Nine in 10 companies cite innovation as “critical” to preparing for upturn
London, October 27, 2009: Top British companies are not investing as much in R&D as their international competitors according to a new study published today. The findings show, however, that the world’s 1,000 largest publicly traded corporate research and development spenders have increased spending on R&D in 2008 despite the recession. These are the findings, released today, of global management consultancy Booz & Company’s fifth annual analysis of global innovation spending.
R&D outlays for these companies rose by 5.7 percent to US$532 billion, even as sales were up only 6.5 percent. While the increase in 2008 R&D spend was less dramatic than 2007‘s gain of 10 percent, it was just slightly less than the 7.2 percent global five-year compound annual growth rate (CAGR) for R&D.
In the UK, R&D expenditure rose by 3.5% (£1/2 billion) - below the global average - while the number of British companies in the global top 1000 R&D spenders declined from 36 to 33. The best placed of these companies was GlaxoSmithKline Plc at no. 11 followed by Astra Zeneca at no. 18.
John Potter, Partner at Booz & Company, said: “The UK should take heed that their competitors in other countries are outspending them on R&D and so could be in a better place to benefit from the upturn as the economy revives.”
Overall, more than two thirds of companies maintained or increased their R&D spending in 2008, much of this was in Europe, despite more than a third (34 percent) reporting that net income plummeted last year, according to the study. More than a quarter of companies decreased their R&D allocation in 2008.
Booz & Company analyzed the world’s top 1,000 public corporate research and development spenders – the Booz & Company Global Innovation 1000 – in what continues to be the most comprehensive effort to assess the link between R&D and corporate performance. The study looked at R&D spending and its link to corporate performance, uncovering insights into how organizations can get the greatest return on their innovation investment. New to the study this year is an in-depth survey of nearly 300 senior managers and R&D professionals from 250 companies around the globe that probes the impact of the downturn on innovation spending and strategy.
Key findings of the report include:
Companies are spending more, but more wisely. “One result of the recession is that it has forced companies to think more carefully about their innovation processes and portfolios – for both good times as well as bad,” observed Kevin Dehoff, a Booz & Company Partner. “This held true through the most turbulent quarters these companies have navigated, indicating they’re ready to make smart bets that will pay dividends in the coming upturn.” Accordingly, the survey of senior managers and R&D directors reveals that seven in 10 companies are now adjusting their strategies to better capture changing customer requirements, and half of the respondents report becoming more conservative with the filters they apply when green-lighting new R&D projects. Four in 10 are becoming more averse to the risks posed by R&D endeavours, and a similar number say they’re getting better at killing bad projects.
Innovation is viewed as increasingly vital to corporate strategy. More than 90 percent of those surveyed say that innovation is critical as their companies prepare for the upturn, and 70 percent of respondents state their companies are either maintaining or increasing their spending on R&D in 2009, according to Booz & Company. Furthermore, the top 100 companies in the Innovation 1000 clearly signaled their investment priorities by increasing R&D spending by 3.2 percent while reducing overall capital expenditures by more than one percent.
The top 20 innovation spenders increased their budgets by just 3.2 percent. This gain is less than half the 7.6 percent rise in 2007 and was the result of a precipitous 35 percent drop in net income among the 20 companies, which fell from $115 billion in 2007 to just $75 billion in 2008. Still, the top 20 spenders accounted for 26 percent of spending by the entire Innovation 1000.
Recession’s impacts on R&D vary widely by industry. In 2008, as last year, two-thirds of R&D spending was concentrated in three industries: computing and electronics (27 percent), health (23 percent), and automotive (16 percent).
- No industry felt the pain more than auto with nine out of the top 10 R&D spenders in the category cutting their innovation outlays in 2008. Overall, 60 percent of auto companies in the Global Innovation 1000 decreased R&D spending, compared with 25 percent who decreased R&D last year. Yet the remaining 40 percent of auto companies on the list increased spending enough that the auto sector on a net basis slightly increased R&D spending overall by 0.6 percent.
- The Software and Internet sector, on the other hand, clearly has seen the recession as an opportunity. Eight out of the industry’s top 10 R&D spenders increased their R&D spending last year.
- R&D spending in the computing and electronics industry was up more than 4 percent, though the proportion of companies that increased R&D spending was essentially unchanged from last year.
- Healthcare companies spent the most on R&D as a percentage of sales –- 12 percent –- followed by Software and Internet (11.4 percent). In contrast Telecom, and Chemicals and Energy, spent the least, 1.4 percent and 0.9 percent, respectively.
- Aerospace and Defense was the only industry to see innovation spending sink, down 2.3 percent.
- In the Consumer sector there was a 4% increase in spend on R&D.
Every global region increased its spending. North American, European, and Japan-based companies retained their 94 percent share of the global 1000 innovation spend. Every region, including China and India, increased its expenditures, though they did so at slower rates. Japan upped its allocations by just 0.5 percent, Europe by 6.3 percent and North America, 6.5 percent. These levels were below the global five-year CAGR of 7.2 percent.
Additional study findings include:
- The top 10 global R&D spenders in 2008 were, in descending order: Toyota, Nokia, Roche Holding, Microsoft, General Motors, Pfizer, Johnson & Johnson, Ford, Novartis and sanofi-Aventis.
- R&D spending among the Global Innovation 1000 ranged from just under $9 billion spent by #1 Toyota to the $58 million spent by #1000 Laird PLC, a London-based maker of electronics equipment, a wide range that explains why the top 100 companies account for fully percent of the total R&D spend of the Innovation 1000.
- Sales of the Global Innovation 1000 grew 6.5 percent to $15 trillion in 2008, a significantly smaller increase than the 10 percent increase this group registered in 2007, and R&D spending as a percentage of sales remained the same as the previous year, 3.6percent.
- North American-headquartered companies on this year’s list spent 4.6 percent of sales on R&D, a slight decrease compared with 2007, while Japanese-headquartered companies spent 3.7 percent of sales, significantly up from last year, and European-headquartered companies spent 3.2 percent, a decrease from the prior year.
- Booz & Company estimates that the Global Innovation 1000 accounts for 80 percent of 2008 total global corporate R&D spending of $660 billion.
The Global Innovation 1000 study is available online at www.strategyand.pwc.com.