Chinese Companies Lead Global R&D Spending Growth

Research and development spending growth by Chinese companies leads the global market, with Alibaba as the top spender while Huawei—as a non-public company—among one of the Top 10 spenders, according to the 2016 Global Innovation 1000 Study from Strategy&, PwC’s strategy consulting business.

In 2016, there are 130 Chinese companies among Global Innovation 1000 (from 123 in 2015), which spend US$46.8 billion on R&D, up 18.6% from US$39.4 billion in last year. As a result, the R&D spending contributed by Chinese companies is also on the rise, up from 5.8% in 2015 to 6.9% in 2016.

For the first time since 2015, PetroChina loses its No.1 place among top R&D spenders in China, surpassed by both Alibaba and ZTE, while PowerChina and make their debut on Top 20 R&D spenders in China, as No.16 and N0.20, respectively.

Noteworthy, as what the study did in previous years, it compares Huawei against other Chinese peers on R&D spending, although it has excluded it out of the top spenders list due to its status as a non-public company. According to its FY 2016 annual report, Huawei spends RMB59.6 billion (US$9.48 billion) on R&D in 2015, making it the highest spender in China and the 9th largest spender—behind Novartis but ahead of Johnson & Johnson—among the Global Innovation 1000 (vs. No.16 in 2015).

“As the R&D spending by European and Japanese companies declines, Chinese companies are in the leading position as their R&D spending growth increased at 18.6%, higher than the 8% growth of North America,” says Adam Xu, Partner and Leader of Digital Practice with Strategy&.

“In light of the innovation-driven development strategy at a national level, Chinese companies have been increasing their investment of R&D year by year, which indicates that they are shifting their advantage from competitive cost to innovation to build up technology capabilities to win in the global market.”

Asia is most product-centric region

Regionally, companies in North America are making the strongest shift to digital offerings— from 15 percent of total R&D spending in 2010 to 24 percent in 2020. While Asia remains the most product-centric region, with 44 percent of R&D allocated to product offerings in 2010, only falling to 40 percent in 2020.

The automotive and industrial sectors are making the most aggressive push towards developing new software offerings. Among companies that made an acquisition during the past five years, the vast majority – 71 percent – were made to enhance capabilities in software (33%) or services (38%).

Digital offerings

By 2020, companies will have shifted the majority of their R&D spending away from physical product-based offerings to digital offerings—software and service, according to the study.

The need to stay competitive is the top reason why companies cited a shift in their R&D budgets towards software and services, and for good reason – according to the study, companies who reported faster revenue growth relative to key competitors allocated 25 percent more of their R&D budgets to software offerings than companies who reported slower revenue growth.

The average allocation of R&D spending for software and services increased from 54% to 59% between 2010 and 2015 and is expected to grow to 63% by 2020.

Meanwhile, the average allocation of R&D spending dedicated to product-based offerings fell to 41 percent (from 46% in 2010), and is expected to fall to 37% by 2020 (an overall decrease of 19% this decade).

Average allocation of R&D spending on software offerings alone will increase by 43% by the end of this decade and R&D spending on services will gradually overtake investment in product-based innovation (39% vs. 37% by 2020). Global R&D spending on software offerings has increased by 65% between 2010-2015, from US $86 billion to $142 billion.

“Many of the world’s major innovators are in the midst of a transformational journey mostly driven by changing – and rising – customer expectations,” says Barry Jaruzelski, innovation and R&D expert for Strategy& and principal with PwC US.

“The shift is also being driven by the supercharged pace of improvement in what software can do, including the increasing use of embedded software and sensors in products, the ability to reliably and inexpensively connect products, customers and manufacturers via the Internet of Things (IoT), and the availability of cloud-based data storage.

Companies will recruit more data and software engineers to build their capabilities 

To support the development of software and services offerings, fewer companies will focus their R&D spending on the electrical and mechanical field.

By 2020, the number of companies reporting that electrical engineers are their top employed engineering specialty will fall by 35%and the proportion of companies who expect that data engineers will represent their largest group of employed engineers will double from 8% to 16%.

“An increase in software and services, even in more traditional industries has created a shift towards hiring talent that can develop software and provide platforms to collect and analyze product-related data,” says Huw Andrews, PwC Partner and Innovation Lead. “The shift is already changing the way business schools think about their course offerings, and will have profound effects both on education and, more generally, on the future of employment.” 



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