Industrial Research Institute's R&D trends forecast for 2005: this year's trends are more...

As the United States economy sluggishly recovers from recession, the annual R&D Trends Forecast records a more favorable outlook for 2005 than has been seen in the past two years. More companies expect to moderately increase "total company expenditures on R&D" and "capital spending for

However, with the U.S. continuing to be entangled in Iraq and oil prices hitting all-time highs, the future of the recovery remains uncertain and the number of IRI member companies increasing their allocation of R&D resources is not dramatic, nor is the magnitude of that increase. More companies are forecasting a modest increase in R&D expenditures of 2.5 percent to 5 percent as compared to the late 1990s when a significant number of companies forecasted a greater-than-5 percent increase. Nevertheless, the 2005 forecast shows more companies willing to make larger overhead commitments by increasing the "R&D professional personnel level" and "hiring of new graduates."

For 2005, more companies expect to decrease the R&D intensity (targeted R&D/Sales Ratio) than increase it, but in comparison to 2004 there is a shift from decreasing the R&D intensity to holding it the same. Of the IRI member companies responding, 21 percent expect the average R&D intensity to increase versus only 12 percent in 2004, and 51 percent of the companies expect the R&D intensity to remain flat for 2005.

Trends Analysis--Looking to 2005

This is the 21st year for the R&D Trends Forecast. The 2005 forecast is based on 112 questionnaires collected from 207 member companies. Of the 112 companies responding, 99 have R&D located inside the United States. The first part of this report will focus on only the U.S. questionnaires, which account for 48 percent of all the IRI member companies.

The survey asked the companies to estimate the relative change in their level of: expenditures, effort allocation, personnel, etc., between what they have done in 2004 and what they plan to do in 2005. The data for the survey were collected during August and September 2004. Being a voluntary survey, the mix of companies shifts from year to year, which reduces the significance of the statistics.

Even though the mix of companies that participate in the survey changes somewhat each year, a chi-squared analysis was conducted comparing the 2005 results to the 2004 results. Based on a 99 percent confidence limit, percentages for each interval are statistically different from the prior year and as we examine the data we see expectations increasing during 2005 for:

* Capital spending for R&D (Q2).

* Hiring new graduates (Q5).

* R&D professional personnel level (Q4).

* R&D spending to support existing business (Q3a).

* Contracts with Federal Laboratories (Q9d).

* New spin-off; based on developed technology (Q9g).

Lowering the confidence limit to 95 percent showed additional increases expected for:

* R&D spending for new-business projects (Q3c).

* Total company R&D expenditures (Q1).

* Acquisition of technological capabilities through M/A (Q9f).

* Grants, contracts, etc., for university R&D (Q9b).

The Sea Change Index, which was started in 2000, is calculated by taking the difference between the number of companies predicting a 5 percent or greater increase and the number of companies predicting no change to a decrease in the coming year. This is a rather conservative index in that it excludes those companies forecasting an increase of tip to but not including 5 percent. However, the Sea Change Index does show gross changes from year to year. The absolute number is less significant than the directional changes that are occuring. Table 1 shows the Sea Change Index for the past six years. The index for 2005 is based on the survey results, which are tabulated in Table 2.

Contrary to the statistical analysis, the Sea Change index suggests that more companies continue to reduce "total company R&D expenditures" and "capital spending for R&D operations," with a continued focus on increasing "new-business projects."

In further analysis, most of the increases for 2005 occurred between 2.5 percent and 5 percent, which is ignored by the Sea Change Index. Significantly more companies expect to increase their expenditures, effort allocation, personnel, etc., between 2.5 percent to 5 percent.

Because the inflation rate remained low and the current Sea Change Index provided an unduly pessimistic outlook, the survey form was modified starting in 2002 to split the level ">0 to <5 percent" into two levels: ">0 to 2.5 percent" and ">2.5 percent to <5 percent." The Revised Sea Change Index includes the ">2.5 percent to <5 percent" level. This revised index is calculated by taking the difference between the number of companies predicting a 2.5 percent or greater increase and the number of companies predicting no change to a decrease in the coming year. The results are shown in Table 3.

The Revised Sea Change Index better discerns changes occurring, especially in "total company R&D expenditures," in "capital spending for R&D operations," and in "the relative distribution of R&D costs." This revised index more closely matches the chi-squared analysis for significance and therefore appears to more accurately reflect the changes in trends anticipated by the IRI member companies.

