Can Western Multi-Brand Retail Giants Prosper in India?

It has been 20 years since India reversed its statist focus in favour of an open-market approach. The move from post-independence socialism to a unique form of market economy is surely one of the great economic success stories of the last two decades. From the IP perspective, the relationship between brands and modes of distribution is one aspect of this ongoing economic story. In that connection, an article that appeared in the April 16th issue of The Economist ("Send for the Supermarketers") attracted my attention.

It is well known that retailing in India is still woefully underdeveloped. Anyone who has been there can testify to the seemingly endless number of small shops (so-called kirana shops) that dot the Indian landscape. In part, such shops are tolerated because they are seen as providing a vital source of economic opportunity for a large number of potential small businesses, and the Indian regulatory apparatus has traditionally brought its full weight to bear in support of these arrangements. Allow in western-style retailing, it is feared, and yesterday's shopkeeper may find that he is no longer competitive.

All of this concern for social safety-netting comes at a cost for the consumer, who is deprived of the benefits of mass retailing. The result is what the article describes as "the most supermarket-hostile environment among big economies in the world." The difficulties include administrative regulation, poor road and train transportation, cold-water storage facilities, complex taxation and the high-cost real estate in many locations.

One manifestation of this policy in support of kirana shops are a series of regulations that hamper certain categories of foreign retail brands from functioning freely in India. Of course, regulatory restrictions are not new in India and are not limited to the retail structure. There was a time when virtually all foreign direct investment (FDI) was limited to a 49% stake by the foreign owner. The best-known example is the Indian car brand Maruti-Suzuki, which reflected the fact that the Japanese manufacturer could only enter the Indian market in the 1980s with a majority local partner.

Today, however, the focus is on the retail sector, where limitations regarding FDI in multi-supermarket chains are still in place. In particular:

1. There is a ban on FDI by multi-brand supermarket chains. This means that the likes of Walmart and Carrefour are still not permitted to enter at the retail level.

2. Such multi-brand chains can up wholesale warehouses, provided that they do not sell directly to the end customer. As a result, for example, Walmart has entered into a joint venture for the provision of wholesale and logistic services and appears to be seeking further such alliances.

3. In contrast, a single-brand retailer, such as Nike, can own a 51% stake in an Indian retail outlet.

These restrictions raise the issue of just how genuinely international any multi-brand retailing brand can expect to be. Granted, even the most successful product brands may be subject to local variation -- but the difficulty in adjusting to local tastes pales in comparison with adjusting to the demands of operating a successful multi-brand retail operation across different and diverse countries.

Carrefour is an excellent example, as its recent exit from the Russian market shows (for a discussion posted on IP Finance on November 12, 2009, regarding Carrefour's tribulations in Russia, see here.) Success, even retail dominance in one major market, provides absolutely no guarantee of success in any other foreign market. On the other hand, the fact that Carrefour has experienced difficulties in establishing a presence in the Russian market does not seem to have directly affected the overall value of the brand.

Circling back to India, the article describes the growth of a local multi-brand retail company called Pantaloon Retail here. As reported in the article, this company has stores in 73 cities in India and it employs 30,000 employees. It expects to reach revenues of $4 billion next year, which is still a small fraction of the total revenues of a Walmart or Carrefour.

My intuition tells me that Pantaloon Retail has no aspirations outside of India. If so, can Walmart or the like successfully compete with this brand at the local Indian level? More generally, are there limits for even the most successful multi-brand retail company at the trans-national level? Considering the strategic task of developing the house brand for such a retail company, must my focus ultimately be breadth or depth? Or can I reasonably achieve both?

Questions, Questions, questions!

Frugal Innovation: Two Titillating Tales

Perhaps the hottest notion floating through international management circles is the idea of "reverse", or "frugal" innovation.  Roughly speaking, the notion is that the time-honoured direction of innovation, namely from West to East/from developed world to developing world, is giving way to a more multi-directional approach. In particular, the idea focuses on emerging markets, such as China and especially India: these markets increasingly have the ability to hone "frugal" innovations intended for the local market, placing a premium on stripping costs while satisfying essential requirements and functionality. The best of these frugal innovations are then ripe for transfer to mature markets as well.

The notion became a particular focus of business school parlour talk after the publication of an article, "How GE is Disrupting Itself", in the Harvard Business Review here, late in 2009, by Jeffrey R. Immelt, Vijay Govindarajan and Chris Trimble. Imeldt is the CEO of GE and Govindarajan, professor at the Tuck Business School at Dartmouth College, is a leading proponent of the "reverse innovation" concept. We ourselves had an early inkling about the potential potency of this concept and already wrote about it on this blog site with great favour in the spring of 2009, here and here.

