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Need Product Companies for India’s Growth

Posted on Friday, Feb 9th 2007

By Sujai Karampuri, Guest Author

I insist on high tech product companies for India. No matter what we do with our IT-ITES sector, we will not scale dramatically to be able to become a true economic power. The GDP of India in 2005 is $720B of which the IT-ITES sector contributes less than 3.2% (it has improved in 2006 to approximately 4.5%). According to report from Goldman Sachs, Indian PPP measure of GDP will exceed that of US in 2038 and will be at approximately $23 trillion.

How do we get there from here? Do we just sit back and hope our current IT-ITES sector, which is primarily driven by services, will deliver us there or do we really take this as a dream and try to make it real?

Only a technology product company can add the right kind of money into India at a faster and quicker pace using smaller manpower. Just look at some of the statistics here (mostly from 2005):

* Total output of Indian software industry for 2005 is $22.6 B (and for 2006 it is slated at ~$40B).

* The number of people directly employed by Indian IT-ITES sector is 1.3 million.

* India is currently producing approximately 180,000 engineers for IT-ITES sector.

* The rate of increase in output of employees is currently at 5.5% over the previous year.

* Assuming a steady increase for the next five years, the output in year 2010 would be approximately 220,000.

According to NASSCOM, India is poised to make $70 B in 2009 with a workforce of 2.2 million. This projection assumes that each employee with earn approximately $32,000 in 2009 while it is approximately $22,000 in 2005.

Now look at this for comparison:

* Microsoft currently makes $40 B with 60,000 employees while Nokia makes $40 B with 40,000 employees. (each employee approximately makes $600,000 to $1M).

* These two companies alone with a work force of 100,000 (in 2005) make more than the projected output for India in 2009 (with 2.2 million workforce).

No matter what we do, contribution of IT-ITES will be marginal in contribution towards Indian GDP unless something dramatic happens. And that can happen only with more technology product companies.

Case of technology product companies

How do you think most developed countries have been able to remain competitive? According to NSF (National Science Foundation, USA), “High-technology industries are driving economic growth around the world”. According to the Global Insight World Industry Service database, “the global market for high-technology goods is growing at a faster rate than for other manufactured goods”.

“Even during the recent, slow-growth, ‘post-bubble’ period (2000–03), high-technology industry continued to lead global growth at about four times the rate of all other manufacturing industries.”

According to NRC, Hamburg Institute for Economic Research, and Kiel Institute for World Economics 1996, “High-technology industries are R&D intensive; R&D leads to innovation, and firms that innovate tend to gain market share, create new product markets, and use resources more productively. These industries tend to develop high value-added products, tend to export more, and, on average, pay higher salaries than other manufacturing industries. Moreover, industrial R&D performed by high-technology industries benefits other commercial sectors by developing new products, machinery, and processes that increase productivity and expand business activity.”

What is the output of high-technology sector in each of these countries?

* In India, high-technology sector accounted for 2.0% in 1980, 3.7% in 1990, 4.8% in 2000, and 4.8% in 2003.

* In US, for 1980s it was 11% of total domestic production, in 1990s it was 13.5%, in 2000, it was 27%. In 2003, it is estimated at 34.2%.

* In Japan, it was 17% of total Japanese domestic production in 2000. In 2003, it is estimated at 15.7%.

* In EU, it increases from 9.5% in 1980 to 11% in 1990 to 13.2% in 2000. In 2003, it is estimated at 13.4%.

* Countries like Taiwan (28.5% in 2003), Ireland (more than 50% in 2003) and China (19% in 2003) fare much better than India.

The case is strong for technology product companies. So, what are we going to do about it?

Related reading:

* Why No Product Companies in India?

* India Needs More Incubator Funds

* Incubator Funds in India

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Hi Sujai,

I completely agree with your article. I believe fundamentally there are a couple of challenges that we face. One, if we take US for instance, i work with several US VCs and realised (and this could be a partial view) that much of the high-tech development is driven by SMEs and start-ups. India still lacks the entrepreneurial spirit and skill. Two, we seem to have some what started believing that service will drive the growth in India. It could be a leading factor by the potenial for high-tech product development is also large given the talent available in India.

