Chemical Producers to Cut Back Capital Expenditures but Increase R&D in 2015

Originally published by: Chemical & Engineering NewsApril 13, 2015

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Some of the chemical industry’s biggest companies plan to increase research investment this year, but they are holding back on capital spending.

The strong U.S. dollar, a weak economy in Europe, and slower growth in China are complicating forward-looking spending plans for many chemical companies this year. Individually, plans vary widely, but as a group, firms are taking a cautious approach to future-oriented spending. In some cases they are looking to university research alliances to get more bang for the buck.

For an interactive look at Capital Expenditures and Research Costs visit http://cenm.ag/spending2015.

For a PDF of the charts in this article click here.

Eight U.S. and European companies tell C&EN they will, as a group, lift research spending 1.3% in 2015 to a combined $3.6 billion.

Twenty-two U.S. and European firms say they will decrease spending on new plants and equipment by 4.4% to $22.9 billion.

The capital spending outlook is colored by BASF, which because of its size has a strong influence on industry statistics. It plans to decrease its 2015 budget by nearly $1.5 billion because it is pulling back on its oil and gas investments. Without BASF, the group plans a 2.4% increase in capital spending this year.

Although the immediate outlook for future-oriented spending may be cloudy, industry leaders acknowledge its importance to advancing their businesses.

At a press conference in Germany last month to showcase Evonik Industries’ research engine, Chairman Klaus Engel said his firm will invest about $5 billion in R&D over the next decade. “Innovations open up new business areas and strengthen our leading market and technology positions,” he said.

To fulfill Engel’s promise, Evonik is trying to speed up the delivery of new products to customers, Ulrich Küsthardt, who became chief innovation officer earlier this year, tells C&EN. “Product life cycles are shorter” than they were a decade ago, he says.

With an R&D budget this year of about $550 million, Evonik intends to beat the competition in part by further internationalizing the core research it now conducts mostly in Germany. For example, to focus on medical devices, the company recently opened a project house—intended to gather experts from across the company for a two- or three-year project—in Birmingham, Ala.

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Click on the link to view an interactive version.

“We will ask ourselves where the best location is to do research, and it won’t always be in Germany,” Küsthardt says. Interestingly, that research won’t focus on basic science. It will instead seek to commercialize new ideas.

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Other chemical firms have a similar take, “Innovation should not be fortuitous. It should create products that should be forseen by the market and have a predictable value,” says Stephen G. Crawford, chief technology officer at Eastman Chemical, which plans to spend about $234 million on R&D this year.

Crawford acknowledges that Eastman’s scientists could develop new molecular approaches on their own. But “it’s not efficient to build all organic capabilities ourselves,” he says.

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A team of six Eastman scientists works out of the center alongside researchers at the school, says Stewart Witzeman, who is the center’s director. The center anchors a $10 million effort over six years to fund projects on matters ranging from fundamental chemistry to applied materials research.

Eastman and Evonik spent 2.3% and 3.2% of sales, respectively, on R&D in 2014, up from 2.1% and 3.1% a year earlier, reflecting an overall upward trend in C&EN’s survey of eight firms. The survey found the group—ArkemaCytec Industries,DuPont, Eastman, Evonik, H.B. FullerW.R. Grace, and Solvay—spent 4.0% of sales on R&D in 2014, up from 3.9% a year earlier.

Over the past decade, R&D spending for the group—excluding Evonik, for which 10 years of data are not available—was up about 20%. But factor in inflation and spending hasn’t increased at all, suggesting that at least for this group, the innovation engine is just maintaining highway speed.

For years the mantra of corporate leaders has been that R&D managers can’t blithely spend more each year. Instead, they need to get more done per dollar of investment.