Wall Street

R&D Spending Increases Despite Recession Trends

In the face of a severe global recession, the world’s 1,000 largest publicly traded corporate research and development spenders actually increased spending on R&D in 2008, affirming the critical importance of innovation to their corporate strategies, according to global management consulting firm Booz & Company’s fifth annual analysis of global innovation spending, released today. R&D outlays for these companies rose by 5.7 percent to US$532 billion, even as sales were up only 6.5 percent. While the increase in 2008 R&D spend was less dramatic than 2007’s gain of 10 percent, it was just slightly less than the 7.1 percent global five-year compound annual growth rate (CAGR) for R&D.

Overall, more than two thirds of companies maintained or increased their R&D spending in 2008, despite more than a third (34 percent) reporting that net income plummeted last year, according to the study. More than a quarter of companies decreased their R&D allocation in 2008.

The study looked at R&D spending and its link to corporate performance, uncovering insights into how organizations can get the greatest return on their innovation investment. New to the study this year is an in-depth survey of nearly 300 senior managers and R&D professionals from 250 companies around the globe that probes the impact of the downturn on innovation spending and strategy.

Key findings of the report include:

Innovation is viewed as increasingly vital to corporate strategy. More than 90 percent of those surveyed say that innovation is critical as their companies prepare for the upturn, and fully 70 percent of respondents state their companies are either maintaining or increasing their spending on R&D in 2009, according to Booz & Company. Furthermore, the top 100 companies in the Innovation 1000 clearly signaled their investment priorities by increasing R&D spending by 3.2 percent while reducing overall capital expenditures by one percent.

Companies are spending more, but more wisely. “One result of the recession is that it has forced companies to think more carefully about their innovation processes and portfolios – for both good times as well as bad,” observed Kevin Dehoff, a Booz & Company Partner. “This held true through the most turbulent quarters these companies have navigated, indicating they’re ready to make smart bets that will pay dividends in the coming upturn.” Accordingly, the survey of senior managers and R&D directors reveals that seven in 10 companies are now adjusting their strategies to better capture changing customer requirements. Nearly half of the respondents report becoming more risk averse in their approach to innovation, changing the filters they apply when green lighting new R&D projects. More than 40 percent said their companies are focusing on process improvements to change R&D spend during the downturn, and a similar number say they’re getting better at killing bad projects, as well as focusing more on newer products that have the potential to grow faster.

The top 20 innovation spenders increased their budgets by just 3.2 percent. This gain is less than one-third the 10.7 percent rise in 2007 and was the result of a precipitous 35 percent drop in net income among the 20 companies, which fell from $115 billion in 2007 to just $75 billion in 2008. Still, the top 20 spenders accounted for 26 percent of spending by the entire Innovation 1000.

Recession’s impacts on R&D vary widely by industry. In 2008, as last year, two-thirds of R&D spending was concentrated in three industries: computing and electronics (28 percent), health (23 percent), and automotive (16 percent).

• No industry felt the pain more than auto with nine out of the top 10 R&D spenders in the category cutting their innovation outlays in 2008. Overall, 60 percent of auto companies in the Global Innovation 1000 decreased R&D spending, compared with 25 percent who decreased R&D last year. Yet the remaining 40 percent of auto companies on the list increased spending enough that the auto sector on a net basis slightly increased R&D spending overall by 0.6 percent.
• The Software and Internet sector, on the other hand, clearly has seen the recession as an opportunity. Eight out of the industry’s top 10 R&D spenders increased their R&D spending last year.
• R&D spending in the computing and electronics industry was up more than 4 percent, though the proportion of companies that increased R&D spending was essentially unchanged from last year.
• Healthcare companies spent the most on R&D as a percentage of sales –- 12 percent –- followed by Software and Internet (11.4 percent). In contrast Telecom, and Chemicals and Energy, spent the least, 1.4 percent and 0.9 percent, respectively.
• Aerospace and Defense was the only industry to see innovation spending sink, down 2.3 percent.

Every global region increased its spending. North American, European, and Japan-based companies retained their 94 percent share of the global 1000 innovation spend. Every region, including China and India, increased its expenditures, though they did so at slower rates. Japan upped its allocations by just 0.5 percent, Europe by 6.3 percent and North America, 6.5 percent. These levels were below the global five-year CAGR of 7.2 percent.

