ON A CLEAR DAY YOU CAN SEE PROGRESS
American R&D is still plodding, but some companies are getting more bang for the buck
On the early 1960s, when he was John F. Kennedy's science adviser, Jerome B. Wiesner was asked to speak at a steelmakers' convention on the state of the industry's research. To get up to speed, Wiesner assigned aides to study the subject. They were shocked to find that steelmakers were not developing new technologies or even adopting the improvements made by Japanese and European competitors. "I don't know why you asked me to speak about research," Wiesner told the group. "You're not doing any. And if you don't change, you'll be out of business in 20 years." Outraged steelmakers wired the President to complain, a response that seems laughable today: They have been trounced by overseas rivals for decades and are only now getting up to speed.
Alarmed by rising foreign competition in a broad array of technologies--from computers and telecommunications to autos and aerospace--experts from government, industry, and academe sound more and more like Wiesner preaching to the steel industry. At first glance, BUSINESS WEEK's annual survey of research and development spending for 1991 will do little to ease their fears. Rocked by recession and global competition, Corporate America is in one of the worst research crunches since BW's annual survey began in 1975. American corporations spent $74 billion on R&D in 1991--up 6.8% from the previous year. But that's a timid 3% increase when adjusted for inflation, the worst two-year performance since 1985-86 (chart).
Despite such numbers, however, there are encouraging signs that at least some companies and industries don't share the complacency that once plagued American steelmakers. For instance, R&D spending rose last year even though corporate profits plunged 31%. Apparently lackluster research outlays also mask some positive trends. Over the past few years, many companies have focused their R&D more carefully to get a bigger bang for their dollar. And the U.S. still spends far more than any other country on such work. "The system is more robust than people think," says John A. Armstrong, IBM's vice-president for science and technology.
BOEING BOOST. There are some caveats to this view. A rosier outlook rests partly on the belief that the recession is largely over. Even then, hardly anyone sees a return to the heady early 1980s, when the defense rush drove real R&D spending to double-digit levels. Today, there's just too much pressure to rein in costs. That's why the rate of R&D growth in real terms should be about the same this year--with a significant turn upward not coming until 1993, says Jules J. Duga, senior R&D policy analyst for Battelle, the research and consulting institute in Columbus, Ohio. It's also one reason why many experts--including Wiesner, now president emeritus of Massachusetts Institute of Technology--argue that Washington must fashion a new technology policy closely tied to industry's needs in order for the U.S. to regain much of its competitive luster. That would mean stripping money from defense and plowing it into generic technologies such as automation, manufacturing, and materials research.
It might take this kind of national direction to trigger a turnaround broad enough to end the ambivalance reflected in the latest R&D numbers. For 1991, conglomerates had the dubious honor of being the only industry to show a spending decrease. Their outlays fell 3%, thanks to five-point drops at both General Electric Co. and ITT Corp. The chemicals industry came in flat compared with 1990. A 9% drop at DuPont Co. depressed the overall numbers and knocked the company from No. 7 to No. 10 among the top 10 spenders. DuPont says the decline was caused by its decision to funnel its pharmaceutical R&D into a new joint venture with Merck & Co.--and that otherwise, its R&D spending actually rose by nearly 6%. Aerospace, withering under defense cuts, nonetheless mustered a 6% gain. But nearly all this came from Boeing Co.: As it geared up for its new 777 jetliner, the Seattle company hiked R&D a heady 71%. Among other industry segments, normally strong computer makers also showed the effects of recession and competition, raising spending a mediocre 3%. IBM weighed things down: Big Blue reversed 1990's 6% decline but managed only a modest 2% rise.
On the upside, health care, dependent on drug and biotechnology companies that must see a string of new products through costly trials, posted a healthy 16% rise, the largest of any group. The beleaguered auto industry somehow kept its spending a point ahead of the industry composite, pushing R&D up 8% after only a 5% hike the year before. General Motors Corp., the nation's perennial big spender, laid out 10% more despite a net loss of $5.9 billion. Part of the figure reflects spending at its Hughes Aircraft Div., and part was to meet new federal requirements for better environmental controls for manufacturing plants. Telecommunications, last year's laggard, turned things around and hiked spending 6% in 1991. The difference: American Telephone & Telegraph Co., which accounts for 83% of industry outlays. AT&T raised its budget 6%, after an 8% cut the year before. The company attributes the rise to new work in computers and advanced communications.
That sectors such as autos and telecommunications managed to rebound after taking hits in 1990 highlights the cautious optimism that's emerging as companies plan next year's R&D budgets. Behind this mood is the belief that the diet of austerity and quality consciousness that U.S. corporations have endured over the past few years is paying off. For example, despite net losses of $7.5 billion last year, Detroit auto makers--which have made gains in reliability, manufacturing, and design--are beginning to win back market share from Japanese rivals. "We intend to capitalize on every opportunity out there," says Ford Motor Co. Chairman Harold A. "Red" Poling.
