2015 Global Innovation 1000 Innovation s New World Order

Transcription

1 Webinar 2015 Global Innovation 1000 Innovation s New World Order

2 Introduction R&D spending and trends Globalization of R&D 1

3 Study authors Barry Jaruzelski is a principal with Strategy&, PwC s strategy consulting business, and with PwC US. Based in Florham Park, N.J., he works with high-tech and industrial clients on corporate and product strategy and the transformation of core innovation processes. He created the Global Innovation 1000 study in 2005, and in 2013 was named one of the Top 25 Consultants by Consulting magazine. Volker Staack volker.staack@pwc.com is a principal with Strategy&, PwC s strategy consulting business, and with PwC US. He focuses on engineered products and services, particularly in the automotive and heavy equipment industries, and specializes in strategic product value management, turnarounds, and implementation of global M&A. Kevin Schwartz kevin.j.schwartz@pwc.com is a principal with PwC US, and leads the firm s innovation and development consulting services. Based in San Francisco, he focuses on driving enterprise-wide innovation and enabling growth through new products, services, and business model innovations. 2

4 For the 11th year Strategy&, PwC s strategy consulting business, studied innovation trends at the world s 1,000 largest publicly listed corporate R&D spenders 2005: Money Isn't Everything 2006: Smart Spenders 2007: The Customer Connection 2008: Beyond Borders 2009: Profits Down, Spending Steady 2010: How Top Innovators Keep Winning 2011: Why Culture Is Key 2012: Making Ideas Work 2013: Navigating the Digital Future 2014: Proven Paths to Innovation Success 2015: Innovation s New World Order 3

5 The study has become a recognized contributor in better understanding what drives success in R&D and innovation The Global Innovation 1000 study has received significant media and academic recognition over past decade: Global Innovation 1000: Selected Press Coverage Called the most comprehensive assessment of the relationship between R&D investment and corporate performance by The Economist in 2009 Awards: Silver (2011) and Gold Medals (2014) for original research by the American Society of Business Press Editors Best of Visions award from PDMA in 2009 Special Achievement Award for advancing innovation dialog from the Innovate Forum in 2006 Cited in more than 180 publications spanning 27 countries & 6 continents 4

6 In addition to performing our annual R&D spending analysis, we examined the globalization of R&D R&D Spending and Trends Analysis of R&D Spending and Trends Annual R&D spending across the 1,000 largest R&D spenders globally (publicly-traded firms) R&D spending by region and industry (absolute spending, growth, and proportion of total) R&D intensity (spending as a percent of revenue) Top 20 R&D spenders globally 10 Most Innovative Companies Methodology Spending determined on the basis of companies annual reports from their most recent fiscal year, as of June 30, 2015 Most Innovative Companies determined based on a web survey of 369 senior R&D executives and Innovation leaders The Globalization of R&D Understanding Global R&D Flows How much and where in the world are companies choosing to spend their R&D How regional spending has changed since we last looked at this topic in 2008, Beyond Borders Methodology We researched the global R&D footprint of: Top 100 companies from the Global Innovation 1000 Top 50 companies in the largest three industries: auto, healthcare, and computing & electronics Top 20 companies in industrials, and software & Internet This resulted in 207 companies reflecting overlap which are headquartered in 23 countries, conducting R&D activities at 2,041 R&D sites in more than 60 countries, and represent 71% of the total Global Innovation 1000 R&D spend. 5

