Dusseldorf, Brussels In no other country did companies increase their spending on research and development (R&D) as much as in the USA in the past year. Meanwhile, European companies are falling further and further behind. This is shown by calculations by the auditing company Ernst & Young (EY), which are exclusively available to the Handelsblatt.
According to this, the five most research-intensive companies in the world – Amazon, Alphabet, Meta, Apple and Microsoft, all from the USA – invested 189 billion euros in their R&D budgets in the past financial year, three times as much as the 29 most research-intensive German companies combined.
And that investment gap is widening. While US companies increased their R&D spending by 16 percent in 2022, the corresponding spending by German companies rose by only 11 percent. US corporations now account for half of global commercial R&D spending.
“Germany as a business location is under pressure like never before in its history,” warns EY Germany boss Henrik Ahlers. High energy and production costs, raw materials that are difficult to obtain with uncertain supply chains and significant geopolitical tensions are a challenging mix for Germany as an export nation.
“We need a good infrastructure, less bureaucracy, attractive funding programs and a stronger investment culture,” demands the CSU European politician Angelika Niebler.
German car manufacturers are investing heavily in the powertrain turnaround
No industry is in such a state of upheaval as the automotive industry. Switching from a combustion engine to an electric drive requires a great deal of effort. Consequently, the car manufacturers stand out among the German listed companies when it comes to research and development.
BMW, Mercedes and Volkswagen spent 26.6 billion euros on this item in the past fiscal year, more than ever before. This corresponds to 39 percent of the research expenditure of all 29 German companies among the 500 most research-intensive companies in the world.
The car manufacturers are primarily concerned with alternative drive concepts, assistance systems and digital networking. Volkswagen is building a battery cell factory in Salzgitter. Not only will cells be manufactured here, but research and development will also be carried out on all aspects of promising battery technology.
But compared to their competitors, German companies spend little on research and development. With its 29 companies, Europe’s largest economy represents only 5.8 percent of the top investors among the 500 most research-intensive companies. With spending totaling 68 billion euros, the figure is 7.6 percent. As a result, the dominance of the Americans is increasing. Since 2018, the number of US corporations among the 500 most research-intensive companies has risen from 140 to 164, while the number of European companies has fallen from 142 to 133.
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What applies to the large German stock exchange groups continues in the economy as a whole. “Compared to other industrialized countries, the R&D intensity of most sectors of the economy in Germany is below average,” says the chief economist at the KfW development bank, Fritzi Köhler-Geib.
According to the findings of KfW, not only the expenditure of large industry, but also that of small and medium-sized enterprises is significantly below that of most other industrialized countries. On the other hand, according to the chief economist, this means that there is great potential for an increase in spending.
New research push through AI
American technology groups have long recognized the potential – and the boom in artificial intelligence (AI) is likely to keep increasing spending. Microsoft has already invested $10 billion in its partner company Open AI, the developer of the Chat GPT language model. The aim is to integrate AI voice applications into the Bing search engine, which competes with Google.
Alphabet and Microsoft highlighted greater efforts in the field of AI when presenting their latest quarterly results. Microsoft boss Satya Nadella spoke of a “new era” that begins with AI. With cash reserves of $115 billion (Alphabet) and $104 billion (Microsoft), both companies have more financial resources than any European corporation.
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Since 2019, the Facebook parent company Meta has invested around 40 billion dollars in research activities of the secretive “Reality Labs” division. It’s about virtual augmented reality. The potential is great: Facebook has 3.7 billion customers worldwide, which means that Meta reaches around 80 percent of all people in the world who have Internet access.
The most research-intensive IT group in Europe is SAP
The European-American comparison shows how fixated the USA is on IT. In Europe, 17 percent of companies making the top 500 can be assigned to the research-intensive technology sector (including e-commerce). In contrast, the proportion in the USA is more than twice as high at 35 percent.
The most research-intensive IT companies in Europe are SAP with 6.2 billion euros in expenditure in the past year, followed by the network operators Ericsson and Nokia with 4.5 billion euros each, followed by the semiconductor specialist ASML with 3.3 billion euros.
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The different industry mix between Europe and the USA, including the dominance of the most research-intensive corporations in America, is likely to prove to be a serious disadvantage for the European economy in the coming years, fears EY partner Ahlers: “The challenges of an increasingly digital world do not make any industry or company Stop.” European politician Niebler sees bureaucracy as a major obstacle. “In Europe, a company first has to dig through mountains of files and then wait months before a decision is made on the application for funding. It just takes too long.”
IT companies like Amazon have impressively demonstrated for years how digital companies are dominating other sectors, i.e. retail. Traditional market leaders such as Walmart in the USA are at a disadvantage – or in Germany, for example, the former Dax groups Kaufhof, Karstadt-Quelle and Metro. None of the three trading groups are listed in the highest German stock exchange league. The research world champion Amazon played a large part in their descent.
The opportunity of biotechnology
However, a closer look shows that Europe is not lagging behind in all areas. With an average of 17.4 percent, European pharmaceutical companies invest a higher proportion of their sales in R&D than US companies. Their share is 14.9 percent.
The Swiss pharmaceutical giant Roche invested the most in 2022 with 16 billion euros, eight percent more than a year earlier. The most research-intensive American pharmaceutical company, Johnson & Johnson, reduced its spending by one percent to 13.9 billion euros within a year.
In terms of sales, European pharmaceutical companies invest more in research and development than their US counterparts.
(Photo: imago images/Cavan Images)
In Germany, Bayer stands out with 6.6 billion euros and Merck with 2.5 billion euros for R&D in the past year. The aim of the Darmstadt group is to double productivity in the area of R&D.
In order to introduce a new product or another key indication every one and a half years on average, Merck intends to focus its competencies and use synergies within the existing pipeline to deliver drugs in the therapeutic areas of oncology, neurology and immunology.
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For example, the strategy in the area of cancer research focuses on tumor DNA and carcinomas of the head and neck. Every year, the healthcare business invests around 20 percent of total sales in research and development activities for novel therapies. In addition to Darmstadt, research locations are the USA with Boston, China with Beijing and Japan with Tokyo.
Bayer focuses its research spending on medicine and agriculture. Around 15,000 researchers work for the group. Bayer has promised billions in investments in Germany in the coming years. A company agreement stipulates that the majority of the research and development workforce in the pharmaceuticals division should continue to be based in Germany. The focus is on biotechnology and data science.
In order to further develop its pharmaceuticals division, Bayer relies on new research approaches in cell and gene therapy as well as drugs to treat diseases such as Parkinson’s or cancer. By 2030, the group wants to be in the top 10 in oncology research. The efforts are necessary because Bayer’s patents for important drugs such as the anticoagulant Xarelto or the eye medicine Eylea will expire in a few years.
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