It is against this backdrop that two recent items drew my intention. The first is a
brief report in the November 13 issue of The Economist, "Tata's Nano: Nah, no." To remind the reader, the Nano is the much-heralded compact car, intended to cost around the equivalent of $2,500 plus taxes, which is meant to address the vehicular needs of the massive emerging middle class in India and elsewhere. I seem to recall that over 100 patent applications were filed in connection with the development of the Nano, which sought to merge world-beating technology in the service of producing frugal innovation at its best. Indeed, the Nano was lauded as a prime example of frugal innovation.

The problem is that there have been relatively few buyers for the car. Cumulative sales to date for 2009 are 40,467 (which seems to me the number of cars struggling to advance at a given moment at any major intersection in Mumbai). Sluggish sales are attributed to the fact that the car is marketed in only a few places in India, the higher-than-expected actual costs, and some early technological glitches in the vehicle. Whatever the reasons, and without discounting the possibility that the Nano might yet become a big success and a bell-wether for frugal innovation in the passenger car industry, its post-natal difficulties point to the dififculties that confront efforts to commercialize the fruits of frugal innovation, first in local markets, such as India, and thereafter to other emerging (and even developed) markets.

The second item was a brief report published on November 18 on Bloomberg.com and written by the prolific Scott Anthony. Entitled "Three Innovation Lessons from the Gillette Guard", it discussed one part of a webinar that will appear as part of an article in the January 2011 issue of "Havard Business Review". Anthony's article describes the efforts of Procter & Gamble to develop a double-edged razor for the Indian market that will meet the requirements of its Indian customers, but which will retail at the price of 15 rupees (about $0.33), with refill cartridges to cost five rupees (about $0.11).


Unlike a previous attempt by P&G in this area, which apparently used MIT graduate students from India, comfortably ensconsed in their Cambridge, Massachusetts surroundings, as its focus group, this time P&G seems to have reached out to actual consumers in the target market to come up with a potentially successful product. As well, P&G appears to have adopted distinctive forms of manufacturing, distribution and promotion for the product. In so doing, according to Anthony, P&G parlayed three fundamental features of product development appropriate for the Indian market: (i) go the source, (ii) delight, don't dilute and (iii) match the model to the market.

What is notable here is that frugal innovation may not be solely the purview of innovators in the emerging market. In this case, the frugal innovation seems to have been carried out by a standard-bearer of the mature market world. The interesting question is whether any of the features adopted by P&G for its Indian-focused market can be repatriated to Western markets. Paying $0.33 for a razor with limited, but satisfactory functionality, and $0.11 for replacement cartridges, sounds like something to which the Western consumer might also be attracted. Or are the economic and cultural demands of the two markets so different that there is nothing that P&G can bring back to its Western markets in connection with this product? And what happens to the P&G brand if there are substantial price differentials, based on the locus of the market, for products of the same category?

India: a follow-up

Just when you thought it couldn’t get more confusing … Following on from the previous post on the Microsoft shrink-wrap case, I came across a Advance Ruling given to GeoQuest Systems BV (a Dutch company) by the Indian authorities in August.

Remember that the Delhi Tax Appeal Tribunal pretty much held that all software payments are royalties, and withholding tax needs to be deducted from payments, even if for shrink-wrap boxed software? Well, the GeoQuest Advance Ruling concludes that a payment for the licensing of special purpose software does not constitute a royalty – so no withholding tax on payments made from India.

The customer was granted an exclusive, but non-transferable, right to use the software and the associated proprietary information. but no rights to modify the source code, make copies or transfer the software to any other person. The software had to be returned at the end of the licence period.

The Advance Ruling confirmed that:

• unless the right to directly exploit copyright in the software (by copying it, amending it or similar) is granted to the payer, the payment should not be considered a royalty under Indian domestic law; and


• a payment for the use of a product that has an embedded copyright is not the same thing as a payment for the use of the copyright.

Now, see, these points make sense. The Advance Ruling makes it clear that income from a supply of software constitutes business profits rather than a royalty, so that no withholding tax should apply. Now, could they just explain this to the Tax Appeal Tribunal?

Beware withholding taxes on software to India

In an early start to the pantomime season, the earlier sensible decision on shrink-wrap software of the Bangalore Tax Appeal Tribunal appears to have been thoroughly ignored by the Delhi Tax Appeal Tribunal, which has held that payments received by Microsoft from end users in India through distributors for sale of Microsoft off-the-shelf, shrink-wrap, software are taxable as royalties (and so are subject to Indian withholding taxes).

