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Cover Story

Does R&D Really Pay?

Issue Date - 03/02/2011
Case Analysis : FMCG
“India to be a global hub”
Klaus Zimmerman talks to avneesh singh on the new possibilities that have opened up for Nestlé as it sets up its r&d centre here

Klauss Zimmermann joined Nestlé in 1988 in the research and development team. He has been instrumental in product and process development of famous coffee brands from Nestlé like NESCAFE and NESPRESSO. Under his guidance, the R&D division is achieving new milestones for the Swiss major. He speaks to B&E on the initiative of announcing setting up of Nestlé’s R&D centre in India and what it means for the company’s future.

B&E: How important a role does research and development play for Nestlé?
Klauss Zimmerman (KZ): It surely plays a very important role because Nestlé is driven by innovation and renovation and if you see, R&D is the engine for this innovation and renovation.

B&E: India is said to face problems with respect to availability of an R&D talent pool. Will this new R&D centre have people working from Nestlé R&D centres around the world or will you be hiring more people from India for this?
KZ: We will recruit most of the people locally. India has a very good education system and so we do believe that we can get talented people here. We are looking more specifically for engineers and scientists but there will be other hires also. We will consider three factors for team building here, which include – old foxes and new lions, men and women and an international composition.

B&E: What will be the size of the new R&D centre at Manesar and what kind of investment will the company make for this R&D centre?
KZ: It will be a 200,000 sq. ft. R&D centre. We are investing around Rs.2.3 billion for this R&D centre at Manesar, Haryana. This will support the growth of Nestlé India and R&D in India will play an important role in the global Nestlé R&D. This centre will be operational by July 2012.

B&E: You have associations with universities for the R&D centres in other countries, say for instance the R&D centre in Japan has association with the University of Tokyo. Will you have similar associations here in India?
KZ: We will work with the local universities and local research institutions. It is not that we are not associated right now, but the new R&D centre will only increase our association.

B&E: What kind of plans do you have for India? Will we see Nestlé set up some more R&D centres in India?
KZ: We have ambitious plans to grow in India. We are focused on BRIC nations. We have also opened an R&D facility in Africa. We have a great vision for India and believe that we can really go far. India will be the worldwide centre for developing products which makes nutritious food affordable.

B&E: Will the R&D centre here cater only to the research and development for the products in India or for other markets as well?
KZ: We will be working on facilitating innovation in a wide variety of foods, including culinary, cereals, beverages and dairy products. It will be interesting to work on leveraging the products innovated here. We are already exporting Munch and Hakka noodles from here.

Case Analysis : AUTOMOTIVE
The change maruti needs!
With over rs.12 billion sidelined for investments in r&D over the next two years, maruti is finally waking up to the ‘innovation’ call.

After a rather joyful FY2009-10, which saw Maruti Suzuki cross the million-plus mark in sales (1,018,365 to be precise), the company’s shareholders welcomed the new financial year on a rather unhappy note. Reason: the first quarter of FY2010-11 saw the company’s market share fall below the 50% level in the domestic circuit for the first time in over two decades. To add insult to injury, despite its topline recording a 27% increase during Q1, FY2010-11 (touching Rs.80.51 billion), the company’s bottomlines fell by 20% (to Rs.4.65 billion). Result: Maruti’s stock plunged by over 12.1% in a single trading day. Over-dependence of the Indian subsidiary on the parent company for technology and R&D, which had resulted in a huge outflow from Maruti’s coffers in the form of high royalty payments over time (royalty had increased y-o-y by 42% during Q1, FY2010-11), had finally come to haunt Maruti.

Not that Maruti had not understood the power of investing in R&D over the years. It was only sceptical about it. For long, the R&D capability of the Indian subsidiary had only been tested on making the products conducive for Indian conditions, which included petty functions like enhancing ground clearance, adjustment of suspension, et al. Count this – while others like M&M and Tata Motors had invested 3.23% & 3.29% of their revenues respectively during FY2009-10, Maruti’s contribution to the cause was only 0.58%. In absolute R&D investment terms, it was M&M’s Rs.6.65 billion and Tata’s Rs.11.70 billion, being compared to Maruti’s Rs.1.73 billion!

But recent developments at the company have been encouraging. From increasing headcount at its engineering units to developing a state-of-the-art R&D facility at Rohtak (which will become operational by 2012), the company plans to invest well over Rs.12 billion in 2011 & 2012. And that should enable Maruti Suzuki to licence home-grown technologies and earn royalties from the same. It will also allow the company to experiment more freely with the models and offer more customised products in the Indian market. Says a hopeful Shinzo Nakanishi, MD, Maruti Suzuki, to B&E, “With our R&D centre at Rohtak, there will be more emphasis on developing the products in India. It will become our R&D hub for Asia and don’t be surprised if there arises a situation in future when you find Maruti Suzuki charging royalty from Suzuki (Japan) for the global projects that would be handled by Maruti’s engineers in India!”

In FY2009-10, Maruti invested 185.5% more in R&D than it did five years back. During the same time, its topline increased by 141.3%, its bottomline by 110.1% and its stock price by 61.5%. Considering the huge investments planned, and trusting that history will be repeated as far as positive effects of R&D on financials are concerned, Maruti will surely find itself on the right side of innovation & wealth-creation, five years from now.

By Pawan Chabra


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