Corporate R&D spending posts modest increase as companies hang tough

Bell Canada back in contention

Private sector R&D is demonstrating surprising resilience in the face of the high-tech downturn and economic uncertainty. With the removal of just one key firm from the picture, Canada’s top performing companies increased their total spending 6.5% in 2002 with particularly solid data from the biotechnology, pharmaceutical aerospace and software and computer services sectors, according to the latest edition of the Top 100 Corporate R&D Spenders List

The image isn’t nearly as rosy when Nortel Networks Corp is thrown back into the mix. The telecommunications equipment giant’s R&D expenditures plummeted for a second year in a row, falling from an astounding historical high of $5.95 billion in FY00 to $3.5 billion in FY02. The latest 29.8% annual drop shaved another $1.5 billion from the Nortel total — equal to the combined R&D spending of the next three highest corporate R&D spenders — and pulled the Top 100 effort down 8.7% to $10.9 billion. That compares to $11.9 billion in 2001.

The downturn in Nortel’s R&D spending may be severe but it doesn’t fully reflect the decline in the Brampton ON-based company’s revenue, which sank 38.8% year-over-year. As a result, Nortel’s R&D intensity (R&D spending as a percentage of sales) jumped from 18.4% in FY01 to 21.1% in FY02. For Ron Freedman, Nortel’s decision to protect its R&D operations as much as possible makes perfect sense.

“Many companies are trying to preserve R&D spending in the hopes of a quick turnaround and Nortel is a good example of that,” says Freedman, president of Research Infosource. “Despite its woes it’s still spending because its future success depends on technology.”

(Research Infosource — a division of The Impact Group — publishes the annual Top 100 Corporate R&D Spenders List and associated report. The Impact Group holds a majority interest in RE$EARCH MONEY).

The decision by corporate R&D executive to hang tough bodes well for an upsurge in R&D spending — an essential element in the federal government’s objective of moving into the top five of R&D spending nations. Freedman argues that companies that keep their R&D engines primed in the face of declining sales will be well positioned when markets rebound.

The performance of several industrial sectors bears that contention out, particularly the biotechnology/pharmaceutical sector. It placed 31 firms in the Top 100 for total R&D spending of $1.526 billion. Last year’s Top 100 list contained 25 biotech/pharma firms with a total spending of $1.27 billion.

The Top 100-ranked aerospace companies also displayed strong R&D growth, increasing outlays 13.6% to $778.8 million. That was due largely to the performance of Bombardier which increased its R&D spending 89.2% to $233.5 million.

Software and computer services placed 11 firms in the Top 100 pushing up total R&D expenditures by 7.6%. The sector was led by IBM Canada, which increased spending by 26.1% to $315.5 million., and Cognos Inc, which jumped 12.5% to $117.3 million.

BELL BOUNCES BACK

Perhaps the greatest surprise on the Top 100 list is the performance of Bell Canada, which seemingly exploded out of nowhere to put a lock on the number six spot with R&D spending of $300 million.The explanation for Bell’s remarkable turnaround is somewhat more mundane — a revision in the way it reports its R&D.

“What we used to report was just the R&D for our profit and loss income statements. Now it includes R&D expenses on our income statement and expenses capitalized on our balance sheet,” says Nick Kaminaris, director of communications for Bell parent BCE Inc. “We decided to report on par with other companies. Now we meet the government definition of R&D, so it’s apples and apples whereas before we were providing oranges.”

Bell’s revised reporting bumped up FY01 R&D spending from $16 million to $285 million.

Bell is one of three telecommunications services firms to make the Top 100. Another BCE subsidiary — BCE Emergis Inc — ranked 31st with spending R&D outlays of $74.3 million, followed by TELUS Corp in 45th spot and R&D spending of $40 million.

The only two sectors to register negative growth were communications and telecom equipment (down 26.4% with Nortel and 13.1 when Nortel is excluded), and electronic parts and components (down 5.5%).

To obtain a downloadable copy of the full Top 100, go to: www.researchinfosource.com.

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