Asia becomes the top region for corporate R&D spend, according to the 2015 Global Innovation 1000 Study, from Strategy&, PwC’s Strategy Consulting Business

Over the last 10 years, total R&D spending by Chinese companies in Global Innovation 1000 has reached $39.4 billion, increased by 3,285% compared to 79% for all Asian companies and 70% for the Global Innovation 1000

Alibaba Group (#84) as a new entrant made its appearance in the #2 spot (next to PetroChina Co. Ltd) among Chinese R&D Spenders

Shanghai, November 2, 2015 – Asia has become the top destination for corporate R&D spend in 2015, accounting for 35% of total in-region R&D, including both domestic and imported R&D. This places Asia ahead of North America and Europe, who dropped to third, in a complete reversal from 2007 when Europe was the previous leader. This is according to the newly released 2015 Global Innovation 1000 Study, from Strategy &, PwC’s strategy consulting business, which uniquely examined the R&D footprint of 207 of the world’s largest corporate R&D spenders.

Robust growth in China and India drove Asia’s growth, recording increases of 79% and 116%, between 2007 and 2015, in imported spend, respectively, as more R&D moves into these regions mainly from the U.S. Results find that China in particular has become the most popular destination, with 71% of R&D professional survey respondents indicating that the most important reason for moving R&D to China is proximity to high-growth markets.

“Asia taking the lead as the top destination for corporate R&D is not surprising when you look at where companies are spending their R&D dollars to support their revenue growth goals,” says Steven Veldhoen, a Partner with Strategy& as well as the Head of China Innovation Practice.

Asia becomes region of largest corporate R&D spending, and China goes from strength to strength
Asia has displaced Europe and North America as the region with the highest corporate R&D spending (i.e. the place where companies spend most of their R&D investments, regardless of where those companies are headquartered). This is a remarkable finding. In our 2008 study, Europe was still the region with highest R&D spending. Europe has fallen to third place while Asia has overtaken both Europe and North America. “It may be remarkable but it is not surprising”, says Steven Veldhoen. “Clearly these global giants (the 1,000 companies with the largest R&D budgets) are investing their R&D in and aimed at the countries and markets where they can achieve highest growth over the next decades. If you were assured that you can also find outstanding R&D talent and operate in stimulating Innovation ecosystems, which you can find in countries like China, India, Korea, China Taiwan and Singapore, would you not be doing exactly the same?”

China keeps going from strength to strength. R&D spending by companies headquartered in China has gone up by 3,285% since 2005. The spending stands at $39.4 billion in 2015 versus $1.2 billion in 2005. There are now 123 China companies which belong to the list of 1,000 largest R&D spenders – up from 8 in 2005. The largest Chinese R&D spender is PetroChina in 2015 with a spending of $2.1 billion. Alibaba has now formally entered the Global Innovation1000 list since its public listing in 2014. It stands at rank #84 with an R&D spending of $1.7 billion (second highest of any Chinese company). As importantly, if Huawei were listed and its R&D spending could be counted in the Global Innovation 1000 it would now have entered the Top 20 list for the first time – a historic first for a Chinese company. It would rank #16, just behind Ford but ahead of Apple. It would have gone up from rank #25 in 2014, and it does not look that its rise up the ranks will stop anytime soon. “Chinese R&D spenders and Innovators are here to stay”, says Steven Veldhoen. “I hear the detractors saying that it is not just about money and that a lot of the Chinese spending is inefficient. Maybe that is true, or at least partly true. But Chinese companies learn quickly and are ultra-flexible, especially privately-owned companies. They will learn fast how to get the most out of their R&D spend, and they will continue to spend. The power of Chinese Innovators will increase further, especially in industries such as high-tech, digital and e-commerce in which Chinese consumers are also at the cutting-edge. Innovation is always a powerful interplay between supply and demand.”

The U.S. remains the largest spender of in-country corporate R&D, whether domestic, imported or exported
According to this year’s results, the U.S. remains the largest spender of in-country corporate R&D, with in-country (domestic & imported) R&D spend at $145 billion in 2015, up 34% since 2007. Imported R&D spend to the U.S., mostly coming from Europe, in 2015 is $53 billion, up 23% from 2007. Exported R&D spend in 2015 is $121 billion, up 51% from 2007, predominantly going to Asia where previously in 2007 it was going to Europe. Despite these figures, the U.S. lead over other countries is narrowing – in 2007, relative corporate R&D in China was 23% of the U.S. total, while in 2015 it now amounts to 38% of the U.S. total.

“While the U.S. lead may be tapering, it still remains the biggest global market and despite the high cost of labor, it offers a more agile and sophisticated workforce. As such, companies look at the U.S. as a desirable market with a capable workforce, an innovative culture and a more flexible business environment that cultivates top talent, all of which are conducive to R&D functions. The U.S. also has accessibility to strategic markets, which is desirable to foreign companies when exporting their R&D functions, with Silicon Valley a particularly powerful draw,” comments Huw Andrews, PwC Partner and Innovation Lead.

