Europe Reports

Economic Downturn Doesn't Deter R&D Investment

March 30, 2010

Balance-sheet tactics adopted by companies within the coatings supply chain in Europe to deal with the economic downturn have triggered cutbacks in investment in production plants but not so much in R&D.

Throughout the chain extending from raw material suppliers through coatings producers to their customers, companies have been focusing on generating cash flow to restrict falls in profits or even increase them, as well as to reduce debt.

The strategy has led to big decreases in capital investment by many companies but to a much lesser extent in R&D expenditure. For the larger players at least maintaining research capacity has become almost sacrosanct.

With production plants, companies are making much deeper cuts in spending, even reducing or postponing major maintenance work.

With R&D they are delaying development of new applications, products and technologies. Some of the larger coatings companies and leading raw material supplies having been saving research money by making their R&D operations more efficient and more productive by cutting staff. Stand-alone incremental product improvements have been set aside in order to concentrate resources on advancing major innovations.

However they have been trying to keep any reduction in R&D spending to a minimum because economic downturns tend to present opportunities for innovation work so that companies can take full advantage of rising demand after a full recovery.

The exception is with SMEs which often have little choice but to make cuts in research expenditure because for them R&D can be highly expensive.

"Companies should not take the risk of calling a halt to innovation projects," said Paul Hodges, a consultant at the London-based consultancy International eChem. "Once you stop development work on something it can be difficult to get it started again."

"Innovation is always important but it's crucial at the moment because when there is a full recovery, the world will be different for coatings and other companies than it was before the crisis," he continued. "The primary concerns will be things like carbon footprints and pressure on natural resources rather than conspicuous consumption."

Multinational coatings companies are particularly anxious to protect their R&D operations. They are conscious of the fact that innovation is vital at present because of the need to adjust their portfolios to the expected new market conditions when demand returns to more normal levels.

The priority in most markets will then be sustainability driven by the needs for energy security, curbs on greenhouse gas emissions, more recycling and conservation of raw materials.

"We're fully aware that when the economy begins to recover, markets and customers will be more focused on sustainable products," said Leif Darner, AkzoNobel's board member responsible for performance coatings. "We (have) therefore maintained our focus on R&D and product stewardship and continued to concentrate on innovations in the field of sustainable technology."

AkzoNobel's sales last year fell by seven percent to $4.8 billion ($6.6 billion). Earnings before interest, tax, depreciation and amortization (EBITDA) dropped 18 percent to $492 million.

However with the help of a 19 percent reduction in operating working capital, cash flow increased 14 times from $91 million in 2008 to $1.2 billion. Net debt was cut by 16 percent.

The company's two coatings operations suffered reductions in capital expenditure-by six percent in decorative paints and by 31 percent in protective coatings. Although total R&D spending rose marginally as a proportion of sales, it was reduced in absolute terms by four percent.

AkzoNobel's strategy this year is to continue with what it calls an "aggressive" program of investment in high growth markets, such as China, India and Latin America and to redirect R&D investment into bigger and bolder innovation projects.

The company has identified 50 large innovation projects. These include water-based decorative and protective coatings, next generation antifouling coatings, self-healing coatings, low-energy curing and biorenewable raw materials.

AkzoNobel is also stepping up its efforts to increase from 20 percent last year to 30 percent the proportion of revenue stemming from eco-premium solutions. A product's eco-premium status is determined by its fulfilment of six criteria in the areas of toxicity, energy efficiency, use of natural resources, emissions and waste, land use and risks, such as accidents.

Hempel, the Danish-based coatings producer, has just opened a newly expanded R&D center in Barcelona for antifouling and protective coatings and a smaller one for decorative paints in Bahrain. Later this year it will be inaugurating a research center in Guangzhou, China, as part of a strategy of bringing closer to the customer its R&D activities, in which its main unit is in Copenhagen.

"R&D is at the heart of the company," said Malte Eggers, group communications director at Hempel, which does not reveal its R&D expenditure. "If we cut back on innovation we are cutting our life line. But we've had to react to the financial crisis. Some customers want less innovation and more lower-cost products. That means more research work on customization, which could require less spending than on ordinary R&D."

Henkel, for which adhesive technologies accounts for nearly 60 percent of research expenditure, kept its R&D spending last year at a similar level to that of 2008. But it cut its global R&D staff by seven percent while adhesives research is being concentrated on larger projects in order to increase the number of breakthrough innovations.

Like other major players, including AkzoNobel, the company has been stepping up its drive to exploit open innovation or the R&D policy of bringing in ideas and research work from outside the company, often through product or technology development partnerships. A similar strategy is pursued by some large raw material suppliers, such DSM of the Netherlands, a leading global producer of coatings resins.

At a time of scarcity of R&D finance, particularly from banks, development partnerships with larger companies offer hope to SMEs struggling to bring innovations to the market.

"In formulation businesses like coatings, if an SME has something innovative to offer it can do quite well at the moment," said David Thomas, chemicals analyst at Oxford Economics, Oxford, England. "If it's a supplier of coatings materials with something worthwhile it could have the opportunity of a partnership with a coatings producer. The bigger companies see these partnership as not only a source of new ideas but a way of cutting R&D costs."

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