-Amit

Amit Shanker Saturday, February 10, 2007 at 2:36 AM PT

Hi Sujal,
Case for products is a recurirng theme, yet when it comes to reality service wins hands down. Fundamental risk avrsion is in play: Service is immediate revenue realization and the feedback loops are tight. Whereas the product it is the otherway around.
When you are small, service looks attractive in competitive market to stay alive. When you grow big you get the why bother attitude…

This boom will bell this cat?
-Balaji S.
http://labsji.wordpress.com

Balaji Sowmyanarayanan Saturday, February 10, 2007 at 5:08 AM PT

[...] Sujai, guest blogging at Sramana Mitra’s blog makes a case for product companies over IT-ITES sector. I agree with him. It is not just needed for India’s growth but also to show the innovative potential among Indian techies No matter what we do, contribution of IT-ITES will be marginal in contribution towards Indian GDP unless something dramatic happens. And that can happen only with more technology product companies. Linked by Krish [...]

Need for product based companies in IT sector at Blogbharti Monday, February 12, 2007 at 6:31 PM PT

[...] Last Fall, I wrote a widely read piece called Venture Capital in India, in which I pegged the Indian venture boom to be largely in Real Estate, Retail, and to an extent in Consumer Internet, not much in actual technology. Last week, Sujai Karampuri made a well researched case for technology product companies in India. [...]

Atanu Dey on India’s Development » Challenge to Indian Entrepreneurs Friday, February 16, 2007 at 6:03 AM PT

I agree with the need for product focus. The high-tech products market is faced with rigorous challenges such as declining margins, huge competition in product design and manufacturing. First, we need to have basic facilities for product R&D and these include having fabrication facilities at research centers and having favorable import policies for importing high tech equipment used to fabricate circuits. We also need to focus on education and training in hardware engineering and manufacturing. We also need to have Taiwanese companies invest in India.

Aravind Friday, February 16, 2007 at 10:44 PM PT

[...] Further Reading: Entrepreneur Sujai Karampuri’s article on why India needs technology product companies. [...]

Sramana Mitra on Strategy » Blog Archive » India Needs More Incubator Funds Tuesday, February 27, 2007 at 2:04 PM PT

There are a number of factors that can ensure product companies in India.
1. Ensure growth of domestic market. This can be done having laws in place that ensure companies/govt. bodies/essential services to follow strict standards…standards that require additional software/hardware/tech processes.
2. Remove piracy. Rampant piracy removes the motivation to create better/cheaper products.
3. Dramatically increase funding level for univ.
4. I think all the IT biggies should start converting their (major) projects into products (keeping in mind of course all the legalities in place).

Vish Friday, March 2, 2007 at 4:18 AM PT

[...] have already written an article called, ‘Need Product Companies In India’s Growth.’ Before I start writing on what we need to do, I would like to talk about some of the most [...]

Sramana Mitra on Strategy » Blog Archive » Why No Product Companies in India? Saturday, March 3, 2007 at 8:19 AM PT

I agree with all the points Sujal makes. Worlwide, product companies are valued more in terms of market valuations, and that single factor allows product companies to raise and fund product development. One way to bootstrap such a sector is to empower indian higher education institutions to place emphasis on product development (rather than just fundamental research). This will require support from government as well as industry biggies. The focus would have to products that are for domestic or low income countries. Basically, what I am saying is that the product companies will have to be inward looking and not for US market.

Lokesh Kumar Saturday, March 3, 2007 at 1:03 PM PT

Hi all,

Agreed, one step ahead I wan to focus, if we are building product companies there is one area which we may lack marketing. Brand India in high tech product developed countries may not agree. So the solution is High tech product companies for Indian people would be a better option. Were we can prove ourselves here then go outside.

High tech need not only be in software and manufacturing the one important area is agriculture which will be the fastest way to grow Indian economy. Other domains require new skill set and technical knowledge. But we have a strong fundamental in agriculture if one is able to see the future products like ethanol or floriculture or ayur veda herbs etc. Im sure will not have two India.

Balamurali Tuesday, March 6, 2007 at 4:17 AM PT

Services companies are more compelling to an entrepreneur in India today than product companies. Some of the reasons have already been listed above. Services mean cashflow and less need for venture capital etc.

But they are also more rewarding for an enterpreneur. Take, for example, Marketics: an 8x return for a company with $8M in revenues is not bad. Would “product companies” do any better?

20 guys could raise $5M and build a “product” and make $8M in revenues. They would get 8x returns, or maybe even less (Oracle only paid 3x for Hyperion, for example).

In my book, Marketics is a champion:
* No venture capital needed
* Excellent returns for the entrepreneurs
* 200 high-paying jobs created, not just 20

Btw, most likely Marketics has created some innovative products along the way too, but they are packaging them as a service, a la IBM.

Samir Raiyani Sunday, March 11, 2007 at 7:56 PM PT

Samir,

You are right, from the 3 perspectives you mention above, service businesses are more attractive than product ventures: no venture capital needed, good returns, job creation.

