Though Apple's R&D spending is massive, it's still more efficient than all other competito...

Posted:
in AAPL Investors edited August 2017
Apple's required financial data tells the tale of a company that has been deeply invested in efficient research and development for 20 years to advance the company's long-term goals -- but it in itself does not herald something big on the horizon.




Research and development has always been an underpinning of Apple's strategies, since Steve Jobs reclaimed the reins, and in Tim Cook's tenure as well.




Apple's research and development budget has been in an upswing for years, and is more related to the income of the company, more than anything else. There is no obvious correlation between an increase in R&D spending for the iMac, the iPod, the iPhone, or the iPad -- or any one of the updates to any of the lines.




Looking at the last five years on a quarterly basis, income has varied a great deal mostly because of release cycles and seasonality -- and Apple's research budget has increased linearly with time.




In fact, as Apple's revenue has increased, it's percentage of its revenue it has spent on R&D year-over-year has been on a relatively flat trajectory since 2009. This signifies that Apple is not chasing any specific goal or radical expansion, but feels no particular need to keep the spending proportionate with the growth of the company.


Apple versus Silicon Valley and South Korea

Media likes to portray Apple locked in mortal combat with its competitors, with a tit-for-tat battle raging day in and day out. Conventional wisdom suggests that besides just supply chain efficiencies to squeeze out maximum profit and an advertising fight to capture the hearts and minds of consumers, the third main front in the battle is research and development spending to make something customers want to buy in the first place.




Apple spends $2 billion less per year on research and development than Samsung, and still crushes it on revenue by over $46 billion per year. Alphabet's R&D expenditures vastly exceed Apple's by more than $4 billion, and Apple clears more than twice the annual revenue.

The gaps are wide in percentage of revenue Apple spends on R&D versus its competitors as well.




Conventional wisdom from mainstream media suggests even today that Apple will drop even more cash very soon on research and development to catch up with competitors. The assumption is that during the course of this battle, Apple is seeing that it is somehow outnumbered by the forces that Page and Brin by any given name field -- and is in mortal peril because of it.

Apple could marshal those forces, if it wanted. At present, Apple's cash hoard is four full years of Alphabet's revenue, and seven years of Facebook's, so there's a lot of leeway to expand R&D.

It just doesn't choose to -- and why should Tim Cook and company get all riled up about any perceived gap in research? The company is by any metric doing more with its research and development dollars to benefit the company and shareholders than all of its rivals.

Battles aren't always won by overwhelming numbers. Using forces correctly is more often the cause of victory.
baconstanglolliver
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Comments

  • Reply 1 of 27
    SpamSandwichSpamSandwich Posts: 29,346member
    Just throwing money at a problem isn't the best way to solve a problem. At least Apple still understands that.
    cornchip
  • Reply 2 of 27
    jd_in_sbjd_in_sb Posts: 1,479member
    Is acquiring companies included in R&D expenses?
    baconstangcmka~+
  • Reply 3 of 27
    k2kwk2kw Posts: 1,278member
    We don't know if there will be an Apple Car yet as a result of project Titan.   That could have been a couple billion in the last few years.   If not their own car they could use another brand (like Geely owned Volvo) to manufacture and sell the vehicle

    Even though I think Tesla is in the lead I still think Apple could get into the EV manufacturing game.   Most Traditional ICE manufacturers are dragging their feet.
  • Reply 4 of 27
    Mike WuertheleMike Wuerthele Posts: 2,883administrator
    jd_in_sb said:
    Is acquiring companies included in R&D expenses?
    No.
    Solicornchip
  • Reply 5 of 27
    melgrossmelgross Posts: 30,521member
    Good article, by the way.

