In scrambling for short-term savings, American and European firms may be inviting long-term harm. Yossi Sheffi of MIT calls it "the outsourcing trap": exporting low-end IT jobs will create new rivals that will eventually overtake their clients.

Whether or not that dire warning is justified, India and China are bound to emerge as hugely important centres of innovation, says Bruce Lehman, who served as commissioner of America's patent office during the 1990s. "My prediction would be that in 20 years' time India and China will both be responsible for more patents than the US."