2004 Biggest Problems

Normally, the "Biggest Problems" survey is conducted in the spring, but this year it was combined with the Trends Forecast. Table 4 shows the results of 12 years of IRI's "Biggest Problems" facing technology leaders. The top issue is "growing the business through innovation," which has appeared as one of the top two biggest problems for the last eight years running. The Trends Forecasts show companies continuing to put more emphasis on new-business projects. The second problem this year is "balancing long-term and short-term R&D objectives," which was a top problem identified throughout the 1990s.

Changes in the Nature of R&D

1. The trends this year are more favorable, although companies seem to remain cautious about the economy.

This is shown by expected moderate increases in:

* Capital spending for R&D (Q2).

* Hiring new graduates (Q5).

* R&D professional personnel level (Q4).

R&D leaders expect an increase in capital spending for R&D operations, with 30 percent of the respondents expecting to increase their "capital spending for R&D operations" by more than 2.5 percent, and 26 percent expecting to hold it the same or reduce it. In contrast, the 2004 survey showed 23 percent of the companies expecting to increase capital spending and 34 percent expecting to decrease it.

2. There continues to be an emphasis on business results from R&D.

The 2005 trend is accelerating versus 2004 with companies spending more R&D funds to "support existing business" (Q3a) and "<new-business projects" (Q3c). In addition, there is a strong increase in those that expect to "acquire technology capabilities through mergers and acquisitions" (Q9f). The trend is flat versus 2004, with twice the number of companies in 2005 expecting to see more "spin-offs based on developed technologies" (Q9g) versus those expecting fewer spin-offs but most expect to keep the number of spin-offs constant.

3. There appears to be a change in the way leaders expect to allocate R&D funds.

With the continued acceleration in spending in support of the existing businesses and new-business projects, there appears to be a shift toward adding more personnel inside R&D, as well as more companies increasing "grants and contracts for university R&D" than in 2004. The 2004 trend continues into 2005 with additional increases expected in:

* Outsourcing R&D to other companies (Q6).

* Participation in consortia for precompetitive university research (Q9c).

* Contracts with Federal Labs (Q9d).

4. Companies are beginning to prime the pump to fill the innovation tunnel.

Three Out of four indicators suggest that more effort is expected to be directed on "the fuzzy front end" to fuel future products and services. More companies are forecasting sizable increases in "grants and contracts to university R&D," "participation in consortia for pre-competitive university research," and "contracts with Federal Labs." However, the respondents reported no increase in the relative distribution of R&D costs toward directed basic research. This appears to contradict the forecasted increases in the university and Federal Lab work, unless:

* the respondents interpreted the question on relative distribution of R&D costs to apply only to internal efforts, or

* the work with universities and Federal Labs is focused on new-business projects, rather than basic research, or

* the work with universities and Federal Labs is an avenue to bolster R&D professional expertise and provide a conduit for new personnel.

But regardless of the intent, it seems that these activities are likely to provide ideas, concepts and technologies for future innovations.

International Perspective

This survey was also sent to IRI member companies outside the United States, from which 13 were returned, representing 54 percent of the IRI member companies that have no R&D located in the United States. Based on these surveys, a large portion of these companies expect a significant increase (>5 percent) in all areas. Few expect any decrease except in R&D intensity, "contracts with Federal Laboratories," and "spin-offs based on developed technology."

The companies with R&D located outside the U.S. that participated in this survey are situated in Mexico (1), Korea (1), Japan (4), Europe (4), and Australia (3). Their survey results can be found in Table 5.

In Conclusion

Overall, the 21st R&D Trends Forecast found member companies more willing to increase R&D and capital spending as well as do more hiring. They also expect to spend more with universities and Federal Laboratories than last year. However, there continues to be a strong emphasis that R&D show business results.

Table 1.--"Sea Change Index"

   Survey Question                                 2000   2001   2002

1. Total company expenditures on R&D                  0      5     -4

2. Capital spending for R&D operations                4      3    -17

3. Relative distribution of R&D costs:

   a) Support of existing business                  -20    -10     -6

   b) Directed basic research                        -9    -21    -11

   c) New-business projects                          34     44     30

4. R&D professional personnel level                  -3     -2     -4

5. Hiring new graduates                              -5      2    -16

6. Outsourcing R&D to other companies                11     11     -6

7. Licensing technology from others ($ volume)       10      4      0

8. Licensing technology to others ($ volume)         20     10     17

9. How will 2005 compare with 2004 for the
   following?

   a) Your targeted R&D/Sales Ratio                 N/A     -1     -5

   b) Grants, contracts, etc. for university R&D      8      3     -1

   c) Participation in consortia for                -14    -12    -19
      pre-competitive university research

   d) Contracts with Federal Laboratories            -9    -13     -8

   e) Participation in alliances and joint R&D       40     40     33
      ventures

   f) Acquisition of technological capabilities     N/A     33     35
      through M/A

   g) Your new spin-offs based on developed         N/A     19     19
      technology

   h) Outside-customer technical-service efforts    -19     -6     -3
      relative to total R&D (in time or $)