    R&D is something I’m particularly familiar with. We did R&D in both of the companies I was involved with.

    most people don’t realize that R&D isn’t linear to the results. In other words, in relation to the products that come out. While a small, but very important detail, may cost a lot in R&D terms, a major feature may cost almost nothing. This is my own experience. A lot of R&D is really the R, but not the D, and a lot is the D, but not the R. It depends. Sometimes you need to go well beyond what you want to do to be able to actually understand the very basics of the science, and other times, you just have to spend on engineering, both mechanically and electronically. These days, software is at the core of most any product, in one way or the other, so that’s included too.

    quite frankly, while I understand why intel needs to spend so much, and Samsung, because both of these have numerous products, with Samsung producing almost everything electronic, I just can’t figure out what Alphabet is spending it on.
    edited August 2017 fotoformatbaconstanglolliverSoliwatto_cobramuthuk_vanalingamcmka~+brucemcadm1
  • Reply 6 of 27
    mike1mike1 Posts: 1,659member
    jd_in_sb said:
    Is acquiring companies included in R&D expenses?
    No.
    The cost of the purchase is not, but if the company they buy is doing  R&D work, those operating expenses are part of the R&D spend each year.
    Solicmka~+
  • Reply 7 of 27
    Mike WuertheleMike Wuerthele Posts: 2,883administrator
    melgross said:
    Good article, by the way.

    R&D is something I’m particularly familiar with. We did R&D in both of the companies I was involved with.

    most people don’t realize that R&D isn’t linear to the results. In other words, in relation to the products that come out. While a small, but very important detail, may cost a lot in R&D terms, a major feature may cost almost nothing. This is my own experience. A lot of R&D is really the R, but not the D, and a lot is the D, but not the R. It depends. Sometimes you need to go well beyond what you want to do to be able to actually understand the very basics of the science, and other times, you just have to spend on engineering, both mechanically and electronically. These days, software is at the core of most any product, in one way or the other, so that’s included too.

    quite frankly, while I understand why intel needs to spend so much, and Samsung, because both of these have numerous products, with Samsung producing almost everything electronic, I just can’t figure out what Alphabet is spending it on.
    Moonshots.
    baconstangcornchiplolliverwatto_cobra
  • Reply 8 of 27
    Mike WuertheleMike Wuerthele Posts: 2,883administrator

    mike1 said:
    jd_in_sb said:
    Is acquiring companies included in R&D expenses?
    No.
    The cost of the purchase is not, but if the company they buy is doing  R&D work, those operating expenses are part of the R&D spend each year.
    The R&D expenses are, as they're a part of Apple. Things like human resources and facilities for those companies are not - that's covered under facilities and other segments.
  • Reply 9 of 27
    melgrossmelgross Posts: 30,521member
    mike1 said:
    jd_in_sb said:
    Is acquiring companies included in R&D expenses?
    No.
    The cost of the purchase is not, but if the company they buy is doing  R&D work, those operating expenses are part of the R&D spend each year.
    That’s not what the question asked. Of course all R&D is partly tax rebated. But unless the company is almost entirely R&D, the amount isn’t going to be significant. R&D doesn’t go under the heading of operating expenses. It goes under the heading of R&D.
    edited August 2017
  • Reply 10 of 27
    melgrossmelgross Posts: 30,521member

    melgross said:
    Good article, by the way.

    R&D is something I’m particularly familiar with. We did R&D in both of the companies I was involved with.

    most people don’t realize that R&D isn’t linear to the results. In other words, in relation to the products that come out. While a small, but very important detail, may cost a lot in R&D terms, a major feature may cost almost nothing. This is my own experience. A lot of R&D is really the R, but not the D, and a lot is the D, but not the R. It depends. Sometimes you need to go well beyond what you want to do to be able to actually understand the very basics of the science, and other times, you just have to spend on engineering, both mechanically and electronically. These days, software is at the core of most any product, in one way or the other, so that’s included too.

    quite frankly, while I understand why intel needs to spend so much, and Samsung, because both of these have numerous products, with Samsung producing almost everything electronic, I just can’t figure out what Alphabet is spending it on.
    Moonshots.
    Yeah, well they keep falling short. But software R&D doesn’t cost THAT much, and so far, from what we see of their hardware experiments, and some of that is odd, to say the least, I don’t see that much being spent on it, including their autonomous efforts.
    baconstang
  • Reply 11 of 27
    taniwhataniwha Posts: 347member
    Actually I beg to differ. The article is blind propaganda and while I think Mike Wuerthele has a point, the article blandly states 

