Manufacturers in China are set to significantly increase expenditure in research and development (R&D), according to a recent global manufacturing survey by KPMG.
The report, titled Global Manufacturing Outlook: Performance in the Crosshairs, surveyed 460 senior executives, across six industries – aerospace and defense, automotive, conglomerates, consumer products, engineering and industrial products, and metals.
While 83 percent of China respondents said they spent less than just one percent or less of their revenue for R&D and innovation in the past two years, this is set to change as 83 percent also indicated they plan to double or triple that level of spend over the next 24 months. Around three quarters (76 percent) of respondents indicated the same in the previous survey.
Globally, 81 percent respondents plan to spend two percent or more of their revenue for R&D and innovation, up from 43 percent in the last two years.
Chinese respondents are also focusing efforts on more innovation – either enhancing existing product lines or breakthroughs. Three out of ten China respondents said they anticipate 10 to 15 percent of their revenue over the next two years to be attributed to new innovation and product innovation, compared to 13 percent of global respondents.
Alex Shum, Partner, KPMG China says: “With increasing competition from other lower-cost countries, China manufacturers must continue their efforts to move up the value chain and increase the added value of their products in order to sustain their revenue growth in domestic and international markets.”
A lack of R&D funding is one of the main challenges impacting their ability to innovate, as indicated by 46 percent of all respondents (53 percent of respondents in China). Other challenges include aligning innovation to the business strategy and lack of knowledge of potential new market areas.
Due to existing challenges of securing new funding, many manufacturers are instead focused on stretching their R&D investments as far as possible and finding alternatives way to proceed, the report notes.
While R&D is crucial to business growth, manufacturers globally have identified intense competition and pressure on prices (39 percent), and an accelerating pace of IT demands on existing systems (32 percent) as key challenges in the next 12 to 24 months.
Increased regulations in the industry and price volatility on key cost inputs both rank in third place, according to 31 percent of respondents.
Respondents from China share similar concerns with their global counterparts. Half of them said they view the prospect of tax increases as a key challenge, followed by market competition and price volatility (both at 40 percent), while efficiency in R&D or product development process ranks third (37 percent).
Meanwhile, almost nine in ten of global respondents said that partnerships will form the future of innovation, up from just 51 percent who said the same in the 2013 survey; over two thirds agree they are adopting more collaborative business models with suppliers and customers to improve growth and leverage investments; 75 percent said they are leveraging decision-support technology in their R&D function.
In China, 87 percent of respondents highlighted the importance of partnership for innovation, however the responses note the country lags behind in terms of introducing new technologies (63 percent said they are leveraging decision-support technology in R&D) and adopting collaborative models (30 percent said they are doing this to improve growth and leverage investments).
Shum concludes: “Investment in R&D and innovation is inherently risky, and such risk may hinder the direction of funding towards this space when companies are under pressure to maintain their bottom line result. Forming partnership with customers and suppliers for innovation could be a cost-effective solution to the problem. However, trust must be well established between the parties before any form of in-depth collaboration can take place.”