Study: Higher r&d spending can mean more profits

By Tony Lewin, Automotive News

Automakers and suppliers invest billions of dollars in r&d, but some are far better than others at turning that into profits, according to an annual study.

In general, the most profitable companies are those with bigger r&d budgets, concludes the UK Department of Trade and Industry in its 2005 R&D Scoreboard. The ministry studied 1000 companies with the highest r&d spending, including 69 in the auto sector.

The old supplier pattern of manufacturing parts designed and engineered by their carmaker customers is over. Automakers depend on Tier 1 suppliers to research technology and to design and engineer major parts and systems. Suppliers spend a substantially larger proportion of sales on r&d, especially Tier 1 suppliers.

The automotive side of Germany's Robert Bosch GmbH spends 9.4 percent of sales on r&d. Denso Corp. invests 8.4 percent of revenue in r&d, with Delphi Corp. at 7.3 percent and Behr GmbH & Co. KG at 6.4 percent. Smaller suppliers such as Valeo SA, NGK Insulators Ltd., Autoliv Inc. and Hella KGaA Hueck & Co., invest significantly above the industry average of 4.3 percent of sales on r&d.

Tech burden shifts

"Innovation is at the heart of Bosch," Deputy Chairman Siegfried Dais told Automotive News Europe, a sister publication of Automotive News. He cited electronic fuel injection, antilock brakes, digital engine management and inline piezo injectors as examples of Bosch's continuing r&d efforts.

"This confirms the general trend of the last five to seven years," said Mark Fulthorpe, forecast analyst at CSM Europe in London. "Automakers have been pushing the burden of technical innovation on their suppliers."

As supplier competition has intensified, many have invested more in technology to win customers, Fulthorpe said.

Yet suppliers closer to the commodity end of the business can devote less than 2 percent of their sales income on r&d and maintain a 4 to 5 percent return on sales. Johnson Controls Inc., Lear Corp. and Tenneco Automotive Inc. are examples.

The auto industry r&d spending average of 4.3 percent of revenue is for automakers and parts makers.

Japanese and German companies are more willing to reinvest earnings into r&d than are French, British or U.S. companies, said the Department of Trade and Industry. "Japan and Germany tend to be r&d specialists, strong in sectors such as automotive and electronics," said the Department of Trade and Industry analysis.

Does investment in r&d help boost company profitability? The study suggests it helps. Bosch believes r&d spending is linked to profitability but says spending must be well-directed.

Wolfgang Dehen, CEO of Siemens VDO Automotive, which spends 8.5 percent of sales on r&d, also values such activity. He spoke of the automotive unit only.

"The majority of our sales are in electronics," Dehen told Automotive News Europe. "Electronics is the main driver of innovation in the auto industry, so our percentage of r&d to sales is significantly higher than on the mechanical side."

Wise investment

The study said many high r&d-investing companies have "sustained out-performance relative to their sector by showing consistent and profitable growth."

Said the study: "Wisely directed r&d should enable a company to maintain an edge for its products, processes and services relative to its main competitors and hence compete successfully in value-added, higher-growth market segments."

The pattern works for carmakers, too.

Ford Motor Co., the industry's No. 2 spender after DaimlerChrysler, ploughed 5.4 billion euros ($6.33 billion at current exchange rates) into r&d last year, yet its operating profit was only 2.5 percent of sales.

DaimlerChrysler's r&d investment was $6.56 billion or 4 percent of sales last year. Its profit margin was 2.4 percent.

But last year Toyota Motor Corp. boosted its r&d spending 25 percent over the average of the previous four years and earned 9.8 percent on sales. Its $6.33 billion r&d budget was similar to Ford's, representing just over 4 percent of revenue.

From Automotive News (A Crain publication)