India and the global standards race

India’s start-up scene is taking off, with a string of e-commerce companies laying the foundations for further business success in software and services. Home-grown smartphone maker Micromax Informatics Ltd broke into the global top 10 this year. It should be noted, though, that companies like these are succeeding mainly by catering to the needs of Indian consumers and adapting technology that was invented, launched, and largely manufactured elsewhere. As India gears up to transform itself via the Prime Minister’s ‘Make in India’ initiative, it is imperative that current local suppliers of smartphones that typically import semi-finished products rise higher in the value chain and create local products. This can only be achieved if India partners with global inventors.

Technology innovation in the setting of global standards is one of the most important areas in which global inventors and giants such as Apple Inc., Samsung Electronics Co. Ltd, Microsoft Corp. and Qualcomm Inc. position themselves for long-run success. Standards touch every major technology, from the guts of the Internet to the networks that operate in the emerging smart home market.

Some standards battles are winner-take-all, like the historic struggle between Windows, Macintosh and OS2 for dominance of the personal computer market. But many standards result from cooperation among rival firms to establish a platform on which many must agree in order to succeed. Mobile communications technology (3G, 4G, etc.) is one example. For the 4G (long term evolution, or LTE) standard, decades of research and development (R&D) and millions of man hours spent in the standard setting resulted in some 2,000 patents from dozens of different firms being declared “essential,” which means that the holders of significant patent portfolios may receive a royalty on devices implementing 4G technologies. Major inventors for these standards like Qualcomm, Ericsson AB, and Samsung have invested billions of dollars in R&D and have a technology headstart over rivals. However, because much of their patented technology is available for a reasonable royalty, new firms can add and exploit their own points of product difference.

Good technology is usually anchored by valuable patents. In 2014, no Indian firms ranked among the top 50 organizations that filed for patents in the United States. Within India, the top filers include, Qualcomm, Philips, Council of Scientific and Industrial Research, Samsung, Microsoft, Siemens AG and Ericsson. None of the leading patent filers are in the business of developing and marketing products. The IT services industry has been important for India’s growth, but it does not scale particularly well because it is so customized and labour-intensive. India needs to enhance and better leverage its innovation potential.

It’s worth looking at the long-running effort by China to create national standards for consumer-facing IT products, which has been slow to bear fruit. The Chinese government is pursuing Chinese standards to spare its firms from paying so much in royalties to multinationals. This is a mistake in that it tends to confine its own firms to a domestic focus. It’s being penny-wise and pound-foolish.

The technology area where China has had the most success to date is telecoms. The government exercises considerable control here, more so than in other consumer sectors. When it wanted its homegrown 3G cellular standard, TD-SCDMA (Time Division Synchronous Code Division Multiple Access), to compete with global rivals, it simply assigned a TD-SCDMA licence to the largest of its three mobile carriers. This guaranteed that the government’s favoured technology would have a large enough market to attract multiple equipment manufacturers.

But moderate acceptance of TD-SCDMA in China did not lead to adoption in any other country. And in numerous other cases where the government has supported domestic technologies, including consumer video discs (EVDs, China’s answer to digital video disc) and multimedia (AVS, China’s answer to AAC compression), the government let market forces decide the outcome. For the most part, China’s homegrown standards fared poorly.

There are several lessons for India in the story of Chinese technology standards. First, technology policies that impose domestic solutions on the market are likely to be a dead end. Second, standards development is best handled by firms, not government agencies, so that companies develop the necessary technology capabilities; and third, it takes time and resources to not only invent but also succeed with global IT standards.

The Indian government can best support the long-term competitive positioning of Indian firms by supporting their investment in R&D and their participation in global standards forums. For firms, participating in activities like the upcoming inaugural conference on innovation, intellectual property and competition at Indian Institute of Management-Bangalore can be a springboard to competing at a higher level, and on a global scale.

David J. Teece is the Thomas W. Tusher Professor in Global Business at the University of California Berkeley and a distinguished speaker at the 1st India Conference on Innovation, Intellectual Property and Competition to be held on 7-8 December at IIM-Bangalore.