Globalization advantage
As globalization increasingly becomes the norm (94% of firms conduct R&D beyond just their home country), companies are reaping the benefits of conducting R&D outside of their home country. Companies with more global R&D footprints now perform as well or better than companies with a narrow footprint, the study finds, suggesting that there are material advantages to exporting R&D and that multinationals are able to coordinate successfully across many global sites.

Additionally, companies seem to derive benefits from a diverse global footprint as survey respondents say access to technical talent (71%), being close to customers (68%) and gaining insight into local market needs (64%) are important attributes in choosing where to conduct R&D.

In addition, Strategy&’s annual analysis of the world’s 1000 largest R&D spenders found:

  • R&D has returned to its long-term growth trend post-financial crisis: In 2015, R&D spend by the Global Innovation 1000 has increased 5.1% to $680 billion, the largest year-over-year increase within the last three years, moving it back to a long-term average growth rate post the financial crisis, with a 10-year CAGR of 5.4%.
  • Industry Breakdown: The three largest industries for R&D Spend in 2015 are computing and electronics (C&E), healthcare and auto. In particular, healthcare is on track to pass C&E as the largest industry by R&D spend by 2019. Meanwhile, the software & Internet industry has the highest growth rate of all the industries between 2014 and 2015 (27%), pushing it past the industrials sector to become the fourth largest industry by R&D spend in 2015. “It is not surprising that the software & Internet industry surpassed the industrials sector as the fourth largest spender of R&D. However, it is a noteworthy milestone, marking how software, the new economy, is trading places with industrials, the older economy,” says Huw Andrews.
  • Top 20 R&D Spenders: Within the Top 20 R&D spenders of 2015, the top three companies have remained fairly consistent over the years – Volkswagen, Samsung, Intel. For the first time Apple has joined the Top 20 R&D spenders 0f 2015 list at #18.
  • Top three Most Innovative companies in the world for 2015: Global innovation professionals have ranked Apple, Google, and Tesla as the three most innovative companies in the world, with Tesla jumping to third place from fifth in 2014.

Methodology
As it has in each of the past 10 editions of the Global Innovation 1000, this year Strategy&, PwC’s strategy consulting business, identified the 1,000 public companies around the world that spent the most on R&D during the last fiscal year, as of June 30, 2015. To be included, companies had to make their R&D spending numbers public. Subsidiaries that were more than 50 percent owned by a single corporate parent during the period were excluded if their financial results were included in the parent company’s financials. The Global Innovation 1000 companies collectively account for 40 percent of the entire world’s R&D spending, from all sources, including corporate and government sources.

In 2013, Strategy& made some adjustments to the data collection process in order to gain a more accurate and complete picture of innovation spending. In prior years, both capitalized and amortized R&D expenditures were excluded. Starting in 2013, we included the most recent fiscal year’s amortization of capitalized R&D expenditures for relevant companies in calculating the total R&D investment, while continuing to exclude any non-amortized capitalized costs. We have now applied this methodology to all previous years’ data; as a result, historical data referenced in the studies from 2014 onward will not always align with previously published figures for the 2005 through 2012 studies.

For each of the top 1,000 companies, we obtained from Bloomberg and Capital IQ the key financial metrics for 2010 through 2015, including sales, gross profit, operating profit, net profit, historical R&D expenditures, and market capitalization. All sales and R&D expenditure figures in foreign currencies were translated into U.S. dollars according to an average of the exchange rate over the relevant period; for data on share prices, we used the exchange rate on the last day of the period.

All companies were coded into one of nine industry sectors (or “other”) according to Bloomberg’s industry designations, and into one of five regional designations, as determined by their reported headquarters locations. To enable meaningful comparisons across industries, the R&D spending levels and financial performance metrics of each company were indexed against the average values in its own industry.

To understand the global distribution of R&D spend, the drivers of that distribution, and how the distribution affects the performance of individual companies, we researched the global R&D footprint of the top 100 companies in terms of their 2015 R&D spend, plus the top 50 companies in the largest three industries (auto, healthcare, and computing and electronics) and the top 20 companies in the industrials and software and Internet sectors. The total number of companies for which we assessed the distribution of R&D spending across countries was 207, reflecting overlap in the top 100 and the five selected industries. These 207 companies are headquartered in 23 countries and conduct R&D activities at 2,041 R&D sites spanning more than 60 countries.

When geographic breakdowns were not publicly available, we collected data on the location of R&D facilities, the product segments each facility supports, the year each facility was established, the number of people it employs, its sales by product segment, and the global distribution of sales. This data was used to allocate total R&D dollars to the countries where facilities were located.

Finally, to understand how global R&D is and will be conducted at companies across multiple industries, Strategy& conducted a separate online survey of 369 innovation leaders around the world. The companies participating represented over US$106 billion in R&D spending, or 16 percent of this year’s total Global Innovation 1000 R&D spending, all nine of the industry sectors, and all five geographic regions.


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