Additional study findings include:

• The top 10 global R&D spenders in 2008 were, in descending order: Toyota, Nokia, Roche Holding, Microsoft, General Motors, Pfizer, Johnson & Johnson, Ford, Novartis and sanofi-Aventis.
• R&D spending among the Global Innovation 1000 ranged from just under $9 billion spent by #1 Toyota to the $58 million spent by #1000 Laird PLC, a London-based maker of electronics equipment, a wide range that explains why the top 100 companies account for fully 62 percent of the total R&D spend of the Innovation 1000.
• Sales of the Global Innovation 1000 grew 6.5 percent to $15 trillion in 2008, a significantly smaller increase than the 10 percent increase this group registered in 2007, and R&D spending as a percentage of sales remained the same as the previous year, 3.6 percent.
• North American-headquartered companies on this year’s list spent 4.6 percent of sales on R&D, a slight decrease compared with 2007, while Japanese-headquartered companies spent 3.7 percent of sales, significantly up from last year, and European-headquartered companies spent 3.2 percent, a decrease from the prior year.
• Booz & Company estimates that the Global Innovation 1000 accounts for 81 percent of 2008 total global corporate R&D spending of $660 billion.

Economy to Impact Two-Thirds of Families this Holiday Season

Retailers are about to embark on the holiday season of the serious bargain hunter. According to NRF’s 2009 Holiday Consumer Intentions and Actions Survey, conducted by BIGresearch, U.S. consumers plan to spend an average of $682.74 on holiday-related shopping, a 3.2 percent drop from last year’s $705.01.

It comes as no surprise that the economy was an overriding theme throughout this year’s survey. Two-thirds of Americans (65.3%) say the economy will affect their holiday plans this year, with the majority of these consumers saying they’re adjusting by simply spending less (84.2%). People will also be shopping for sales more often (55.0%), using more coupons (41.7%) and putting up last year’s decorations (34.0%). Many Americans will also make changes in gift-giving, planning to buy more practical gifts (36.0%), buying a joint gift for kids or parents (17.3%), and making more gifts (16.7%). Additionally, more than one-fourth of Americans (28.6%) say the economy is forcing them to travel less or not at all for the holidays.

“While last holiday season was filled with chaotic confusion, adjusting to uncertainty has now become routine for many Americans,” said NRF President and CEO Tracy Mullin. “This holiday season will be a bit of a dance between retailers and shoppers, with each group feeling the other out to understand how things have changed and how they must adapt.”

Americans’ eagle-eye on bargain hunting is adjusting the priorities of many shoppers. According to the survey, more than half of holiday shoppers say that sales and price discounts (43.3%) or everyday low prices (12.7%) will be the most important factor when deciding where to shop. Factors like selection (21.0%), quality (11.8%), convenience (4.9%) and customer service (4.4%) declined from last year.

Not surprisingly, the majority of holiday shoppers (70.1%) will purchase from discounters this year, though more than half (55.8%) will also shop at department stores. Grocery stores (45.0%), the Internet (42.4%), clothing stores (33.8%) and electronics stores (31.8%) will also be popular destinations. In addition, one in ten holiday shoppers (11.4%) will buy gifts or other holiday-related merchandise at thrift stores or resale shops.

Retailers are compensating for soft sales this holiday season by cutting back on inventory. According to NRF’s Port Tracker report, released in September, traffic to the nation’s ports has scaled back to levels not seen since 2003.

“In anticipation of weak demand, many retailers scaled back on inventory levels to prevent unplanned markdowns at the end of the season,” said NRF President and CEO Tracy Mullin. “Once the most popular items are gone, retailers won’t have anywhere to get them, so if there was ever a holiday season to buy early, this is it.”

Whether they’re shopping to get the best selection or trying to stretch out spending over a longer period of time, many holiday shoppers are starting early. According to the survey, 39 percent of Americans will begin their holiday shopping before Halloween, which is comparable to previous years.

As in previous years, three-fourths of Americans’ holiday budget will be spent on gifts. While spending on family members will decline by a slight two percent ($387.06 in ’09 vs. $395.15 in ’08), gifts for friends ($66.77 vs. $80.13) and co-workers ($19.26 vs. $22.63) will see double-digit drops. Americans also plan to spend about five percent less ($34.81 vs. $36.88) on “other” gifts for people like babysitters, teachers and clergy.

Candy and food spending may be one bright spot this year, with the average person planning to spend $10 more in that category than last year ($90.26 in 2009 vs. $80.28 in 2008). Spending on other non-gift categories like decorations ($40.75 in ’09 vs. $43.45 in ’08), greeting cards and postage ($26.77 vs. $27.39), and flowers ($17.05 vs. $19.10) is expected to drop.

