Lack of R&D incentives for Domestic Companies in Telecom PLI

 SITARA has written to PMO on this:

RECOMMENDATIONS

 For this we request the following:

1.      We are not asking for a withdrawal of the scheme, as some employment benefits are perceived under it, we are only asking for an Addendum which gives strong incentives for domestic companies investing in R&D including manpower accounted as per Indian accounting standard.

2.      To prevent foreign OEMs from availing of the benefits under R&D for assembly operations and IPR which is not Indian, even if the bulk of their R&D is done in captive R&D centres in India with no spillover into the domestic ecosystem, it must be specified that R&D benefits will go only to companies headquartered in India/ owning IPR registered in India and the worldwide profit made on these IPR must be accrued in India only. As of now R&D is capped to only 15% of the investment. Creating Indian IPR should be mandatory as it will ensure the “Indian-ness” of even MNC companies in addition to their low value-addition activities in India.

3.      Also, the companies that can avail of the scheme have been limited to 10 for MSME and 10 for domestic and global firms, of which only 3 are reserved for domestic, leading to the danger that a few  companies will monopolise the benefits. Hence the addendum must also remove the cap of 10 successful companies in each MSME and non-MSME category respectively from 10 – and extend it to all eligible candidates. In addition, to ensure fairness and prevent just one applicant from getting the entire amount, there should be a cap on the maximum subsidy amount given to any single applicant.

Microqual -pioneer in provisioning passive microwave components, service and solutions to Mobile Telecom Operators and Telecom Equipment Manufacturers in India.

Deloitte list of fast 50 India often contain a sprincle of hardware firms and Microqual is on the list in 2011, 2009, 2008, 2006 and 2005.

Microqual was founded by a young entrepreneur Mahesh Choudary in 1999 starting with Splitter used to connect  customers using WLL (Wireless in Local Loop) technology. Microqual today is a Rs 235 crore company provides complete and integrated lifecycle solutions for passive infrastructure to the telecom companies' right from site selection, civil and electrical construction to installation and maintenance. 

Under the RF feeder cable manufacturing business, Microqual has a manufacturing unit in Aurangabad, Maharashtra where copper-core and aluminium-core cables are sheathed for indoor and outdoor application. A second RF equipment facility is operational in Rudrapur (2 units) where active and passive RF components like repeaters, connectors, jumpers, antenna, splitters, couplers, combiners etc are manufactured. The company has an R&D laboratory in Bangalore, where product development and research work is done. Apart from being a manufacturer and material supplier, Microqual is also a Turnkey Service Provider (TSP) to telecom operators and tower companies. Microqual erects telecom towers (Ground Based Towers and Roof Top Towers) on small parcels of land (less than 0.25acre) procured and selected by the customer (telecom service provider). Microqual also undertakes the operations and maintenance contract for telecom operators. Microqual was one of the  first companies to win a contract for active maintenance from Huawei. Microqual is also engaged in the business of In-Building telecom Services (IBS) where it is involved in activities like RF planning and designing inside buildings (such as institutional areas, corporate campuses, shopping malls, hotels etc), leasing space from the builder/owner of the building, deploying RF infrastructure and then leasing out this RF network to telecom service providers to cater to the tenants /occupants of the building.
How did a hardware product company survive in India? The firm did not plan to become world's largest manufacturer of any electronic component and did not set up R&D center to develop next new material for components. Instead, the firm's business priorities have been driven primarily by its customer's needs and it uses technology innovatively to enhance value for them by offering products, services and innovative solutions resulting in reduction of Capex, Opex and Space (ROCS), thereby increasing their overall profitability and time to market. 
Mahesh  formula for scaling an IP driven business in India and product development provides great insights to factors that led to the success of Microqual."I think most people are good product developers, but something that we learnt very early on is that people lack in the final phase of customization. We realized that if we can do that part well, then we are a very good value proposition. I think this is one of the most important aspects of scaling. 

Good, Bad, Ugly and Self Destructive features of TRAI recommendations to support Indian Telecom Manufacturing

Policy prescriptions can be classified as Good, Bad, Ugly or Self Destructive using Stephen J. Ezell and Robert D. Atkinson (WWW.ITIF.ORG) narration. When both India and trading partners are winners, then that policy is Good, Bad when both India and  the world lose, Ugly when only India wins and Self destructive when India loses but competing nations win.

