UK: Research or Die.

UK: Research or Die. - Traditionally, R&D is the first casualty when a recession looms. But, according to Hugh Aldersey-Williams, some British firms believe the consequences of failing to invest may be worse in the long term.

Last Updated: 31 Aug 2010

Traditionally, R&D is the first casualty when a recession looms. But, according to Hugh Aldersey-Williams, some British firms believe the consequences of failing to invest may be worse in the long term.

Slowdown, downturn, hard landing, recession ... whatever you want to call it, everyone agrees that, economically speaking, things can only get worse over the next few months. New Labour blames the previous administration; while shadow chancellor Francis Maude put the responsibility firmly on the current Government's shoulders. Political bickering is, however, irrelevant. A more important question is: what should businesses do to survive?

When the going gets tough, the smart make tough decisions. Every chief executive will look at his cost-base, scrutinise new projects and analyse expenditure. Traditionally there is a general tightening of belts; a collective battening down of hatches. Managers tend to concentrate on the short term.

And often the area where cuts come first and deepest in a downturn is in reseach and development. R&D spending in the UK shrank by 8% in the 1989/90 financial year in anticipation of the economic squeeze. Not until the mid-1990s did it regain its pre-recession level. This time around, the R&D scoreboard - published annually in June by the Department of Trade and Industry - shows that overall R&D spending has already begun to fall back again from the mid-'90s peak.

Some of Britain's most successful businesses, however - Psion, Dyson, Glaxo Wellcome and Unilever, to name a few - are bucking this trend. Their strategy is to spend their way to prosperity. And they are maintaining or increasing their research budgets during the hard months ahead.

Take Psion, a small company with a single line of products, just the sort of company which might be considered vulnerable in a downturn. In 1997, the company launched its Series 5 organiser, only the fifth major product since the company launched in 1983. The Series 5 is now selling well but has a price tag of £400. There is absolutely no prospect of the firm resting on its laurels and cutting back on research in anticipation of hard times.

'We have a formal process for looking at (research) proposals. There's no thinking that, "There's a recession coming, let's batten down the hatches," ' says Charles Davies, Psion's group development director. What matters for Psion, he says, is whether the proposals are convincing. In 1997, Psion spent £10.9 million on R&D, nearly 8% of sales. It plans to maintain that level.

'Our R&D expenditure is almost decoupled from whether there's a recession (or not). Mostly what we worry about are the uncertainties of the business we are in. We do talk about R&D as a percentage of sales, but we don't drive it that way round. It is all driven by the business case and the level of urgency for new products.'

Dyson Appliances has powered on dramatically since it launched its first 'dual cyclone' vacuum cleaner in 1993. It now commands more than half of the UK vacuum-cleaner market. In 1997, Dyson Appliances spent 7% of its £149 million turnover on R&D. That was an increase of one per cent on the previous year.

James Dyson, an inventor himself, says the proportion of income spent on R&D will continue to rise as the company puts more resources into developing products. 'We're trying to move into new areas to make products that have radical new technology in several fields at once, so our spending is disproportionately high,' he says. 'We are not overly concerned about recession as we believe most people are prepared to pay for better technology, whatever the economy may be doing.'

The company plans to launch several improved vacuum cleaners as well as other domestic products - thought to include a washing-machine - in 1999. Other plans include the adapting of the 'cyclone' technology to create a device that will filter particles from diesel exhausts. 'The growth opportunities that these present more than outweigh any threat from a recession,' says Dyson.

The firm has just opened a leading-edge R&D facility, and is attracting top engineers and designers. R&D staff comprise almost a quarter of its more than 1,100 workforce.

It's not just dynamic new entrants who are putting their money where their mouths are. Some of Britain's biggest and longest-established firms also plan to keep spending. For Glaxo Wellcome, R&D centres mainly on the science required to develop future pharmaceutical products. As with most drugs firms, R&D also increasingly involves the close-to-market stages of product development.

But even by the standards of its rivals, Glaxo Wellcome has a high level of R&D expenditure. Its R&D workforce of 10,000 worldwide is nearly 20% of its total workforce.

Much of the firm's R&D is aimed at providing the necessary scientific information to win regulatory approval for new products. But the core effort is the search for new chemical substances. The firm's best known drug is Zantac, used to treat gastro-intestinal conditions, now 'off-patent' and available without prescription - so it needs replacement. Attention has shifted to respiratory ailments, reflecting the market opportunity offered by the increasing incidence of often untreated asthma and other conditions.