   Survey Question                                 2003   2004   2005

1. Total company expenditures on R&D                -15    -16     -2

2. Capital spending for R&D operations              -18    -18    -15

3. Relative distribution of R&D costs:

   a) Support of existing business                  -24    -20     -5

   b) Directed basic research                       -21    -17    -21

   c) New-business projects                           7      1      8

4. R&D professional personnel level                 -22    -24     -9

5. Hiring new graduates                             -14    -22     13

6. Outsourcing R&D to other companies                -8     -8      6

7. Licensing technology from others ($ volume)       -2     -5      1

8. Licensing technology to others ($ volume)          8      1      9

9. How will 2005 compare with 2004 for the
   following?

   a) Your targeted R&D/Sales Ratio                  -8    -15     -7

   b) Grants, contracts, etc. for university R&D     12     10     30

   c) Participation in consortia for                  0     20     18
      pre-competitive university research

   d) Contracts with Federal Laboratories            28     38     29

   e) Participation in alliances and joint R&D       49     44     50
      ventures

   f) Acquisition of technological capabilities      18     15     29
      through M/A

   g) Your new spin-offs based on developed          20     11      8
      technology

   h) Outside-customer technical-service efforts     18     20     22
      relative to total R&D (in time or $)

Table 2.--Results of 2005 R&D Trends Forecast for Companies with
R&D Located in United States

                                                 Relative Change
                                           (% of Respondents Reporting)

   Expected Changes in 2005                    Less
   Compared with 2004 Experience             than -5%       -5% to 0

1. Total company expenditures on R&D            8              13

2. Capital spending for R&D operations          9              17

3. Relative distribution of R&D costs:

   a) Support of existing business              4              13

   b) Directed basic research                   9              22

   c) New-business projects                     5              10

4. R&D professional personnel level             7              13

5. Hiring new graduates                         4              13

6. Outsourcing R&D to other companies           1               7

7. Licensing technology from others
   ($ volume)                                   0              11

8. Licensing technology to others
   ($ volume)                                   0               6

9. How will 2005 compare with 2004 for
   the following:

   a) Your targeted R&D/Sales Ratio               Decrease 28%

   b) Grants, contracts, etc. for                 Decrease 5%
      university R&D

   c) Participation in consortia for              Decrease 5%
      pre-competitive university
      research

   d) Contracts with Federal                      Decrease 1%
      Laboratories

   e) Participation in alliances and              Decrease 3%
      joint R&D ventures

   f) Acquisition of technological                Decrease 6%
      capabilities through M/A

   g) Your new spin-offs based on                 Decrease 9%
      developed technology

   h) Outside-customer tech-service               Decrease 6%
      efforts relative to total R&D
      (time or $)

                                                 Relative Change
                                           (% of Respondents Reporting)

   Expected Changes in 2005
   Compared with 2004 Experience            >0 to 2.5%    >2.5% to <5%

1. Total company expenditures on R&D            38             21

2. Capital spending for R&D operations          43             19

3. Relative distribution of R&D costs:

   a) Support of existing business              48             22

   b) Directed basic research                   43             18

   c) New-business projects                     34             27

4. R&D professional personnel level             44             24

5. Hiring new graduates                         51             28

6. Outsourcing R&D to other companies           49             29

7. Licensing technology from others
   ($ volume)                                   61             16

8. Licensing technology to others
   ($ volume)                                   65             14

9. How will 2005 compare with 2004 for
   the following:

   a) Your targeted R&D/Sales Ratio              Remain-same 51%

   b) Grants, contracts, etc. for                Remain-same 60%
      university R&D

   c) Participation in consortia for             Remain-same 72%
      pre-competitive university
      research

   d) Contracts with Federal                     Remain-same 68%
      Laboratories

   e) Participation in alliances and             Remain-same 44%
      joint R&D ventures

   f) Acquisition of technological               Remain-same 59%
      capabilities through M/A

   g) Your new spin-offs based on                Remain-same 74%
      developed technology

   h) Outside-customer tech-service              Remain-same 66%
      efforts relative to total R&D
      (time or $)

                                                 Relative Change
                                           (% of Respondents Reporting)