7 Introduction R&D spending and trends Globalization of R&D 6

8 Executive Summary In 2015, R&D spending by the Global Innovation 1000 increased 5.1% to $680 billion, the largest year-over-year increase since R&D spending is now in line with the long-term trend of R&D spending growth of 5.4% over the last 10 years. R&D intensity spending as a percent of revenue - also spiked to 3.7% from 3.5% in 2014, which is the result of falling revenues experienced by the Global Innovation Similar to what happened in 2010 after the Great Recession, companies tend to stick with their innovation program despite cyclical revenue fluctuations. Software & Internet had the highest year-over-year growth rate (27%) of all the industries, which propelled it past the industrials sector to become the fourth-largest industry by R&D spend. Apple made its first-ever appearance in the Top 20 R&D Spenders list and has an intensity of 3.3%, compared to an average of 12.5% for the other 19 companies on the list. Apple and Google remain the two most innovative companies, according to our survey respondents, while Tesla jumps to third place, pushing Amazon down to fifth. Toyota rejoins the ranking at number 10 after a two-year hiatus. 7

9 Higher R&D spend doesn t ensure performance The Performance Disconnect Example analysis showing relation between R&D & financial performance ~10,000 analyses found NO statistical relationship between R&D spend and: Sales growth Gross profit growth Operating profit growth Operating margin Net profit growth Net margin Market cap growth Total shareholder return Indexed Sales Growth y = 0.032x R² = Source: Strategy& 2015 Global Innovation 1000 analysis, Bloomberg data, Capital IQ data 8

10 however, there is a minimum threshold you can be Too Rich or Too Thin The Performance Disadvantage of the Bottom 10% of Spenders Indexed Performance Spending much less than industry median does lead to consistently lower performance Spending much more than industry median does not drive consistently better performance Operating Profit Growth Index Regionally Adjusted Shareholder Return Index Indexed Bottom 10% Indexed Middle 80% Indexed Top 10% Source: Strategy& 2015 Global Innovation 1000 analysis, Bloomberg data, Capital IQ data 9

11 In 2015, R&D spending by the Global Innovation 1000 saw the return to the long-term growth trend Global Innovation 1000 R&D Spending $US Billions 10-year CAGR = 5.44% 5.4% +70% $400 $409 $447 $501 $538 $508 $560 $614 $638 $647 $ Y-o-Y Growth 2.2% 9.3% 12.2% 7.3% -5.6% 10.3% 9.7% 3.8% 1.4% 5.1% Source: Strategy& 2015 Global Innovation 1000 analysis, Bloomberg data, Capital IQ data 10

12 Innovation 1000 firm revenue fell 1%, reversing the longterm trend of decreasing R&D intensity Global Innovation 1000 R&D Intensity (Spending as a Percent of Revenue) 10-year CAGR = -1.24% -1.2% 4.2% 3.9% 3.8% 3.8% 3.6% -11.7% 3.8% 3.6% 3.5% 3.6% 3.5% 3.7% 10-year Average 3.7% Y-o-Y Growth -8.5% -2.0% -0.8% -4.5% 5.3% -5.5% -2.0% 2.5% -2.2% 6.1% Source: Strategy& 2015 Global Innovation 1000 analysis, Bloomberg data, Capital IQ data 11

13 Computing & electronics, healthcare, and auto continue to be the three largest industries in terms of total R&D spend 2015 R&D Spending by Industry Total = $680 Billion Telecom Other Consumer Aerospace and Defense 2% Chemicals and Energy 3% 3% 6% 2% 24% Computing and Electronics Industrials 11% Software and Internet 11% 16% Auto 21% Healthcare Source: Strategy& 2015 Global Innovation 1000 analysis, Bloomberg data, Capital IQ data 12

14 Software & Internet passed industrials and healthcare is closing in on C&E as the largest industry by R&D spend R&D Spending by Industry $US Billions $180 $160 $140 $166 $145 Computing and Electronics Healthcare $120 $100 $80 $60 $40 $20 $0 $109 $76 $75 $42 $22 $20 $12 $10 Auto Software and Internet Industrials Chemicals and Energy Aerospace and Defense Consumer Telecom Other Source: Strategy& 2015 Global Innovation 1000 analysis, Bloomberg data, Capital IQ data 13