    "The company is by any metric doing more with its research and development dollars to benefit the company and shareholders than all of its rivals"

    which is utter crap. It doesn't attempt to assess or support this by actually presenting any supporting data on other metrics. One such metric could be, for example, the number of Patents registerd, and by that particular metric Apple is way way behind the Tech sector leaders which for at least a decade have been IBM and Samsung. The number of Apple patents registered outside the USA was way way down in the Peleton (the field of midfield also-rans in the Tour de France for those who don't know the term). 

    I happen also to come from an R&D background and the dollars spent is really irrelevant. What counts are the marketable results ... new products or new technology.  A good example these days seems to be Alphabet, which seems to throw a lot of R&D money around with nothing really much to show for it.

    It's also often the case that the profit-leader in a sector is not necessarily the technology leader, which is clearly applicable to Apple. They have a long and successful record of making the profits often enough when coming up from way behind in terms of real innovation. Its obviously a winning strategy at the moment, so who's complaining. Whether or not it's a recipe for future success is a question I could easily ask but not answer. We will see.
  • Reply 12 of 27
    radarthekatradarthekat Posts: 2,428moderator
    taniwha said:
    Actually I beg to differ. The article is blind propaganda and while I think Mike Wuerthele has a point, the article blandly states 

    "The company is by any metric doing more with its research and development dollars to benefit the company and shareholders than all of its rivals"

    which is utter crap. It doesn't attempt to assess or support this by actually presenting any supporting data on other metrics. One such metric could be, for example, the number of Patents registerd, and by that particular metric Apple is way way behind the Tech sector leaders which for at least a decade have been IBM and Samsung. The number of Apple patents registered outside the USA was way way down in the Peleton (the field of midfield also-rans in the Tour de France for those who don't know the term). 

    I happen also to come from an R&D background and the dollars spent is really irrelevant. What counts are the marketable results ... new products or new technology.  A good example these days seems to be Alphabet, which seems to throw a lot of R&D money around with nothing really much to show for it.

    It's also often the case that the profit-leader in a sector is not necessarily the technology leader, which is clearly applicable to Apple. They have a long and successful record of making the profits often enough when coming up from way behind in terms of real innovation. Its obviously a winning strategy at the moment, so who's complaining. Whether or not it's a recipe for future success is a question I could easily ask but not answer. We will see.
    Something tells me you don't have a very solid comprehension of innovation.  What Apple does isn't as easily identifiable to the lay person who considers bigger screens, for example, innovation.  Apple often innovates behind the scenes, like with ARKit.  Just watch Apple create a sensation over the next year via ARKit.  This has been in works, behind the scenes, for years, as evidenced by the fact that iPhones going back to the 6S will support ARKit apps. That's forward thinking innovation and that started years earlier with the iPhone 5S modernizing the processor to 64-bit architecture.  Apple is a platform building monster, and you're going to see the fruits of those years-long efforts begin to leave its competition in the dust.  How will Samsung and others provide the same AR capabilities and development platform?  By waiting on Google to copy Apple's ARKit toolkit.  And even then, it'll be available only on the latest Samsung phones.  Apple doesn't innovate, my ass! 

    Patents haven't much helped Apple protect its intellectual property from the copycats.  So Apple has taken a different route.  Its platforms run only on Apple hardware, so if you want the capabilities and integration across a wide array of platforms, it's Apple or a hodgepodge in the Android/Windows world.

    Apple is a platform building monster.  They treat everything as a platform, initially closed for internal use but eventually opened in intelligent and controlled ways to leverage their developer community, which ultimately cements the platform as an integral part of an interconnected and growing ecosystem.