Policy Recommendations- Good

•  Set up an International standard Testing and Certification Agency by way of converting TEC into an Autonomous Agency. 
• To remove the comparative tax disadvantage on domestic manufactured products. 
• The requirement for “provenness” be waived for domestic manufactured products provided  the product meets the requirement of quality, technical specifications and standards and are certified by the testing and certification organisation. 
• Ten telecom clusters be identified immediately. 
• A Telecom Research and Development Park should be established. 
• Set up Telecom Research and Development Fund(TRDF) . 
• Create a Telecom Manufacturing Fund(TMF) for providing venture capital to indigenous manufacturing.

Policy Recommendations- Bad

·         Subsidy for capital and working capital , deferring the payment of Excise/Sales Tax/VAT/GST, Income Tax holiday, exemption from countervailing duties,  Excise duty etc

Policy Recommendations- Ugly

·         Set up a second fab unit with government funding.

Policy Recommendations- Self Destructive

·         Preferential market access to domestic manufacturers in procurement by the Government and Government Licensees, with incentives and penalties.

What is your view?

TRAI recommends Telecom Research fund, Telecom research park and Telecom Manufacturing fund

After an exhaustive process of consultations, TRAI finalised its recommendations on need and measures to support Indian Telecom Manufacturers. Highlights:

• TRAI recommended preferential market access in public procurement from Indian  Manufactured Products and Indian products (Indian IP). For the year 2012-13 preferred access is targeted at 45% ( 30% for Indian manufactured products with min value addition of 25% and 10% for Indian Products) and this is binding on public sector units, MTNL, BSNL etc but also on Government Licensees. Well all service providers are licensees- will private players accept the recommendation?  If service providers do not meet the stipulated minimum, they need to deposit amount equal to 5% of short fall with either Telecom Research Fund or Telecom Manufacturing Fund. And if they exceed the minimum, they get refund from license fee in proportionate manner- if they exceed 20% i.e they procure 50% from India, then they get rebate of 20% on license fee for that year.
• All equipment manufacturers (less than 1000 crore turnover ) should get interest subsidy of 3% for Indian Manufactured product and 6% for Indian product. Another incentive is to defer taxes (excise/ sales tax etc) for a period of 5 years with nominal rate of interest and income tax holiday for 10 years.
•  TEC to be made an autonomous organization of international reputation for product testing and certification. Once certified , the tender condition of `provenness' to be waived off for 10% of tendered requirement.
• Telecom clusters to be identified and developed. Manufacturing units in the cluster to be provided subsidy at 4.5%
• Telecom Research Park to be set up with 1000 acres of land and 5000 crores of investment, 1000 incubating start-ups, by 2013. The work should begin by May 2011.
• Telecom Research and Development fund with a corpus of 10,000 crores. At 8%, the corpus would make available Rs 800 crores to support about 40 innovations every year.
• Government to provide 3000 crores to Telecom Manufacturing Fund and rest from other bodies.

Download report(241 pages): TRAI

Memorandum submitted by Indian Innovators Association in response to Consultation Paper on Encouraging Telecom equipment manufacturing in India

RECOMMENDATIONS
Our recommendations on R&D/ Innovation take into consideration the lessons learned from earlier attempts supporting R&D/ Innovation of Indian Telecom Equipment manufacturers. Grants for start-ups are available from TePP program of DSIR, conditional grants available for pre-commercial stage R&D from TDDP program of DSIR and soft loans are available from TDB of DST for technology commercialization. None of the programs are sector specific.
a) Lessons from R&D projects ( handled by A.S.Rao at DSIR)

• Technology absorption ignores technology advances

A public sector undertaking in Chennai had successfully improved Teleprinter with ruggedized design but Fax entered as disruptive technology.

• Developing components while systems change

Technically challenging component innovations like ASICs for Line card /Conference card / STD-PCO had not generated revenues, as system level technology changes made these components redundant.

• Targeting current price leaves the firm cash less

A Bangalore based firm took up development of ADSL, starting from circuit design but by the time product is ready with test approval, Chinese prices crashed to below BOM cost.

• Technology Life Cycles do not follow predictable time table

Delhi based firm developed Multi Lingual Pager in several Indian languages but market never developed to the same scale as China.

• Incremental innovations do not matter

Due to limited R&D competence, Time-to-market is disproportionately large in a scenario of shortened Technology Life Cycle.

