By R&D we generally mean product and process improvement in food industry. If R&D is focussing only on product and process the intervention is only within 20% of the total cost. R&D in food industry has to create significant innovation in all other areas and that may happen through technology, opines Rajat Baisya
India is in the threshold of the company of leading global economies and fast integrating with the global economy. Our GDP stands at USD 2.44 trillion and per capita is USD 1850 growing at a rate of 6.7%. As the economy is growing contribution of the service sector continues to grow and currently at 60%, industry 24% and agriculture only 16% of our GDP. We are the 10th largest economy in terms of nominal GDP and 3rd largest in terms of purchasing power parity. But we still have a long way to go. Although agriculture contributes to 16% of our GDP but over 50% of our workforce is engaged in agriculture only.
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 and as value growth often misleading as it also includes inflationary factor in price increase we need to measure volume growth. Currently, the real term growth stands at about 8%. Other indicators are investment including FDI, market penetration, revenue from new product development. Businesses normally try to derive at least 25% sales revenue from new products, wealth or value generation and 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 the processed food industry so far has been pioneered by large private and multinational companies who have created products for their own survival and growth. Public funded research in the food processing industry has contributed earlier but nothing much in the current context. In select sectors like spices, flavours and condiments, food ingredients, marine, and dairy products indigenous research has made contributions and that too in the past.
By R&D in 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 to be cost-competitive and quality and productivity improvement. Nothing much has been done in these areas as yet. What is being done is piecemeal localised effort and not an integrated development.
If we take an example of pineapple comparable figure of farm-level productivity is here, we are one of the lowest at 16 MT/hectre when it is much higher in other countries. For Brazil productivity of pineapple farming is 40 MT/ Hectre and Thailand 25 MT/hectre. But 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 when it is 23% in China. One of the reasons of low-value addition is low price recovery but in the international market, we cannot expect higher price recovery, and therefore, the only solution is cost reduction.
We need breakthrough research and development. In Europe they have competency centres funded by EU to help SME sectors to be competitive and therefore, even SME sectors also use robots to reduce cost. To speed up the development effort we need to collaborate and co-create and that is what is done in developed countries.
Make in India initiative was aimed at attracting foreign investment to set up a manufacturing plant to produce here and sell all over the world. To make India a global manufacturing hub we need to be competitive but our manufacturing competitiveness index is still low. Can R&D in food industry help which needs discussion.
We are now passing through 4th Industrial revolution. 1st industrial revolution was triggered by the invention of steam by James Watt and we realised 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 late fifties.
The 3rd industrial revolution began in 1960 first by PC and later on by the internet which has revolutionised the business environment 4th industrial revolution that we are now passing through will be shaped by series of 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.
Prof Klaus Schwab, Founder Chairman of Global Economic Forum has studied the performance of three large companies in Detroit in 1990 & at Silicon Valley in 2014 and found that in terms of market capitalisation 3 times value has been created by 10 percent of the employees which means productivity has gone up 30 times in two decades.
Things are going to be drastically different in the next couple of years and industry all over are gearing up for that including food processing industries for survival and more importantly for sustainability. Robots and Cobots are helping food processing industries to reduce cost and also for performing process faster and with more precision reducing product risk and improving the quality.
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 computerised 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.
Robotics and artificial intelligence has drastically reduced the costs
Green processing, reverse supply chain, green supply chain, complete utilisation of waste, sustainability & environment friendliness are the key concern areas. Enzyme assisted food production in order to increase yield and reduce extreme treatment to keep nutritional factors better are widely practiced now. Also enzyme engineering for better storage stability and use of solar and wind energy 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 ozonisation, 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 when it hits the digestive system, it acts like fiber. Resistant fiber is proved to be beneficial in reducing cancer, lowering cholesterol and provide protection 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 challenges as revealed from the Deloitte Global Manufacturing Competitiveness survey 2016 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, Cost competitiveness. Workforce Productivity, Suppliers Network, Legal & Regulatory system, Education Infrastructure, Physical Infrastructure, Economy, Trade, Financial and Tax system. Innovation Policy and Infrastructure, Energy Policy. Local Market Attractiveness, Healthcare System.
Key Drivers to succeed:
Embracing advanced technologies to drive competitive advantage. Advanced technologies are increasingly underpinning in global manufacturing competitiveness.
Leveraging strengths of ecosystem partnerships beyond traditional boundaries. Adoption of innovation strategies aimed at embracing a broader ecosystem approach, developing and taking advantage of integrated manufacturing and technology clusters and partners, will be a growing imperative for going forward 2016 Deloitte Global survey report on manufacturing competitiveness is out now and India stands at 11 when China is still at no 1 and USA at no 2 and Germany at No 3 position.
However by 2020 India is projected to go up to 5th position and China to come down to 2nd position, USA 1st and Germany will be 3rd in the ranking. Talent and technology making all these changes and India need 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, 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 is focussing only on product and process the intervention is only within 20% of the total cost. Our R&D is working 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 is about 15% of the product costs compared to 8% in developed countries. Technology and infrastructure will make help in reducing logistics costs.
In food safety, I would only like to say that it is the responsibility of the processors. Unsafe food cannot survive in the market place. One incident can bring down the company to the ground. You will remember what happened to Nestle even in a fabricated case. FSSAI as well as other standards are to be taken as minimum standards. Businesses will develop differentiated standards to create their unique value proposition in the market place. 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 products or unsafe products to be in the market. Making public alert, streamlining licensing process, fees linked with production and sales and not with installed capacity, faster redressal of consumers, and processors complaints will help. Outsourcing services will help.
FSSAI has to provide leadership, remove the perception of fear from the mind, and inculcate friendliness will help. FSSAI has become a monolith now – it needs to divided into industry verticals to be managed better. Is FSSAI performing this role now is the question?
To sum up by saying R&D in food industry can impact on sectoral development if it can intervene holistically at all functions and operations of the business. Locked up value needs to be unlocked and R&D should help in massive cost reduction exercise in all functions. Failing which they are only white elephants and just cost centres. Industry, more particularly SME sector needs a competency centre and Knowledge and Innovation Centre to help the industry to build a competitive edge in the global market. Focus on 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.