Professor Juan Alcacer of the Harvard Business School (HBS) is researching location strategies of multinationals as well as global intellectual property (IP) rights with special focus on telecommunication. Visiting India recently to conduct a course on ‘Building a global enterprise’ at the HBS’ Executive Education program at Mumbai, Professor Alcacer took time out to provide an interesting perspective on a number of recent developments in the telecom industry. Edited excerpts:

Could you tell us about your current research projects? We understand that you are looking at offshoring decisions of telecom firms.

We are trying to understand the location decision of manufacturers of handsets and trying to relate that to the outsourcing of the production per se. The electronic industry is generally prone to a lot of outsourcing. But companies like Nokia or Samsung did everything inside. They were doing a bit of outsourcing but they were peripheral. Starting 2007-08, you saw more outsourcing, in part because of e-commerce and production costs coming down dramatically. Now, parts of the cell phones became commodities and anybody could assemble them. The chip, which was one of the more advanced parts and which was in the hands of a few companies, became accessible after a Chinese company called Mediatek started to produce most of the chips for cell phones at a low cost. You could go to China and pick the parts you wanted and assemble a phone. We are trying to relate that to innovation. The argument that many of these firms used is that they were outsourcing production to allow them to concentrate on innovation. We tested that hypothesis and what we found was that the companies that were not leaders in the market were outsourcing. The ones who did outsourcing were doing it to cut costs. Moreover, those who were outsourcing were less likely to introduce innovations.We also found there was a self-selection process. Companies that were not advanced in technology started to outsource and that accelerated the process of not being too innovative. There was one outlier – Apple – which was outsourcing some part of its production to Foxconn in China – they were innovative.

What we found is that if you are not paying attention to both innovation and production, then there are problems. That is the explanation for why the people who are outsourcing are not the most innovative.

Have companies such as Samsung lost out to new low-cost Chinese competitors?

Some of these Chinese companies may not be following the IP regulations very closely. They can get into some markets but not others. There are restrictions on where they can go. The IP is in the hands of very few players – like Samsung, Nokia, Ericsson, Apple, Qualcomm etc. There is bifurcation of the IP and R&D in the hands of a few companies. You have innovation in the business models – such as Xiaomi. What happens is that when the business model starts moving overseas, it starts having problems because the Ericssons and Apples start suing you when you get into their markets where you do not have IP. So, the Xiaomis have not been producing patents or innovating in the core technologies at all and not able to compete where IP regimes are very strict. So, yes, it is not something that gives you a global footprint.

But China and India are the largest markets and they have loose IP regimes.

China and India are large markets unit-wise but not in terms of profits. These people (Chinese companies) are playing a game of very low margins and targeting a specific segment of the population, which is the low end. Apple has shown you can make a lot of money by having a few products and targeting the high-end. In a way, the decline of Nokia can be explained by the fact that they tried to play at both ends. That is a very hard game. You have to save money somewhere and sometimes you save money by not paying IP. Xiaomi has very limited success in other markets. If you go in the low end, it is a very hard industry. Xiaomi is not making money. That is a business model that is very difficult to export.

It is a mix of different models. Wars are being fought in the telecom industry – it is not just an operating system competing, it is an eco system competing. The gadget and the complementors (operating system, operator, the applications) – these make it more complicated. That makes it more interesting.

Tim Cook (Apple CEO) was in India recently. Has Apple come into India a little too late?

The timing is very interesting. Timing has different components – there is an industry component, a country component, a company component and a competitive component. Sometimes, I am too late because my competitors are already there. Sometimes, even if there are no competitors in that market, I won’t go because I am not ready. The timing decision happens when all the above clocks are synchronised. Let me give you some examples.

When Russia opened up its oil industry, you had different companies bidding and they reacted differently. Some said it was too unstable. Some said, we don’t know how many oil fields they are giving or the quality of the oil fields because the data is coming from Soviet Union, and who knows what these people were doing. Everybody was looking at this clock (industry), but some entered immediately, some waited. If you are an Exxon, you have the luxury of waiting. The pressure to go very fast is on those who are weak because that is your only chance – you try to take advantage when no one else is there even when the market is uncertain and risky. You think that you have to try because you are hoping for a breakthrough. Making it in Russia will make you a big guy and make you a lot of money – so goes the thought process and many small firms do that. Some enter depending on what else they have going in other parts of the world. That’s the firm clock. One clock (the industry) is the same for everybody but the other (the firm clock) is different.

I think your question is about whether the Indian market is more mature and if Apple should have then been here earlier. That is true if you are a small firm but it may not be true for Apple. Apple can wait a bit longer. Their firm clock is such that they could not do everything at the same time. They entered China and did OK there despite competition. In the last year/quarter, they have not done that well. But, overall, they have done well. When you go to a market, you go not only to sell but also to learn. And, they learned a great deal in China. They can learn a great deal in India. It is also a great source of talent. So, to answer your question, it is not late.

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