Automakers and suppliers invest billions of Euros in research and development, but some are far better than others at turning that into profits.
In general, the more profitable companies are those with bigger r&d budgets, concludes the UK Department of Trade and Industry in its annual R&D Scoreboard. The ministry studied 1,000 companies with the highest r&d spending, including 69 in the auto sector.
Renault has the best margins among European volume automakers and spends above the industry average on r&d. Honda and BMW are examples of how sustained r&d investment can raise margins.
Even an apparent exception, profitable BorgWarner with below-average r&d spending, has an edge in technology.
"The success of the double-clutch transmission could be a big factor," said Mark Fulthorpe, forecast analyst at CSM Europe in London. "Those with the best technology get access to the best customer base and are able to deliver the best margins."
The old pattern of suppliers
simply manufacturing parts designed and engineered by their carmaker customers is over. Automakers depend on Tier 1 suppliers to research new technology and design and engineer major parts and systems. Suppliers spend a substantially larger proportion of sales on r&d, especially T1 suppliers.
The automotive side of Germany's Robert Bosch currently spends 9.4 percent of sales on r&d. Denso invests a hefty 8.4 percent of revenue in r&d, with Delphi at 7.3 percent and Behr at 6.4 percent. Even middle ranking suppliers such as Valeo, NGK, Autoliv and Hella invest significantly above the industry average.
"Innovation is at the heart of Bosch," Deputy Chairman Siegfried Dais told Automotive News Europe in an interview. He cited electronic fuel injection, ABS braking, digital engine management and inline piezo injectors as direct examples of Bosch's continuing r&d efforts.
"This confirms the general trend of the last five to seven years," said Fulthorpe. "Auto-makers have been pushing the burden of technical innovation on their suppliers."
As supplier competition has intensified, many have invested more in technology to win new customers, added Fulthorpe.
Yet suppliers closer to the commodity end of the business can devote less than 2 percent of their sales income on r&d and still maintain a 4 to 5 percent return on sales. Johnson Controls, Lear and Tenneco are examples.
Combining automakers and partmakers, the auto industry r&d spending average is 4.3 percent of revenue.
Japanese and German companies are more willing to reinvest earnings into r&d than the French, British or US, said the DTI.
"Japan and Germany tend to be r&d specialists, strong in sectors such as automotive and electronics," said the DTI analysis. "The UK and Switzerland, on the other hand, tend to be value specialists."
Does investment in r&d help boost company profitability? The DTI's figures suggest it helps. Bosch believes r&d spending is linked to profitability, but says spending must be well directed.
Wolfgang Dehen, president and CEO of Siemens VDO, which spends 8.5 percent of sales on r&d, also values such activity. He spoke of his automotive unit only.
"The majority of our sales are in electronics," Dehen said in an interview. "Electronics is the main driver of innovation in the automotive industry, so our percentage of r&d to sales is significantly higher than on the mechanical side."
The UK's DTI said many high r&d-investing companies have "sustained out-performance relative to their sector by showing consistent and profitable growth."
The report said: "Wisely directed r&d should enable a company to maintain an edge for its products, processes and services relative to its main competitors and hence compete successfully in value-added, higher-growth market segments."
The pattern works for carmakers too.
Ford Motor Co., the industry's No. 2 spender after DaimlerChrysler, ploughed E5.4 billion into r&d last year, yet its operating profit was only 2.5 percent of sales.
DaimlerChrysler's r&d investment fell to E5.6 billion or 4 percent of sales last year. Its profit margin dropped to 2.4 percent.
But last year Toyota boosted its r&d spending 25 percent over the average of the previous four years and earned 9.8 percent on sales. Its E5.4 billion r&d budget was similar to Ford's, representing just over 4 percent of revenue.
- Edmund Chew contributed