Global chemical industry R&D is well despite declining research intensity

A living thing

09 October 2008 19:45  [Source: ICB]

Despite declining research intensity, research and development is alive and well in the global chemical industry. Which leading players are seeking to strengthen international activities?

Cynthia Challenger/Vermont

SINCE ITS inception, the chemical industry has placed a high priority on investing in research and development (R&D). While the absolute amount of dollars spent continues to climb, research intensity (R&D/sales) has actually fallen in recent years.

In the US, chemical industry R&D spending totaled $27.33bn (€20.1bn) in 2007, increasing by 67% compared with 1997 levels, according to Kevin Swift, chief economist of the American Chemistry Council (ACC). The association expects that number to rise to $31.45bn by 2010.

Key technologies receiving attention include bio-based processes, novel catalysts, sustainable chemistry, "smart" materials and advanced composites, says the ACC. Jack Solomon, chairman of the Vision2020 Steering Committee of US-based group Chemical Industry Vision2020 Technology Partnership, says his group is mainly emphasizing R&D focused on the identification of alternatives to oil-based feedstocks.

The group, an industry-led partnership among public and private sector stakeholders in the chemical and allied industries, identifies R&D priorities and influences federal and corporate R&D investment.

Today, most US chemical companies allocate 1-3% of annual sales to R&D. The heavily research-oriented pharmaceutical sector allocates as much as 25%.

These US research intensity rates compare well with global numbers. US-based consultancy Kline analyzed the R&D spending of the top 50 global chemical companies. It found that R&D intensity peaked globally around 2004 and has been declining since, according to Kline senior vice president Jonathan Goldhill.

Looking at different segments, Kline has found that among the top 50 companies, specialty chemical firms have the greatest R&D intensity at 2.8%, followed by diversified companies at 2.0% and commodity companies at 1.1%. It is not surprising that specialties, which are sold on performance, tend to demonstrate higher R&D intensity.

Geographically, over the past five years, Europe has had the highest level of R&D intensity, which can be attributed to the high proportion of specialty and diversified firms in the region. However, according to Kline, the gap between R&D spending by world region has been narrowing during that time.

The growth in such spending in Asia is partially as a result of the increasing trend of Western companies moving R&D efforts to emerging economies. R&D intensity is conversely declining in the mature markets as companies look to reduce costs and establish centers of excellence in areas of rapidly growing demand.

US-based Honeywell Specialty Materials, for example, has established a global R&D position to support and speed up product development. R&D on a global scale gives access to excellent talent and the ability to do research 24 hours a day, meet local customer needs and reduce R&D costs while gaining a stronger R&D portfolio and achieving a higher speed to market, according to the company's president, Europe, Middle East, Africa & India, Bernard Pellereau.

For Germany-based BASF, 80% of its R&D expenditures are in Europe, 17% in the Americas and 3% in Asia-Pacific. The chemical major is also involved in about 1,800 global alliances in 41 countries with universities, research institutes, start-ups, partners from industry and customers. "BASF is continually looking at ways to strengthen R&D internationally," says Dieter Jahn, senior vice president and head of Science Relations and Innovation Management for the company.

German life sciences company Bayer spends most of its R&D dollars in Europe, too, but has research centers in seven countries. For certain businesses, such as Bayer MaterialScience, the market development and the rapidly growing customer base in Asia are of increasing importance, according to Thomas Bieringer, head of corporate development-innovation for Bayer.

IN-HOUSE RESEARCH

Bayer keeps all of its major R&D activities in-house. "The primary focus is still to manage our daily research work and innovation within the company," says Bieringer. "However, we continue to promote and drive efficient cooperations and strategic partnerships with a view to specifically expanding and complementing our own expertise with excellence from outside."

In the pharmaceutical and consumer product sectors, companies are aiming to shift innovation from internal to external activities.

"These efforts are motivated by the fact that it is increasingly difficult to maintain historical levels of innovation through internal efforts alone, and there are similar trends in the chemical industry," Goldhill asserts.

For the top 50 companies, Kline has found that there is no correlation between R&D intensity and profitability or growth. In addition, while R&D intensity has been declining in recent years, the average return on assets has been increasing. Acquiring R&D seems to be a smarter approach than internal development, but it is not a sustainable one.

"Chemical companies have a decision to make about how they are going to achieve growth through innovation," Goldhill says.

"Historically, process and product improvements have accounted for 80-90% of R&D spending," notes Eric Vogelsberg, senior vice president of Kline's chemicals and materials practice. "But our clients have begun to realize that they need to focus more on true innovation, and they are struggling with how to grow their businesses."

According to Swift, although there is risk associated with R&D, the rates of return on successful innovations can be as high as 25-35%. In a study of public chemical companies, the US-based Council for Chemical Research found that every dollar invested in chemical R&D produces $2 in operating income over six years, or a 17% return.

Investment in real innovation has been undervalued for a long time, however, and it will take industry a while to catch up to where it needs to be.

BASF spends 63% of its R&D dollars on new and improved products, 19% on new and improved processes, 16% on method development and 2% on new application development. In 2007, it spent $1.89bn on R&D, an increase of 40% over 2004. Spending will rise to about $2.18bn in 2008.

Based on those expenditures, BASF expects to achieve annual sales by 2010 of more than $5.2bn from new or improved products and applications that have been on the market for five years or less. It expects to reach $6.5bn of these sales by 2015.

BASF is targeting five areas for innovation-driven growth: energy management raw material change nanotechnology plant biotechnology and white (industrial) biotechnology. It is aiming for annual sales from these clusters of $2.6bn-$5.2bn by 2015.

CROP PROTECTION FOCUS

Bayer also expects significant returns on its R&D investments. Between 2008 and 2012, Bayer CropScience is planning to bring 10 new crop protection active ingredients to the market, with a combined peak sales potential of more than $1.3bn. This objective complements existing plans to achieve sales of $2.6bn with active ingredients launched since 2000 by 2011.

"We are in general focused on application-oriented research. For various platform technologies such as biotechnology, nanotechnology and process research, though, some basic research is also conducted," says Bieringer.

Bayer's R&D activities range from new products - for example, pharmaceuticals, crop protection products and carbon nanotubes (Baytubes) - to improvements or new applications for existing products.

Even successful innovators should not forget that innovation has as much to do with developing different ways of marketing, branding and business models and strategies, as it does with traditional R&D.

"There are a lot of things that can and should be put into the mix to increase value," says Goldhill. "Great R&D is not the only answer. Companies need these other activities as well to create value."

US CHEMICAL INDUSTRY R&D SPENDING

1997 2002 2007
$ bn $16.39 $20.40 $27.33
As % of shipments 3.90% 4.40% 4.10%
Breakdown of pharma and other chemical spending
$ bn/% Shipments $ bn/% Shipments $ bn/% Shipments
Pharma $10.21 11.0% $14.13 9.9% $20.12 10.8%
Other chemical $6.17 1.9% $6.21 1.9% $7.21 1.5%
Spending by type
Basic 14.50% 10.30% 11.00%
Applied 27.40% 35.00% 32.50%
Development 58.10% 54.70% 56.50%

Source: National Science Foundation, American Chemistry Council


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