Despite generally poor results for 1996 sales and earnings, chemical companies expect to increase their R&D spending this year. The decision to increase spending actually isn't too surprising since chemical companies are turning more and more to their R&D organizations to fuel business growth.
Overall spending on R&D by 26 major chemical producers surveyed by C&EN will rise for the first time in five years. The last increase occurred in 1992, at a time when the industry hit a low point in combined annual earnings and companies increased their investments in R&D an average of 3.7%. The estimated 3.5% increase for 1997 follows a drop of 1.8% in 1996. This year, combined spending by the 26 companies is expected to hit nearly $3.9 billion.
However, in constant-dollar terms using 1987 as a base year, spending will remain essentially flat between 1996 and 1997. But at least the downward trend of the past several years appears to have slowed or stopped. In 1997, estimated R&D spending by the companies surveyed by C&EN will have fallen about 10% in current dollars and about 24% in constant dollars from its peak in 1990.
DuPont's peak in R&D spending of $1.38 billion also occurred in 1990. The company leads the chemical industry in R&D spending and, for possibly the first time in 12 years, could have an R&D spending level below $1 billion. Since 1990, its spending has decreased steadily and today is 27.5% below that peak year in current dollars.
DuPont is estimating 1996 and 1997 spending at $1 billion. The company's sale of its medical products business and the creation of an elastomers joint venture with Dow in April 1996 brought 1996 spending down about 6% from $1.07 billion in 1995.
The factors affecting DuPont's results are fairly typical, since acquisitions and divestment of businesses played havoc with the R&D spending figures for individual companies in this year's survey. Analysis of year-to-year changes in spending are complicated by the numerous businesses that have changed or will change hands between 1995 and 1997.
For 1996, 13 companies increased their R&D spending, whereas five held it at last year's levels, and eight, including DuPont, decreased spending. Six companies say they will not change their R&D spending in 1997, but 17 now plan to increase spending and only three foresee decreases in the coming year.
The degree to which companies are investing in R&D can be seen by looking at spending as a percentage of sales . This percentage is expected to remain steady in 1997 at about 3.3 to 3.4%. A few years ago, the same group of companies invested as much as 4.5% of their sales in R&D.
Many companies, such as Dow Chemical, DuPont, and W.R. Grace, have shed research-intensive businesses, such as pharmaceuticals or agrochemicals, and have brought the level of spending as a percentage of sales more in line with the current industry average. Spending as a percentage of sales varies widely from company to company, ranging from just more than 1% to nearly 6% and depends largely on a given company's business mix.
Missing from C&EN's survey this year is Monsanto, which has a mix of drug, chemical, and agrochemical sales. One of the industry's biggest spenders - more than $600 million per year in the past several years - the company chose not to disclose its 1996 figure. It also declined to predict R&D spending for 1997, since its split into a life sciences and a chemical company is pending this year.
Although overall spending for those companies surveyed is predicted to be up a few percentage points in 1997, individual company results vary widely, from double-digit decreases at Olin and Lubrizol to double-digit increases at Albemar le, BetzDearborn, Ethyl, Grace, Praxair, and Union Carbide. In 1996, Crompton & Knowles hiked R&D spending by an apparent 271% because of its merger with Uniroyal Chemical in August. The company will increase spending about 6% in 1997.
In 1997, Olin, which is selling off several businesses (C&EN, Oct. 14, 1996, page 9), expects sales to drop 30% and R&D spending to fall a commensurate 25%. Lubrizol plans to hold its R&D spending down by 10.5% as part of the company's overall strategy to reduce the complexity of its products and gain better control of its cost structure. Morton International's spending will decrease just 3.8%.
Ethyl's R&D spending fell nearly 15% in 1996 but will recover nearly 11% in 1997. Much of the increase will come from its acquisition of Texaco's lubricant additives business. Praxair's increase of 18% in 1996 and 11% for 1997 comes largely from the addition of the Liquid Carbonic business.
At Grace, spending dropped 19% in 1996, reflecting the sale of its health care, water treatment, and other smaller businesses. The company will raise its 1997 R&D budget 14%, says a company spokesman, reflecting "a greater commitment ... to R&D in its packaging and specialty chemicals businesses."
At BetzDearborn, R&D spending increased in 1996 and will do so again in 1997, largely because of Betz's acquisition of Grace's Dearborn water treatment chemicals business last year. Albemarle sold its &agr;-olefins business to Amoco Chemical in 1996, but with little apparent effect on R&D spending. Arco Chemical's planned acquisition of Olin's isocyanates business is not reflected in its 1997 R&D spending estimate.
Most of the remaining seven of nine chemical companies that spend more than $100 million per year on R&D intend to increase spending in 1997. Air Products & Chemicals, Dow, Union Carbide, Rohm and Haas, and FMC will post solid increases in 1997. FMC and Rohm and Haas will break the $200 million mark, and Union Carbide will move closer to it. PPG Industries will keep its R&D spending steady at about $240 million, and Eastman Chemical will spend just 2% more for a total of $186 million in 1997.
After three years of falling R&D spending, Dow will increase its R&D investment 6% to $812 million. Dow's agricultural products joint venture with Eli Lilly, called DowElanco, is contributing more to its R&D spending figure. And Dow will increase real spending to help in the commercialization of its metallocene-catalyst-based polymers.
For the 24 companies participating in both this and last year's surveys, actual combined spending for 1996 came in just 1% shy of the total estimated for the year. Although spending was down slightly more than predicted last year at this time, it still suggests that chemical producers did not face any major upsets that caused them to pull back from spending. This year, in the aftermath of reengineering, R&D managers can be expected again to try to get the most out of every budgeted dollar.