R&D covers everything from 'blue skies (pure rather than applied) research right through to establishing positioning of products prior to launch', says Martin Sutton, manager of corporate communications. 'It isn't just a matter of how much you spend, it's how you do things. We've redesigned the R&D process.' Clinical development and strategic marketing staff now work side by side within the six groups covering the firm's areas of clinical expertise.

The company tops the DTI's R&D scoreboard. It spent £1.15 billion on R&D in 1997, 14.4% of sales. It spent exactly the same percentage in 1996 - indeed the figure has held remarkably steady since 1991. Prior to that Glaxo had progressively increased its R&D expenditure from 8% to 13% in the five years to 1990 in a single-minded international expansion programme.

Glaxo Wellcome's research spend is broadly comparable with its leading-edge competitors. Pfizer in the United States spent very slightly more than the British company in 1997, both in absolute terms and as a percentage of sales (15.8%). But Pfizer - inventor of Viagra - hiked its R&D spend from the previous year. It would take a calamitous recession to affect the company's proportion of R&D spending.

Spending in different industry sectors varies dramatically. Unilever, the giant consumer goods group, ranks fourth in the 1998 UK R&D scoreboard with a spend of £546 million, or 1.8% of sales. For Unilever, R&D has long ranged from fundamental science to brand development, such as making Persil available in tablet form. As at Glaxo Wellcome, the policy is to hold R&D spending rock steady regardless of economic conditions.

'Our business is internationally spread. People always wash and eat. This produces a smoothing effect, so our R&D is very constant as a percentage of sales,' explains Ray Moran, administrative head of Unilever's central research division. 'We preach very strongly that you can't switch R&D spending on and off like a tap.' That is particularly true with an aggressive competitor such as Proctor & Gamble in your market.

Richard Duggan, now an advisor to the DTI Innovation Unit, was in charge of R&D spending on detergents at Unilever's Port Sunlight laboratories during the last recession. Duggan says that it takes years to build an R&D base. The spend is by definition focused on the long term, so the short-term ups and downs of the business cycle don't affect the longer-term decisions.

To discourage faint-hearted managers from switching off the R&D tap, Unilever introduced a scheme in which any group that wanted to axe a programme of research had to bear half the costs of doing so. 'This made it expensive,' says Duggan. As a result, many managers thought better of the idea and continued with the research.

So how does this more positive approach to R&D compare with what happened during the last recession? Perhaps Dyson and Psion, Glaxo and Unilever are not typical. Few will admit to slashing R&D expenditure, although official statistics already show a substantial drop. Some experts remain sceptical that much has changed. 'The rhetoric of innovation and R&D is bigger than ever before in government and in industry,' says James Woudhuysen, professor of innovation at De Montfort University. 'But the search for mergers and acquisitions and the emphasis on shareholder value creates a bigger barrier to successful R&D.'

Companies committed to research may face tough choices. In sectors from IT to pharmaceuticals, companies may reduce the spread of their bets. Forced to focus, they will find that choosing the right area in which to specialise is fraught with risk.

Even companies that have found their niche may find themselves cutting back, almost despite themselves. Oxford Instruments began to display this knee-jerk reaction last year. The scientific instrumentation company has grown by both feeding off and feeding into fundamental research to become a leading supplier of super-conducting magnets for medical scanners and research as well as other technology. With nearly 90% of sales outside the UK, it has suffered recently from weakness in overseas markets and the strong pound.

Difficult trading conditions affected the company's approach to innovation. 'We were becoming more risk-averse,' says chief executive, Sir Peter Williams.

'As a by-product of the necessary tightening, we were trying to play safe, looking at what would generate a boost in earnings per share next year - all the classics.' Seeing this happening, Williams took steps to reverse the trend. Oxford Instruments put up for grabs a proportion of its existing R&D budget for additional bids from its business units, specifically to fund projects that were both more promising and more adventurous than the norm.

Williams' new research projects had to meet very specific criteria. 'The profile required was that (the research) would make a material difference to the business, and the risk profile was such that in the ordinary conduct of business they wouldn't be doing it,' he says. He wanted to achieve spectacular results and this inevitably meant taking bigger risks than usual.

This is muscular R&D talk from Williams, but appropriate enough for the tough times ahead, where maintaining if not increasing spending levels in this sector will be crucial. The importance of research and development is best summed up by Charles Davies of Psion: 'You die if you don't invest in R&D.'.

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