• Retaining R&D team is a challenge

For completion of any R&D project, there is need for a team of minimum 3 to work together for 3 years. Recruiting and retaining R&D people is a challenge faced by many SME due to disparities with service sector. Many R&D projects had to be short closed.

b) Characteristics of Telecom Innovations
Pathways of innovation adoption & diffusion in Telecom equipment are different from that of innovations for `plug and play’ devices. Standards and Network externalities play a critical role in influencing technology acceptance behavior. Due to Network externalities value of service improves with number of users, standards facilitate diffusion in short period and service firms reach tipping point by exploiting a proven technology riding on a dominant standard. Market economics act as strong disincentive for service players to adopt local innovations as their business model takes technology as a given parameter and not something to be experimented. Customers of telecom innovations need to be incentivized to test and adopt Indian innovations.
c) Issues for consideration regarding the R&D effort:
1. What should be the objective and focus of the R&D effort for the year 2020?
R&D efforts by telecom equipment manufacturers for market introduction in 2020 are visible today as academic papers. In other words, supporting academics now could generate required competencies for telecom equipment manufactures to take relevant R&D in 2020. We recommend large scale extra mural research funding by DST and other agencies giving preference to cross border academic partnerships.
2. Flowing from the above, what should be the objective and focus of the R&D effort for 2015?
IP accessed today will provide building blocks for R&D by manufacturing firms in 2015. We recommend liberal funding to established Indian manufacturers for accessing critical IP with strategic investment in university spin-off firms in USA and Europe. This investment has to be done in start-ups for technologies at fluid stage before emergence of dominant design/ standard.
3. What is the level of ‘Indian Products’ that we should attempt to achieve at the end of 2015 and 2020?
Market decides the winners and target of 10% by 2020 and 5% by 2015 is realistic.
4. What is the broad level of investment required for this effort?
RDDE Investment from Government: Rs 2,000 crores
Investment by VCs and equipment manufacturers: Rs 3,000 crores
5. Which Institutions, whether in the Public or private sector, are best suited to carry out this effort? And why?
For- profit-commercial firms are the most efficient convertors of knowledge to revenues. Others can only be enablers and facilitators.6. What can be the linkages established with Institutions or Indians abroad? Will this reduce time delays?

• Linkages between researchers to take up joint research program.

• Fast track funding of university spin-offs promoted by Indian origin students and faculty without condition of return home.

• Open innovation platform to tap global talent.

7. What should be the role of the Government and the Industry in regard to the R&D effort? In particular, what should be the investment, if any, by the Government?

• Technology Incubation fund: Rs 50 crores ( all by Government as grant)

• Pre-commercial stage technology development: Rs 500 crores (Rs 250 crores by Government as soft loans and matching R&D investment by commercial firms)

• Dedicated Telecom Venture Funds: Rs 2000 crores ( 10 baby funds, TDB investment Rs 1000 crore and VC investment Rs 1000crores)

8. Should an R&D fund be set up? If so, how can the fund be managed effectively to meet its objectives?

• Full collection and utilization of R&D Cess on Imported Technology and USO fund should take care of the needs. While technology is imported in the form of equipment, components, software, consultancy and license, R&D cess is levied only in the case of Joint Ventures with technology license agreement. This needs to be relooked and scope expanded to include all forms of technology imports.

• Though there are existing programs in DSIR, DST, DIT etc, the scope of support is narrow with application process time of 9 to 12 months, not congenial in fast changing technology. Man power costs, IP acquisition costs, market development costs etc are not supported under the existing programs.
• Telecom incubation Fund can be managed by professional bodies like incubator at IIMA to orchestrate the network of all stakeholders. A brief of Telecom Innovation Funnel is attached.

• Start-ups need seed funding and series funding at revenue stage and dedicated VC funds can be established with TDB co-investing 50%. These baby funds for young ventures can be managed by incubators at IIT/ IIITs.

• Established firms do not take equity funds from VCs and they need to be supported at pre-commercial stage with soft loans. In the present circumstances it is inconceivable for an established player to start from research stage. They need to be encouraged to take research from national and international bodies to the market, by adding value. This calls for liberal support to Indian telecom product firms to make strategic investment IP ofuniversity spin-offs in India and outside. Professional organizations like incubator at IIM, Banaglore , where most of equipment manufacturers are located, can manage the funds.

• The customers of telecom equipment need to be provided incentives to test and adopt Indian innovations. Purchase and price preference in public procurement seems out of place though implemented intelligently in USA, EU and China. There can be condition that 10% of equipment sourced is based on Indian IP.

9. What could be the fiscal incentives to be offered by the Government? Should such incentives be linked to any outcome?

• Fiscal incentives for R&D are liberal for profit making firms.

• If investment in Indian incubated start-up is included in tax savings, the public will take care of all investment needs of Indian innovators. Crowd funding is emerging as an alternate mechanism.

• There is need for fiscal incentives to innovation intermediataries, IP trading and bundling houses, Common facilities owners etc.