Handset firms trying to avoid paying royalty worrying
Given how governments tend to be more sympathetic when there are a large number of petitioners making a concerted campaign—witness the moves to regulate Bt cotton seed prices/royalty after a few seed firms put up a united front against Monsanto—the lobby body for firms assembling handsets in India has done well to craft a similar strategy in response to patent holders like Ericsson winning injunctions in Indian courts which forced several handset manufacturers to pay royalties. According to a news story in this paper last week, the Indian Cellular Association which represents mobile handset assemblers/manufacturers has put out an advisory asking its members ‘to have a calibrated approach …(to) raise similar issues in terms of patent invalidity, non-essentiality, non-infringement, and abuse of dominant position in the market etc … may help your organisation navigate successfully around the current litigation.’ Once enough assemblers/manufacturers argue the patents are really non-essential or are an abuse of dominance, the hope is the government may intercede and put a cap on royalty payments—Ericsson wants a 1% royalty rate—especially if the case is made out that this is hurting Make-in-India.
It would be unfortunate if the government were to do so. While this newspaper supports paying royalty on all patents, those in telecom are different from those in, say, pharmaceuticals. In all other royalties, the attempt is to exclude others and allow just one or two firms to manufacture a drug, say. In the case of telecom, the concept of Fair Reasonable and Non-Discriminatory (FRAND) ensures that the technology is available to all firms who agree to pay—that is why, instead of having just a few mobile phone manufacturers, you have as many as you have today.
Indeed, while some manufacturers argue that paying a royalty to various innovation companies will reduce their profits dramatically, there is no known case of royalty-stacking—in any case, the sharp reduction in prices of all handsets, including the recently-introduced 4G ones, is testimony to royalty rates being reasonable and to the kind of innovation being made available to assemblers/manufacturers. It is also important to keep in mind that even when phones are not manufactured here and are imported from, say, China, the royalty rates are embedded in the price; it’s just that we don’t get to know about it.
To the extent the government wants to promote Make-in-India, the way to do it is not to put a cap on royalty rates, but to ensure that phones are genuinely manufactured here, as opposed to just a few screws being put onto kits imported from China. Finance minister Arun Jaitley took the first step last year by putting a countervailing duty on imports; if this was followed up by putting a similar one on imports of ‘unpopulated’ printed circuit boards, another process would shift to India and, over several years, Indian manufacturers will start doing more design work and even create their own patents. Once manufacturers have their own patents, they can cross-license them and end up not paying royalties as they do today; and with royalties having to be paid on phones made in India—as opposed to being included in import payments to China—this would also save precious forex, apart from allowing the government to levy taxes on such payments.