Ok, so this only applied to payments made before January 1, 1999, while Microsoft had direct arrangements withIndian distributors for the software sale, on a principal-to-principal basis. But it still holds good for other companies' sales of software now. In effect, the decision means that any sale of software to India should have tax withheld from the payment, no matter what form the software actually takes - that's going to make quite a difference to some profit margins.

The reason it doesn't apply to Microsoft's sales since January 1, 1999, is that since then Microsoft software has been manufactured and distributed in India by Gracemac Corporation (a US company) under an exclusive licence. The Tax Appeal Tribunal also held that payments for software licensing should be treated as royalties for tax purposes, which makes a little more sense than their decision on shrink-wrap given that Gracemac is actually exploiting the intellectual property by manufacturing the CDs (not a lot more, assuming that the licence doesn't actually allow Gracemac to change, adapt or otherwise directly use the intellectual property).

There was also some outrageous comments on the ability of Indian domestic law to override tax treaties - that's not IP specific, but it's got international tax lawyers choking.

India Frees Up Foreign Payment of Royalties

When I began my career in tech transfer in the 1980s, one of the most challenging aspects was the restriction placed on the payment of royalties and the like. In particular, many countries, particularly in South and Central America, placed severe restrictions on the amount of royalties that could be paid to a foreign licensor. Creative solutions abounded in those days to play the system in a way that was mutually beneficial to the local licensee and its foreign licensor. Some time in the 1990s I think, these restrictions were relaxed. While I have not followed the issue closely since that time, it is my impression that these restrictions have been relaxed in that region.

Fast forward to 2009 and a December 18th post by Swaraj Paul Barooach on the iconic SpicyIP Blog. Entitled "Liberalization of Foreign Technology Agreement Policy, the blog reported on the December 17 Press Release by the Government of India Press Note No. 8 (2009 series), which effectively provides that no longer will government approval of royalty payments be required above certain defined thresholds here. In short, the prior policy

"freely allowed payments and remittances up to a lump sum fee of $2 million and payment of royalty of 5% on domestic sales and 8% on experts. In addition, where there is no technology transfer involved, royalty up to 2% for exports and 1% for domestic sales ... on use of trade marks and brand names ...".

Payments above these limits required the prior permission of the Government of India (Project Approval Board, Department of Industrial Policy and Promotion).

These limitations have now been scrapped, at least in material part. Lump sum payments and/or royalty payments for technology transfer or for the use of trade marks or brands no longer require Governmental approval, no matter, it appears, is the amount of the payment. There is one restriction, namely, the Foreign Exchange Management (Current Account Rules, 2000. What exactly are the contents of these rules is not further specified in the Press Release. As well, "[a] suitable post-reporting system for technology transfer/collaborations and use of trade mark/brand name will be notified by the Government separately."

There seem to be at least three related factors at work here. First, the amount of foreign direct investment (DFI) in India continues to increase apace (over $25 billion in 2008). At least a part of that DFI would also see to require collaboration agreements with foreign entities for the use of technology within India. As well, technology is increasingly licensed-in to India for the purpose of use and commercialization within the Indian national market. Restrictions on the amount of royalties that can be freely paid abroad would only serve to reduce the optimal use of this technology within India.

Second, there might be a connection between the new policy and the increasing liberalization of capital flows out of India. Think of Tata and its recent spate of acquisitions over the past several years. It would seem that such capital flows go hand in hand, at least conceptually, with the scrapping of approval requirements for royalty payments above a certain amount.

Third, much talk has made lately over the notion of reverse innovation, where India serves as the foundation for innovation, which is then transferred to the developed world: see here. It seems that if India is to benefit from royalty streams from abroad for the use of such fruits of reverse innovation, it behoves it to allow unfettered payments of royalties by Indian entities abroad.

All in all, the provisions as set out in the Press Release point to a liberal Indian market for tech transfer, something which could have even been dreamed in the 1980's.

Bullish about Liberal Royalty Payment Policy

Will There Be an Indian Form of IP Practice?

We often read how the 21st century will be the "Century of Asia". In truth, it is more than I am capable of to imagine how this tectonic shift will ultimately play out. That said, I do often wonder how the face of technology will change with the rise of Asia. One glimmer was suggested in a recent article that appeared in The Economist entitled "Health Care in India: Lessons From a Frugal Innovator" (April 18, 2009). The focus of the article is a description of various ways in which Indian innovators are coming up with novel ways to compete successfully in the medical arena. The impetus for these developments is driven by a combination of poverty, geography, an underfunded public health system, and poor infrastructure, on the one hand, and world-class technology, nascent health insurance, liberalized terms for foreign investment, and entrepreneurial spirit, on the other.

