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Debate between Jaideep Prabhu and Peter Williamson - CAM 59

19 December 2009

Dear Jaideep,

It’s time to jettison the idea that the rise of Chinese and Indian competitors simply means cheap, low-quality imitations flooding world markets. The leading companies in India and China are rewriting the rules of the game by competing on innovation – that’s right, innovation – the ace card that was supposed to enable European and American companies to stay competitive despite high costs, huge pension liabilities and cosy social contracts.

I know the idea was that the West might surrender the low-end, standardised product segments to these new competitors and move to the ‘sun-lit’ uplands of added value. But the new competitors coming out of China and India aren’t keeping to that script. Instead, they are delivering innovative technology, more customer choice and new business models to Western markets more flexibly and at lower cost.

For example, Chinese digital direct X-ray machines which capture your chest X-ray directly into a computer system (assuming the NHS actually had one) make those old plastic film versions look like something out of a museum. The new electric runabout G-Wiz cars I see powering up on London’s new kerb-side recharging points actually come from the Indian company Reva (short for Revolutionary Electric Vehicle Alternative). China’s Huawei just won the contract to install fourth generation (4-G) mobile telecoms equipment to handle video-on-demand for Telenor, the Norwegian mobile phone operator – formerly a loyal customer of Ericsson and Nokia Siemens Networks. Similar things are happening with innovative Indian biotechnology companies and Chinese green energy solutions. I could go on, but you get the picture.

The West seems to have missed the fact that China and India aren’t playing catch-up: they are playing leap-frog. And the progress of this strategy is only gathering pace. Witness the fact that in 2008, the number of patented inventions granted to Chinese companies outstripped those granted to multinationals in China. Patent applications by Chinese competitors are growing exponentially. In India, meanwhile, 14 new compounds, including four in clinical trials, are under development for the treatment of cancer, diabetes, inflammation and infectious diseases. And all at just one company – Piramal Lifesciences!

You must agree that it’s time for us to wake up to reality and rethink our strategies for innovation, unless we want to become a museum of what was state-of-art in the 20th century.

Yours,

Peter

22 December 2009

Dear Peter,

Greetings from Bangalore where I have just completed detailed interviews with multinational and local companies (including Reva) on how they are innovating in India for global markets.

These interviews, and similar ones I’ve done over the last couple of years in India and China, have made it clear to me that something remarkable is indeed going on in these countries in the area of innovation. As you say, it is certainly time to jettison the idea that China and India are simply about cheap, imitative, low-quality products and services. Instead, what we are witnessing seems nothing less than an innovation revolution that is only just gathering steam.

But here’s where I would depart from your view on all this. Unlike you, I do not think the innovation revolution in India and China poses a threat to the West; rather I believe it works to the West’s benefit in the following ways.

First, the major prime-movers in the innovation revolution in India and China are Western multinationals. Take Fortune 500 firms, many of which are headquartered in Western Europe and North America. A majority now have major R&D centres in India and China. These R&D centres are new, large and state-of-the-art; more often than not, they develop key inputs into global products employing the large volume of high-quality scientific and technical talent that India and China produce on an annual basis. By tapping into such high-quality talent, Western businesses benefit directly from the innovation revolution occurring in India and China.

Second, the products and services produced by the Indian and Chinese R&D centres of Western multinationals typically end up in Western markets where they provide significant benefits to Western consumers, at lower prices. For example, General Electric (GE) India recently developed an ECG machine for the Indian market that was a tenth of the cost (and a fifth of the weight) of its existing Western equivalent. This product was then introduced into China and now has FDA approval for introduction into the US. In a time of ballooning healthcare costs, I can only imagine the impact this product is likely to have not just in the US, but in the UK and Western Europe as well.

Finally, while Chinese and Indian innovators such as Huawei, Piramal and Reva may pose a competitive threat to their Western counterparts in telecoms, pharmaceuticals and automobiles, I think that this competition is good for everyone, not bad. Indeed, such a competitive challenge is no different from that which Western firms already pose to each other on an ongoing basis. If anything, such competition will make existing firms less complacent and more eager to develop products and services that make our lives better, whether we live in the West or the East, the North or the South.

