R&D Spenders Get No Respect

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A company can spend billions of dollars on R&D and get little respect as an innovator. Even though that is the conclusion of a new study by Booz & Co., the conclusion is misleading.

Booz reports that: “As our annual Global Innovation 1000 study, now in its sixth year, has consistently demonstrated, the success of these companies is not a matter of how much these companies spend on research and development, but rather how they spend it.”

It is easy to guess that Apple (NASDAQ: AAPL) is in the top spot on the list, followed by Google (NASDAQ: GOOG), and 3M (NYSE: MMM). Facebook is in the top 10 for the first time. These companies will be the targets of the next wave of innovation, which means they will have to spend more and more to hold the positions they already have.

The overlap of these “innovators” with the firms that spent the most money on R&D last year is small. Most of the companies with massive R&D budgets are in the pharmaceutical industry. Roche, Pfizer (NYSE: PFE), Novartis (NYSE: NVS), and Merck (NASDAQ: MRK) are among the top 10 by dollars spent on R&D. Old world tech companies, such as IBM (NYSE: IBM), Microsoft (NASDAQ: MSFT), Nokia (NYSE: NOK), Intel (NASDAQ: INTC) and Cisco (NASDAQ: CSCO), are also high on the list of companies that spent the most money last year. The group of largest R&D spenders also includes auto manufacturers Toyota (NYSE: TM), General Motors (NYSE: GM), Volkswagen and Honda (NYSE: HMC).

The difference between the two lists is that the largest spenders mostly invest dollars to stay in the places they already hold in the business world. Pharma companies need to replace drugs that are about to come off patent, or already have. Old world tech companies like Microsoft and Intel need to keep pace with firms that have new successful hardware and software products that challenge their sales. Auto companies are in a race to make their cars and light trucks safer and more useful to consumers.

But Apple, Facebook, and Google are only a few years away from the need to spend R&D money to hold their own rather than advance rapidly within their own industries. Almost no one believes it about Apple, but eventually there will come a time when its revenue growth is no longer in the high double digits. Google’s products like

Android and some of its search features already have stiff competition. Google might wish it had spent more R&D money on Android in the recent past. It has been assaulted by Microsoft over intellectual property issues. Android customers  now pay Microsoft IP licence fees in many cases.

It is easy to believe that the companies growing the fastest and with the most attractive products to consumers and businesses are the most innovative. This will not last for those firms. Eventually all companies spend R&D money to hold their positions within their industries. It is just a matter of the age of the each company’s products and the state of new competition, which is always entering the market — often aimed at the innovators with sharply growing sales.

Douglas A. McIntyre