Where There Is No Research the Companies Perish
U.S. companies are trimming back on research and development spending, reports the National Science Foundation. And statements by IBM and Apple Computer that they will take a scalpel to their research budgets confirm the trend.
Such economizing may be understandable in the face of a lingering national slowdown and computer company losses.
But it’s probably a mistake. R&D; is what companies spend not on current operations but on future products. And it just may be that investing in tomorrow is the smartest thing to do when times are hard. Motorola Inc., now one of the most highly valued companies in U.S. business, did just that a half dozen years ago and triumphed.
An unusual company that started in 1928 as a car radio maker and became a leader in semiconductors and cellular telephones, Motorola found itself slipping behind Japanese competitors in manufacturing and technology in the mid-1980s.
So it spent heavily on research, increasing annual outlays from $524 million in 1987 to $1.3 billion, an amount equal to 1 1/2 times its total pretax profit, in 1992. Today Motorola, with $13 billion in annual sales of communications products and semiconductors, is a research leader in U.S. business. And its stock, at a recent price of $88.50 a share, is selling at 33 times earnings--almost double the average for all companies on the New York Stock Exchange.
The high price reflects enthusiasm for Motorola’s worldwide position in wireless communications--cellular telephones, two-way radios, pagers--a field where it seems to have a Midas touch. For example, Motorola opened a factory in China three years ago to make half a million pagers a year for export. But there is so much demand in China that Motorola is selling 4 million pagers there this year and building a $120-million manufacturing complex.
But success is not a happy accident; in global competition you make your own luck. You may recall that in the mid-’80s the world was conceding the important semiconductor industry to Japan and bemoaning the loss of U.S. competitiveness. It was then that Motorola (and Intel and other U.S. electronics firms) redoubled R&D; efforts.
The Schaumburg, Ill.-based company had to relearn manufacturing techniques, in some cases working in partnership with Japanese firms. Today it is second to Intel, the world leader, in microprocessors, and still behind Japanese producers in memory chips. But Motorola leads the world in the sophisticated controller chips that increasingly are the brains of every machine--there are more than a dozen Motorola chips in an average car’s engine.
Like an evolving species, semiconductors have come to dominate the products of which they used to be only a part. “There used to be 400 components in a cellular telephone, now there are 40 and soon three or four chips will be the whole phone,” says Bertrand Cambou, director of technology for Motorola’s semiconductor division.
So the microchip business, once regarded as a technical sideshow, now occupies center ring and is key to the development of new products for all industries. That’s why it was so important for U.S. firms to make the R&D; effort in semiconductors.
With competitiveness goes value. “Investors should look at research spending per share as much as earnings per share,” says Michael Murphy, an investment manager and publisher of the California Technology Letter, because R&D; indicates that the company can keep coming up with new products.
Motorola may earn $3 a share this year but it will spend close to $5.50 a share on R&D.; Not surprisingly, more than half its product line is new within the last five years.
But more than numbers, ambition and vision define a company. At Motorola, Chairman George Fisher talks of the need to be a technological leader for the 21st Century. And former CEO Robert Galvin, now 71 and chairman of the executive committee, tells how a maker of car radios turned into a technological powerhouse.
In 1948, Bell Labs invented the transistor and invited all companies to learn the new technology. Motorola’s chief of research at the time, Dan Noble, “said we should not only use transistors in our radios but manufacture them as well,” Galvin explains. “Why? Because the science was new and everybody, big company and small, would start out on an equal footing.”
Noble was right. Success in the new business has gone to companies from other fields, such as Texas Instruments and Motorola, or entrepreneurial start ups like Intel and National Semiconductor. But the new industry’s need for constant R&D; and new products baffled traditional giants such as General Electric and Westinghouse.
Nice story but “Motorola is not without warts,” says analyst Jonathan Joseph of Kidder Peabody. It has failed competitively in microprocessors and its latest venture--a joint effort with IBM and Apple to develop the PowerPC chip--remains unproven.
Research spending is no guaranty of success, either. IBM spent $6 billion a year on research but still came a cropper.
True enough, say analysts, but research doesn’t go to waste. IBM’s R&D; has brought it many advanced products that will become visible as the giant firm restructures. The same goes for Apple which in trimming R&D; is not touching its promising research in communications devices.
As for Motorola, the new Power microprocessor, called the 601, is only the beginning. “We are already working on more advanced versions, the Power 603, 604, 620,” says technology director Cambou.
The rest of U.S. industry take note: What you spend researching the products of tomorrow is more important than the profits of today. It’s your future.
