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Key points from the Scoreboard
- The 2003 R&D Scoreboard has been expanded to include the top 700 international
companies (companies with R&D over £34m) and the top 700 UK companies. It
also includes new data on cost of funds and on 2001 and 2002 US patents granted
to companies in nine R&D intensive sectors.
- The business environment was difficult for companies during the 2002/2003
financial year with both profits and employee numbers down. Despite this, R&D
intensities (R&D as % sales) are unchanged from 2002 for Japan at 4.3% and have
increased slightly both for the USA to 5.2% and for Europe (but only to 3.7%). The
UK 700 R&D intensity is the same as in 2002 but 23 more companies now have
R&D of £260k or more.
- The Americas (primarily USA) lead in total R&D for pharmaceuticals & health and
electronics & IT while Europe leads in overall engineering and in ‘all other sectors’.
Comparing the main European countries, UK companies in the international 700
have much higher total R&D in pharmaceuticals & health than Germany and France
but much lower total R&D in both electronics & IT and in the broad engineering
sector (where the UK is under 12% of Germany).
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- The financial environment for UK companies differs from that in the other major
countries in two ways. Firstly, UK companies have a higher cost of funds relative
to both sales and R&D than the US, Germany, France or Japan. This is driven by
higher UK dividends. Secondly, acquisition spend relative to R&D plus Capex
investment is much higher in the UK, even than in the USA, (the UK is typically
larger than the USA by a factor of over three).
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- The UK has its highest proportions of R&D in pharmaceuticals & biotechnology
(40%) and aerospace & defence (9%) whereas the international 700 has its highest
proportions in IT hardware (22%), automotive (18%) and pharmaceuticals &
biotechnology (17.5%). UK 700 R&D intensity is above international levels in
pharmaceuticals, aerospace and health but below in most other sectors.
- The five high R&D sectors of IT hardware, pharmaceuticals & biotechnology,
electronic & electrical, software & IT services and health account for almost 60%
of all R&D and are all dominated by the USA with the exception of electronic &
electrical where Japan leads, Germany is second and the USA is in third place.
The UK is in second place in both pharmaceuticals & biotechnology and health.
A comparison of the US 1000 with directly comparable UK-owned companies
in the UK 700 shows that the UK has 50% more companies with low R&D intensity
(below 2%) but only just over one third the proportion of companies with high
intensity of over 10% (mainly drawn from the high R&D sectors).
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- New entrants in both the international top 100 and UK top 100 between 1998 and
2003 are mainly in the IT hardware, pharmaceuticals & biotechnology, software & IT
services, electronic & electrical sectors with, for the international 100, companies in
automotive and aerospace & defence as well.
- An examination of US patents for major companies in 2002 shows that companies
are granted from 1 (pharmaceuticals) to 6 or 7 (Electronics or IT hardware) patents
per year on average for every £10m of R&D although there are naturally sizeable
variations between the companies in each sector. Europe just leads in this ratio for
pharmaceuticals & biotechnology, but lags the USA and Japan for IT hardware and
electronic & electrical.
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- A study of higher R&D intensity middle-sized companies (sales up to £500m)
in the international 700 shows that the USA dominates with 80% of companies
followed by Europe with 13% and Japan with 5%. These companies also have
very high growth rates. A more detailed comparison of middle-sized companies
in the US 1000 with comparable UK-owned ones from the UK 700 shows that
the UK has less than one third of the US proportion of companies with R&D
intensity above 10% but 60% more below 2%. However, the UK does have
exemplar high growth middle-sized companies in all the five high R&D
sectors – it is just that more are needed (and more capable of growth to larger
sizes). For example, the US has almost 20 times as many companies with R&D
intensity above 10% as does the UK.
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- R&D is related to company performance measures with R&D intensity linked
to sales growth and labour productivity to R&D per employee. In the 2003
Scoreboard it is also shown that current sector market capitalisation-to-sales
ratios are higher for pharmaceuticals & biotechnology, software & IT services
and health (relative to R&D intensity) than for engineering-related sectors.