15 Software & internet grew at over 27%, far greater than the growth of all other industries from 2014 to 2015 % Change in R&D Spending by Industry % % % 6.0% 5.0% 4.5% % -0.7% -2.8% -4.3% -10.0% Software and Internet Industrials Healthcare Aerospace Auto Chemicals Computing Other Consumer and Defense and Energy and Electronics Telecom Source: Strategy& 2015 Global Innovation 1000 analysis, Bloomberg data, Capital IQ data 14

16 Apple made its first-ever appearance in the Top 20 R&D Spenders in 2015 despite having a low intensity Top 20 R&D Spenders Rank Company Region Industry 2015 R&D Spending ($B) Intensity (%) 1 Volkswagen Europe Auto % 2 Samsung Asia Computing and Electronics % 3 Intel North America Computing and Electronics % 4 Microsoft North America Software/Internet % 5 Roche Europe Healthcare % 6 Google North America Software/Internet % 7 Amazon North America Software/Internet % 8 Toyota Asia Auto % 9 Novartis Europe Healthcare % 10 Johnson & Johnson North America Healthcare % 11 Pfizer North America Healthcare % 12 Daimler Europe Auto % 13 General Motors North America Auto % 14 Merck North America Healthcare % 15 Ford North America Auto % 16 Sanofi Europe Healthcare % 17 Cisco North America Computing and Electronics % 18 NEW Apple North America Computing and Electronics % 19 GlaxoSmithKline Europe Healthcare % 20 NEW AstraZeneca Europe Healthcare % Honda fell to #21, IBM fell to #26, Total $176.5 Increase or decrease within Top 20 ranking compared with 2014 Companies that have been among the Top 20 R&D Spenders since 2005 Source: Strategy& 2015 Global Innovation 1000 analysis, Bloomberg data, Capital IQ data 15

17 Apple & Google continue to lead the Most Innovative list, while Tesla has moved up to third 10 Most Innovative Companies Rank Apple Apple Apple Apple Apple Apple 2 Google Google Google Google Google Google 3 3M 3M 3M Samsung Amazon Tesla 4 General Electric General Electric Samsung Amazon Samsung Samsung 5 Toyota Microsoft General Electric 3M Tesla Amazon 6 Microsoft IBM Microsoft General Electric 3M 3M 7 Procter & Gamble Samsung Toyota Microsoft General Electric General Electric 8 IBM Procter & Gamble Procter & Gamble IBM Microsoft Microsoft 9 Samsung Toyota IBM Tesla IBM IBM 10 Intel Facebook Amazon Facebook Procter & Gamble Toyota Source: Strategy& 2015 Global Innovation 1000 survey data and analysis 16

18 As in previous years, the 10 Most Innovative Companies outperform the top 10 R&D spenders Most Innovative Companies * vs Top 10 R&D Spenders Financial performance normalized by indexing values within each industry Highest Possible Score: 100% 10 Most Innovative Companies Top 10 R&D Spenders 63% 65% 63% Normalized Performance of Industry Peers: 50% 55% 53% 46% Lowest Possible Score: 0% 5Y Revenue Growth CAGR 5Y EBITDA as a % of Revenue Avg 5Y Market-Cap Growth CAGR Source: Strategy& 2015 Global Innovation 1000 analysis, Bloomberg data, Capital IQ data *Only 9 of the 10 Most Innovative Companies were included in Market-Cap Growth. Tesla was removed as it does not have Market-Cap data spanning back five years. 17

19 Introduction R&D spending and trends Globalization of R&D 18

20 Executive Summary R&D is now a global activity for the vast majority of major corporations, as 94% conduct R&D in countries beyond their home country. Asia has become the number one region for corporate R&D spending, Europe has fallen to number three, and North America remains in second place. In our 2008 study, this order was reversed. Asia s rise was driven by strong imports and domestic R&D spending. Most notably, China increased in-country R&D spending by 79% and is closing in on the U.S. as the largest country destination for imported R&D. The U.S. is still the largest in-country (domestic and imported) R&D spender. However, its overall lead is shrinking against most Asian countries, but expanded over most Western European countries. Europe s fall to third-largest region for R&D spending was the result of low growth in domestic and imported R&D, and high growth in exported R&D; most noticeably in France and Germany. Surveyed R&D professionals ranked access to talent and proximity to customers higher than tax advantages in choosing where to conduct R&D. 19