A Very Merry Christmas and a Happy New Year!
Jaideep



9 January 2010

Dear Jaideep,

Happy New Year! And thanks for your thoughts from ‘in the thick of things’, so to speak, in Bangalore. I’m glad you agree that innovation is buzzing in India and China. You make a convincing argument that Western businesses will benefit from the rise of R&D hotspots in India and China through higher R&D productivity. You also rightly point out that consumers will enjoy improved products that offer better value for money.

But how will the Western economies pay for all of this? What does it mean for workers in the US and Europe? We have grudgingly accepted that low-skilled jobs will move from Europe and the US to India and China (even if not all of us are convinced that services – what the Americans poignantly call ‘flipping burgers’ – will take up the slack).

But now, by your own admission, those high value R&D jobs are also moving East. That doesn’t follow the script: high-value jobs in design, engineering and R&D were supposed to stay here. Of course we should specialise in our ‘comparative advantage’ as David Ricardo rightly explained back in 1817 (albeit it in London rather than Cambridge). But what is our comparative advantage? The answers are scarce. A few, such as international bankers, lawyers and consultants who can hawk their scarce skills and networks of relationships in the global market have done well.

But those who face direct (or even indirect) competition from what you rightly describe as the “large volume of high quality scientific and technical talent that India and China produce on an annual basis” are hurting. Are you aware that people in the lowest 40% of the income distribution in the US have not seen any increase in their real (inflation adjusted) standard of living for the last 20 years – despite the longest economic boom seen for a century?

Competition may be good, but it will bring a rude reminder that many in the West have been living beyond the means they can realistically command in today’s more competitive global market. It will come as a shock to the US and European labour force to discover that their knowledge (let alone the sweat of their brow) is not as valuable as they thought – especially given the massive amount of public debt yoked around their necks. Surely you can’t believe there won’t be losers as innovation in China and India rapidly ramps up?

Best regards,

Peter



23 January 2010

Dear Peter,

It’s good to hear from you, as always. I’m back in the UK now, and the return was a bit of a shock in some ways. One day I was in 25 degree sunshine in Bangalore and the next I was in a snow storm in Cambridge. Somehow the weather seemed to reflect, at least for a moment, the contrasting fortunes you allude to between East and West. Bangalore, and by extension India, was full of sunny optimism, while Cambridge and the UK seemed to be in the midst of a winter of discontent.

Undoubtedly, there’s truth in what you say about the impact of India and China on the economic and psychological health of the West; I would be naive to deny that. The globalisation of manufacturing and services in the 1990s certainly brought with it both winners and losers. And certainly there are a large number of people in the West for whom the fear of being among the losers is a dominant emotion. However, I think this fear is mostly misplaced in the context of the globalisation of innovation that we’ve seen in the 2000s. Here’s why.

You raise the issue of the potential loss of white-collar jobs accompanying the globalisation of innovation (mirroring the loss of blue-collar jobs that accompanied the globalisation of manufacturing). However, I would argue that innovation is different from manufacturing in one crucial regard. While manufacturing is largely about costs and is a zero sum game, innovation is more often about quality and is a growing pie game.

For instance, Rachel Griffiths and her colleagues at the Institute for Fiscal Studies looked at the patenting rates of UK firms who opened R&D centres in Europe and found that this process increased the patenting rate of the R&D workers at home. Rather than replace home activity, the foreign activity actually stimulated it further! I believe the same thing is happening with firms that have opened such centres in India and China.

You also raise the issue of comparative advantage. I think it will be a while before the centre of power shifts from West to East (if it ever does). If one looks at the 20 largest spenders in R&D, all but one (Samsung) is a Western or Japanese firm. These 20 firms together spent $128 billion on R&D in 2007, accounting for more than 25% of the spending of the top 1000 big R&D spenders worldwide. I don’t see top management at these companies rushing to make themselves and their compatriots obsolete in a hurry, whatever the extent of their admiration for their Indian and Chinese counterparts.

Which brings me to your last point: the standard of living of people in the West. You quote an incontestable statistic: the lowest 40% of the income distribution in the US have not seen any increase in their real standard of living for the last 20 years. But here’s another: the World Bank estimates that 456 million Indians (42% of the population) live below the poverty line of $1.25 per day (in China there are about 150 million such people). Further, current estimates suggest that even if India grows at healthy rates for the next four decades, its per capita income will be only a quarter of the US level by 2050 (while China’s will be at best half). The world may indeed become a more level playing field over the next few decades, but standards of living in the West will still be significantly better.

