The slippage in research and development spending captured in Booz & Co.’s survey of giant companies around the globe for 2009 shouldn’t surprise anyone. But its finding of an increased “R&D intensity” seems a sign of hope for future growth.
The overall intensity rating — showing R&D as a percentage of sales — climbed to 3.75% among the world’s 1,000 companies that spend the most on innovation. That was up from 3.46% in 2008.
The backdrop for the intensity increase was an 11% falloff in total revenues, from $15.1 trillion to $13.4 trillion, against a relatively small 3.5% slippage in R&D spending. By contrast, in 2009 sales, general, and administrative spending fell 5.4%, and capital expenditures plunged 17.5%.
“A typical company view was, ‘I cut capital spending because I don’t need incremental capacity with demand down,’ and SG&A is a bit of a necessary evil,” says Booz partner and report co-author Barry Jaruzelski. “But they cut R&D last; that’s the future revenue stream that these companies are protecting.”
The Booz study, titled “Global Innovation 1000,” also provides a breakdown of R&D intensity by industry, creating a picture of where the greatest interest in development lies. A huge R&D hit in the automobile industry, with R&D spending off 14.3%, was sharper than the 12.7% decrease in industry revenue. In fact, the auto industry’s falloff in spending represented fully two-thirds of the $18 billion in lower R&D spending among the 1,000 companies surveyed.
The computing and electronics industry recorded a 6.7% decline in both revenues and R&D, meaning its intensity measurement was unchanged. That category remains the largest in dollar amount of R&D spending, with health care number two. (Autos ranked third.)
However, pharmaceutical company Roche Holding rated the top position in innovation spending, with its 11.6% rise in R&D, to $9.1 billion. As number one, it replaced Toyota, which cut its spending nearly 20%, falling to fourth place, according to the Booz survey.
Across a range of industries, though, Jaruzelski sees this year and next year as the real test of companies’ commitment to innovation. And he suspects most companies will pass that test by sharply raising R&D spending and measuring greater intensity as well.
In the auto industry, the increases in intensity could well be long term, in Jaruzelski’s view. “There’s going to have to be a significant commitment to the new power train, in terms of hybrids,” he says. Without that, “there’s no reason to think, as a percent of sales, that it will move more than a little from the 4% where it is now.”
Respondents were asked to identify the three companies they rate as most innovative, and by far the winner in that poll was Apple Computer. The perception of Apple as a leader, however, suggests there is more to being an innovation front-runner than just spending on R&D. Apple ranked 81st in R&D spending, and its intensity measurement was a mere 3.1%, compared with 12% for Google, the number-two “most innovative” company in the rating. (Microsoft, voted the sixth-most-innovative company, was second overall in R&D spending, with the amount spent equating to 15.4% of revenues.)
There’s no question that 2009 corporate spending overall represented “a brutal hit,” says Jaruzelski. “But remember that even in the Great Depression, innovation didn’t stop. In fact, some of our biggest innovations came then, from the jet engine to the chocolate-chip cookie. Television was just being rolled out, and, by the way, Hewlett-Packard was founded in the 1930s.”