American Tech Firms Are Winning the R&D Spending Race With China

by News & Trends by Marketing
American Tech Firms Are Winning the R&D Spending Race With China

Led by Amazon and Google, U.S. firms spend $5 for every $1 by Chinese companies, PwC says

The Wall Street Journal — By Timothy W. Martin

Updated Oct. 30, 2018 8:21 a.m. ET

SEOUL—As the U.S. and China tussle over trade and technology, American companies maintain a major advantage over their Chinese rivals in a critical area: spending on research and development. 

U.S. firms, led by Amazon.com Inc. AMZN -0.55% and Google parent Alphabet Inc., invested more than $5 in R&D for every $1 spent by Chinese companies, according to a new report from PricewaterhouseCoopers LLP, which logged the top 1,000 spenders among publicly traded companies. PwC’s report tracked the year ended June 30.

Chinese tech giants— Baidu Inc., BIDU 0.89% Tencent Holdings Ltd. TCEHY 0.61% andAlibaba Group Holding Ltd. BABA 2.21% —each spent less than at least 44 other companies, including Panasonic Corp. PCRFY 2.30% , the Japanese industrial and consumer-electronics conglomerate. 

The disparity reflects an approach toward innovation by Chinese firms over the past decade in which they excel at “applications of existing technology, rather than original research,” said Edward Tse, chief executive of Gao Feng Advisory Company, which advises Chinese and foreign firms. He cited mobile payments and messaging apps as examples.

PwC’s figures don’t include private companies, however, which leaves out China’s state-owned monoliths and closely held Huawei Technologies Co., the world’s largest maker of telecommunications equipment. Huawei said it spent more than $13 billion on R&D last year.

Future Bets

U.S.-based companies accounted for $329 billion of a record $781.8 billion in R&D spending tallied by PwC for the year ended June 30. While Chinese R&D investment came in at $61 billion, in 2010 that figure was just $7 billion, PwC said. Today, 145 Chinese companies are among the top 1,000 R&D spenders, up from 14 a decade ago.

The uptick in spending reflects pressures on Chinese firms to come up with homegrown innovations, particularly in artificial intelligence, 5G and self-driving vehicles, Mr. Tse said.

“The gap between the U.S. and China is closing and continues to close,” said Barry Jaruzelski, the lead author of the report who leads PwC’s U.S. industrial product practice. “It wouldn’t be a shock if the lines cross in the next 10 years.”

Among China’s biggest R&D spenders, Alibaba spent $3.6 billion and internet giant Tencent invested $2.7 billion. By comparison, Amazon, which spent the most of any publicly traded company, invested $22.6 billion in R&D, up 40% from a year earlier. Google parent Alphabet spent $16.2 billion.

Deeper Pockets

The Silicon Valley giants have higher revenue than their Chinese counterparts, so the R&D spending gap is narrower when such investments are measured as a percentage of sales.

Amazon’s vast array of businesses requires hefty R&D investments, for robots working in warehouses and delivery drones. In September, the company announced a bundle of 15 new or updated devices that could be powered by its AI assistant, Alexa. The company is also using virtual reality to allow consumers on its traditional shopping website to view items in their own home.

Alphabet, meantime, has been spending to build up its engineering talent, particularly in AI. Chief Financial Officer Ruth Porat said on an earnings call last week that R&D was the company’s largest driver of an increase in operating expenses.

Last year, Tencent opened its first U.S.-based AI lab in Seattle, run by a former MicrosoftCorp. researcher who specializes in speech recognition. The new facility complements an existing AI lab at its Shenzhen headquarters, which is staffed by more than 200 engineers and 50 AI scientists.

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Alibaba recently said it would set up a dedicated unit to develop its first AI chip, which would be used in self-driving cars or smart cities.

Amazon and Alphabet declined to comment, as did Baidu and Alibaba. Tencent said it couldn’t comment before its earnings report on Nov. 14.

A broader measure of global R&D spending, published in a report this year by the Alexandria, Va.-based National Science Board, said China investments were roughly four-fifths that of the U.S.

PwC researchers say they haven’t found a correlation between investment and innovation. The findings show that the tech industry is a central driver of R&D spending, accounting for nearly $2 of every $5 spent world-wide.

Some of the lower R&D spending by Chinese tech giants can be explained by their relative youth compared with their Silicon Valley rivals, with their larger global operations and budgets, tech-industry experts say. 

Alibaba, Tencent and other large Chinese firms, more so than their American counterparts, have sought to innovate through acquisition rather than with in-house research, said Sabrina T. Howell, an assistant finance professor at New York University’s Stern School of Business who researches American and Chinese innovation.

“Some of what you see in R&D is the outsourcing of innovation in China,” she said.

Another factor is the difference in purchasing power for R&D dollars in the two countries, especially when it comes to hiring scientists and engineers.

China produced 4.7 million graduates in science, technology, engineering and mathematics in 2016—more than eight times the 568,000 in the U.S., according to the World Economic Forum.

“When you spend a million dollars, how many scientists do you get?” said Mr. Jaruzelski. “You’d get more Ph.D.s in China than you would in the U.S.”

—Laura Stevens, Douglas MacMillan and Shan Li contributed to this article.

October 31, 2018