09 February 2009 20:13 [Source: ICIS news]
By Nigel Davis
LONDON (ICIS news)--Chemical companies cut back on research and development (R&D) spending in a downturn at their peril.
As difficult as the current slump may be, this is still a technology-driven industry. Innovation, whether technological or not, underpins growth in the short term and, ultimately, survival.
It is increased global competition that creates the need for more innovation and more technological research. Research applied to products and processes yields dividends over the years and helps breed sustainability. Adequate levels of well-directed research sustain the businesses in which a company wants to grow.
This does not mean the overall R&D spend is sacrosanct. There will be fluctuation in the absolute level of chemical-industry research spending during this global recession.
But the crunch will hurt some more than others.
Just as shifting capital spending has an impact on competitiveness and the battle for market share, changes in R&D spending also work their way through the system.
The results will not be immediately apparent, but if a chemical company is to continue to create value for its shareholders, customers and society as a whole, it needs to fully understand the implications of a cut in the R&D budget or changes to the way in which R&D works.
There are clever ways to manage the R&D process. Partnerships in basic research, for example, help companies tap in to knowledge they might otherwise lack. The R&D function should be a powerhouse of ideas, new products and new processes.
If it is not, then there is justification for realignment, but the strategic implications of research cutbacks are considerable.
The stayers in this industry will sustain R&D effort during the downturn.
Not for nothing have the likes of BASF and the pharma-to-materials company Bayer stressed in recent months the level of their spending on research.
Drugs companies need to keep spending on R&D to feed the voracious pharmaceuticals product pipeline.
A more broadly based chemical company like BASF spends at different levels relative to sales in different parts of the business, but the requirements of the R&D engine corporately are well understood.
The most successful players in chemicals have been those in which technology at one time or another has flourished. In petrochemicals and plastics, the great advances in process technology created sector leaders.
Companies may have adopted different models to capitalise on process R&D, but core research competences underpinned their development. The breakthroughs that today’s developing competences produce will help feed future growth and underpin the fortunes of some suppliers. Just last week, consultants Nexant launched a study into the latest, potentially ground-breaking process technologies in chemicals and plastics. The driving forces behind these technologies will likely be reduced costs, alternative feedstocks and a reduced energy footprint.
New processes for well-established chemicals can be expected to continue, over time, to help re-shape the sector.
Ground-breaking research will tap into global mega-trends: population growth, global warming, the need for more food and water. And clever chemistry, often conducted at the boundary with other disciplines such as physics, biology and medicine, will provide some of the answers to the world’s most pressing problems. It will throw off a host of other ideas ripe for further development.
R&D is the lifeblood for the chemicals producer that expects to survive anything other than the short term. Short-term changes in R&D spending can have significant long-term consequences.
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