WASHINGTON — As the healthcare and technology industries kick their research-and-development spending into high gear, aerospace and defense companies' own R&D funds are expected to remain stagnant over the next couple years — although a small boost may be seen depending on whether President-elect Donald Trump grows the defense budget, an analyst said.
Defense and aerospace companies spent about 3.3 percent less on research and development (R&D) in 2016 than they did in 2015, according to a study conducted by PricewaterhouseCoopers' strategy consulting business Strategy&, which measured R&D trends from the top 1,000 publicly-held companies worldwide. Over the past five years, R&D spending in this sector has remained flat with about $21 billion to $23 billion spent annually. In 2016, companies spent a collective $21.6 billion.
In future years, "We expect it to be relatively steady," Barry Jaruzelski, a PricewaterhouseCoopers principal, said during a Nov. 9 interview. "Maybe it starts trending up if the reinvestment in the defense space happens, as Trump has indicated during the campaign. But you wouldn't expect a dramatic change.
"I think the bigger thing, particularly for the defense industry from a US government customer perspective, is how are they going to tap into the significant innovation and R&D activity in the private sector in key areas like computing and software, because they're going to have to," he said. Both of those industries invest much more heavily in research and development, with computing and electronics company investments totaling $163.4 billion this year and software and Internet company R&D reaching $87.8 billion
There are a couple of reasons why other industries spend so much more on R&D than the aerospace and defense sector, Jaruzelski said. Companies believe it's a "fairly flat industry" from a revenue perspective, thus making such investments riskier. Another reason is that Defense Department spending — including about $70 billion in fiscal 2016 for research, development, test and evaluation — helps to minimize the need for industry to make their own investments. Even if a Trump presidency does herald a larger defense budget, corporate R&D spending is still unlikely to reach the heights of the commercial electronics industry.
In the aerospace and defense sector, companies from North America and Europe dominated the top 20 R&D spenders. Commercial and defense aviation rivals Airbus and Boeing captured the number one and two spots, respectively, with United Technologies, Leonardo and Rolls Royce rounding out the top five.
Only three companies outside of the North American and European regions cracked the top 20 list: Kawasaki Heavy Industries and shipbuilder IHI, both of Japan, and Israeli firm Elbit Systems. No Russian or Chinese manufacturers were listed in the top 20 R&D spenders for aerospace and defense, likely because the study did not track state-owned defense companies, Jaruzelski said.
Interestingly, European companies beat out US firms in "R&D intensity" or R&D spending as a percentage of revenue. Of the companies measured in the study, European businesses charted a 5.7 percent median R&D intensity, while US defense contractors lagged behind at 3.3 percent.
"Part of this is the confluence of the magnitude of the US government’s defense activities and the amount of R&D that the government funds," Jaruzelski said. Another contributing factor may be that European companies report R&D slightly differently than their US counterparts.