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Companies Show Move Toward Increased R&D Funding

Aug. 3, 2014 - 03:45AM   |  
By MARCUS WEISGERBER   |   Comments
FRANCE-BASTILLE-DAY
France-based Dassault, which builds the Rafale fighter, spent the largest percentage of money on internal research and development compared to the firm's total revenue in a Defense News survey. (Franck Pennant / AFP via Getty Images)
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WASHINGTON — Pentagon acquisition chief Frank Kendall last summer challenged defense firms to spend more of their money on internal research-and-development (IRAD) projects.

Kendall’s comments sparked widespread debate and divided the defense industry into two camps: one that believed internal investments would spur future government business, and another that believed it could all be a colossal waste of money and time without detailed guidance of where to invest.

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One year later, investment numbers show companies still appear mixed in their views, but more have increased internal research-and-development spending.

Of the 29 companies that responded to Defense News’ request for IRAD numbers, 18 increased their spending between 2012 and 2013 while 11 decreased their independent research over that same period.

It is worth noting that many of the companies have seen a decline in both defense and overall revenue over that same period. It’s also worth pointing out that firms with large commercial businesses tend to invest more of their own money on research-and-development projects.

Company R&D investments are typically driven more by commercial programs than defense, said Byron Callan, an analyst with Capital Alpha Partners.

Take US multinational conglomerate General Electric, for example. The company spent $4.7 billion on internal research and development in 2013. The company posted total revenue of $146 billion in 2013.

Broken down even further, the company’s aviation division — which had $21.9 billion in revenue, mostly commercial — spent $1.8 billion on IRAD.

US aerospace giant Boeing spent $3.1 billion on IRAD in 2013. Of that amount, $1.2 billion was for defense projects, said Todd Blecher, a company spokesman. But Boeing’s overall IRAD spending has declined from $3.9 billion in 2011 to $3.3 billion in 2012.

In the commercial market, Boeing has been developing new jetliners, including the 787 Dreamliner and new versions of the wide-body, long-range 777 and venerable narrow-body 737.

France-based Dassault Aviation spent the largest percentage of money on IRAD compared to the firm’s total revenue. Another commercial-heavy company, Dassault, spent €482 million (US $660 million) — nearly 10.5 percent of its total revenue — on IRAD projects. Dassault boosted its IRAD €95 million between 2012 and 2013, according to figures provided by the company.

US-based FLIR, maker of much-in-demand intelligence sensor equipment, spent nearly 10 percent of its $1.5 billion revenue on IRAD.

While nearly two-thirds of the companies that responded increased IRAD between 2012 and 2013, among the companies that decreased IRAD spending over that same period included Northrop Grumman, General Dynamics, Rockwell Collins, Saab and Exelis.

Lockheed Martin, the world’s largest defense company, boosted its IRAD funding $112 million between 2011 and 2013 and plans to further increase independent funding for development projects another $30 million in 2014.

“[W]e are continually investing in our business, investing for growth, investing in our portfolio,” Marillyn Hewson, the firm’s chairman, president and CEO, said in an interview last month at the Farnborough International Airshow in England.

“We invest in the business, we are investing in acquisitions, we have purchased a number of companies already this year [and] we will continue to look,” she said.

But despite Lockheed’s three consecutive years of increasing IRAD, its numbers are still well below the $822 million it spent in 1999.

Still, Hewson notes the company recently invested in a California-based technology lab and will continue making strategic investments in growth areas, such as hypersonics, nanotechnology, renewable energy, microgrids and cybersecurity.

“We are certainly up to our game in terms of investment,” she said. “We will continue to invest in it as the threats change. We have to stay ahead of them. We will continue to invest there. There is a broad range.”

One IRAD investment strategy employed by larger firms is acquiring smaller companies with a specialty in a certain technological field.

Gen. Mike Hostage, the head of the Air Force’s Air Combat Command, said his organization holds “innovation conferences” that includes battlefield operators, research labs and industry representatives.

“The idea is our industry partners have IRAD money that is their lifeblood,” Hostage said at a July 29 Air Force Association-sponsored event.

“That’s how they produce things that will eventually produce profit. It’s IRAD that produces the stuff I actually need to go to war,” he said. “So it’s really important to me that we spend the [science and technology] to keep the labs producing technology, but also that industry takes that technology and produces real things with it.” ■

Vago Muradian and Aaron Mehta contributed to this report.

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