The Financial Express

High-tech: Acquiring redesign capability

| Updated: October 03, 2019 20:47:38

High-tech: Acquiring redesign capability

From Africa to South Asia, there have been great initiatives to get a piece of the high-tech economy. To witness the roaring of their tigers or lions, high-tech parks or economic zones are being developed, fiscal incentives in the form of tax differential offered, next-generation mobile data networks rolled out, subsidies given, and youths are inspired  to pursue the mission of startups or building robots. Yes, some visible signs of progress are reported. India is happy to report that 95 per cent of mobile phones sold in India carry Made in India label. Bangladesh also reports progress in succeeding with meeting 40 per cent local demand of mobile phone through local assembling. Following the footsteps of Asian countries, the Ethiopian government is developing a "portfolio" of industrial parks as the centrepiece of its plan to make the country an African high-tech manufacturing hub. Inspired by the high tech mission, often school students impress us upon building humanoid, demonstrating the ability to listen and respond. But are these successes good enough to roar the economy?

To create the success of local high-tech production in meeting 95 per cent local demand, India imported over $13 billion components, mostly from China. In this high-tech adventure, India's value addition is barely 17 per cent, mostly through labour.  One of the key factors underpinning India's success is the duty differential between imported and India-made handsets, which used to be 11.5 per cent in 2017, making local manufacturing cheaper. Unfortunately, in creating this success, India's local brands have lost their market share to Chinese makers. Xiaomi captured the top spot in Q2 2019 with a 28 per cent share. Its shipments grew 6 per cent YoY (year on year) driven by product portfolio expansion. Among the top five, four are Chinese makers, and South Korea's Samsung is the other one. Chinese makers are offering handsets, which are more appealing to Indian customers than handsets being offered by local brands like Micromax. Over the last decade, not only Huawei, but all major Chinese brands like Xiaomi, Oppo or Vivo focused on ideas (patents) of the redesign of handsets, making them more appealing, and less costly to produce. As a result, Chinese makers are succeeding in making a profit out of ideas of the redesign, while local Indian brands are losing market share by replicating commodity designs.

India's strategy of expanding value creation out of component manufacturing also falls short. Most of the expensive smartphone components like camera sensors, display modules, processors, antenna, software, and lenses have high intellectual property (IP) components. Production of these high precision components is capital intensive, leaving very little room for labour. Due to high IP and capital intensity, scale and scope advantages are a critical barrier to benefit from local production to compete in the cost front. Often production for local consumption increases the cost. For such a reason, Apple virtually does not make any physical component. It sources components from more than 200 global suppliers, including rival Samsung. Therefore, in the absence of ideas for redesign, labour-based value addition in assembling and component manufacturing falls short of stimulating the economy. 

The argument could be that market will be expanded through export. But labour-based little value addition falls short in making the product cost-competitive in the global space. For example, upon succeeding in capturing the local market of TV and refrigerators by exploiting the advantage of tax differential, Bangladesh is now contemplating on high-tech export success. It's being reported that local brands are exporting such products in different parts of the world, including Africa and the Middle East. But what is the underlying strength? It appears to be the cash incentive. On one hand, import tax on components and capital machinery is zero. On the other hand, cash incentive on export is 10 per cent or above. As opposed to local value addition, such fiscal incentives are major drivers of high-tech export success.

It appears that labour-based value addition in replicating high-tech products has been continuously shrinking. Capital intensity and economics of scale and scope advantages are also limiting the scope of leveraging the available scope of labour based value addition. It's time to focus on redesign capability acquisition. It has been observed that upon acquiring the capacity of how to make, sustained industrial success stories focused on acquiring the redesign capability, often by taking advantage of emerging technology. For example, Japanese automobile makers learned how to make automobile from Europeans as well as Americans. But they did not create success out of how to make. Their success is deeply rooted in acquiring the capability of how to redesign automobiles. On the other hand, Indians, upon learning how to make an automobile from the British firms, could not master the skill of how to redesign -- making products increasingly better as well as cheaper.   

The emergence of new technologies, changes in customer preferences, and positive externality effects open the opportunity of getting ideas of redesign. For example, automobiles used to be mechanical machines. But major makers like Toyota or Honda have been leveraging the advantage of information technology in redesigning automobiles. One of the major redesign strategies is to replace the roles of human and physical components with software. According to a McKinsey report, software value addition will keep growing at a rate of 7.0 per cent per year until 2030, far higher than 3 per cent overall growth of the sector. This will see the value of software in this sector nearly double from $238bn to $469bn. Due to failing in acquiring this redesign capability, India's automobile makers are consistently losing competitive edge.

It's being noticed that there has been a race to leverage artificial intelligence (AI) as a strategic technology to redesign products, and also processes.  Wipo (world intellectual property organisation) showed that the number of AI-related patent applications worldwide rose from 18,995 in 2013 to 55,660 in 2017 - 300 per cent growth in just four years.  Although startups dominate AI technology talk, industrial companies of the past century are dominating the patent portfolio.  It may not surprise us to see IBM, Microsoft or Alphabet among top 10 AI patent recipients. But what about Japan's Toshiba, NEC, Fujitsu, Panasonic, Canon, Sony, Toyota, NTT and Mitsubishi? Five of them are among the top ten.  It seems that major players of the industrial economy are generating AI-centric ideas for redesigning their products, in delegating human roles to machines. Despite startup craze, incumbent companies in making their existing products better performing, safer, smarter and also cheaper will likely be beneficiaries of AI.

High-tech products not only have new technology core, they are also causing disruption to previous generations. The high-tech industry has also been disrupting labour-based value addition comparative advantage of developing countries. On the other hand, high-tech technology portfolio is also opening the opportunity of getting ideas to redesign existing products as well as processes in improving the quality and reducing the cost. It's imperative to upgrade the strategy from labour-based value addition, whether in assembling or component manufacturing, to high-tech idea-based redesign. Otherwise, the high dream of developing countries fuelled by subsidy and low-cost labour for replicating high-tech products will likely fail to roar the economy. 

M Rokonuzzaman PhD is an academic and researcher on technology, innovation ands policy.


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