21 The largest spenders by region have remained the same, but where they spend their R&D has changed Corporate R&D by Companies Headquartered Region 2007 & 2015 $US Billions Corporate In-Region (Domestic & Imported) R&D 2007 & 2015 $US Billions +37% +37% $351 0% 24% 34% $480 1% 25% Rest of World Asia 30% Europe In 2015, almost half of all R&D spend came from North American companies, but only about a third of all R&D was actually done in North America. $351 4% 27% 34% $480 5% 35% 33% Rest of World Asia North America 42% 45% North America 35% 28% Europe Asia is now the top regional destination for R&D spending, followed by North America and Europe. In 2007, that order was reversed. Source: Strategy& 2015 Global Innovation 1000 analysis 20

22 Asia s rise as the top region for R&D spending was driven by both robust imports and domestic spending Asia In-Country (Domestic & Imported) R&D 2007 & 2015 $US Billions +120% $55 $50 $45 $40 $35 $30 $25 $20 $15 $25 $55 +24% $50 $ % $28 $13 +98% $ % +121% % $10 $5 $7 $7 $3 $3 $6 $5 $7 $0 China Japan India South Korea Singapore Taiwan Rest of Asia Source: Strategy& 2015 Global Innovation 1000 analysis 21

23 Leading the way for Asia was China, which is closing in on the U.S. as the largest country for imported R&D Top Five Countries That China Imported R&D from 2007 & 2015 $US Billions Imported R&D by Country 2007 & 2015 $US Billions +79% $44 15% Rest of World $0 $10 $20 $30 $40 $50 $60 U.S. +23% China +79% $25 22% 7% 9% 12% 20% 6% 7% 10% 21% 41% South Korea Switzerland Germany Japan +141% U.S. India U.K. Japan Germany Israel Canada +12% +74% -7% +64% +12% +116% 31% France -21% Singapore +121% Source: Strategy& 2015 Global Innovation 1000 analysis 22

24 R&D professionals ranked strategic reasons higher than cost advantages when moving R&D functions to China What Are the Benefits of Moving R&D Functions to China? n = % 90% Top three responses based on proximity 80% 70% 60% 50% 40% 30% 71% 59% 54% 53% 39% 33% 30% 26% 20% 10% 0% Proximity to High Growth Market Proximity to Key Manufacturing Sites Proximity to Key Suppliers Lower Development Costs Access to Technical Talent Easier Place to Export to the Rest of the World Experienced Labor Market Reliability of Project Execution Source: Strategy& 2015 Global Innovation 1000 survey data and analysis 23

25 The U.S. remains the largest in-country R&D spender... In-Country (Domestic & Imported) R&D 2007 & 2015 $US Billions +34% $150 $100 $109 $ % +24% $50 $55 $25 $50 $40 +15% $28 $ % $28 $13-5% $23$22-21% +98% +69% $20 $16 $11 $7 $13 $7 +41% +12% $11 $8 $9 $10 $0 U.S. China Japan Source: Strategy& 2015 Global Innovation 1000 analysis Germany India U.K. France South Korea Israel Italy Canada 24