“While the economic climate has shown some improvement from last holiday season, retailers are not out of the woods yet,” said Phil Rist, Executive Vice President, Strategic Initiatives, BIGresearch. “With a variety of factors still up in the air, including uncertainty over job security, many Americans just aren’t buying into the talk of recovery.”

Though Americans were less inclined to purchase gift cards last season, the popular gifts retain their spot at the top of the list among gift recipients. According to the survey, 55.2 percent of adults would like to receive a gift card this holiday season, with clothing (48.8%), books and DVDs (48.6%) and electronics (33.2%) among other popular choices.

NRF continues to expect holiday sales to decline 1.0 percent to $437.6 billion.

Is Wall Street Evil?

Pres. Obama is in New York right now for a couple of fundraisers. Last night in front of an audience that included some folks in the world of finance, he chided them to join him in his effort to implement financial industry reform rather than fight his efforts to do so, as many have been doing.

Ever since the first bailouts of Wall Street firms with billions of dollars in loans, the world of finance has been in the sights of the Obama administration. The alleged greed of these folks is a big part of what caused all the problems we are now facing, in particular with regard to predatory lending practices convincing people to buy houses with mortgages they could not afford whose interest rates reset to much higher levels. Ignore that it all started with the Clinton administration’s effort to dramatically lower the lending standards at Fannie and Freddie back in 1998, and that the Bush administration continued to support and fan this. It’s just this idea that everyone should have a home went a little too far.

But yes, some people took advantage. Yes some lenders were predatory. But does this mean that the head of Goldman Sachs shouldn’t have a nice pay package? It’s a bit of a stretch I think. There is, of course, a much broader question of executive compensation in general in the US, which is dramatically higher, as a percentage of profit, than in just about any other country.

But the market forces are what they are. It takes what it takes to get great talent to join a company at a senior level. Would it be better if execs took a hit when things are bad more than they usually do? Probably. But how to fix that? The good old democratic way. If shareholders think a board is not exercising proper judgment in pay packages, it can simply throw the board out. Is that not easy? It’s not. But it can be done.

Why just pick Wall Street? Aren’t there a bunch of bad people in a lot of industries (real estate, construction, entertainment just to name a few)? But don’t those same industries have lots of good people? For most people business is about making money, and that is the core of our capitalist system. Let’s hope the regulators don’t tweak it too much.

Americans Split on Attitudes towards Ads Which Mention the Recession and Economic Troubles

As economic woes continue, advertisers have to decide how to deal with the issue of the recession. Some ignore it and find different ways to encourage people to buy in troubled economic times while others put the economic troubles front and center and mention the recession. What strategy actually works is a different issue altogether and the American consumer is mixed about that.

Just over one-quarter of Americans (27%) say advertisements which mention the economic troubles and the recession make the brand seem more manipulative while just under one-quarter (23%) say the advertisements make the brand seem more realistic. Just over one in ten (12%) say these types of advertisements are depressing and make them less likely to purchase the brand. Two in five Americans (39%), however, have no opinion about advertisements which mention the recession.

These are some of the findings of a new Adweek Media/ Harris Poll, survey of 2,186 U.S. adults surveyed online between September 25 and 29, 2009 by Harris Interactive.

Different groups have different attitudes on these ads

Different groups have different opinions on advertisements which mention the recession and economic troubles. Men are more likely than women to say these ads make the brand seem more manipulative (29% versus 25%) while women are more likely to believe these ads make the brand more realistic (27% versus 18%).

There are also age differences on ads which use the recession. Those aged 18-34 are more likely than those aged 55 and older to say these types of ads make the brand more realistic (27% versus 18%).

Education and household income are other differentiators on the use of the recession in advertisements. Looking at education, those with a college degree are more likely than those with a high school or less education to have an opinion at all, both believing that the ads make the brand seem more manipulative (31% versus 24%) and make the brand seem more realistic (26% versus 17%). Those who have a household income of less than $35,000 are more likely than those with an income of $75,000 or more to say the ads are depressing and make them less likely to purchase the brand (16% versus 8%). Those with a household income between $50,000 and $74,999 a year are more likely to make a brand more manipulative (32%).

So What?

Advertisers have to walk a fine line with their ads when dealing with the economic issues Americans are currently facing. Do they discuss the recession or pretend it doesn’t exist? We know there are certain tactics which work better than others for addressing the economy (mostly value propositions and luxuries for less), so when it comes to actually mentioning the recession, these tactics should be interwoven so advertisers do not seem to be manipulating the consumer or, even worse, depressing them and leading them to not purchase the brand.

