West Michigan manufacturers continue to take a steady yet conservative approach to research and development spending.
The publicly-traded manufacturers in West Michigan collectively spent nearly $1.9 billion on R&D activities in 2016, up more than 6 percent from the prior year, according to an analysis by MiBiz of annual reports filed with federal securities regulators.
The analysis showed manufacturers in the region remain committed to investing in engineering, research and development activities, while at the same time avoiding overextending themselves financially.
R&D spending as a percentage of net sales, a metric known as R&D intensity, fell in the range of 1 percent and 6 percent among manufacturers in the region. The R&D intensity was highest for Kalamazoo-based medical device maker Stryker Corp. at 6.3 percent, and lowest for Steelcase Inc. and Spartan Motors Inc. at 1.1 percent.
For all West Michigan companies in the analysis, the R&D intensity stood at 3.2 percent, the same as in the prior year and consistent with results over a five-year period.
The reported R&D investment by West Michigan companies reflects a larger sentiment among manufacturing companies nationwide, said Bobby Bono, the U.S. Industrial Manufacturing Division leader for PricewaterhouseCoopers LLC.
“(The data) looked to me to be consistent for when we talk to executives,” Bono said. “What I’m seeing with industrial manufacturing companies for the rest of 2017 and 2018 is a consistent investment in what they’ve been making the last few years.”
According to the 2016 Global Innovation 1000, an annual analysis from Strategy&, a division of PwC, companies have started shifting their R&D spending to focus on software and services, more so than physical products, as technology takes on greater importance. The shift to software investment is most prevalent among North American firms, which are on track to have software development account for 24 percent of their total R&D spending by 2020.
Meanwhile, R&D intensity at 4.2 percent globally tied the all-time record first set in 2005, according to the report.
Locally, some companies — including Steelcase Inc., Neogen Corp., Gentex Corp. and Kellogg Co. — saw their R&D intensity decrease modestly in recent years. However, small fluctuations up and down are common and aren’t indicative of any long-term trends, Bono said.
“Some years you may spend a little bit more, some years a little bit less,” Bono said. “I think you look at it more on a timeline. If you have a bunch of good projects with a bunch of return, you might spend more one year and spend less the other year, just because you don’t have the opportunity.”
While R&D intensity offers some insight into the investment a company is putting into new products or developing new markets, it does not have any statistical bearing on the firm’s financial performance, according to the Strategy& report. The firm’s research found no relationship between R&D spending and sales growth, profit, operating margin, market capitalization, or total shareholder return.
Although R&D spending has remained steady during the years coming out of the economic recovery, Bono has observed some anecdotal evidence that executives are becoming more cautious.
“They thought they had some certainty or more certainty in the beginning of the year, and I think now they’re getting more cautious as this legislative stuff gets more and more delayed,” he said.
Specifically, executives are uncertain about tax, health care and other reforms that were promised at the beginning of the Trump administration but have taken longer than expected to materialize.
“Executives can plan for anything, they just need to know the rules,” Bono said. “Not knowing the rules makes them cautious and makes them wait. They just want to know the rules so they know how to invest the money and how to direct their business.”
Despite the rising level of uncertainty, Bono believes manufacturers will continue to invest in research and development mainly because of the lessons they learned from hoarding cash during the Great Recession.
“Back then when the economy got bad, (companies) were trying to conserve all the cash they could,” Bono said. “I think there’s a lesson learned in that you can’t turn (R&D) off because it affects you in a couple years where you don’t have the innovation and you don’t have the new product offerings when the market comes back. Maybe you’re investing more cautiously, but you can’t stop investing in your next product and next offering.”
MiBiz Editor Joe Boomgaard contributed to this report.