    MacOS

    iOS

    iOS+ (on iPad)

    CarPlay

    Siri

    ApplePay

    Watch OS

    TVOS

    Apple Music

    Maps

    HomeKit

    HealthKit

    Metal

    Airplay

    Machine Learning

    AFS (Apple File System)

    ARKit

    NFC

    Apple is leveraging them all to create capabilities no other vendor will be able to beat, or even fast-follow because they haven't done the groundwork.

    edited August 2017 brucemcbadmonk
  • Reply 13 of 27
    cmka~+cmka~+ Posts: 21member
    jd_in_sb said:
    Is acquiring companies included in R&D expenses?
    I suspect your question was at least in part rhetorical? Apple does seem to acquire much of its new tech through, well, acquisitions (as opposed to bottom up R&D). This may indeed be efficient but the article (and/or accepted accounting norms) suggest that all of apple's innovations are born strictly out of a lean R&D budget, when clearly many are the result of costly (if wise) acquisitions. 
    avon b7
  • Reply 14 of 27
    croprcropr Posts: 794member
    If one would show me the bar graph without the names and ask me where do you put your money I would not take the first one.  If company A invests 5% of its revenue in R&D and company B investes 10% of its revenue in R&D, I would prefer company B.  This company will launch in the future more innovative products and services

    This is exactly the reason why this article justs proves the opposite that it tries to prove.  R&D efficiency in not a common benchmark in the business world and it is not without reason.   The logical error in the article is that R&D is about investments in future products and revenue is about current products. 

    I don't think it was the intention of the author to prove that Apple is too much milking its current cash cow (read iPhone), but he unconsciously did.



  • Reply 15 of 27
    avon b7avon b7 Posts: 2,326member
    If you have an interest in this subject, you can find a nice collection of figures here:

    http://iri.jrc.ec.europa.eu/scoreboard.html

    Interpretation of real efficiency is difficult but the figures are interesting.
  • Reply 16 of 27
    Mike WuertheleMike Wuerthele Posts: 2,883administrator
    cropr said:
    If one would show me the bar graph without the names and ask me where do you put your money I would not take the first one.  If company A invests 5% of its revenue in R&D and company B investes 10% of its revenue in R&D, I would prefer company B.  This company will launch in the future more innovative products and services

    This is exactly the reason why this article justs proves the opposite that it tries to prove.  R&D efficiency in not a common benchmark in the business world and it is not without reason.   The logical error in the article is that R&D is about investments in future products and revenue is about current products. 

    I don't think it was the intention of the author to prove that Apple is too much milking its current cash cow (read iPhone), but he unconsciously did.



    Well, that's the problem right there, isn't it? The reason why I compared the financials, and put in nearly 20 years of data into the spreadsheets, is that this unnamed company for a long time has historically pulled out massive revenues on a relatively flat amount of spending.

    Nobody invests in a vacuum. Nobody just looks at just the percentage to decide who to invest in. My issue has more to do with a lot of media jumping on reports of Apple's R&D and saying OH NO! APPLE IS SO FAR BEHIND AND MUST CATCH UP! -- that shows a lack of comprehension.
  • Reply 17 of 27
    carnegiecarnegie Posts: 363member
    cropr said:
    If one would show me the bar graph without the names and ask me where do you put your money I would not take the first one.  If company A invests 5% of its revenue in R&D and company B investes 10% of its revenue in R&D, I would prefer company B.  This company will launch in the future more innovative products and services

    This is exactly the reason why this article justs proves the opposite that it tries to prove.  R&D efficiency in not a common benchmark in the business world and it is not without reason.   The logical error in the article is that R&D is about investments in future products and revenue is about current products. 

    I don't think it was the intention of the author to prove that Apple is too much milking its current cash cow (read iPhone), but he unconsciously did.



    Well, that's the problem right there, isn't it? The reason why I compared the financials, and put in nearly 20 years of data into the spreadsheets, is that this unnamed company for a long time has historically pulled out massive revenues on a relatively flat amount of spending.

