In the food business, R&D typically refers to process and product enhancement. The intervention only accounts for 20% of the overall cost if R&D is solely focused on the product and process. R&D in food industry must significantly innovate in all other areas, and technology may be the means of doing this, writes Rajat Baisya.
Transform India’s Food Industry
India is on the verge of joining the elite nations with the fastest-growing economies in the world and is quickly assimilating. India’s GDP has reached $3.75 trillion in 2023, from around $2 trillion in 2014, moving from the 10th largest to the 5th largest economy in the world. India’s GDP in current price terms ranks above the UK, France, Canada, Russia, and Australia, but below the USA, China, and Germany. The IMF forecasts that India’s GDP will be USD 4.95 trillion in 2026, overtaking Japan’s USD 4.71 trillion.
What works in India’s favor on the private consumption front is the size of its consumer base, the rising income, and the aspirations of its young population, which is the largest in the world. Furthermore, India needs income generation at the grassroots and a transition of labor from agriculture to manufacturing and services—the MSME sector can be of significant help on both fronts. Besides, many MSMEs work in the services sector, which accounts for 57% of GDP.
With the economy expanding, the service sector now contributes 60% of GDP, followed by industry at 24% and agriculture at 16%. However, there is still a long way to go. Despite accounting for 16% of our GDP, more than half of our labour force is employed only in agriculture.
Challenges and Opportunities
We need to have a common understanding of what we mean by sectoral growth. Most importantly, domestic market growth and international market growth. Growth is normally determined both as value growth and volume growth. As value growth is often misleading and includes inflationary factors in price increases, we need to measure volume growth. Currently, the real-term growth stands at about 8%. Other indicators include investment, FDI, market penetration, and revenue from new product development. Businesses normally try to derive at least 25% of sales revenue from new products, wealth or value generation, employment, knowledge creation, and innovation. In a significant part of these factors, R&D in food industry can impact provided it is directed in the right direction.
R&D effort in processed food industry so far has been pioneered by large private and multinational companies that have created products for their survival and growth. Public-funded research in the food processing industry has contributed earlier but little in the current context. In select sectors like spices, flavors and condiments, food ingredients, and marine and dairy products, indigenous research has made contributions and that too in the past.
By R&D in the food industry, we normally mean product and process improvement. The processed food industry, however, needs comprehensive and holistic development for competitive advantage. Process innovation should help the processed food industry be cost-competitive and improve quality and productivity. Nothing much has been done in these areas as yet. What is being done is a piecemeal localized effort rather than an integrated development.
Costs, Margins, and R&D in Food Industry
If we take the example of pineapple, a comparable figure of farm-level productivity is here; we are one of the lowest at 16 MT/hectare when it is much higher in other countries. For Brazil, the productivity of pineapple farming is 40 MT/hectare and for Thailand, 25 MT/hectare. However, only R&D intervention will not be able to deliver comparable productivity. We need a holistic and integrated approach.
In terms of value addition, we are again very low at 12, and now it is 23% in China. One of the reasons for low-value addition is low price recovery. Still, in the international market, we cannot expect a higher price recovery; therefore, the only solution is cost reduction.
We are now passing through the 4th Industrial Revolution. 1st industrial revolution was triggered by the invention of steam by James Watt, and we realized the power of steam. 2nd industrial revolution was driven by the invention of electricity and internal combustion engines, leading to the development of automobiles. Coal and electric power were at the root of industrial development, which continued till the late fifties.
Automation and Technology in Food Industry
The 3rd industrial revolution began in 1960, first with the PC and later with the internet, revolutionising the business environment. 4th industrial revolution that we are now passing through will be shaped by innovation, including driverless cars, smart cities, lighter and tougher material, supercomputing. China has already claimed that they have developed faster chips than a supercomputer. Nanotechnology, biotechnology, artificial intelligence, the internet of things, blockchain technology, sequencing of the human genome, and synthetic biology will remarkably change the way of life and society as such.
Things will be drastically different in the next couple of years, and industries all over are gearing up for that, including food processing industries, for survival and sustainability. Robots and Cobots are helping food processing industries reduce costs and perform the process faster and with more precision, reducing product risk and improving quality.
Innovation and R&D in Food Processing
There is extensive use of artificial intelligence and automation. Logistics functions and material handling functions are completely automated. I have visited a large dairy processing plant at Novo Mesto. Batch weighing, mixing, packaging, warehousing, despatch, everything is computerized and working on a pre-programmed control based on sales order processing. In all these functions, there is no human intervention. Hardly you can see a few people working in the plant laboratory.
