The biggest manufacturers listed on the London Stock Exchange spend on average 4.92% of their annual turnover on research and development, The Manufacturer can reveal.
Average spending on R&D in the sector was 4.92%, though this increases to 5.71% when excluding food, beverage and packaging manufacturers.
Spending on R&D across manufacturing sectors represents 72% of all business R&D investment in the UK, showing that manufacturing carries a disproportionate majority of the country’s science-based research.
Stripping out the three pharma companies – GlaxoSmithKline, AstraZeneca and Shire – average spending on R&D at the 18 remaining manufacturing companies in the FTSE-100 who provided figures is just 2.72% of their 2012 turnover, the independent research by The Manufacturer shows.
Engineering companies have the biggest range of R&D spend, from 1% to 7.6% of annual turnover. In the engineering sector, the average investment in R&D was 4.43%, similar to the overall average for FTSE-100 manufacturers.
Aerospace manufacturer Meggitt, with £1.606bn turnover, small compared with some global aerospace companies, leads the engineering sector in the proportion of R&D spend, just coming out on top of big players Rolls-Royce and BAE Systems with 7.6%.
A steady increase in revenue has seen a similar pattern follow Rolls-Royce’s R&D expenditure. In 2011 Meggitt saw profits jump an impressive 25% from a 2010 total of £1,162m to £1,455.3m. Then in 2012 the company saw this growth progress a further 10% to £1,605.8m. With 20% of the firm’s R&D budget funded by customers, the increased revenue has helped further R&D spend.
The pharmaceutical industry dominated R&D investment with an average spend of 18.13%. Again, the company with the smallest revenue made the biggest proportionate investment as Shire plc topped GlaxoSmithKline (GSK) and AstraZeneca with 20.63 % of revenue, despite reporting only a sixth of the sales revenue of AstraZenaca and less than one-eighth of GSK’s.
The chemicals industry shows a lower spend than might be expected. The two chemicals firms who make it onto the FTSE-100, Johnson Matthey and Croda International, spend an average of 1.57%.
Alan Eastwood, senior economist at the Chemical Industries Association, whose members include both pharma and chemical manufacturers, notes that an investment of just below 2% of revenue is fairly common in the chemicals industry, which has posted flat growth in recent years. From 2007 to 2011, UK chemical companies’ expenditure on R&D has gone from £668m to £689m.
It is hoped that industry leaders like GSK will use R&D investment to increase UK production, says Mr Eastwood.
“Glaxo is doing a lot of R&D in the UK that will be exploited around the world, we hope that the Patent Box legislation will encourage them to exploit more of it here in terms of actual production.”
Food, beverage and packaging companies came out with the lowest spend, indicating little research-based innovation in these sectors compared with engineering firms. Diageo’s annual report demotes the importance of R&D at the global drinks manufacturer, saying spending on such research is “generally written off in the year in which it has incurred”.
While the variety of product variants in food manufacturing increases constantly, the processes used in the mixing, baking, distilling and processing of food and drink products are often well established and perfected techniques with little radical improvement over time.
As many FTSE-100 companies reveal their R&D spend in their latest annual reports, the UK’s biggest companies are willing to reveal what they invest. For smaller manufacturing companies the role of R&D is not as well documented but remains crucial to survival and growth.
Having had steady success, a growing company like acoustics components manufacturer TMAT is now in a position to allocate a regular spend of around 2% turnover on R&D.
Jason Lippitt, managing director of TMAT, believes that even with limited resources smaller businesses must find a way to use R&D if they want to survive.
“R&D is of paramount importance to us. We haven’t yet invented the products we will be making in five years. R&D is the lifeblood of the business.
“As long as you have that spirit of innovation and you design a crystal clear strategy, you will find better ways of doing things, of improving products for customers. If that’s your passion, you’ll find the resources to develop that idea.”
Some companies’ R&D budgets have had a boost this year from government support.
Aeroengine maker Rolls-Royce’s annual report refers to the input of ‘significant government funding’ in the context of R&D. It states that of the £919m spent on R&D in 2012, £577m was funded by the group’s own resources.
This admission suggests that some 37% of the company’s R&D is not funded from its balance sheet.
In comparison to other countries UK business lags behind some of the bigger global players in R&D investment with an average spend of just 1.77%, according to OECD statistics.
One reason why R&D levels in Britain are underwhelming is that tax incentives to encourage more R&D investment have only been introduced recently and have not had time to be felt in company reports.
Andrew Johnson, senior economist at manufacturers’ group EEF, said the Government is heading in the right direction to promote R&D spending.
“The Government has moved in the right direction with R&D tax credits. In particular with the large company’s tax credit, we know from talking to various manufacturers it is important that the UK has a [tax] credit system that is at least comparable, if not better, than what major competing countries offer.”
Mr Johnson said that the service-intensive bias of the UK economy means that there is a tendency to spend relatively less on R&D, so a smaller manufacturing sector tends to mean a smaller aggregate spend on R&D.
“We would argue that the way the economy has grown in the last 10 or 15 years, with consumers able to fund their spending on the back of rising house prices or rising asset prices, that isn’t going to work going forward and we need a more sustainable model of growth. One of the key elements of that has got to be investment in innovation and R&D.”
The evidence suggests that not all the country’s biggest companies share Mr Johnson’s sentiment.
Marc Sobbohi
