German carmakers, like US high-tech firms, have figured out that chunky spending on research and development has the same effect on investors as a rosy profits outlook. The world’s biggest automaker, Volkswagen, places fifth globally for R&D spending in a ranking led by Amazon and Google parent Alphabet.
The league table prepared by EY, the auditing firm, showed Amazon leading by far after boosting its R&D spending last year by 41 percent to €20.1 billion ($22.8 billion). VW weighs in with €11.6 billion. Daimler, BMW and auto components supplier Continental bring the total R&D spending of auto industry leaders to €25.5 billion.
German carmakers are leading the drive into autonomous driving and electric cars as they transform the industry from its 19th-century mechanical roots into the digital world of the 21st century. Companies are investing in the future at the cost of leaner profits now.
Automakers going high tech
The 500 R&D leaders covered in the EY survey raised spending as a whole by 6 percent last year to €532 billion, a record. US companies, led by the tech giants, increased R&D spending an average 11 percent. South Korea’s Samsung and Swiss Roche were the only non-US companies alongside VW in the top 10.
Historically, R&D spending correlates strongly with growth and increase in the stock price. Amazon may be a special case with a 2,000 percent leap in its stock price since 2008, but Apple registered a 736 percent jump and Alphabet, 393 percent. Even Microsoft, that hoary relic from the 20th century, saw a 294 percent increase in its stock price.
Germany’s carmakers don’t have the high-tech history of these digital giants, but their R&D spending is moving them quickly into this category. It’s not likely they can catch up to the US tech companies, let alone Samsung, which announced R&D expenditures of €138 billion over the next three years as part of its intensive effort to develop new growth sectors like artificial intelligence and biopharmaceuticals.
As Europe’s biggest spender on R&D, VW is likely to hold onto that place after announcing it will spend €34 billion between now and the end of 2022 on developing e-mobility, digitalization, autonomous driving and mobility services.
Buoyant economy lifts R&D
“Ever shorter product cycles and rapidly changing consumer demands are increasing the pressure on companies to top up their innovation budgets,” said Julie Linn Teigland, EY regional manager for Germany, Austria and Switzerland. A buoyant economy and record earnings are helping them do that, she added.
US firms continue to lead, however, spending the equivalent of 5.6 percent of sales on R&D, compared to 3.4 percent for European firms and 2.6 percent for Asian companies. The increase in R&D spending outpaced the growth in sales at US companies, 11 percent to 8 percent. In Europe, the reverse was true, with sales growing 10 percent and R&D spending, 3 percent.
The US tech giants are not leaving fields like autonomous driving to the legacy carmakers, either. This makes their dominance in R&D even more of a threat to the German leaders. The five biggest tech spenders in the US increased their R&D spending last year by 20 percent to €68 billion.
Research without borders
Nor are research efforts confined by national borders. Amazon is collaborating with the Max Planck Institute in Tübingen in machine-learning. Other IT firms, like semiconductor maker Qualcomm, are tapping German expertise in areas as diverse as biotechnology, smart grids, autonomous driving, battery technology and the internet of things.
The auto industry isn’t the only sector in Germany registering strong R&D spending. Conglomerates like Siemens, drug and pharmaceutical giants like Bayer also rank high. The 32 German firms in the EY survey spent a total €54 billion on R&D last year, a gain of 5 percent. Germany enjoys a home advantage in traditionally strong sectors like machinery and engineering.
A separate study from DZ Bank gives German firms good marks on R&D. “Compared to other European countries, German business is not only doing well in the intensity of its research,” experts Michael Stappel and Claus Niegsch wrote, “but also in terms of research, development and marketing follow-up, as demonstrated by patent applications or exports of high-tech goods.”
Ulf Sommer covers companies and markets for Handelsblatt. Darrell Delamaide adapted this into English for Handelsblatt Global. To contact the author: email@example.com