   Expected Changes in 2005                                   More
   Compared with 2004 Experience             5 to 10%       than 10%

1. Total company expenditures on R&D            15             4

2. Capital spending for R&D operations           5             6

3. Relative distribution of R&D costs:

   a) Support of existing business               5             7

   b) Directed basic research                    6             2

   c) New-business projects                     18             6

4. R&D professional personnel level             10             1

5. Hiring new graduates                          2             2

6. Outsourcing R&D to other companies           13             1

7. Licensing technology from others
   ($ volume)                                    9             3

8. Licensing technology to others
   ($ volume)                                   10             5

9. How will 2005 compare with 2004 for
   the following:

   a) Your targeted R&D/Sales Ratio               Increase 21%

   b) Grants, contracts, etc. for                 Increase 55%
      university R&D

   c) Participation in consortia for              Increase 23%
      pre-competitive university
      research

   d) Contracts with Federal                      Increase 30%
      Laboratories

   e) Participation in alliances and              Increase 53%
      joint R&D ventures

   f) Acquisition of technological                Increase 55%
      capabilities through M/A

   g) Your new spin-offs based on                 Increase 17%
      developed technology

   h) Outside-customer tech-service               Increase 28%
      efforts relative to total R&D
      (time or $)

A scale of 1 to 6 was used, with 1 representing "significantly
less" (less than -5 percent), 2 "slightly less" (-5 percent to 0),
3 "approximately the same" (even with inflation) (greater than 0
to 2.5 percent), 4 "slightly more" (>2.5 to <5 percent), 5 "somewhat
more" (5 to 10 percent), and 6 "significantly more" (more than
10 percent).

Table 3.--"Revised Sea Change Index"

   Survey Question                         2003     2004     2005

1. Total company expenditures on R&D         15       -1       23
2. Capital spending for R&D operations        0      -12        7
3. Relative distribution of R&D costs:
   a) Support of existing business           -1       -7       23
   b) Directed basic research                -8       -7        2
   c) New-business projects                  38       24       35
4. R&D professional personnel level           6       -9       20
5. Hiring new graduates                      10       -9       20
6. Outsourcing R&D to other companies        10       17       37
7. Licensing technology from others
   ($ volume)                                18       16       17
8. Licensing technology to others
   ($ volume)                                33       16       26

Table 4.--IRI's "Biggest Problems" Facing Technology Leaders
in 1993-2004 (% of Total Responses)

                            2004   2003   2002   2001   2000   1999

Growing the business          33     41     37     20     20     16
  through innovation
Balancing long-term/          17     12     12     14     14     19
  short-teen R&D
  objectives/focus
Accelerating innovation       16     12     12     26     23      5
Leadership of R&D within       9      5     12      8      8     13
  the corporation
Management of global R&D       5      2      2      5      4      4
Measuring and improving        4      5      3      7      5      6
  R&D productivity/
  effectiveness
New business ventures          4      3      3      4      2    N/A
Attracting and retaining       4      2      2      2    N/A    N/A
  talent
Improving knowledge            4      2      3      1      4    N/A
  management
Integration of technology      3      5      8      7     13     13
  planning with business
  strategy
Managing innovation            0      2    N/A    N/A    N/A    N/A
  through cycling local/
  global economic
  conditions
Total # Responses:            99    133    151    113    191    230

                            1998   1997   1996   1995   1994   1993

Growing the business          14     17     10      6    N/A    N/A
  through innovation
Balancing long-term/          18     19     17     15     17     14
  short-teen R&D
  objectives/focus
Accelerating innovation        6      3      9      8     11     11
Leadership of R&D within       8      8      8      5      6      7
  the corporation
Management of global R&D       3      6      5      4      3      4
Measuring and improving        6      4     12     12     15     15
  R&D productivity/
  effectiveness
New business ventures        N/A    N/A    N/A    N/A    N/A    N/A
Attracting and retaining     N/A    N/A    N/A    N/A    N/A    N/A
  talent
Improving knowledge          N/A    N/A    N/A    N/A    N/A    N/A
  management
Integration of technology     12     13     11      7     10     11
  planning with business
  strategy
Managing innovation          N/A    N/A    N/A    N/A    N/A    N/A
  through cycling local/
  global economic
  conditions
Total # Responses:           174    223    242    258    193    248

Table 5.--Results of 2005 R&D Trends Forecast for Companies
with R&D Not Located in United States

                                               Relative Change
                                         (% of Respondents Reporting)