    Nobody invests in a vacuum. Nobody just looks at just the percentage to decide who to invest in. My issue has more to do with a lot of media jumping on reports of Apple's R&D and saying OH NO! APPLE IS SO FAR BEHIND AND MUST CATCH UP! -- that shows a lack of comprehension.
    I think your core point, as I take it, is dead on.

    When it comes to creating products which customers want and are wiling to pay for, Apple gets far more bang for its R&D buck than most of its competitors and other tech companies.

    Some make the generic accusation that Apple overcharges for its products and that its doing so is why it is so profitable. But I think that accusation misses what's really going on. Apple's gross margins aren't out of whack with what some others realize on comparable products. The differences start with Apple selling more of those premium products on which it, and some of its competitors, realize higher gross  margins. That difference helps with the next difference: Operational efficiency.

    Realizing a lot more gross profit - because it sells a lot more premium, high margin, products - creates greater leverage for Apple on its operating expenses. And that's where the real difference is - not in gross margins but in operating margins. Apple is more efficient not only when it comes to R&D spending, but when it comes to SG&A spending as well. Those costs don't bleed off nearly as much of Apple's gross profit as they do for some of Apple's competitors (and other companies in general). Apple, e.g., doesn't need to spend as much money on marketing in order to sell a given number of iPhones as competitors do in order to sell the same number of comparable products. Apple keeps most of its gross profit (as pre-tax income); other companies generally don't.

    Even when it comes to gross margins, there are reasons why Apple's can be higher (on comparable products) that don't represent overcharging (in relative terms) customers. For one thing, there's scale. Selling so many units of given particular products means reduced (per-unit) input costs. For another, Apple operates a very successful direct distribution channel. That means that it doesn't need particular third-party sellers as much as some competitors do. Those third-party sellers need to be able to sell Apple products more than Apple needs them to sell its products. That's in part because of Apple's direct distribution channel and in part because of the generally aspirational quality of Apple products. (Whether that status - as being perceived in an aspirational way by many consumers - is deserved is another matter; but Apple products do still quench that aspirational need for many even while they remain affordable for many and have become ubiquitous - that's part of the magic that has made Apple so successful.) Third-party sellers perceive benefits in being able to sell Apple products beyond whatever (net) income they realize from selling those products. That means that Apple is in a better position to keep more of the retail prices of its products for itself. Even without consumers paying more, Apple can get a bigger piece of the pie by having third-party sellers accept a smaller piece. As I indicated, that's possible in part because those third-party sellers see other advantages in selling Apple products.

    In addition to continuing to make great products which (many) people love and crave, Apple is a phenomenally well run company. I suspect in the future college economics departments will teach courses focusing on Apple as a case study in how huge companies can be run successfully.
  • Reply 18 of 27
    nhtnht Posts: 4,171member
    cropr said:
    If one would show me the bar graph without the names and ask me where do you put your money I would not take the first one.  If company A invests 5% of its revenue in R&D and company B investes 10% of its revenue in R&D, I would prefer company B.  This company will launch in the future more innovative products and services

    This is exactly the reason why this article justs proves the opposite that it tries to prove.  R&D efficiency in not a common benchmark in the business world and it is not without reason.   The logical error in the article is that R&D is about investments in future products and revenue is about current products. 

    I don't think it was the intention of the author to prove that Apple is too much milking its current cash cow (read iPhone), but he unconsciously did.



    Well, that's the problem right there, isn't it? The reason why I compared the financials, and put in nearly 20 years of data into the spreadsheets, is that this unnamed company for a long time has historically pulled out massive revenues on a relatively flat amount of spending.

    Nobody invests in a vacuum. Nobody just looks at just the percentage to decide who to invest in. My issue has more to do with a lot of media jumping on reports of Apple's R&D and saying OH NO! APPLE IS SO FAR BEHIND AND MUST CATCH UP! -- that shows a lack of comprehension.
    Your approach is correct. Coming from the R&D world I can attest for the major orgs I've been apart of, including a major research lab, most R&D money is wasted.

    They are amusingly both micromanaged and without sufficent oversight.