For example, the article described how "beating heart" surgery has proved so successful as an alternative to conventional surgical practices in the West that the purveyor of the method, Wockhardt, an Indian hospital chain, has seen rising medical tourism to its site in Bangalore. Another example are chains of "no-frill" hospitals that appear to succeed in squeezing out of the hospital facilities "nice to have" but ultimately non-essential elements without compromising the provision of core health services. Somewhat ironically, the increasing access to health procedures by more and more Indians enable local doctors to actually hone their skills beyond those of their Western counterparts simply because of the absolute number of surgical procedures performed.

Even if one controls for rhetorical flourish, it cannot be gainsaid that the Indian experiment in carving a distinctive path to 21st century medical innovation is noteworthy. When one considers as well the great anticipation surrounding the Tata Nano car, one gets the sense that the Indian experiment is seeking various ways to reach out to the rising middle class with goods and services that cannot be provided by the more affluent West.

The question that comes to mind is whether the Indian experience in innovation will also result in a distinctive IP practice to support this innovation. In theory, technology should more or less be culturally neutral, and in a sense, that is probably true. It is for that reason that the exploitation of technology can leapfrog countries and continents. On the other hand, I wonder whether the ways that we do IP in the West are so tied up with the manner in which we do innovation and technology that we IP practitioners become captive of the very system that we are supposed to be serving. If so, it is not only Western technology that faces a significant challenge by the rise of Asia, but the legal and quasi-legal constructs that ballast Western innovation.

There is at least one whiff in the article that supports my rumination. Reference is made to Paul Yock, head of the bio-design laboratory at Stanford University. Yock expresses the concern that medical technology innovation has focused solely on need, while effectively turning a blind eye to cost. Hence the gaze towards India. As the article observes, Dr. Yock "believes that India's combination of poverty and outstanding medical and engineering talents will produce a world-class medical devices industry." If so, what is there to say that this Indian type of innovation will not spill over into the way that patents and other IP are conceived and drafted, and the manner in which the technology is diffused and protected. It is certainly food for thought.

Is this the portent of a distinctive Indian IP?

India's Copyright Board given royalty-fixing powers

In a recent decision India's Supreme Court has increased the powers of the Copyright Board, ruling that the Board is entitled not only to grant compulsory licences but also to decide on royalty rates. The rates in question are those payable by radio stations for the use of music, these usually being negotiated with the copyright collecting societies. In this instance, however, Phonographic Licence Ltd was seeking a substantial increase in royalties received, to the alarm of the broadcasters. The Board's decision to grant a licence was appealed the Supreme Court on 1 6May 2008.

While affirming that the Board has the power to establish royalty rates, the Court has also said that the Board should consider whether to order that royalties be payable at a fixed rate or on a revenue basis. In doing so, the Board must take into account the interests of copyright owners and the general public [source: note by Merry Pariyaram, ALMT Legal, Mumbai, writing in World Media Law Report].

It seems to me that, as time progresses, the connection between the IP rights owner and the establishment of a royalty rate grows increasingly tenuous. Originally the rights owner would have established the royalty rate himself; next, it is passed to a collecting society; then it is taken from the collecting society and given to the Board (or Copyright Tribunal). In Europe this in turn may be subject to the final word from the Commission and ultimately the European Court of Justice.

Indian FMCGs look to brand val as a marketing tool

Business Standard (India) has reported that Indian companies are now turning to brand valuation as a means of assessing the success of their market strategies in the fast-moving consumer goods (FMCG) sector. One example is cited of a company that shifted the emphasis of its marketing from retail-targeted incentives to consumer-oriented ones. Adds the article,

"Brand valuation measures mainly two criteria - the potential profitability of the brand and non-financial factors like brand recall as compared with competitors. In India, such exercises have been undertaken mostly by large conglomerates, such as Tata, since it is easier to quantify the royalty to be charged from group companies using the corporate brand name. However, of late, companies across sectors, especially fast-moving consumer goods and telecommunications, have been valuing their individual brands. In the FMCG sector, brand valuation used to be popular mainly among multinational companies. However, sources say a clutch of home-grown entities are taking the route. Among these companies are Marico, Dabur India, Sun Earth Ceramics (the maker of Sonora tiles), Cholayil (the maker of Medimix) and personal care services firm VLCC".

The article then says:

"Disclosing the value of brands enables companies to have better investor relations and consumer perception. It also helps in tackling corporate litigations considering the rise in trademark cases, say companies".