Chinese companies lead the global R&D spending growth, and Alibaba (#61) and ZTE (#70) overtake PetroChina (#73) as the top R&D spenders in China
Shanghai, October 26, 2016 – By 2020, companies will have shifted the majority of their R&D spending away from physical product-based offerings to digital offerings—software and service, according to the 2016 Global Innovation 1000 Study from Strategy&, PwC’s strategy consulting business. The need to stay competitive is the top reason why companies cited a shift in their R&D budgets towards software and services, and for good reason – according to the study, companies who reported faster revenue growth relative to key competitors allocated 25 percent more of their R&D budgets to software offerings than companies who reported slower revenue growth.
- The average allocation of R&D spending for software and services increased from 54% to 59% between 2010 and 2015 and is expected to grow to 63% by 2020.
- Meanwhile, the average allocation of R&D spending dedicated to product-based offerings fell to 41 percent (from 46% in 2010), and is expected to fall to 37% by 2020 (an overall decrease of 19% this decade).
- Average allocation of R&D spending on software offerings alone will increase by 43% by the end of this decade and R&D spending on services will gradually overtake investment in product-based innovation (39% vs. 37% by 2020).
- Global R&D spending on software offerings has increased by 65% between 2010-2015, from US $86 billion to $142 billion.
“Many of the world’s major innovators are in the midst of a transformational journey mostly driven by changing – and rising – customer expectations,” says Barry Jaruzelski, innovation and R&D expert for Strategy& and principal with PwC US. “The shift is also being driven by the supercharged pace of improvement in what software can do, including the increasing use of embedded software and sensors in products, the ability to reliably and inexpensively connect products, customers and manufacturers via the Internet of Things (IoT), and the availability of cloud-based data storage.
Companies will recruit less mechanical engineers and more data and software engineers to build their capabilities
To support the development of software and services offerings, fewer companies will focus their R&D spending on the electrical and mechanical field. By 2020, the number of companies reporting that electrical engineers are their top employed engineering specialty will fall by 35%and the proportion of companies who expect that data engineers will represent their largest group of employed engineers will double from 8% to 16%.
Huw Andrews, PwC Partner and Innovation Lead says, “An increase in software and services, even in more traditional industries has created a shift towards hiring talent that can develop software and provide platforms to collect and analyse product-related data. The shift is already changing the way business schools think about their course offerings, and will have profound effects both on education and, more generally, on the future of employment.”
Regionally, companies in North America are making the strongest shift to digital offerings—from 15 percent of total R&D spending in 2010 to 24 percent in 2020. While Asia remains the most product-centric region, with 44 percent of R&D allocated to product offerings in 2010, only falling to 40 percent in 2020. The automotive and industrial sectors are making the most aggressive push towards developing new software offerings.
Among companies that made an acquisition during the past five years, the vast majority – 71 percent – were made to enhance capabilities in software (33%) or services (38%).
R&D spending growth by Chinese companies leads the global market, with Alibaba as the top spender while Huawei—as a non-public company—among one of the Top 10 spenders
In 2016, there are 130 Chinese companies among Global Innovation 1000 (from 123 in 2015), which spend US$46.8 billion on R&D, up 18.6% from US$39.4 billion in last year. As a result, the R&D spending contributed by Chinese companies is also on the rise, up from 5.8% in 2015 to 6.9% in 2016.
For the first time since 2015, PetroChina loses its No.1 place among top R&D spenders in China, surpassed by both Alibaba and ZTE, while PowerChina and JD.com make their debut on Top 20 R&D spenders in China, as No.16 and N0.20, respectively.
Noteworthy, as what we did in previous years, we compare Huawei against other Chinese peers on R&D spending, although we have excluded it out of the top spenders list due to its status as a non-public company. According to its FY 2016 annual report, Huawei spends RMB59.6 billion (US$9.48 billion) on R&D in 2015, making it the highest spender in China and the 9th largest spender—behind Novartis but ahead of Johnson & Johnson—among the Global Innovation 1000 (vs. No.16 in 2015).
“As the R&D spending by European and Japanese companies declines, Chinese companies are in the leading position as their R&D spending growth increased at 18.6%, higher than the 8% growth of North America,” says Adam Xu, Partner and Leader of Digital Practice with Strategy&. “In light of the innovation-driven development strategy at a national level, Chinese companies have been increasing their investment of R&D year by year, which indicates that they are shifting their advantage from competitive cost to innovation to build up technology capabilities to win in the global market.”
Top 10 R&D spenders in China (inc. Hong Kong)*
Strategy&’s annual analysis of the world’s 1000 largest R&D spenders also found the following:
- By 2018, the healthcare sector will surpass computing and electronics to become the largest R&D spending industry globally (US$165 billion v. US$159 billion), and the software and internet industry will leap ahead of the automotive sector (US$129 billion v. US$105 billion); Industrials rounds out the Top 5 R&D industries by spend.
- For the first time in the study’s history, the number of Global Innovation 1000 companies headquartered in the US grew, up 9.5% year over year.
- Volkswagen, Samsung, Amazon, Alphabet (Google) and Intel round out the Top 5 R&D Spenders, with Amazon and Google making bold moves up the list (+4 and +2 positions, respectively).
- Global innovation professionals have named Apple, Alphabet (Google), and 3M as the three Most Innovative Companies in the world.
- The 10 Most Innovative Companies continue to outperform the Top 10 R&D Spenders on key performance metrics, as has been the case for each of the past seven years.
2016 Ranking: The 10 Most Innovative Companies vs. Top 10 R&D spenders
*The 10 Most Innovative Companies are named by respondents of a 2016 survey of global innovation experts.
To learn more about the 2016 Global Innovation 1000 Study, visit www.strategyand.pwc.com/innovation1000. A copy of the study findings by geography and industry are available from the media contact. Additional multi-media assets including infographics and video are also available.
About the 2016 Global Innovation 1000 Study
As it has in each of the past 11 editions of the Global Innovation 1000, this year Strategy& 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, 2016. To be included, companies had to make their R&D spending numbers public. 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. Strategy& also conducted an online survey of 466 innovation leaders around the world. The companies participating in the survey represent more than US$91 billion in R&D spending, or 13.5 percent of this year’s total Global Innovation 1000 R&D spending. For information about the methodology of the study, please contact the media representative.
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