West Michigan manufacturers have taken a disciplined approach to research and development spending throughout the sustained period of economic recovery and growth.
The nine publicly-traded manufacturers in West Michigan collectively spent more than $2 billion on engineering, research and development (R&D) activities in 2018, up 6.5 percent from the prior year, according to an analysis MiBiz conducted of the annual reports companies filed with federal securities regulators.
The analysis showed local manufacturers are remaining consistent in their commitments to R&D activities even when faced with heightened risk, according to Mike Wall, director of automotive analysis in Grand Rapids at IHS Markit.
“Even in a time of uncertainty, the local companies around here are keeping disciplined on the R&D,” Wall told MiBiz. “They do that to their credit and it should bear well for them at the end of the day when you look at the investments that they are making. Frankly, I expect all these companies know that if they don’t, their competitors will.”
R&D spending as a percentage of net sales, a metric known as R&D intensity, ranged from less than 1 percent to more than 6 percent among the companies in the analysis. R&D intensity remained highest for Kalamazoo-based medical device maker Stryker Corp. at 6.3 percent, and lowest for Spartan Motors Inc. at 0.9 percent.
Across all nine publicly-traded West Michigan-based manufacturers, R&D intensity stood at 3.3 percent, up slightly from the prior three years and consistent with results over a seven-year period.
The consistency of their investments comes as good news, according to Wall.
“I take heart in seeing this activity because from a macroeconomic perspective, I have been wondering if suppliers might take a breath or if companies in general may pause,” Wall said. “At least as a relation to 2018, they’ve been keeping pace and that’s a testament to their overall strategy and what they’re looking to execute on.”
Among individual countries, the United States is the largest performer of R&D, followed by China, according to an analysis of global R&D intensity by the National Science Foundation. According to the 2018 Global Innovation 1000, an annual study from Strategy&, a division of PricewaterhouseCoopers, four industries — computing and electronics, health care, automotive, and software and internet — accounted for 76 percent of total R&D spending in the U.S. For the purposes of the study, “innovation” is equated with R&D intensity.
Automotive industry suppliers like Zeeland-based Gentex Corp., which spent 5.8 percent of its annual sales on R&D, are the “absolute poster child” for innovation as a result of that investment, according to Wall.
“All we have to do is look at our vehicles, the development of autonomous vehicles, safety technology, and even instrumentation to be able to see that (R&D is a way of) staying relevant and staying on the cutting edge with your products,” Wall said.
The analysis of data from local publicly-traded companies also likely sheds some light on the R&D intensity of privately-held manufacturers in the region, according to Chad Paul, partner and central region leader in R&D tax services at the Milwaukee office of accounting firm BDO USA LLP.
“With smaller companies, when they make an investment in new automation or something like that, it may create a spike in terms of a percentage, but I think generally what you’re seeing is a similar investment by private companies as well,” he said.
While R&D intensity offers insight into the investments companies are making in new products or process, there is no long-term correlation between the amount of money a company spends on its innovation efforts and its overall financial performance, according to the Strategy& report.
Yet, according to Paul, new product and process development is the “lifeblood” of many organizations. If the consistency of R&D intensity throughout the past seven years is an indicator of innovation, West Michigan companies may be leading the pack, he said.
“(The analysis) is reflective of what we see in Western Michigan,” Paul said. “Western Michigan’s recovery has been strong and robust and consistent. I think not every market in the region or nationally has seen that level of recovery.”
In 2019, Paul predicts West Michigan companies will sustain their disciplined R&D investments relative to their budgets.
“To me, the numbers look good,” he said. “I haven’t heard or seen of anything that is really going to change the level of investment as it relates to R&D, other than potentially geopolitical and economic situations.”