Global telecom giant Alcatel-Lucent is likely to sell its research and development (R&D) centers in India. CNBC-TV18 learns that it has approached three IT firms for a possible buy. These include Wipro, Infosys and Cognizant. The combined value of arm is expected at Rs 250 crore, informed a source.

Of course, the news was immediately denied by official sources, which claim that R&D is “strategic asset” to drive “innovation”.

Core competence?

What is strategic? There is one notion, that of core competence, which says that something is strategic if you can do it better than anyone else and is hard for your competition to copy. For most parts of R&D, which could be routine maintenence, routine development of software etc., service companies are better suited. They can use their scale to drive efficiency in these parts. Billing rates of IT services companies, which could be seen as one measure of efficiency, have shown flat to downward trend. This demonstrates their ability, in general, to drive efficiency.

Business critical?

Could it be that R&D is critical to the business of Alcatel-Lucent? Criticality of component does not, by itself, drive a make decision. Forged components that go into making engine parts, for example, are critical to the performance of automobiles, but they are outsourced anyway. The decision here would be driven by the knowledge that this critical component is not a differentiator in the marketplace (i.e., all auto manufacturers need it) and that there is an external party that can aggregate all this demand and operate more efficiently.

Driver of innovation?

Could it be that R&D is strategic because it is the only way to drive innovation, without which there would be a disadvantage to Alcatel-Lucent at the marketplace? On the face of it, this argument holds water. But, we need to ask ourselves: what amount of R&D that takes place in-house actually drives innovation? A lot of maintenance activities and routine development of product software is also grouped under R&D, there is a case to be made that this would be done much more efficiently by services companies. A case could be made to separate out only innovation driving R&D (mostly, bell-labs) from other parts.

New paradigms

Of course, the notion of what is “core” and what can be outsourced is continuously being changed. For example, Bharti has now outsourced most of its network. This would have been sacrilegious some time ago.

There could be a notion of semi-core developing here. Something that is critical to the business, yet not a differentiator. If any such sale does materialize, it would be interesting to see how IT services companies could aggregate work from various such semi-core activities that keeps their clients satisfied that they are not being put to a disadvantage while also driving efficiency.

In simple terms, India’s stance is “climate change? Ain’t my problem!”.

It is our problem!

But, the fact remains that climate change is eminently “our problem”.  Here are some reasons why it is:

1. The issue of poverty is  linked with subsistence farming and rural communities. 68% of land under cultivation in India is rain fed.  There is some evidence to so support the claim that climate change is making monsoons more erratic and is increasing the severity extreme events. 
2. What is the effect of climate change on the gangetic plain that is home to some 500 million people? The Himalayan glaciers that feed the mighty rivers are retreating at the rate of 10-15 meters a year, the effect of which could be massive flooding followed by drought events.
3. In general, agricultural production in India of rice and wheat is projected to drop between a massive 40% to 52% if temperatures were to rise by 2.5  to 4.9 degrees centigrade.
4. In particular, rice is very vulnerable to climate change. Rice is a very important staple crop in India.  It is estimated the rice production will fall 10% for every degree rise in temperature. 
5. Sea level rise is another climate change induced menace that India can ill afford. Apart from ecological destruction of important natural resources such as sundarbans, it can disrupt coastal economies by flooding, damages by extreme events and intrusion of saltwater in freshwater and groundwater resources. 
6. Sea water acidification and general temperature increase puts stress on marine ecosystems causing events such as coral bleaching. India should be concerned about the sustainability of the fisheries resources that it depends on.

These are big problems that will affect us no matter who puts up more carbon dioxide in atmosphere.  We share the planet with all the people whose unsustainable lives have “caused the problem” and we aren’t “helping” even if we keep well below the global per-capita average!

There is an upside, an opportunity.

A saner position for India is to acknowledge this global problem and demand that the developed world help us cope.

If we are going to move to  a carbon neutral economy sooner or later,  does huge investments in carbon tainted infrastructure make sense?

Let us look at one sector responsible for carbon emissions – power sector.  There are several things in this sector that are unique to India.  Our losses in transmission and distribution, for example, stood at 33% in 2005 , in other words we have a very inefficient grid. We also have a huge power theft problem. I guess this is partly motivated by our ethic that stealing from government is okay. Moreover, considerable section of our country still remains off-grid.

On the flip side, India as also very well endowed with natural energy resources such as sunlight and wind. We receive about 5,000 trillion kWh/year in solar energy. All these make up for a case that creatively funded (with some subsidies from developed countries), community run (because, while stealing from government is okay in our culture, stealing from our neighbors is most certainly not), off grid electricity generation near the place of consumption could solve multiple problems by creating sustainable (both economically and ecologically) energy infrastructure and eliminating inefficiency of  centralized grid.

India also has huge potential in terms of carbon sequestration, for example, using the Terra Preta or Biochar method. This method involves converting biomass that is agricultural byproduct into charcoal and using it to fertilize soil, thereby also achieving sequestration of carbon. This could potential be paid for by some sort of carbon trading scheme, providing triple benefits to farmers involved – provide an additional source of income, increase soil fertility and also reduce global warming!

With regards to our policy, we could act like a stubborn child and refuse to move ahead. We could demand for our share of “right to pollute” on a per-capita basis and slam the west for ruining the world before we could. The saner option, however, remains that we recognize the need to change and do it in a way that is both politically savvy and economically advantageous for us in the long run, which inevitably involves keeping our growth sustainable ecologically.

The case I am interested in is that of telecom industry. Telecom industry is seeing commoditization of its services. Broadband connections, for example, compete on price per bytes moved. Only the most efficient bit-movers would win such a game. Voice operators compete on price per minute. While this seems a little more flexible than the price per byte owing to the fact that bytes required to carry a minute of voice may vary on quality of service and compression, it seems unlikely that operators aren’t already on efficient horizon in these technical aspects. Only mobile-VAS services seem to escape this price-per-unit of bandwidth paradigm. Mobile VAS in India has so far been a small percentage of operators’ revenues.

Does this mean telecom industry (has/was always/)will become a “infrastructure” industry with only cost-leadership positions being sustainable? Does this mean the operating-margins (EBITA) of companies like AirTel (37% in Q3-09) and Cisco (28% in FY-08) will show a downward trend, notwithstanding the unique positions and contexts these firms currently find themselves in? I’d like to see the views of my readers who, in my opinion, tend to be smart and well-informed.