Expected Changes in 2005                     Less
Compared with 2004 Experience              than -5%       -5% to 0

l. Total company expenditures on R&D          0               8

2. Capital spending for R&D operations        0              15

3. Relative distribution of R&D costs:

   a) Support of existing business            0               8

   b) Directed basic research                 8               8

   c) New-business projects                   0              17

4. R&D professional personnel level           0               8

5. Hiring new graduates                       8               0

6. Outsourcing R&D to other companies         0               8

7. Licensing technology from others           0               0
   ($ volume)

8. Licensing technology to others             0               0
   ($ volume)

9. How will 2005 compare with 2004
   for the following:

   a) Your targeted R&D/Sales Ratio              Decrease 55%

   b) Grants, contracts, etc. for                Decrease 67%
      university R&D

   c) Participation in consortia for             Decrease 50%
      pre-competitive university
      research

   d) Contracts with Federal                     Decrease 67%
      Laboratories

   e) Participation in alliances and             Decrease 54%
      joint R&D ventures

   f) Acquisition of technological               Decrease 44%
      capabilities through M/A

   g) Your new spin-offs based on                Decrease 38%
      developed technology

   h) Outside-customer tech-services             Decrease 33%
      efforts relative to total R&D
      (time or $)

                                               Relative Change
                                         (% of Respondents Reporting)

Expected Changes in 2005
Compared with 2004 Experience             >0 to 2.5%    >2.5% to <5%

l. Total company expenditures on R&D          31             15

2. Capital spending for R&D operations        38              8

3. Relative distribution of R&D costs:

   a) Support of existing business            33             25

   b) Directed basic research                 31             23

   c) New-business projects                    8             25

4. R&D professional personnel level           31             46

5. Hiring new graduates                       23             62

6. Outsourcing R&D to other companies         42             25

7. Licensing technology from others           80              0
   ($ volume)

8. Licensing technology to others             50             17
   ($ volume)

9. How will 2005 compare with 2004
   for the following:

   a) Your targeted R&D/Sales Ratio             Remain-same 9%

   b) Grants, contracts, etc. for               Remain-same 0%
      university R&D

   c) Participation in consortia for            Remain-same 0%
      pre-competitive university
      research

   d) Contracts with Federal                    Remain-same 17%
      Laboratories

   e) Participation in alliances and            Remain-same 0%
      joint R&D ventures

   f) Acquisition of technological              Remain-same 0%
      capabilities through M/A

   g) Your new spin-offs based on               Remain-same 25%
      developed technology

   h) Outside-customer tech-services            Remain-same 0%
      efforts relative to total R&D
      (time or $)

                                               Relative Change
                                         (% of Respondents Reporting)

Expected Changes in 2005                                    More
Compared with 2004 Experience              5 to 10%       than 10%

l. Total company expenditures on R&D           8             38

2. Capital spending for R&D operations        15             23

3. Relative distribution of R&D costs:

   a) Support of existing business            17             17

   b) Directed basic research                 15             15

   c) New-business projects                   17             33

4. R&D professional personnel level            0             15

5. Hiring new graduates                        0              8

6. Outsourcing R&D to other companies          8             17

7. Licensing technology from others           20              0
   ($ volume)

8. Licensing technology to others              8             25
   ($ volume)

9. How will 2005 compare with 2004
   for the following:

   a) Your targeted R&D/Sales Ratio              Increase 36%

   b) Grants, contracts, etc. for                Increase 33%
      university R&D

   c) Participation in consortia for             Increase 50%
      pre-competitive university
      research

   d) Contracts with Federal                     Increase 17%
      Laboratories

   e) Participation in alliances and             Increase 46%
      joint R&D ventures

   f) Acquisition of technological               Increase 56%
      capabilities through M/A

   g) Your new spin-offs based on                Increase 38%
      developed technology

   h) Outside-customer tech-services             Increase 67%
      efforts relative to total R&D
      (time or $)

A scale of 1 to 6 was used, with 1 representing "significantly less"
(less than -5%), 2 "slightly less" (-5%, to 0), 3 "approximately the
same" (even with inflation) (greater than 0 to 2.5%), 4 "slightly
more" (>2.5 to <5%), 5 "somewhat more" (5 to 10%), and 6 "significantly
more" (more than 10%).

This report was written by Alan D. Ayers, manager-external technology at Energizer Battery Manufacturing, Inc., and chair of IRI's Research-on-Research Committee. It is based on the forecast conducted annually by the ROR committee, with the assistance of Margaret Grueza and Madora Bianco on staff at the IRI. aland.ayers@energizer.com