26 however, its lead against key Asian countries is eroding % Change , In-Country (Domestic and Imported) R&D Relative to the U.S. Height of bar = 2015 In-Country R&D Spend ($US Billions) Lost Advantage U.S. = 0 Gained Advantage China $55 64% India $28 61% South Korea Israel Eastern Europe* Italy $14 $11 5% $11 15% $13 26% 48% Japan Germany Canada U.K. France -41% -29% -7% $50-14% $32-16% $10 $22 $16 Asia Europe North America Rest of World -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% Source: Strategy& 2015 Global Innovation 1000 analysis *Eastern Europe Includes: Russia, Poland, Romania, Czech Republic, Slovakia, Croatia, Hungary, Bulgaria, Estonia, Latvia, Serbia, Turkey, and Slovenia 25

27 U.S. firms significantly increased R&D performed in low-cost Asian countries such as China and India U.S. HQ Firms R&D Allocation 2007 & 2015 $US Billions Top 7 Countries That the U.S. Exported R&D to 2007 & 2015 $US Billions $146 $214 $80 $121 11% 11% Rest of World 17% 21% Europe 45% 36% Rest of World 27% 45% 25% Asia 43% U.S. 5% 6% 7% 8% 9% 9% 10% 5% 5% 7% 7% 9% 15% 15% Japan Canada Germany Israel U.K. China India In 2007, the U.K. was the top export destination for U.S. R&D. In 2015, it was third Source: Strategy& 2015 Global Innovation 1000 analysis 26

28 Europe s decline was the result of low growth in domestic and imported R&D, and high growth in exported R&D % Change in R&D Spending By Region North America Europe Asia 100% 100% 100% 90% 90% 90% 86% 80% 80% 80% 70% 60% 50% 40% 40% 50% 70% 60% 50% 40% 46% 70% 60% 50% 40% 60% 30% 20% 21% 30% 20% 18% 30% 20% 16% 10% 0% 10% 0% 2% 10% 0% R&D by Domestic Companies R&D Imported R&D Exported R&D by Domestic Companies R&D Imported R&D Exported R&D by Domestic Companies R&D Imported R&D Exported Source: Strategy& 2015 Global Innovation 1000 analysis 27

29 European firms increased their R&D allocation to Asian and North American high-cost countries European HQ Firms R&D Allocation 2007 vs $US Billions Offshore Nearshore Home $119 2% 13% 5% 23% 2% 23% 57% $144 4% 14% 9% 25% 3% 16% 32% 29% Rest of World Asian Low-Cost Countries (LCC) Asian High-Cost Countries (HCC) North American HCC Eastern European LCC Western European HCC Home European firms decreased their total R&D allocated to Europe from 57% in 2007 to 48% in % Source: Strategy& 2015 Global Innovation 1000 analysis Note: High-cost countries (HCC) refers to countries with an average engineering wage > $35,000. All countries with an average engineering wage of less than or equal to $35,000 are low-cost countries (LCC). 28

30 The three largest economies in Europe - the U.K., France, and Germany - all increased their share of exported R&D R&D Allocation by Country 2007 vs $US Billions U.K. Domestic R&D France Germany Exported R&D % ($12) 33% ($6) 50% ($10) 50% ($10) 65% ($20) 35% ($11) % ($11) 20% ($3) 65% ($14) 35% ($8) 69% ($35) 31% ($16) Source: Strategy& 2015 Global Innovation 1000 analysis 29

31 In fact, France only saw positive growth in exported R&D, but those exports were not to other European countries. % Change in R&D Spending in France French HQ Firms R&D Export Allocation 2007 & 2015 $US Billions % Change 50% 45% 40% 35% 46% 0% $10 29% $14 12% Rest of World 30% 25% 26% Asia 20% 15% 10% 5% 32% 29% Europe 0% -5% -10% -15% -20% -25% -21% -20% 38% 33% North America replaced Europe as the primary destination for French R&D. North America R&D Imported R&D by Domestic Companies R&D Exported Source: Strategy& 2015 Global Innovation 1000 analysis 30

