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Cover Story
 

Does R&D Really Pay?

Issue Date - 03/02/2011
 
“So far, we have only worked on prototypes...”
When it comes to r&d, who can be trusted more than the japanese? maruti has done that for 28 years. And now, it wants a role-reversal!

B&E: It is often said that Maruti Suzuki is highly dependent on the parent company for R&D. What is your view on the R&D capabilities of Maruti Suzuki, as a standalone entity?
I. V. Rao (IVR): We have been working on developing and nurturing the R&D capabilities at Maruti Suzuki India for a long time now. We first sent Indian engineers to Suzuki Japan for actual on-the-job training to enhance their engineering capabilities in the mid-1990s. It went on to the next level when we launched the Zen in 2003. That version was originally designed by Japanese engineers, but we introduced some design changes in it. Then began the Swift project in 2003, in which both Indian and Suzuki engineers from Japan, worked in collaboration. So to say that Maruti India is totally dependent on its Japanese partner for R&D would be wrong.

B&E: Judging by what you say, surely there seems an intent from Maruti to develop a strong R&D base in the country. How has manpower grown in your engineering department to help your cause?
IVR: Over the last three years, we have seen a consistent rise in headcount at our engineering unit. We currently have 1,060 engineers at Maruti and hope to close FY2010-11 with a total of 1,100. We also plan to add another 200 in FY2011-12.

B&E: Much is expected from your new R&D center that is coming up at Rohtak. Your comments?
IVR: We believe so. The facility is spread over an area of 700 acres, which will also house a world-class test track, for all possible tests, including crash-test, mileage-test, speed-test, et al, to be conducted on the new product. So far, we have only worked on design and prototypes of various models, which are only partially tested in India. So with our new facility, we also hope to accelerate the process of vehicle development.

B&E: So do we also expect a Made-in-India car from Maruti soon?
IVR: Yes. We are going to set up additional facilities that are required for being self-sufficient for the validation of the new Made-in-India model being developed in the country.

B&E: Do you believe that R&D investments in your industry result in enhancing shareholder wealth?
IVR: Definitely yes! The enhanced engineering capabilities will help Maruti understand the requirements of the Indian consumer better, which will therefore translate into more consumer-friendly products. The increased sales and bottomlines therefore, will enhance enterprise value as well as m-cap of the company.

B&E: Royalty payments have been a big problem for Maruti as far as financials are concerned. Will the new efforts in R&D ease the pressure?
IVR: This is one area where I still have a doubt. For instance, though we are gearing up our engineering capabilities in terms of full body change of cars, we are still using the same old platform which was developed by Suzuki. Not only that, the actual engine and transmission system which are being used in existing models are being carried forward to the new models. Given such factors, it will take time to understand the exact impact on the royalty front.

 
Case Analysis :BIOPHARMACEUTICALS
Now for the blockbusters
For biocon, r&d is sacrosanct, irrespective of market conditions. but the ultimate value generation is yet to come

A recent report by ASSOCHAM (January 17, 2011) states that Indian companies still take a long time before investing in R&D. On the same note, a random poll conducted by them showed that 46% of the CEOs of Indian companies spent less than 1% on R&D in the year 2009-10. But biopharmaceutical giant Biocon has resiliently stayed the course over time.

It was evident when Biocon was severely tested in FY 2008-09, the company witnessed a sharp fall in profitability due to heavy MTM (Mark To Market) losses and the global downturn. Net profit dropped by 74.3% to Rs.1.11 billion for the fiscal year. Biopharmaceutical companies all across the globe were reducing their expenditure on R&D due to economic shrinkage. But Biocon’s R&D expenditure in FY 2009-10 amounted to Rs.594.5 million (6.3% of sales), a rise of 110% compared to FY2009. By the end of FY 2010, it was estimated that the biopharma giant had employed 13% of its work force into research and development. Biocon’s IN-105 is the only Oral Insulin in the world to be in long duration clinical trials, and would be its most major success story. However, its recent failure in phase 3 clinical trials has dampened its hopes to an extent. Another novel product is the T1h, which could be used in many auto-immune situations. The company has effectively leveraged global partnerships. It has also entered into tie ups with Mylan, Optimer, Amylin and Vaccinex. Its custom research division Syngene set up India’s largest R&D alliance with Bristol Meyers-Squibb, and has grown its revenues by 30% in FY 2009-10. In all, its research services business has posted revenues of Rs.2.8 billion in FY 2009-10.

In an exclusive interaction with B&E, Biocon Chairman Kiran Mazumdar Shaw elaborates that the company has a balanced portfolio approach to R&D and finances its R&D programmes through internal accruals, backed by earnings from generics & biosimilars. “Generics & Biosimilars as near and mid term opportunities and novel programs are potential large, long term opportunities,” she adds.

Going by the record on the market front, the mcap of the company in 2008 was Rs.43.06 billion. It then sank to Rs.28.90 billion in 2009 and rose again to Rs.50.80 billion in 2010. Even though Biocon is relentlessly building a well balanced R&D structure and developing new skills, it’s most cherished objectives are clearly bringing IN-105 and T1h to the market. They will help Biocon break free of the volatile global economic cycles and unleash a phase of accelerated revenue growth. Those will be the ultimate R&D success indicators for Biocon, even though it does have a thriving R&D business.

By Anindita Chakraborty

          

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