Innovators Ready for Rebound

10/27/09

Booz & Company's 2009 edition of the Global Innovation 1000 report finds large R&D spenders are keeping the pace when it comes to developing new products and services despite fiscal challenges presented by the economic downturn.

In the face of a severe global recession, the world’s 1,000 largest publicly traded corporate research and development spenders increased R&D budgets in 2008, affirming the critical importance of innovation to their corporate strategies, according to Booz & Company’s Global Innovation 1000, the global management consulting firm’s fifth annual analysis of global innovation spending. R&D spending at these firms rose 5.7 percent in 2008, a slower rate of growth than the prior year’s 10 percent increase, but in line with the group’s 6.5 percent increase in worldwide sales. More than two-thirds of the companies included in this year’s Global Innovation 1000 maintained or increased R&D spending in 2008, even though a third of the companies reported a financial loss for the year.

As in previous years, Booz & Company identified the 1,000 public corporations worldwide that spent the most on researching and developing products and services for their marketplace. Additionally, the firm conducted a special survey of nearly 300 senior managers and R&D leaders from 230 companies, which collectively spent more than US$230 billion on R&D in 2008. This additional survey presented participants with detailed questions about their companies’ response to the recession, and the authors of the study conducted in-depth followed up interviews with a number of top R&D executives.

The feedback from corporate leaders revealed that innovation investment is increasingly viewed as essential to corporate strategy: More than 90 percent of the executives surveyed stated that innovation is critical as they prepare for the upturn, and a majority have maintained or expanded their portfolios and are pursuing new products to improve growth and margins.

Not all companies, of course, maintained or boosted R&D spending. More than a quarter of the Global Innovation 1000 cut their innovation budgets in 2008. And many companies were cautious: The top 20 companies increased R&D spending just 3.2 percent in 2008, compared to 10.7 percent in the prior year.

Early evidence also indicates that as companies entered 2009, spending on innovation slowed further. However, that slowdown came in the face of even steeper declines in sales and income: Among the 522 companies reporting results for the first quarter of 2009, R&D spending decreased by 7.4 percent—which is still less than half the rate of their 18.5 percent decline in sales.

In many ways, the recession has forced the corporate sector to improve its approach to innovation. 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. Nearly half of the respondents report becoming more risk averse in their approach to innovation, changing the filters they apply when green lighting new R&D projects. More than 40 percent said their companies are focusing on process improvements to change R&D spend during the downturn, and a similar number say they’re getting better at killing bad projects, as well as focusing more on newer products that have the potential to grow faster.

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. As the number one spender on R&D for the third straight year, The Toyota Motor Corporation’s budget was just under $9 billion. The company maintained its top rank despite its first-ever annual loss, more than $4.3 billion in 2008. Toyota’s R&D spending was 5.7 percent lower, however, than it was in 2007.

The computing and electronics industry retained its top spot in R&D spending among the industry sectors, spending $149 billion, accounting for 28 percent of the total spend. As in previous years, health care and auto came in second and third, spending 23 percent and 16 percent, respectively. Outside of the massive decline in sales that the auto industry has faced since the spring of 2008, R&D spending in the industry increased, but only by 0.6 percent. Aerospace and defense was the only industry to see R&D spending fall, by 2.3 percent for the companies on this year’s list.

Changes in R&D intensity, however, varied: Five industries—auto, computing and electronics, consumer, industrials, and health care—increased R&D intensity, while telecom, software and Internet, aerospace and defense, and chemicals and energy saw a decrease. A 1.4 percent increase in intensity, to 12 percent, allowed health care to take over the top spot in R&D intensity this year, and chemicals and energy decreased its intensity by 10.4 percent, to 0.9 percent, the lowest of all the industries.

Companies headquartered in the three major regions—North America, Europe, and Japan—continued to account for 94 percent of the total R&D spending of the Global Innovation 1000, and every region, including China and India and the rest of the world, increased its spending.

However, the rates of regional spending growth were slower. Japan increased its spending by just 0.5 percent, Europe by 6.3 percent, and North America by 6.5 percent; the global five-year compound annual growth rate was 7.2 percent. Overall, the recession has had a noticeable, but relatively mild, effect on R&D spending thus far. Given the weak growth in both overall sales and net income, it’s no surprise that companies are spending somewhat more cautiously on innovation.

Judging from the data in this year’s study, the results of the senior management survey, and conversations with executives, the recession’s effect on innovation activity has not been as severe as some observers of the business scene might have anticipated. Innovation has become central to every company’s efforts to compete, and the degree of competition has been in no sense reduced by the downturn; if anything, it has been heightened. Long product development cycles have forced companies to maintain their R&D spending even when revenues decline. And most companies are fully aware of the need to be in position to profit from the coming upturn.

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