China may not need Western technology much longer
Western governments are increasingly reluctant to exchange technology with the Chinese. The United States and the Netherlands have just placed new limits on exports of semiconductors and machinery to produce them. Meanwhile, Chinese companies are climbing the ranks of the top spenders in research and development, a sign they may not need Western technology for much longer.
5 years ago, when I made my previous list, the multinational infrastructure and mobile phone devices Huawei Investment & Holding Co. was in sixth position after Microsoft (MSFT), as it is now, despite being the only Chinese company among the top 25 in the world. This company has been joined by ByteDance Ltd., owner of TikTok, Tencent Holdings Ltd. (0700), owner of WeChat and a gaming giant, and Alibaba Group Holding Ltd. (BABA), a provider of e-commerce, services payment and cloud computing services.
ByteDance’s US$14.6 billion is for 2021 and comes from a document that the private company presented to its workers in 2022 and that the WSJ reproduced in October. On April 1, The Information also reported that ByteDance had told its investors that its profits increased 30% last year, so my guess is that its R&D spending for 2022 it would be even bigger.
All of these figures come from publicly released financial statements, but companies have a considerable range of discretion in defining what is meant by research and development spending. Even Amazon Inc. (AMZN) doesn’t even disclose it, instead adding a line item to its income statement for “technology and content” which is probably mostly R&D, but confusing. The SEC (Securities and Exchange Commission of the United States) sent him a series of letters in 2017 and 2018, urging him to be accountable about R&D like other companies, but he backed off after the company claimed that “our business promotes the simultaneous research, development and updating of our products and services, whether new or existing” and that stipulating only Research and Development would be complicated and meaningless for its investors.
The possibility exists that another private company spends even more on R&D than the $7.5bn that 25th-ranked Bayerische Motoren Werke AG (BMW) does, though unlikely. Huawei is owned by its employees, but publishes an annual report in the same way as foundation-owned auto parts company Robert Bosch GmbH and the family, which used $6.7 billion last year and ranks in place thirty-four. (Similar to other companies in Europe and Japan, it would rank higher on the dollar-denominated list if the euro and yen were stronger.) Globally, large private companies largely appear to be blind to their R&D spending, although a considerable number are not the type to invest heavily in R&D.
That profile implies being in technology, pharmaceuticals, or automobile manufacturing. This has been the case for decades. The number of technology companies has grown, with newcomers Amazon, Google parent Alphabet Inc. (GOOGL), and Facebook parent Meta Platforms Inc. (META) now holding the top three spots and the top three. most Chinese companies are new to the list. But when I found a ranking of the top 20 for 2004, compiled by Booz Allen Hamilton from Bloomberg data, I was surprised by how many household names it contained.
Of the companies listed here that are not in the current top 25, all but one remain in the top 50, with Matsushita Electric’s successor, Panasonic Holdings (6752), ranked 61st. Mercedes’ combined R&D spending -Benz Group AG (MBG) and Stellantis NV (STLAM), the products (with the addition of Fiat) of the breakup of DaimlerChrysler in 2007, would put it 16th. Also, if you’re wondering where you fit in all this, the Semiconductor industry leader Taiwan Semiconductor Manufacturing Co. (2330) ranks 41st in R&D but fourth in capital spending, trailing only Amazon, Samsung Electronics (005930) and Saudi Arabian Oil Co ( 2222).
One thing that has changed since 2004 is the further along the top spenders are. Amazon and its unique accounting aside, current No. 2 Alphabet is spending more than four times as much on research and development as No. 20 Bristol-Myers Squibb (BMY). In 2004, No. 1 Microsoft spent less than twice as much as No. 20 Merck (MRK).
Most major automakers are spending similar amounts on R&D, adjusted for inflation, as in 2004. The exceptions are Volkswagen AG (VOW3) and BMW, which are spending substantially more, and Ford Motor Co. (F) , which is spending a third less. Pharmaceutical companies generally spend much more, but the most spectacular increases have been in technology, among what I suppose we should start calling the companies MAAAM (others have suggested MAMAA, but they’re wrong), for Microsoft Corp., Apple Inc. ( AAPL), Amazon, Alphabet, and Meta. With the exception of Apple, R&D spending by these companies goes towards inventing and improving not so much physical products as algorithms, AI systems and the like, which also applies to Chinese counterparts ByteDance, Tencent and Alibaba. In the US, most of these companies have been announcing big layoffs of late, but so far the effect on their R&D spending is barely noticeable.
For the companies themselves, these huge increases in R&D spending could be of limited value. A 2020 study by accounting academics at the University of Washington and the University of Texas found that while there was once a strong relationship between research and development spending and future profitability, it has become much weaker since the 1990s. the 1990s. For national and regional economies, the evidence still points to a payoff in terms of productivity and growth gains, although it is too early to tell whether this will hold true for the R&D boom of recent years. If so, it looks like the US and China are better positioned to benefit.
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