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Companies shifting more R&D spending away from physical products to software and services: 2016 Global Innovation 1000 Study

PWC Network
Press release

Companies shifting more R&D spending away from physical products to software
and services: 2016 Global Innovation 1000 Study

Companies who allocated more of their R&D budgets to software offerings
reported significantly faster revenue growth than others according to PwC's

LONDON, 2016-10-25 01:01 CEST (GLOBE NEWSWIRE) --
By 2020, companies will have shifted the majority of their R&D spending away
from product-based offerings to software and service offerings, according to
the 2016 Global Innovation 1000 Study from Strategy&, PwC’s strategy consulting
business. The need to stay competitive is the top reason why companies cited a
shift in their R&D budgets towards software and services, and for good reason –
according to the study, companies who reported faster revenue growth relative
to key competitors allocated 25 percent more of their R&D budgets to software
offerings than companies who reported slower revenue growth.

-- The average allocation of R&D spending for software and services
increased from 54% to 59% between 2010 and 2015 and is expected to grow to
63% by 2020.
-- Meanwhile, the average allocation of R&D spending dedicated to
product-based offerings fell to 41 percent (from 46% in 2010), and is
expected to fall to 37% by 2020 (an overall decrease of 19% this decade).
-- Average allocation of R&D spending on software offerings alone will
increase by 43% by the end of this decade and R&D spending on services
will gradually overtake investment in product-based innovation (39% vs. 37%
by 2020).
-- Global R&D spending on software offerings has increased by 65% between
2010-2015, from US $86 billion to $142 billion.

“Many of the world’s major innovators are in the midst of a transformational
journey mostly driven by changing – and rising – customer expectations,” says
Barry Jaruzelski, innovation and R&D expert for Strategy& and principal with
PwC US. “The shift is also being driven by the supercharged pace of improvement
in what software can do, including the increasing use of embedded software and
sensors in products, the ability to reliably and inexpensively connect
products, customers and manufacturers via the Internet of Things (IoT), and the
availability of cloud-based data storage.

Companies will recruit less mechanical engineers and more data and software
engineers to build their capabilities

To support the development of software and services offerings, fewer companies
will focus their R&D spending on the electrical and mechanical field. By 2020,
the number of companies reporting that electrical engineers are their top
employed engineering specialty will fall by 35 percent and the proportion of
companies who expect that data engineers will represent their largest group of
employed engineers will double from 8% to 16%.

Jaruzelski says, “An increase in software and services, even in more
traditional industries has created a shift towards hiring talent that can
develop software and provide platforms to collect and analyse product-related
data. The shift is already changing the way business schools think about their
course offerings, and will have profound effects both on education and, more
generally, on the future of employment.”

Regionally, companies in North America are making the strongest shift to
software offerings—from 15 percent of total R&D spending in 2010 to 24 percent
in 2020. While Asia remains the most product-centric region, with 44 percent of
R&D allocated to product offerings in 2010, only falling to 40 percent in 2020.
The automotive and industrial sectors are making the most aggressive push
towards developing new software offerings.

Among companies that made an acquisition during the past five years, the vast
majority – 71 percent – were made to enhance capabilities in software (33%) or
services (38%).

Strategy&’s annual analysis of the world’s 1000 largest R&D spenders also found
the following:

-- By 2018, the healthcare sector will surpass computing and electronics to
become the largest R&D spending industry globally (US$165 billion v.
US$159 billion), and the software and internet industry will leap ahead of
the automotive sector (US$129 billion v. US$105 billion); Industrials
rounds out the Top 5 R&D industries by spend.
-- For the first time in the study’s history, the number of Global Innovation
1000 companies headquartered in the US grew, up 9.5% year over year.
-- Volkswagen, Samsung, Amazon, Alphabet (Google) and Intel round out the Top
5 R&D Spenders, with Amazon and Google making bold moves up the list
(+4 and +2 positions, respectively).
-- Global innovation professionals responding to a 2016 survey have ranked
Apple, Alphabet (Google), and 3M as the three Most Innovative Companies in
the world.
-- The 10 Most Innovative Companies continue to outperform the Top 10 R&D
Spenders on key performance metrics, as has been the case for each of the
past seven years.

2016 Ranking: The 10 Most Innovative Companies vs. Top 10 R&D spenders

Rank 10 Most * 2016 R&D Top 10 R&D 2016 R&D
Innovative R&D intensity Spenders R&D intensity
Companies spend spend
(US$ (US$
Bn) Bn)
1st Apple Inc. 8.1 3.5 % Volkswagen AG 13.2 5.6 %
2nd Alphabet Inc. 12.3 16.4 % Samsung 12.7 7.2 %
Co Ltd
3rd 3M Co. 1.8 5.8 % 12.5 11.7 %
4th Tesla Motors Inc. 0.7 17.7 % Alphabet Inc. 12.3 16.4 %
5th Inc. 12.5 11.7 % Intel Corp 12.1 21.9 %
6th Samsung 12.7 7.2 % Microsoft 12.0 12.9 %
Electronics Corp
Co Ltd
7th Facebook Inc. 4.8 26.9 % Roche Holding 10.0 19.9 %
8th Microsoft Corp 12.0 12.9 % Novartis AG 9.5 19.2 %
9th General 4.2 3.7 % Johnson & 9.0 12.9 %
Electric Co Johnson
10th International 5.2 6.4 % Toyota Motor 8.8 3.7 %
Business Machines Corp
*The 10 Most Innovative Companies are named by respondents of a 2016 survey of
global innovation experts.

To learn more about the 2016 Global Innovation 1000 Study, visit A copy of the study findings by
geography and industry are available from the media contact. Additional
multi-media assets including infographics and video are also available.

About the 2016 Global Innovation 1000 Study
As it has in each of the past 11 editions of the Global Innovation 1000, this
year Strategy& identified the 1,000 public companies around the world that
spent the most on R&D during the last fiscal year, as of June 30, 2016. To be
included, companies had to make their R&D spending numbers public. The Global
Innovation 1000 companies collectively account for 40 percent of the entire
world’s R&D spending, from all sources, including corporate and government
sources. Strategy& also conducted an online survey of 466 innovation leaders
around the world. The companies participating in the survey represent more than
US$91 billion in R&D spending, or 13.5 percent of this year’s total Global
Innovation 1000 R&D spending. For information about the methodology of the
study, please contact the media representative.

About Strategy&
Strategy& is a global team of practical strategists committed to helping you
seize essential advantage. We do that by working alongside you to solve your
toughest problems and helping you capture your greatest opportunities. We bring
100 years of strategy consulting experience and the unrivalled industry and
functional capabilities of the PwC network to the task. We are part of the PwC
network of firms in 157 countries with more than 223,000 people committed to
delivering quality in assurance, tax, and advisory services. To learn more
about PwC’s Strategy&, visit

© 2016 PwC. All rights reserved.

PwC refers to the PwC network and/or one or more of its member firms, each of
which is a separate legal entity. Please see for further

Kiran Chauhan
Strategy&, PwC's strategy consulting business
T: +1 (416) 890-8695

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