As part of my research for this year’s ASSEMBLY Top 50 story, which appears in the October issue of ASSEMBLY magazine, I also looked at R&D spending for the top 50 publicly owned manufacturing companies in the United States. I assumed that the highest ranked companies in the Assembly Top 50 would also be among the biggest spenders on R&D.
In fact, there was no consistent correlation between R&D spending and financial performance. For example, 11 companies in the Assembly Top 50 have posted three or more consecutive years of double-digit revenue growth. Of those, only one, No. 16 Motorola, was among the top 10 in R&D spending, and just two more-No. 4 GE and No. 24 Cisco Systems-were in the top 20. The company with the highest ratio of R&D spending to gross revenue-No. 49 Sun Microsystems-has ended five straight years with a net loss. Similarly, No. 26 Delphi ranks 20th overall in R&D spending, and it’s among the top 10 in terms of R&D spending as a percentage of gross revenue. Ironically, however, the automotive supplier has experienced two straight years of declining revenue and four straight years of net losses.
What gives? Intuitively, my original thesis-a linear relationship between R&D spending and greater revenue and profits-must be true. No. 2 Toyota spends more on R&D than any other automotive OEM. It can hardly be a coincidence, therefore, that the company will almost certainly take over the No. 1 spot in the Assembly Top 50 within the next two years.
Perhaps it’s not the quantity of R&D spending as much as the quality. No. 33 Apple Computer spent $712 million on R&D in 2006. That’s 65 percent less than Sun and 82 percent less than Cisco Systems. And yet one good idea-the iPod-has completely transformed the company. Indeed, sales of Apple’s digital music player now exceed sales of computers.
For an answer to this paradox, we need only look to Major League Baseball. For the past seven years, the New York Yankees have had the highest payroll in baseball, and yet they haven’t won the World Series. In contrast, the Colorado Rockies are poised to win the National League pennant with a fraction of the Yankees’ payroll, solid young talent, and a hitter-friendly ballpark.
Similarly, lavish R&D spending does not necessarily guarantee higher sales and profits. However, by hiring the right people, providing an environment to succeed, and focusing R&D resources on a handful of projects with the greatest potential, manufacturers can still hit home runs and win the game in the end.
The following table shows how the Assembly Top 50 stack up according to R&D spending. (Note: Data on R&D spending could not be found for No. 27 Magna, No. 34 Flextronics and No. 36 Whirlpool. Spending figures are in millions of U.S. dollars.)
|Company||Rank||Net Income||Gross Revenue||R&D Spending||% Change from ’05||R&D as % of Sales|
|J & J||14||11,053||53,324||7,125||12.9%||13.4%|
|Illinois Tool Works||44||1,718||14,055||145||13.3%||1.0%|