The emphasis on efficiency is having a broad impact on every pursuit from marketing to production to R&D. Companies have slashed research projects outside core areas. They have shortened the time for product development by bringing researchers, developers, and marketing staffs together at the onset of a project to try to do things right the first time and avoid costly fixes later. And stung by Japan's success at improving existing technologies, they often have moved to smaller-scale R&D projects aimed at improving current products rather than pouring money into iffy new ventures. The result is a shattering of the almost sacred adage that more R&D is better R&D. "To use resources more effectively--that's the challenge we have," sums up IBM's Armstrong.
RECORD TIME. Competitiveness gurus like the idea, but not always the results. They warn that too much attention is focused on the "D" side of R&D, to the detriment of the basic research that gave the U.S. its edge in the first place. "All the incentives in the current managerial environment are biasing managers toward incremental improvement," laments Joseph G. Morone, director of the Center for Science & Technology Policy at Rensselaer Polytechnic Institute. Indeed, companies often view their choice as either research or development, concedes John S. Mayo, president of AT&T's Bell Laboratories. The legendary facility has taken heat recently for focusing on incremental developments to the detriment of the once freewheeling research that spawned the transistor and the laser.
A popular belief today, however, is that good companies can have it all. Says Mayo: "If there's one word that characterizes the new environment, it's the word `and,' as in R and D." He cites as an example the lab's recent invention of the optical amplifier. The device, which will be used first in a transpacific undersea fiber-optic cable in 1994, will sharply increase the efficiency of light-wave transmissions. The rapid commercialization is possible because the lab started development engineering early--instead of waiting until basic research was finished.
IBM has another twist. It bypassed its traditional development processes altogether to bring out its Power Visualization System, a hardware and software package that turns strings of supercomputer data into easily manipulated pictures. Researchers worked directly with customers to get the product market-ready in record time. The project began in September, 1989. The first units, which start at $320,000, were shipped last December.
Such success stories are no longer rare, but Corporate America still faces serious challenges. For one thing, new BUSINESS WEEK figures show that overseas rivals continue to plow money into R&D at a faster rate than their U.S. counterparts (table). Indeed, as U.S. companies tighten the reins on basic research, Japanese companies are taking the opposite tack. The most vivid example is NEC Corp.'s $32 million complex in Princeton, N.J. The Japanese electronics giant has assembled some 45 researchers to explore fundamental problems in physics, biophysics, optoelectronics, and computer science.
DEFENSE PLAY. Besides these competitive threats, there's another nagging problem: A number of studies show that U.S. elementary and high school students continue to underperform their peers in most developed nations when it comes to science and math. Unless more attention is paid to this end of the R&D pipeline, former National Science Foundation Director Erich Bloch wonders whether better targeting and other strategies will revitalize U.S. research. "People are getting the idea, but are they getting it fast enough?" Bloch asks.
The question strikes a nerve--and helps explain why Corporate America is looking to Washington for long-term help. Few resources are as great as the $74.6 billion federal R&D budget. But nearly 60% of these funds are earmarked for defense. Largely as a result, the nation as a whole devotes a much lower percentage of R&D to civilian work than its chief rivals (chart).
With the collapse of the Communist bloc, the idea of redirecting military research and development funds to civilian use is gaining momentum. The reasoning: Although commercial technologies do drift out of military R&D--the jet engine is an example--the benefits would be faster and more abundant if the government launched a campaign to improve U.S. competitiveness. A formula for this is spelled out in a new book entitled Beyond Spinoff: Military and Commercial Technologies in a Changing World. The book is co-authored by five current and former members of the Center for Science & International Affairs (CSIA) at Harvard University's John F. Kennedy School of Government.
The authors say government must take three steps. First is a program to educate companies about existing technologies. Next, just as the government builds and maintains roads, it should build wind tunnels and other test facilities that many companies can't afford. Finally, it should support R&D in path-breaking technologies, such as automation and robotics, that will benefit many industries. "In order for the government's technology investments to be truly fruitful, they need to be in tune with the technology investments of private industry," argues CSIA Director Ashton B. Carter, one of the authors.
`STEPPING UP.' An early sign of movement can be found in the 1993 federal budget proposal before Congress. Among its R&D expenditures is $803 million for high-performance computing and networking, things such as the high-speed data lines linking universities, government labs, and industry. Some $4 billion is targeted for biotechnology--projects such as mapping the human genome. Another $1.8 billion is earmarked for advanced materials and processing research, and $321 million goes to advanced manufacturing. These figures represent a modest, though real, increase from current spending levels.
Motorola Inc. Chairman George M.C. Fisher cites this as evidence that the Administration and Congress are "stepping up to the plate." But he and others still seek a comprehensive and explicit technology policy. This year could be a watershed. "A lot will depend on the economy, and a lot will depend on the next Administration," notes Edwin Mansfield, director of the University of Pennsylvania's Center for Economics & Technology. "And both the economics and the politics are very much up for grabs." Despite all the discord, there is one point of agreement: Industry is poised for recovery--and with the unique opportunity provided by the Soviet Union's collapse for shifting military funds to civilian use, there's never been a worse excuse for doing business as usual.Robert Buderi in Boston, with John Carey in Washington, Joseph Weber in Philadelphia, and Bureau Reports