fbpx
Back

September 1, 2005

Too Little Innovation

The numbers suggest other nations are catching up with the United States.

Companies that lack the commitment to ongoing research and development may want to consider a March 2004 study by Deloitte Research. The report said that because of changing customer demands and competitive offerings, 70% of products sold today will likely be outmoded by 2010. In other words, any manufacturer or company in the manufacturing supply chain that fails to put money towards development of new products and processes may find itself unable to compete in the near future.

Although North American businesses boast an impressive pipeline of new products to combat the threat of obsolesce, our global trading partners are boosting their R&D efforts, too. Their aim, of course, is to catch up with the United States. At the same time, however, the numbers show that domestic companies are scaling back their R&D efforts somewhat. The R&D spending gap between the U.S and the rest of the world is narrowing. And while it will take years for that R&D gap to close entirely, mounting investments in new products and improved processes confirm just how rapidly the technological competition
is intensifying.

The most recent (FY06) federal R&D budget request is an all-time high of $132.3 billion, $733 million above last year’s historic high, and 45% above federal research spending in fiscal year 2001.

Those are huge dollar figures and a sizeable percentage increase. But some of our toughest global competitors actually are spending more—at least as a percentage of their gross domestic products. U.S. investment in science is three times that of Japan and half again as much as all the European nations combined, says the Office of Science and Technology Policy. But American R&D represents 2.7% of GDP, whereas in Japan, the United States’ closest rival, R&D consumes 3.3% of GDP.

'A CRITICAL VULNERABILITY'

So just how alarmed should we be over those figures? In May of this year, Norman R. Augustine, retired Lockheed Martin Corp. chairman and CEO, and Nobel laureate Burton Richter co-authored a Wall Street Journal article, claiming that U.S. government funding for research in engineering and the physical sciences had basically remained unchanged for 20 years, using inflation-adjusted dollars. By contrast, between 1991 and 2001, R&D expenditures in South Korea rose 220%, and in China 350%, the pair reported.

South Korea and China start from much farther back, and so North American R&D spending still greatly outstrips them in dollars. But, says Shirley Ann Jackson, president of Rensselaer Polytechnic Institute, a technological university based in Troy, New York, “While the U.S. has the strongest national economy with the largest per-capita income, its success masks a critical vulnerability. At home, the source of the innovative capacity and technological ability is thinning.”

Where exactly is this “thinning” taking place? Start with the government/academic/corporate breakdown of U.S. R&D expenditures. Federal funds constituted close to 60% of academic R&D expenditures over the past decade, as measured by the National Science Board’s “Science and Engineering Indicators 2004,” a bi-annual report. Since 1990, inflation-adjusted federal dollars for academic R&D have grown continuously, increasing by about 66% through 2002. That's the good news.

The bad news is that federal support to all other sectors declined by 14% during that time, reaching a low in 2000. In the five years since that nadir, federal funding for nonacademic R&D has rebounded—but not enough to offset the overall, long-term decline.

Company-funded R&D, which has outstripped its federally funded counterpart since 1980, reached a record $180 billion in 2000. Since then, it too has been in decline. In 2002, the most recent year for which statistics are available, corporate America spent roughly $177 billion on R&D, which comprised two-thirds of the national total of $276 billion.

GLOBAL R&D

The question is, why?

One reason may be the globalization of major corporate R&D. In Thomas Friedman’s book, The World is Flat, he calls this “the globalization of innovation.” North American companies may outsource R&D or have research done by their overseas subsidiaries (see “Build It and They Will Come,” p. 38). This means, according to Friedman, that no one country or company will be able to control the entire development cycle. In itself, that does not sound like a bad thing. But control of that cycle—the fact that we “owned” innovation while other countries were producers—always has been important to American competitiveness.

The North American metals industry provides a case in point. Some groundbreaking R&D efforts pay off in the short-term with new products. Some 70% of the types of steel used in new automotive construction didn’t even exist 10 years ago, for instance. Other efforts to develop new processes have longer-term, but potentially even greater ROIs, through development of new processes. Productivity at American steel mills has tripled over the past 20 years, from an average of 10 man-hours per finished ton to three man-hours, as reported by the American Iron and Steel Institute (AISI), a Washington, D.C.-based trade organization.

In the ever-changing global business landscape, it remains to be seen whether where R&D happens will matter. What is clear is that the owner of the patent will enjoy the ROI and the boost in competitiveness, and that only well-managed companies with an ongoing commitment to research and development, good times and bad, will be able to enjoy either.

WAITING TO BE ASKED

Although press coverage of its $17 million order with Norway’s Stat Oil attributed its success to R&D, St. Louis, Missouri-based Maverick Tube Corp. has no R&D department. Rather R&D is a part of the sales process. Richard W. Preckel, director of investor relations and business development, says the company, one of North America’s largest producers of welded tube products for the energy industry, “hasn’t done a good job of quantifying” its research efforts—in fact has never quantified the dollars spent.