32 R&D professionals ranked access to talent and proximity to customers as top factors in choosing where to conduct R&D The Most Important Attributes When Considering Where to Conduct Your R&D n = % 90% 80% 70% 60% 71% 68% 64% 56% 50% 40% 30% 44% 38% 34% 20% 10% 0% Access to Technical Talent Proximity to Customers Insight into Local Market Needs Operating Costs Labor Costs Software Design Tax Advantages Source: Strategy& 2015 Global Innovation 1000 survey data and analysis 31

33 R&D professionals ranked attributes related to managing employees most challenging when conducting R&D abroad The Most Challenging Attributes When Conducting R&D Outside of Home Country n = % 90% 80% 70% 60% 50% 40% 53% 51% 47% 43% 41% 39% 30% 20% 10% 0% Finding/Retaining Talent Intellectual Property Protection Quality and Customer Focus Risk/Project Management Managing Cultural Differences Focus on Profitability* Source: Strategy& 2015 Global Innovation 1000 survey data and analysis * Focus on profitability includes those who voted for Currency risk and Return on investment 32

34 In both 2007 and 2015, companies investing in R&D globally performed ~20% better over local R&D spenders Global R&D vs. Local R&D Driven Median of OI CAGR, Op Margin, and ROA Industry Indexed Median Values Industry Indexed Median Values Discussion Global R&D Driven companies invest more than 60% of their R&D spend on facilities outside their home country annually. Local R&D Driven companies invest less than 60% of R&D spend on facilities outside their home country annually. 3Y Op Income CAGR 3Y Op Margin 3Y Return on Assets 5Y Op Income CAGR 5Y Op Margin 5Y Return on Assets Global Local Source: Strategy& 2015 Global Innovation 1000 analysis Note: In 2015, 38.57% is the median R&D spend at home among the universe of 207 companies studied; % of R&D spend in home countries ranges from 0 to 100%; Companies selected for the study are top 100 R&D spenders overall, the top 50 spenders in Auto, C&E and Health, and the top 20 in industrials and software. 33

35 Unlike in 2007, companies with more dispersed R&D footprints now outperform companies with focused ones Highly Focused vs. Dispersed R&D Footprints Median of OI CAGR, TSR, and Market Cap CAGR Industry Indexed Median Values Industry Indexed Median Values Discussion Highly Focused R&D Footprint players have the smallest number of R&D sites, after indexing against sales. Dispersed R&D Footprint players have a widespread network of R&D locations. 3Y Op Income CAGR 3Y TSR 3Y Market Cap CAGR 5Y Op Income CAGR 5Y TSR 5Y Market Cap CAGR Highly Focused Dispersed Source: Strategy& 2015 Global Innovation 1000 analysis Note: In 2015, highly focused R&D footprint companies have less than 1.3 sales indexed R&D location, (1.3 representing the 25% percentile in the universe of 207 companies); Number of indexed R&D locations range from 0.03 to 40.77; Dispersed R&D Footprint companies have more than 1.3 sales indexed R&D location. 34

36 For the complete study and more information on the annual Strategy& Global Innovation 1000 study Please visit: For media or other inquiries, please contact: Kiran Chauhan

37 Strategy&, part of the PwC network, is a global team of practical strategists committed to helping you seize essential advantage. We do that by working alongside you to solve your toughest problems and helping you capture your greatest opportunities. These are complex and high-stakes undertakings often game-changing transformations. We bring 100 years of strategy consulting experience and the unrivaled industry and functional capabilities of the PwC network to the task. Whether you re charting your corporate strategy, transforming a function or business unit, or building critical capabilities, we ll help you create the value you re looking for with speed, confidence, and impact. We are part of the PwC network of firms in 157 countries with more than 208,000 people committed to delivering quality in assurance, tax, and advisory services. Tell us what matters to you and find out more by visiting us at strategyand.pwc.com. Global Copyright and Definition 2015 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see for further details. Mentions of Strategy& refer to the global team of practical strategists that is integrated within the PwC network of firms. For more about Strategy&, see No reproduction is permitted in whole or part without written permission of PwC. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 36