However, overall, product companies fetch significantly better returns than service companies, which is why, VCs prefer them. Hyperion, long before Oracle acquired them for 3X, had returned a lot more to its VCs during the IPO. If you read Jerry Rawls’ interview till the end, Finisar went public at $5 Billion valuation, on a ~$50 Million revenue (bubble years).

The point is, if you do have a breakthrough innovation, the multiples can be very compelling in a product company mode.

On the other hand, the return Marketics has fetched is not usual for a service company. Typically, service companies get valued at 1X to 1.5X valuation, if you stretch it, may be 2.5X.

I don’t know enough about Merketics to be able to gauge what prompted the 8X multiple. But rather than making sweeping generalizations, you should study the rationale.

Sramana Mitra Sunday, March 11, 2007 at 8:08 PM PT

[...] Karampuri in Need Product Companies for India’s Growth makes an unconvincing case for encouraging the high tech industry in India. On the way he quotes [...]

6 AM Pacific » Blog Archive » More IT Services Bashing Friday, March 30, 2007 at 8:38 PM PT

Wrong. You need more lowskill intensive mfg industries to help India’s growth. In addition to the direct contribution to GDP they will also generate demand for Indian IT products. Most companies cited above catered to local markets first before going global and increasing their revenues per employee.

So first help the Indian establishment push reforms to spur low skill intensive mfg. Products will take care of themselves.

Ram Medury Saturday, March 31, 2007 at 3:26 PM PT

I don’t think Sujai argues against Manufacturing jobs. It is, however, not one of India’s historical core competencies, while Software is. His discussion is an exploration of product versus services within the software / IT eco-system.

Sramana Mitra Sunday, April 1, 2007 at 10:10 AM PT

I agree that Sujai is exploring the pdt vs svc paradigm in the Indian context. However there is a need to flip this argument. Without a strong mfg base, IT pdts will not be able to succed in India. It will be very difficult to dream of creating global products without first launching them in the domestic market. China again is poised to succed here since it has a larger domestic IT market.

Why do you think mfg is not a core competency? Was it China’s till the 1990s or for that matter any Western conuntry’s before the Industrial Revolution? We just need to get our act together on the policy front and remove the shackles the government is hell bent on imposing.

Ram Medury Monday, April 2, 2007 at 11:03 PM PT

That doesn’t mean you can use the present tense for something that doesn’t exist. India MAY become a manufacturing base one day. Today, it isn’t. That’s all. Reality is pretty stark.

Sramana Mitra Monday, April 2, 2007 at 11:08 PM PT

[...] the incubator fund requirements, while entrepreneur Sujai Karampuri wrote some passionate pieces on why we need technology product companies in India, and why we don’t have [...]

Entrepreneurship in India « Startup Dunia - Indian startups and Entrepreneurship Thursday, April 5, 2007 at 9:31 AM PT

IMO, Product without Service is useless. Service without Product is pointless.
Personally, I would like to see these things happen which will improve India’s stand in IT.

Sustainable domestic need
Enable Entrepreneurship

I think in near future, we will have more patents created from India, generating licensing and royalty income.

Srini Wednesday, April 18, 2007 at 11:28 AM PT

Nice…

Augustinos Monday, June 11, 2007 at 7:23 PM PT

There is no doubt that the Technology product company have higher revenues per employee. However, the technology company also invloves highers stakes and higher risk. Today most Indian enterprenuers look for the higher returns at lower risk, IT services being already established presents this oppurtunity. Also you have mentioned about the contribution of IT – ITES industry being 4.5 % of total Indian GDP, if the objective is to grow the Indian GDP the likely target should be all the sectors and preferably the ones which are biggest contributors. If the revenues per employee is the selected metric than Government and PSU being the largest employers should be right target. An eGovernance intiative using our capabilties in IT services should be of the natioanl interest for increasing the efffciency in the sectors of the Indian Economy that have mutiplier effect. The efficiency improvement in sectors such as Infrastructure, finance, education will not only have mutiplier effect, it will also make life of an average Indian much simpler and Safer making him suitable to take higher risk and make substantail investment in Technology product sector in future.

Sudeep Gupta Friday, August 17, 2007 at 12:45 AM PT

Today India spends billions of $$ supporting R&D labs.Scientific revelations stops at the Lab stage.The scientist’s interest wanes once he publishes the paper.What needs to be done is to have Technology product companies set up and transfer these technologies which the Tech product companies can further improve up on and take it to the applicable Industry.There will be a big boom on such industries in India in the near future.

KV Sunday, January 13, 2008 at 10:55 PM PT

Hi Sujai

i am agree wid ur most of the points ..
but services companies are also most required in indian crowd …..

