Despite (or because of) the global financial crisis, a survey by global management consulting firm Booz & Company has shown that the top 1,000 public corporate research and development spenders increased their outlay in 2008. While sales were up only 6.5 percent, R&D expenditure rose 5.7 percent to US$532 billion with leading companies recognizing the importance of focusing on R&D in order to be in a position to take advantage of competitors in the coming upturn.
The fifth annual analysis conducted by Booz & Company affirmed the critical importance of innovation to corporate strategies, and while R&D spending was down on 2007’s gain of around ten percent, it was only slightly less than the 7.1 percent global five-year compound annual growth rate (CAGR) for R&D.; And although 34 percent of companies had a net income decrease in 2008, more than two thirds either maintained or increased their R&D spending. This is partly as a result of long product development cycles that force companies to continue spending even when revenues decline but it is also due to the fact that there is an awareness that it is important to profit when the market recovers.
Top 20The top 20 R&D spenders were - in descending order - Toyota, Nokia, Roche Holding, Microsoft, General Motors, Pfizer, Johnson & Johnson, Ford, Novartis, Sanofi-Aventis, GlaxoSmithKline, Samsung, IBM, Intel, Siemens, Honda, Volkswagon, AstraZeneca, Cisco Systems and Panasonic. Interestingly, nine out of the top ten R&D spenders in the automotive sector reduced their innovation outlays in 2008, and while 60 percent of automotive companies reduced their R&D spending, the remaining 40 percent increased their R&D spending enough to lift the level by 0.6 percent. The Toyota Motor Company, for example, suffered the first loss in its history and whilst it reduced R&D spending by nearly six percent, it still maintained its number one position as the biggest global spender on innovation. And while R&D spending was down in the auto sector, eight out of the industry’s top 10 R&D spenders in the Software and Internet sector, increased their R&D spending last year.
The importance of innovationThe survey showed that over 90 percent of respondents said that innovation was critical in preparing for the upturn and 70 percent stated that their companies are either maintaining or increasing R&D spending in 2009. Additionally, the top 100 companies increased their spending on R&D whilst reducing their capital expenditures. “Reducing efforts on innovation would be similar to unilateral disarmament in wartime,” said Barry Jaruzelski, Partner at Booz & Company. “Now is an opportune time to build advantage over competitors, especially weaker ones that may have to skimp on R&D for financial reasons. Overall, the study demonstrates an optimistic outlook on the part of the companies in the Innovation 1000.“
Spending R&D dollars more wiselyThis year the study included an in-depth survey of nearly 300 senior managers and R&D professionals from 250 companies from all over the world. It found that nearly seven out of ten companies are working on strategies to meet the requirements of customers, and that projects that weren’t succeeding were halted a lot earlier. About half of the respondents also indicated that they were more risk averse in their approach to innovation and they looked more carefully at new projects before giving the green light. There is also more focus on the development of new products that have growth potential.
“Innovation is what drives our competitive position in all three of our markets — automotive, professional, and consumer — and therefore we can’t back off,” said Robert Lardon, corporate vice president for strategy and investor relations at Harman International Industries Inc. Adalio Sanchez, general manager of IBM’s System X server business, echoed that point of view, “I would argue that the recession is a catalyst for increased innovation.”
Effects of the recessionThe recession has certainly taken its toll on the global economy and the companies involved in the survey were also affected. Their R&D expenditure – US$532 billion was well below expenditure in 2007 and whilst sales were up 6.5 percent – US$15 trillion the gain was less than the same group registered in 2006 and 2007. The R&D spending as a percentage of sales remained steady at 3.6 percent proving that R&D spending is not related to overall corporate performance.
Global increase in R&D spendingEvery global region increased its expenditure with North America, Europe and Japan-based companies retaining their 94 percent share of the global R&D spend with the highest spender - Toyota - investing just under US$9 billion. North America spent 4.6 percent of sales on R&D, European-headquartered companies spent 3.2 percent and Japanese-headquartered companies spent 3.7 percent of sales.
Study methodologyBooz & Company retrieved data from 1,000 public companies that spent the most on research and development in 2008. The companies were analyzed on R&D expenditures, sales, net profit, gross profit, operating profit and market capitalization. The expenditure was expressed in US dollars using the average exchange rate for the year and total shareholder return was obtained and adjusted for each company’s corresponding local market total shareholder return. Companies were put into one of ten industry categories with two-thirds of the spending concentrated in three industries - computing and electronics (28 percent), health (23 percent), and automotive (16 percent).
The additional survey of senior managers and R&D professionals had respondents who represented all ten industry sectors, with 49 percent from North America, 38 percent from Europe, 13 percent from Asia, and less than 1 percent from the rest of the world.