Apple Is Getting More Bang for Its R&D Buck

Steve Jobs said in 1998 that “innovation has nothing to do with how many R&D dollars you have.”

Apple Only Spends 3.5% of Revenue on R&D

Silicon Valley is aglow from so-called moonshots. Google’s parent company, Alphabet, is building autonomous vehicles, life-extending drugs, and animal-look-alike robots. Facebook is developing Internet-beaming drones and virtual-reality headsets, while Microsoft has unveiled hologram glasses and is chasing breakthroughs in translation software. IBM’s AI software, Watson, will take on all comers in chess.

Compared with its resources, Apple has remained relatively quiet. It spent just 3.5 percent ($8.1 billion) of its $233 billion in revenue in fiscal 2015 on research and development, a lower percentage than every other large U.S. technology company, data compiled by Bloomberg show. By contrast, Facebook spent about 21 percent ($2.6 billion) on R&D, chipmaker Qualcomm 22 percent ($5.6 billion), and Alphabet 15 percent ($9.2 billion).

Apple’s success belies the conventional wisdom that a leading tech company must reinvest a sizable chunk of its sales in R&D or risk being overtaken. Apple has never subscribed to that philosophy. Steve Jobs said in 1998 that “innovation has nothing to do with how many R&D dollars you have.” He liked to point out that when the Mac was introduced, IBM was spending about 100 times more than Apple on research.

Under Chief Executive Officer Tim Cook, Apple leans heavily on advances made by suppliers, focusing on crucial technology such as semiconductors, according to Ram Mudambi, a business school professor at Temple University in Philadelphia. Apple’s size motivates suppliers to pitch the company their biggest breakthroughs, says Mudambi, who studies successful companies with low research budgets.

The prospect of getting a new chip, screen, or camera flash inside a future iPhone helps Apple steer other companies’ research. Apple sold more than 230 million iPhones last year and has committed to spending $29.5 billion in the next 12 months on components such as chips, screens, camera modules, and graphics processors, up from $24.5 billion last year. “Suppliers are racing with each other to get Apple’s business, and part of the racing they are doing is spending more on R&D,” Mudambi says.

Apple knows it can’t rely on its suppliers for everything. It’s expanded research outlays significantly over the past three years, to $8.1 billion in fiscal 2015, up from $6 billion in 2014 and $4.5 billion in 2013. One of the biggest investments has been in the proprietary semiconductors at the heart of the iPhone and iPad. The latest A9 chip, built for the iPhone 6S and iPad Pro, is faster than any chip on the market made by leading semiconductor companies. Apple’s workforce has also increased sharply over the past few years; as of Nov. 20, the company had 135 chip-related job openings for engineers and designers. The growing research budget hints at future products, such as the company’s rumored car.

Research isn’t the whole story, either. Apple laid out $11.2 billion in 2015 on capital equipment, mostly things like tooling and manufacturing gear. Such expenditures, which include the construction of a spaceshiplike corporate headquarters, will hit $15 billion in 2016. While other companies make a bigger show of their projects, “Apple’s work is in secret. It is substantial and calibrated by market opportunity,” says Horace Dediu, founder of researcher Asymco.

Apple’s relative thriftiness extends to its vaunted advertising and marketing operations. The company spent $3.5 billion on advertising and marketing over the past four quarters, while Google spent about $8.8 billion in the past three. R&D spending isn’t worthwhile if it never leaves the lab, says Tim Swift, a business professor at St. Joseph’s University in Philadelphia. “Apple’s products are going through some of the most effective and sophisticated marketing we’ve ever seen,” he says. “That’s the other half of what makes Apple the most productive R&D spender.”

The bottom line: Apple has doubled its R&D spending since 2013. It still spends a smaller portion of revenue than any other big U.S. tech company.

 

Is It Time to Stop Thinking of Apple as Hardware Company? 

Is It Time to Stop Thinking of Apple as Hardware Company?
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