    Its not about of $$$ you pour into R&D or even the amount of IP disclosures (patents and copyrights) but the number of actual valuable products produced for that organization and not some other.

    A few observations: 

    1) Small projects are almost as difficult to manage (from a Program vs Project management perspective) as large projects.  Thus program managers prefer fewer large swing for the fences R&D projects because 5 big projects are easier on them than 50 mid or 500 small projects.

    2) Small projects will fail often with zero results.  This metric is hard to hide. Huge projects often declare success regardless of outcome. It's easier to inflate the ROI on one project than 500.  Amusingly small and mid sized projects end up under more scrutiny per dollar than large projects so large projects end up with an "ooops" in the six figures while little projects are often crushed under the processes built for large projects. "Tailoring" down large processes is hard for managers to want to do.

    3) Research is hard.  A small number of huge projects gives you few at bats.  A large number of small projects often can't get critical mass to jump to the next phase. A successful organization has some mechanism to have lots of little projects they can get behind and push if there is value.

    4) Organizations/Divisions good at research (e.g. Xerox Parc, MS Research) often suck at transitoning IP to product. Hence Apple profiting from the GUI and not Xerox.  These divisions become fiefdoms that are self licking ice cream cones.

    Measuring the bottom line vs R&D across a long span of time IS the correct way to judge the R&D prowess of a company. 
    radarthekat
  • Reply 19 of 27
    melgrossmelgross Posts: 30,521member
    taniwha said:
    Actually I beg to differ. The article is blind propaganda and while I think Mike Wuerthele has a point, the article blandly states 

    "The company is by any metric doing more with its research and development dollars to benefit the company and shareholders than all of its rivals"

    which is utter crap. It doesn't attempt to assess or support this by actually presenting any supporting data on other metrics. One such metric could be, for example, the number of Patents registerd, and by that particular metric Apple is way way behind the Tech sector leaders which for at least a decade have been IBM and Samsung. The number of Apple patents registered outside the USA was way way down in the Peleton (the field of midfield also-rans in the Tour de France for those who don't know the term). 

    I happen also to come from an R&D background and the dollars spent is really irrelevant. What counts are the marketable results ... new products or new technology.  A good example these days seems to be Alphabet, which seems to throw a lot of R&D money around with nothing really much to show for it.

    It's also often the case that the profit-leader in a sector is not necessarily the technology leader, which is clearly applicable to Apple. They have a long and successful record of making the profits often enough when coming up from way behind in terms of real innovation. Its obviously a winning strategy at the moment, so who's complaining. Whether or not it's a recipe for future success is a question I could easily ask but not answer. We will see.
    Number of patents isn’t the measurement that’s used here. The measurement is amount of sales in dollars, and profits in dollars, vs the amount of R&D as a percentage of that. So the article gets it right.

    and, this article isn’t original in that, many others have been saying the same thing for years now. That includes those in the financial industry. You can’t make up your own metrics, and if something doesn’t fit those self made up metrics, say that what’s being said isn’t true.
  • Reply 20 of 27
    nhtnht Posts: 4,171member
    taniwha said:

    I happen also to come from an R&D background and the dollars spent is really irrelevant. What counts are the marketable results ... new products or new technology.  A good example these days seems to be Alphabet, which seems to throw a lot of R&D money around with nothing really much to show for it.

    It's also often the case that the profit-leader in a sector is not necessarily the technology leader, which is clearly applicable to Apple. They have a long and successful record of making the profits often enough when coming up from way behind in terms of real innovation. Its obviously a winning strategy at the moment, so who's complaining. Whether or not it's a recipe for future success is a question I could easily ask but not answer. We will see.
    Because the A series processors don't have market leading performance and power management...oh wait, it does.

    In what strategic technology area is Apple "way behind"?

    Because it isn't processors, GPUs, material science, industrial design, manufacturing, cyber security, operating systems, development toolchains/frameworks, financial systems, content delivery or application software.  

    It's not even behind in cloud infrastructure anymore.
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