Of companies in IT hardware, pharmaceuticals & biotechnology and software
& IT services with above sector average market cap-to-sales ratios, 80-90%
also have above average R&D plus Capex as % sales. Portfolios of UK high
R&D intensity companies from both the FTSE 100 and FTSE 250 have shown
share price growth from 1997 to 2003 of 30% and 50% respectively. The FTSE 100
has dropped 15% over this period whilst the FTSE 250 has increased by only 17%.
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What the Scoreboard contains
- Details of R&D investment, Capex, sales, profits, employee numbers,
growth of these quantities and market capitalisation for UK and
international companies. All data is extracted directly from company
annual reports & accounts and key ratios are calculated for each company
and sector. Companies are classified by FTSE sector and by country.
- 700 UK-based companies (39 from the FTSE 100) are included with R&D
investments totalling £16bn. The international section comprises the top
700 R&D investing companies (each with over £34m R&D) with R&D totalling £207bn.
- New data for 2003 includes100 more international and UK companies
together with new information on cost of funds, US patents and market
cap to sales ratios. The data on stockturn and market breadth introduced
last year is continued for 2003.
- These enhancements make the Scoreboard an even more useful
sector-based international benchmarking tool for companies.
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What the Scoreboard Analysis says
Overall Perspective
- The 2002/3 financial year was difficult for many R&D intensive
companies with little change in overall R&D or sales and reductions
in both profits and employee numbers. However, 60% of international
companies increased R&D over the previous year.
- The financial environment in the UK differs from that in other major
countries in two respects. The cost of funds as a ratio of either sales
or R&D is higher (higher dividends) and the ratio of acquisition spend to
R&D plus Capex investment is much higher (higher even than for the USA).
- The R&D intensity (R&D as % sales) for the US (at 5.2%) and Europe
(at 3.7%) have both increased slightly over 2002 with Japan the same
at 4.3%. Within Europe, both Germany (4.6%) and Switzerland (6%)
have increased their intensities significantly whereas the UK has
changed only marginally. R&D intensity has increased over 2002 for 8
of the top 10 international sectors.
- New entrants to both the international and UK top 100 companies since
1998 have been concentrated in electronic & electrical, IT hardware,
pharmaceuticals & biotechnology and software & IT services with, for
international, more companies also in aerospace & defence and
automotive.
R&D Sector Mix and Intensity
- R&D active UK companies are dominated by pharmaceuticals &
biotechnology (40%) and aerospace & defence (9%) whereas
internationally the largest sectors are IT hardware (22%), automotive
(18%) and pharmaceuticals & biotechnology (17.5%). The UK is strong
in food processing and oil & gas (9% compared to 2% internationally)
but has lower proportions in electronic & electrical (4% vs 10%),
automotive and IT hardware.
- Within world regions, the Americas have most R&D in both
pharmaceuticals & biotechnology plus health and electronics plus IT
while Europe leads in overall engineering and in the all-other-sectors
category. Within Europe, UK companies perform more R&D in
pharmaceuticals and health than other European countries but much
less in electronics & IT and overall engineering than either Germany
or France.
- UK company R&D intensity (and also Capex intensity) is above
international levels in the strong sectors of pharmaceuticals &
biotechnology, aerospace & health but well below international levels in
electronic & electrical, software & IT services, chemicals and engineering
which also account for smaller proportions of the UK total.
- The distribution of R&D intensity for the top 1000 US companies is very
different to that of a strictly comparable set of UK-owned companies.
The UK has a 50% higher proportion of companies in the lowest intensity
band (up to 2%) while the US has almost three times the UK proportion
in the highest intensity bands (above 10%). The UK’s relative position,
however, has improved over the last 4 years.
The Five High R&D Sectors and Middle-sized Companies
- The five high R&D sectors (electronic & electrical, health, IT hardware,
pharmaceuticals & biotechnology, software & IT services) account for
almost 60% of international 700 R&D and all are dominated by the USA
except for electronic & electrical where Japan leads and the US is third
behind Germany. The UK is in second place in both pharmaceuticals &
biotechnology and health and in third place for software & IT services.