“It starts as a fairly simplistic effort to solve a problem,” Preckel says. “As you go through the process, you’re evaluating how big the payback will be.” Working with engineers at its subsidiary, Precision Tube/SeaCAT, Maverick’s engineers found themselves taking the company further and further into the relatively new field of coiled tubing products.

“Coiled tubing is a highly engineered product,” Preckel says. “As we worked on the coiled flow line project in Norway, for service and antifreeze lines for an offshore LNG project, we saw that there were a number of these projects around the world where we can now provide these products.”

In its original business of jointed tubing and casing, some of Maverick’s products are essentially commodities. The fear is that pure R&D will result in a payroll with a lot of “very bright people who invent cool things but without a lot of customer applications—which makes it difficult to pay for your R&D efforts.”

Maverick, therefore, waits for a problem before hunting for a solution. “The only way to get into it is for a customer to come to your door and ask,” Preckel says. “The pipe and tube industry is not like the space exploration industry. There are not huge margins in our business. We have been around for hundreds of years. There is a level of R&D that’s appropriate for every company in every industry. Finding that level is what’s important.”

Having said that, Maverick has a two-fold strategy for growth. First, to become more global. The company, public since 1991, is pursuing that through acquisition, most recently of Tubos del Colmena, S.A., in Columbia, to be present in regions primed for oil and gas exploration. Second, to become “a higher technology company. We want to be able to provide more technical solutions for our customers. My anticipation for the company is that we will continue to move down the path with products like coiled tubing,” Preckel says.

Which may well mean getting a lot more systematic about its unquantified, ad hoc approach to R&D.

– Rebecca Rolfes

 

 

BUILD IT AND THEY WILL COME

When the U.K. passed legislation mandating greater child-proof packaging for some pharmaceuticals, Alcan Inc. was way ahead of the pack. “Our R&D process is different from most manufacturers’,” says spokesperson Alexander Christen. “We don’t wait for someone to ask us to develop a solution. We develop a solution and then convince people that they should be using it.”

The solution in this case was Guardlid, an aluminum-based film that has to be peeled off a blister pack before the pills can be popped out. Adults have no problem opening the package, but small children weren’t strong enough to break the film and couldn’t read the instructions.

Alcan, like Maverick Tube Corp. (see sidebar, p. 36), has been on an aggressive global acquisition push. The Montreal-based aluminum giant, however, is very systematic about its R&D efforts, acquiring technical expertise and research facilities as it acquires companies.

“When we merged with the algroup in 2000 we acquired R&D assets in Switzerland,” Christen says. “We began to find the synergies and to identify the objectives for R&D. That caused a jump in investment.”

R&D spending in 1999 was $67 million, jumping to $115 million in 2002 and to $296 million in 2004. This is in pursuit of the corporate goal of doubling in value every 5 years.

In 2003, Alcan acquired Pechiney, then the No. 3 aluminum company in the world. Alcan’s workforce doubled as did the number of countries in which it operated. Several R&D facilities came along with that acquisition as well. “We had been mostly invested in primary aluminum,” Christen says. “That acquisition helped us identify the packaging business and the engineered products business as the growth opportunities. That requires R&D.”

As it has grown and acquired, Alcan’s R&D efforts have pursued parallel streams. One is toward new products like Guardlid. The other is toward new processes.

Pechiney was using the AP30 smelting technology, for instance, which became part of the Alcan network and one of the reasons the acquisition was so attractive. But Alcan went further and is developing AP50, which significantly reduces the completion time of full metal production, “a very important development for us and one we are franchising to the rest of the aluminum industry.”

Its latest and most ambitious effort is a $1.3 billion investment in the Gove alumina refinery in Australia. This will be supported by the Queensland Research and Development Centre in Brisbane, which will work on new technologies for alumina production processes.

There is no difference, according to Christen, in the ROI calculations for product R&D vs. process R&D. But the years to payoff and the years of competitive advantage are light years apart. Packaging is a fast-moving “cut throat” business. “These companies are looking for short-term quick fixes.” Bauxite and alumina, more cyclical endeavors, allow “more gradual development and a longer wait for the return.”

There is also no difference in how Alcan thinks of R&D around the world. Packaging is mostly researched in North America. Australia will look at bauxite and alumina processes. Primary metals mostly fall under the Canadian and French R&D centers. And engineered products—everything from balsa wood to extrusions—are usually researched where the products themselves are manufactured.

“You’ve got to follow the dimensions of the individual markets,” Christen says. “Aluminum is cyclical but stable. It’s fair to say that R&D strategies go with our overall objective: to maximize value. Products that will boost the bottom line but which will last, that are environmentally friendly. Whatever happens, we firmly believe in the value of R&D.”