Having written this, I realise that the difference in weather I experienced on returning from Bangalore to Cambridge was a bit of an illusion really. Things only look sunny in India now and grey over here; but come the summer, Indians will be facing the heat while the snows in Cambridge will melt and life will once more be very pleasant indeed. Don’t you agree?

Best wishes,

Jaideep



25 January 2010

Dear Jaideep,

Greetings from Beijing and thank you for your last email. The weather is below freezing here, but the economy is hot – back to double-digit growth and all the fears are of overheating, bubbles and inflation. Quite different from the news I received from London on the same day: hoping the UK might have emerged from recession in the last months of 2009, with a growth rate of 0.4%.

But maybe you are right about innovation being a positive sum game. The past two days I have been with a Chinese company that makes equipment for the construction industry – from cranes to bulldozers. It’s the leader in the Chinese market and now it is looking to open R&D centres in Europe and hire what it calls ‘foreign talent – so maybe there is hope for us in the West yet! There are definitely opportunities as well as threats from the increasing demand for innovation in Asia. What worries me, however, is whether we are equipped to capture those opportunities? They might pass us by unless we engage more fully with what is probably the tipping point triggered by the financial crisis: a switch of the world’s growth engine from West to East.

It seems to me that if we are to turn the ramp-up of innovation in India and China from a threat to an opportunity, then it won’t be enough to focus on innovation that produces rarefied gadgets for niche markets at prices only a few can afford. Take the example of healthcare services. What they want in India and China is high-tech, portable equipment that can deliver reasonable performance at very low cost. In an earlier email I mentioned digital direct X-ray machines. Philips produces an amazing machine that can produce real-time, X-ray videos of the beating heart. The trouble is they cost £300,000! In the same industry the leading Chinese company focused its innovation on how to apply this high technology in simplified form to everyday applications like chest X-rays. They also made their equipment plug-compatible with a hospital’s existing IT systems. The price tag is just £30,000 and the machines are taking the growth markets by storm. We not only need more innovation if we are to avoid losing ground to Chinese and Indian innovation, we need different innovation that allows us to leverage our innovation capabilities in the the growth markets of the future.

You rightly point put that per capita income in India and China is still a long way behind the US and you doubt it will ever catch up. But that future is sooner than we think – it looks like China, for example, will overtake Japan as the world’s second largest economy in the first quarter of 2010, a full decade before most expected this to happen.

The good news is that Western multinationals can play this new innovation game successfully. GE, for example, created a hand-held electrocardiogram device for emerging markets that sells for just $1000. It’s now selling rapidly in the US. The issue for Western workers is that this product was developed in India – what GE calls ‘reverse innovation’. I’m sure we can learn to do this new-style innovation that will allow us to capture opportunities in emerging markets – but I’m not convinced our research establishment will actually make the transition. I fear they may retreat into the bunker and argue that this kind of ‘cost innovation’ isn’t really innovation at all.

Today, the West may have the upper hand in terms of its share of spending on R&D – a fact your statistics clearly show. But that could change rapidly. China, for example, minted another 6.3 million university graduates last year; of those 1.8 million were newly graduated engineers. You may be rightly looking forward to the return of a wonderful spring in Cambridge, but I fear your confidence is fed by too many images from the rear-view mirror!

Best wishes,



Peter

25 January 2010

Dear Peter,

Wonderful to hear from you, and good to know that although Beijing is freezing, the Chinese economy is keeping you warm!

On reading your latest email, I have the strong feeling that we might actually agree about a lot after all. First of all: I couldn’t agree more about innovation being a positive sum game. The example you give of the Chinese construction company is a perfect example of this. Indeed, I often argue with those in the West who are inclined to worry about the eastward flow of R&D investment that this flow is very likely to reverse soon. As Chinese and Indian multinationals grow in size and seek a global innovation footprint they are very likely to do so by setting up R&D labs in the West.