These three sectors have the highest growth rates of the five.
- 94% of international middle-sized companies (sales from £50m to £500m)
are in the five high R&D sectors and 82% of these are from the USA
which leads in all five sectors. 87% of the middle-sized companies are in
IT hardware, pharmaceuticals & biotechnology and software & IT services
which have very high R&D intensities and R&D growth rates.
Pharmaceuticals & biotechnology also has a high growth rate for sales.
- Middle-sized companies from the US 1000 are contrasted with
comparable UK-owned companies from the UK 700 to show that the
UK has many more in low intensity bands (0-2%, 2-4%) but less than
one third of the US proportion with R&D intensity above 10%. The UK
also has a larger proportion of its higher intensity middle-sized companies
in the smaller size parts of the middle-sized range. However, there are
successful UK companies in all five high R&D sectors – it is just that
more are needed, and more capable of growing to larger sizes.
R&D and Company Performance
- A preliminary patent analysis shows a sevenfold difference between
sectors in the ratio of US patents granted per £10m R&D investment.
For a country, therefore, this ratio will be affected by sector mix. Europe
leads the US and Japan in the ratio for pharmaceuticals & biotechnology,
but lags for IT hardware and electronic & electrical.
- In addition to summarising the well-established links between R&D
intensity and sales growth, R&D per employee and labour productivity,
R&D plus Capex intensity and total shareholder return (for the broad
engineering sector), the Scoreboard introduces new links between R&D
and both market cap to sales ratios and share price growth.
- The market capitalisation to sales (MC/S) ratio for two groups of major
sectors rises with R&D intensity. 80-90% of those companies in the
highest R&D intensity sectors of IT hardware, pharmaceuticals &
biotechnology and software & IT services with above average MC/S also
have above average R&D plus Capex intensity for their sector.
- The share price of the group of all high R&D intensity companies in the
FTSE 100 has been ahead of the FTSE 100 index in every year since 1997
and is now 130% of its 1997 value, the FTSE 100 having dropped by 15%
in this period. The high R&D intensity FTSE 250 companies are also well ahead of the FTSE 250 index.
The Challenge for UK Companies
- The UK has a leading position in pharmaceuticals & biotechnology, health
and aerospace & defence with R&D intensities above the international
sector averages. It will be important to maintain this strong position.
- There are other sectors where the UK’s R&D intensity is well below
international levels and where the UK also has smaller proportions
of its R&D than are found internationally.
- There are examples of UK middle-sized companies in all the high R&D
sectors which have high R&D intensity, high growth rates of R&D and/or
sales and where the market cap to sales ratio suggests above average
prospects. A comparison with the USA suggests that the UK needs a
higher proportion of such exemplars amongst its middle-sized
companies and more with the ability to grow to larger sizes.
- A combination of good strategic choices (e.g. organic vs acquisition
growth and high value added products & services), operational excellence,
customer care and wise and balanced investment in the future will enable
UK companies to sustain profitable growth and succeed in world markets.
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What the Scoreboard doesn’t say
- That the R&D reported in companies’ annual accounts is the only
measure of innovation. Investments in capital equipment, market
development, skills, new ways of working and other intangible assets
are all methods of gaining competitive advantage.
- That it is simply a case of investing more. The Scoreboard is rather
an international benchmarking tool to help companies decide if they
are investing the right amount compared to competitors in their sector
as part of their overall business strategy.
- That it is the only source of information. Companies and their
shareholders are best placed to assess this and all the other information
relevant to their technical strategies and business plans.
- That it covers all R&D activity funded by companies in the UK. While
the Scoreboard seeks to be as comprehensive as possible, it does not,
for example, include companies that undertake R&D but do not declare
the amount invested in their accounts. It also excludes UK companies
investing less than £30k per annum in R&D. As a Scoreboard for company
funded R&D, it naturally excludes publicly funded R&D.
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Endorsers
The following organisations have kindly agreed to endorse the Scoreboard
as a source of information for companies and their shareholders
when considering the amount invested in R&D as part of the innovation
process and business strategy.
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