– There are very less crowd (technically sound) available who are really need in product based companies.
– Most of the colleges in India are private where ppl take admission just sake of degree… And after that they got placed in any big companies like Infosys, Wipro, Tcs etc….. where they go through their training program and start working according to them.

And if there will most of product companies will be in existence then unemployment can be arise as an issues . Caz generally these companies don’t have much time to train them and then get work from them…..

So finally i would like to say product and Service Companies both should maintain one ration for India’s growth

Dev Tuesday, January 29, 2008 at 5:27 AM PT

I think most of your comments are agreeable to me. The US Garbage industry spends more money on R&D than India’s IT industry.

Of course the barriers to entry are so minimal, every Tom-Dick-and-Harry has a “software company”. In fact there is no differentiation between a 15 person company and a 50,000 person company. They both start looking for people after the need arrives. At 18-20% attrition rate everyone is stretched thin – makes agrument for industry wide consolidation.

I question the static nature of the markets in the original analysis by Sujai – that the landscape will remain what it is today or close to it. My educated guess is, may be, by 2025 the concept of software is obsolete and hence the need for millions of human beings. Even with innovation, it will be a struggle to get to 2038 at the growth rates being used.

A recession in India will devastating since more money transfers to underground markets everytime that happens. The financial integrity of India’s economy has not been tested yet (Japan went into a 10 year stagflation/recession and still not recovered).

I second the thought that Indian companies need to produce products and services won’t go very far. From my experience having lived in the US for over 15 years is that the minute the $10/hr jobs left New York, Philadelphia nad New Jersey they have travelled to a fair number of stops. India is just another stop till say Nigeria can do the same work for 25 cents/hr.

First go local before you aspire to be global – see Tata Motors, Tata Steel, Reliance. Their businesses are solidly built on local economy.

Make products that Indian in India want to buy in volumes. Meet global safety and compliance requirement for the Indian market and then use the large volumes to flood global markets.

Amul and Dhara are excellent examples of such a concept.

Madwesh Monday, March 24, 2008 at 2:00 PM PT

Madwesh, I do second some of your thoughts. India is just one more step in search of Low cost labour. But, the key point is that Indian companies are opening sweat shop (forgive me for using the term) facilites in countries that have better labour arbitrage opps. While India is graduationg to productised services/ quality hub/ high end processes.

India is much like the phoenix, which when starts rising is unstoppable [ unless it hits the roof (global recession)].

Coming back to Mr mitra point, YES ! IP/ products/ productised services is an imperative for better employee productivity [ Tanla, Subex, Sasken, Onmobile, Talisma, even Texas Instrument's India arm - are a proof in point]. The point in essence is can 1 take a risk and bet on a product which creates new paradigms in existing market place [requires patience, foresightedness, ability to assemble resources and actually sweat it out with the team]; or is it just incremental value addition/ cost arbitrage [inherent need of instant cashflows] that one is looking at offering – giving rise to one more typical IT/ ITES company. Most Indians [in India] resort to the latter and we have few more emplyees added to the IT / ITES list of employees.

Analysing Marketics transaction, the company had been growing at 100 % YOY hence FY08 revenues wud have been USD 16 million [ assumption] and 8 mn for FY07. Add to this the 30 % + EBIDTA, and stickyness of customers.

and Voila.. you would have gotten 15 X Ebidta . Just looking at Price to Sales in isolation may be misleading, do factor in Growth, client quality, higher profitablity and 1 may stop looking at 8 X revenues [Trailing].

p.s. The transaction had more than 50 % of the outflow pegged to EBIDTA of next year.

an observation:
Key execs looking at joining startups not only want the ESOPs / stake in the company but also 30 % + hike in salaries and added perks
and to top it all want well defined KRAs ;-)

Manish Johari Sunday, April 13, 2008 at 12:31 PM PT

Sujai, I am the son of a german engineer who immigrated to the U.S. He was responsible for the design and development of the parachute system for the Apollo and Gemini Space missions and more recent Space Shuttle. I have written to such companies as Boeing to seek financial assistance in an innovative flying saucer vehicle that will out perform the common helicopter, and make it possible for executives to fly right into the heart of a city with limited hazards. The executives here in my country have an attitude of superiority manifested in an overbearing manner. So I am willing to take my concept were ever it will be given consideration. Here in the U.S., I have yet to even recieve a reply.

Thank You,

Tom Metz – Florida

Tom Metz Sunday, September 13, 2009 at 9:17 AM PT

We can arrange ECB funding.Any corporates in need of external commercial borrowing ,can contact us.
jeykrishnan@gmail.com

Jeykrishnan Saturday, August 27, 2011 at 6:28 AM PT
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