New Survey Shows Affluent Have Hopeful Outlook— But Not Convinced Recession is Over

A new survey of the wealthiest 10% of US households by the American Affluence Research Center shows the affluent have a negative opinion of current business conditions, but have a positive 12 month outlook for improvements in business conditions and the stock market.

In the near term, the affluent have concerns regarding their personal household income. This is contributing to weakness in their plans for December holiday gift purchases, which they estimate will average about $2,400 or a 5% decline from what they spent in 2008. As an extension of this, spending plans over the next 12 months for 8 major items and 17 different categories of products and services continue to be soft though somewhat stronger than in the spring 2009 survey.

There are expected near term reductions in expenses such as purchases of primary residences, vacation homes, cruises, and motor vehicles. Also major home appliances, vacation travel, and designer apparel are expected to experience declines. The surveys also track changing investment objectives as the stock market rises and falls.

Conducted twice annually, the American Affluence Research Center survey provides insights into the concepts of the “new normal”, “stealth wealth”, and “luxury shame” that are contrary to the anecdotal examples appearing in recent media coverage of the luxury market.

Most affluent expect to return to pre-recession levels of spending once they are convinced the recession is over and they see a recovery in their net worth, which has been hit by declines in the value of their savings and their home. They do not expect to see the end of the recession, with real improvements in the rate of unemployment and the value of their savings and their homes, for about 18 to 24 months and possibly in to early 2012.

Madoff Victims Sue the SEC…Can They?

There’s a very old legal maxim that we Yankees adopted from the British. It’s so old it even has a Latin name: Rex non potest peccare. It means “the King can do no wrong.” This concept of sovereign immunity remains and it is nearly impossible to sue the government for something. Must have been fun for the old British monarchs. Some former US Presidents thought they were immune too. That didn’t work out too well. In any event, there’s an exception. If, for example, the guy waxing the floor at the Pentagon doesn’t warn people and someone slips and falls and breaks their collar bone, you can sue the government for that. So if they are negligent in carrying our their function, you can sue. But you cannot sue them for making policy, declaring war, things like that.

So sure enough two victims of the Bernard Madoff $65 billion Ponzi scheme (as an aside, prosecutors now estimate losses much lower, at around $13 billion, though of course still huge!), Phyllis Molchatsky and Steven Schneider, are suing the SEC for negligence and asking for $2.4 million that they lost. They say the SEC missed countless opportunities (including at least 6 formal complaints) that they should have followed up on to get this guy. They cite an internal SEC report that essentially admits this. The SEC says it’s a meritless case. Everyone acknowledges that mistakes were made on this one. But merely as a legal observer it will be interesting to see whether the court lets this go forward. Was the decision not to follow-up essentially a policy decision of some sort, or was it merely implementing an existing policy? I’ll keep an eye on this one for you guys.

10K Dow Sounds Nice!

The Dow Industrial Average finished above 10,000 today, marking an important psychological milestone for investors and anyone with a 401(k). November 2008 was the last time we saw this number, on the way down. The first time it hit 10k was just about 10 years ago. So I guess for those who say equities always do better than any other form of investment over any 10-year period may have to attach an asterisk to this crazy past decade.

According to Marketwatch.com, the latest rise resulted from earnings reports improving because of increasing revenues, not just higher earnings from reducing costs. But we can only have a very small Snoopy dance on this one. The dollar is very low. Unemployment remains high. Real estate, well just don’t go there. So we’ve a ways to go.

But as I’ve said many times….beats the alternative!

PS A Feldman first – I’m writing this on a plane heading to NY – first with WiFi…a blessing and a curse I think!

Skilling Gets His Day in (Supreme) Court

The Wall Street Journal just reported that the US Supreme Court has agreed to hear an appeal from Enron Corp.’s former CEO, Jeffrey Skilling. Skilling was convicted of fraud and a bunch of other stuff in 2006 and sentenced to 24 years in prison and fines of $45 million following what  the Journal called the “spectacular collapse” of Enron following the discovery of widespread accounting deception at the huge energy company.

The prosecution based its case on a novel theory that he committed fraud because the company was denied his “honest services.” Skilling points out that at no time did the government suggest that he did anything for personal gain. It appears the Supremes want to rule on whether the “honest services” theory holds up. An appeals court has already confirmed Skilling’s conviction but did say that his sentence was not correct and needed to be recalculated.