Which brings us to your second point about what the West will need to do to make the most of this opportunity as it arises. I think you are absolutely right: the West will need to, as you put it, “engage more fully with what is probably the tipping point triggered by the financial crisis: a switch of the world’s growth engine from West to East”.

This will, of course, involve many things. It will require a change in mindset: large Western multinationals and their R&D personnel are going to have to get a little less enamoured of technology for technology’s sake and start thinking more about what the purpose of innovation is in the first place: getting more value for less cost for more people. India and China, where the pressures exist to innovate to this end, are the perfect labs in which to develop such innovations and the mindset that underpins them. The examples you give of the Chinese X-ray machine and GE’s ECG machine are excellent cases in point. The future does indeed belong to emerging markets – that is where the growth is – and emerging markets demands cost-effective solutions; to tap into these markets, therefore, Western firms are going to have rethink how and why they innovate. This may not be easy, as you indicate, as it will also require changes in power structures and some amount of humility, but I am confident that the West can and will rise to this particular challenge.

More importantly, if they wish to be the most favoured destinations for the growing multinationals of China and India, the countries of the West will have to continue to produce significant numbers of high-quality scientists, engineers, managers and creative people of all sorts to feed the innovation process.

No doubt they will face competition on this score from India and China who have the advantage of numbers, especially as their populations are relatively young in comparison.

More seriously, there might be the temptation among some governments in the West to deal with their growing budget deficits by cutting back on spending on universities and research. I think this would be a major error that would hurt long-term competitiveness and innovation.

Again, however, I am confident that better sense will prevail. I for one cannot believe that the powers that be would allow 800 years of excellence in Cambridge to end up as some sort of museum to the 20th century and before.

As I said, I think we agree on most of the underlying dynamics of what will happen in the global innovation system over the next few years. Where we might disagree, if at all, is on how the West will fare. Where you seem pessimistic about this, I think I am optimistic for the most part.

Best wishes,

Jaideep



26 January 2010

Dear Jaideep,

Thanks for your thoughtful comments. I think we are coming towards some meeting of minds about the rise of innovation in China and India and some of its implications for the West. I hope your messages about the need to refocus the thrust of some of our innovation efforts and your cautions about the risks of cutting back on support for research and education are taken to heart by both our policy makers and the business community.

I’m not so sanguine, but I have to admit, you did cause me to wonder whether I was being a bit pessimistic about the threat of thr West being left behind in the dust of the global innovation race. Then I looked at today’s Financial Times online (yes, it is available through the internet here in China). The following headline stuck me: ‘China scientists lead world in research growth’. The article goes on to report that China far outperformed every other nation, with a 64-fold increase in peer-reviewed scientific papers since 1981, with particular strength in chemistry and materials science. Looking to the future they point out that China’s ‘awe inspiring’ growth had put it in second place to the US – and if it continues on its trajectory it will be the largest producer of scientific knowledge by 2020! India also showed creditable growth in scientific output over the same period. Aren’t you being over optimistic about our prospects?

Best regards,

Peter



26 January 2010

Dear Peter,

Thank you for your latest email. I think you’re right: we’re clearly converging on some common points of agreement here.

There no doubt: India and China are on the rise. In a way this is fitting: after all, these countries were among the most productive and inventive in the world only two and a half centuries or so ago, and had been so for a few centuries before then. Perhaps nothing captures their rise better than the statistics you quote on the quality and quantity of their recent scientific output.

The question then is: how should the West respond to this rise. Again I think we both agree: the West should take the rise of India and China very seriously and study carefully both the reasons for this rise and its full implications for the West. The West should then act to ensure it takes full advantages of the opportunities this rise provides.

But the real question however is: how will the West respond? Will it respond to the rise of India and China in the way that India and China responded to the rise of the West in the late 18th and early 19th centuries? In other words, will the West not respond at all and merely slumber through the next few decades? I think not. I think the West is too energetic, too reflective, to self-critical, too paranoid even, to let any of this happen.

Eventually, I suppose, a large part of me wants to believe that we might finally have reached a point in history when one country’s success does not mean another’s failure. And so maybe my optimism is really a sort of hope in disguise. Or, you might even say, it’s wishful thinking of a kind.

Shall we agree to leave it at that and let time decide?

Best wishes,

Jaideep

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