Green processing, reverse supply chain, green supply chain, complete utilization of waste, sustainability & environment friendliness are the key concern areas. Enzyme-assisted food production to increase yield and reduce extreme treatment to improve nutritional factors are widely practiced. Also, enzyme engineering for better storage stability and solar and wind energy use are widely prevalent.
Innovative methods are also used for better microbial control in food processing, including – microwave and radio-frequency heating, pulsed electric fields (PEF), high-pressure processing (HPP), ionizing radiation, ohmic heating (OH), treatment with ultraviolet light, and ozonization, ultrasound, etc. are followed. Process technology Innovations are directed to improve product quality, shelf life and functionalities in addition to increased environmental adherence and that improve marketability. Resistant starch is a form of carbohydrate that has its own unique properties. It behaves like starch, but it acts like fiber when it hits the digestive system. Resistant fiber is proven beneficial in reducing cancer, lowering cholesterol and protecting against cardiovascular diseases. Resistant starch is also known as a fat-burning ingredient with its properties of aiding the body in metabolism and burning fat.
Global Manufacturing Competitiveness
As revealed by the Deloitte Global Manufacturing Competitiveness survey 2016, global manufacturing challenges are: Regulation and traceability, Product Development and Innovation. The manufacturing skill gap, Rising Healthcare costs, Environmental concerns and considerations Key drivers for manufacturing competitiveness are talent and cost competitiveness. Workforce Productivity, Suppliers Network, Legal and regulatory system, Education Infrastructure, Physical Infrastructure, Economy, Trade, Financial and Tax system. Innovation Policy and Infrastructure, Energy Policy. Local Market Attractiveness, Healthcare System.
Embracing advanced technologies to drive competitive advantage. Advanced technologies are increasingly underpinning global manufacturing competitiveness.
Leveraging strengths of ecosystem partnerships beyond traditional boundaries. Adopting innovation strategies to embrace a broader ecosystem approach and developing and taking advantage of integrated manufacturing and technology clusters and partners will be a growing imperative for going forward. The 2016 Deloitte Global survey report on manufacturing competitiveness is out now, and India stands at 11 when China is still at No. 1, the USA at No. 2 and Germany at No. 3 position.
India’s Global Manufacturing Position
However, by 2030, India is projected to go up to 5th position, China will come down to 2nd position, USA 1st and Germany will be 3rd in the ranking. Talent and technology are making all these changes, and India needs to focus on both these two elements in addition to infrastructure. And on supplementary ratings, India compares well on things like quality, availability and cluster development with other lead countries in the race.
If we look at how costs stack up in relation to product pricing, it will reveal that manufacturers and marketers have only 7 to 10% net margins, and the rest are all costs to be distributed. Prime cost includes raw, packaging material, process costs, direct labour and standard wastages. If R&D in food industry focuses only on product and process, the intervention is only within 20% of the total cost. Our R&D works within the realm of prime cost, which never exceeds 20% of the end selling price. R&D in food industry has to create significant innovation in all other areas, and that is what is happening now through technology. Logistics is another area that can significantly reduce costs. Our logistics costs are about 15% of the product costs compared to 8% in developed countries. Technology and infrastructure will make help in reducing logistics costs.
Food Safety and Regulation
In food safety, it is the responsibility of the processors. Unsafe food cannot survive in the marketplace. One incident can bring down the company to the ground. You will remember what happened to Nestle, even in a fabricated case. FSSAI and other standards are to be taken as minimum standards. Businesses will develop differentiated standards to create their unique value proposition in the marketplace. FSSAI and other regulators should only play the role of facilitator and educator. Massive consumer education will solve the problem. Knowledgeable and enlightened consumers will not allow spurious or unsafe products to be on the market. Making public alert, streamlining the licensing process, fees linked with production and sales and not with installed capacity, and faster redressal of consumers and processor complaints will help. Outsourcing services will help.
FSSAI has to provide leadership, remove the perception of fear from the mind, and inculcate friendliness to help. FSSAI has become a monolith now – it needs to be divided into industry verticals to be managed better. Is FSSAI performing this role now is the question?
To sum up, R&D in food industry can impact on sectoral development if it can intervene holistically in all functions and operations of the business. Locked-up value needs to be unlocked, and R&D should help in massive cost-reduction exercises in all functions. Failing which, they are only white elephants and just cost centers. Industry, particularly the SME sector, needs a competency center and Knowledge and Innovation Center to help the industry build a competitive edge in the global market. Focus on the environment and sustainability – even if it costs more. Ultimately, everything has to be market and consumer-driven. Otherwise, take risks to perish.
*The author is the chairman of Strategic Consulting Group and served as Professor and Head of the Department of Management Studies, IIT Delhi.