The Enron scandal, followed by a similar set of problems at WorldCom, Adelphia and others led to the sweeping securities law reform in the Sarbanes-Oxley Act of 2002. It showed that big frauds can happen in big companies, even when the best auditors in the country are on the job. The Enron scandal even resulted in the collapse of Arthur Andersen, one of the five biggest worldwide accounting firms.

Why do we care what happens to the guy whose apparent misdeeds killed a company and many thousands of jobs now 7 years after the scandal? For quite awhile he was the fall guy, with many feeling sorry for the out of touch “outside man” Chairman Ken Lay, who died of a heart attack waiting for his sentencing awhile back.

Were the “off balance sheet” arrangements arranged with Skilling’s blessing, in which underperforming assets were moved to “hidden” outside entities, truly horrible? Was the failure to disclose these arrangements in fact illegal or fraudulent? Now it would be, as Sarbanes closed the loop and now requires all such arrangements to be disclosed. Was Skilling railroaded into a conviction with a tainted Houston jury and a lynch mob mentality throughout the nation at the time?

Hopefully you know me by now, faithful blogees. I do not have the answers to these questions. Just hope to get you to think about it a little. Skilling must have known that failure to disclose these arrangements was not very nice, but illegal at the time? Just not clear, which probably explains the difficulty the prosecution had in fashioning a proper cause of action against him.

California Dreamin’

For those of us old enough to remember (I am almost not quite), one of the greatest rock songs ever, “California’ Dreamin,” was written by the Mamas and the Papas in 1963 and released in 1965 (well I was in kindergarten). The classic has been covered a million times by the Beach Boys and many others.

John and Michelle Phillips of the group were living in NY at the time and thinking about the sunshine here in LA, where I am now for business meetings the next few days.

Some things about California stay the same. It is still the source of many new trends, including my perennial favorite cobb salad. Little kids with their yoga instructors on Muscle Beach. Apparently it’s all the rage here to like some obscure band called the Beatles. A “doctor” has set up his “office” right on Venice Beach where you can get a card entitling you to medical marijuana for a year as long as you have (or claim you have) certain medical issues (anxiety will do it). Fires and small tremors seem to remain a sometimes frustrating way of life. And the sun still loves to shine.

But times are tough. And they seem tougher here than in most. Real estate has fallen apart (though some signs of life have commenced). There is a sense of everything toned down conspicuous consumption wise. The infrastructure, from my non-scientific observation, is in bad shape. The government is running on a shoe-string. There is talk of legalizing marijuana mainly to raise taxes.

Will they make it? Yes. While New York wakes up a little faster thanks to reinvigorated Wall Street firms, when will private equity, venture capital, and the entertainment businesses, all central to the Cah-lee-fawnia (as Gov. Schwarzenneger loves to call it) economy, wake up? It’s slow for all. The film business is not bad though. It seems like Haagen Dazs we have continued to allow ourselves small luxuries like going to the movies. Or maybe we just need the escape. Maybe both.

My next trip is back to China in November, where things will certainly be in contrast to here in CA. I have a number of clients and important contacts here, so I’m pulling for the left coast. And not too shabby Dodgers and Angels!

Americans Get Cautiously Optimistic About Finances

One year after the U.S. banking crisis came to a head, a new survey finds that consumers and small business owners are finally seeing some positive light at the end of the economic tunnel.

Fifty-two percent of consumers believe their financial prospects will improve over the next 12 months, and 61 percent of small business owners are expressing similar optimism about their potential businesses growth. Those are among the major findings in a new survey from Digital Insight.

There is also good news for financial institutions. Nearly 70 percent of respondents expressed confidence in the stability of their bank or credit union, along with a desire to get more online financial management tools from them.

Digital Insight’s Second Annual Online Financial Management Survey also found that:

• Eighty-eight percent of consumers now pay bills and transfer funds online, but 62 percent would like a single place to manage their complete financial picture, no matter where the information originates.
• Nearly half of consumers would like online help with tracking expenses and budgeting.
• Approximately 80 percent of consumers and small businesses named their bank or credit union as their most trusted online destination to manage their finances − an increase from 68 percent of respondents last year.
• Seventeen percent of small business owners have increased their use of online financial management tools in the past year.
• The top five tasks small business owners would like to manage online are: processing credit card and automated clearinghouse payments; invoicing; making remote deposits; planning and filing taxes; and learning about new products and services.

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