How big companies can beat the patent chaos of India

How big companies can beat the patent chaos of India

June 17, 2013: 1:59 PM ET

There are several companies that are doing well in India by adapting to the market instead of the other way around.

By Ravi Venkatesan

FORTUNE — Multinational pharmaceutical companies agree on one thing — that India is one of the hardest places in the world for Big Pharma to compete thanks to price controls, compulsory licensing of drugs, poor intellectual property protection, and a host of capable generic competitors.

The recent decision by India’s Supreme Court to deny patent protection to Novartis (NVS) for a reformulated version of an anticancer drug has just added more fuel to the fire, provoking drug companies and the U.S. Chamber of Commerce to unleash angry warnings that it would cut off investment to the world’s most populous democracy and ultimately limit access to lifesaving medications. The judgment adds to a growing list of trade tensions between India, the U.S., and Europe at a time when India desperately needs more foreign investment to restart its slowing economy.Novartis is emblematic of many multinationals that rigidly stick to their developed market business models even as they try to conquer emerging markets with fundamentally different economic and social realities. They seek to extend their reach into these developing countries by replicating their developed-country pricing and distribution as well as employing lobbyists to pave their way over regulatory barriers where they exist.

Most multinationals, therefore, find themselves part of a “1% Club” where India accounts for an irrelevant 1% of their global business and their market share is also in the low single digits. They inadvertently allow themselves to be seen as the new imperialists and cede market leadership to more flexible competitors.

Within the pharmaceutical industry itself, there are several companies that are doing well in India by adapting to the market instead of the other way around. Since 2005 when the Indian government first allowed patents, foreign pharmas have doubled their market share from 15% to 30%.

In the foods sector, Nestle has built a massive instant noodle business by understanding India’s changing demographics and appealing to the Indian palate instead of attempting to change the nation’s dietary habits as Kellogg (K) did when it entered the market. German retailer Metro has built a fast-growing wholesale business even as Wal-Mart (WMT) struggles to crack India’s retail regulatory barriers.

Apple’s (AAPL) reluctance to invest in a country with poor distribution where carriers cannot subsidize the price of an expensive handset created opportunity for Samsung and Nokia (NOK) to dominate the cellphone market. In a land of vegetarians where the cow is considered sacred, McDonald’s (MCD) has become a fast-food leader by localizing its menu and pricing and now even opening completely vegetarian restaurants.

Microsoft (MSFT) discovered India to be a tough place to run a software business with a piracy rate of 75%, governmental obsession with open source software, poor Internet infrastructure, and low usage of computers. Realizing most Indians think of “copyright” as the “right-to-copy,” the company chose to adapt its business model for India instead of vice versa. Launching new lower-priced versions of Windows and Office, creating local language versions, and massively increasing distribution resulted in a 10% decline in piracy.

The lesson is clear. Chaos is a defining feature of emerging markets like India, and to do well in these countries, multinationals need to embrace and conquer chaos, not shun it. By chaos I mean a cocktail of ineffective and corrupt government, bureaucratic red tape, uncertain policies, bad infrastructure, lack of IP protection, and distrust of multinational corporations.

Most emerging markets tend to resemble chaotic India far more than China, and therefore winning in India is a pretty good litmus test or proxy for a multinational firm’s ability to succeed in other emerging markets. Paradoxically what this means is that it is precisely because India is so challenging, that global companies must learn to succeed in this market; in the process they develop the mindset, capabilities, and products that greatly help them win in other markets.

Don’t get me wrong. By no means should India and other countries be let off the hook for their systemic shortcomings that make them hostile places in which to do business. There are real issues like corruption, harassment by tax authorities, stultifying bureaucracy, policy vacillation, and retroactive amendments to the law which the government must address urgently.

However, is it such a crime for the Indian government to want to ensure that its citizens, 800 million of whom live on less than $2 a day, have adequate access to lifesaving drugs? Is it wrong for India to be cautious about embracing genetically modified food or opening up its sensitive retail sector? If anything, the nation’s highest court performed its fiduciary duty by safeguarding its national interest. By refusing to address its real shortcomings, India unfortunately allows other countries to clump all these issues together and put it on the defensive.

Companies that are really successful in emerging markets are contrarian. Their CEOs are not waiting around for or coercing these emerging economies to evolve into what they want them to be and are instead adapting their business strategies to the current reality. Relying more on personal immersion than spreadsheets and boardroom presentations to develop their market understanding, leaders of these companies are able to look past the chaos and see the potential of markets like India.

Their visceral understanding of the market fuels a commitment to winning in what will be one of the world’s largest economies. They invest early with a long-term view and make great efforts to quickly localize their operations. That translates into local management with real authority, localized business models, and market-specific products. Their actions are quite contrary to the vast majority of multinationals that prefer to wait until the market explodes and until then opportunistically seek the next new market du jour. When it comes to succeeding in emerging markets, corporate mindset trumps everything else.

The author is the former Chairman of Microsoft India and Cummins India and author of the bookConquering the Chaos: Win in India, Win Everywhere, to be released in June by Harvard Business Review Publishing.