News Column

HP Slashes R&D Spending

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Struggling Hewlett-Packard (HPQ) -- long celebrated as among the world's most innovative corporations -- has over the past quarter century dramatically reduced the share of revenue it devotes to research and development, an investment widely considered essential for companies to stay on the cutting edge of technology.

The figure has steadily declined from 11 percent in 1987 to less than 3 percent over the past four years. By comparison, most of Silicon Valley's 20 biggest tech companies last year spent at least 10 percent on R&D and several spent

more than 20 percent, according to an analysis by this newspaper. Corporate R&D focuses on creating new products and services, or improving existing products and services, with the goal of increasing sales and profits.

Whether this trend has anything to do with HP's recent decline in sales and profitability isn't clear, and HP insists it hasn't lost its inventive touch. But some industry analysts fear the amount it allocates for research is endangering its legendary status as a technology trailblazer.

"Strategically, it's suicidal," said tech analyst Rob Enderle. "What it means is, as other companies like Cisco (CSCO) and IBM continue to advance, they keep falling behind."

Experts acknowledge there is not necessarily a direct connection between lavish R&D spending and innovation. And it is hard to make comparisons between tech companies in different parts of the industry. Intel (INTC)

spends nearly 20 percent of its revenue on R&D, while eBay (EBAY) spends a little over 11 percent. And Apple (AAPL) spends slightly more than 2 percent.

But HP CEO Meg Whitman has expressed concern about the issue, vowing to boost the company's R&D spending, saying, "R&D is the lifeblood of this business."

Since it was founded in 1939 after creating an audio oscillator for the sound system of the movie "Fantasia,"

HP has earned global renown for cutting-edge products.

Among other things, the Palo Alto corporation designed the first commercial light-emitting diode, the first programmable scientific desktop calculator, an ultrasound product for imaging the human heart, cooling technology to cut energy use in data centers and a method to quickly control the spread of computer viruses across corporate networks.

More recently it has developed everything from a new class of energy-efficient computer servers to solar-powered gadgets soldiers can wear on their wrists to view digital maps and other information.

Nonetheless, HP's sales have slowed over the past couple of years, in large part because the consumer market for its personal computers has dwindled. Whitman, who became CEO in 2011, has been trying to revitalize the company. After announcing nearly 30,000 layoffs last year to help cut costs, she told analysts that with some of the savings "we are going to increase the R&D budget pretty substantially."

HP's research and development expenditures have inched upward under Whitman and the $3.4 billion it spent last year was three times, in dollars, what it spent in 1987, the earliest year the figure was tracked by financial information company Bloomberg. Even so, over that same period, HP's revenue has grown 15 times larger.

In total dollars spent for R&D last year, the corporation ranked fifth among the 20 biggest Silicon Valley companies that reported such

data. Intel topped the list at just over $10 billion -- the most in corporate America -- while Sanmina, a San Jose maker of optical electronics and mechanical products, spent the least -- about $22 million.

But as a percentage of revenue, HP's expenditure ranked third from the bottom, with only Apple and Sanmina lower.

Hewlett-Packard spokesman Michael Thacker questioned the relevance of comparing companies that way, insisting "innovation is alive and well at HP." He noted it obtained more than 1,300 patents in 2012 -- the most of any local company -- adding that Whitman is determined to turn what HP innovates into products more quickly.

Some industry experts also point out that HP gets more than a quarter of its revenue from the maintenance and other business-support services it provides its customers, which don't require big R&D investments. And HP has less need to invent technology today than it once did, they said, because it now often relies on what others develop, such as Intel's chips for its personal computers.

Like many chipmakers, Intel -- which devoted 19 percent of its revenue to R&D last year -- spends heavily so it can find ways to keep shrinking its circuits' components, while anticipating future uses for its chips.

"We have things going on in everything from traditional lower-power processors to things like robotics, visual computing, what we call the Internet-of-things, big data, you name it," said Sean Koehl, an Intel technology evangelist. "If it's related to computing, we have someone working on it."

Although a study last year by consultant Booz & Co. concluded "there is no long-term correlation between the amount of money a company spends on its innovation efforts and its overall financial performance," it said computer and electronics companies typically allocate 6.5 percent of their revenue to R&D.

Another study, in December, by research organization Battelle and R&D Magazine found research and development spending has surged in some other countries, particularly China. And it warned that "in our increasingly technology-dependent world, strong continued support of R&D investments is essential to maintain and grow a nation's economic strength."

Given the intense push in other parts of the world to develop groundbreaking products, more than 40 percent of the 668 industry technology specialists that corporate adviser KPMG recently surveyed said they considered it likely the center of tech innovation "would shift from Silicon Valley to another country in the next four years."

While other experts find that assessment unduly pessimistic, several said it was vital for companies here to keep pumping money into research and worried that HP has done too little of that.

"HP is not as competitive as they should be across a lot of their portfolio," said Baird Equity Research analyst Jayson Noland, "and that absolutely has some correlation to what they spend on R&D."

Contact Steve Johnson at 408-920-5043. Follow him at Twitter.com/steveatmercnews.

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(c)2013 the San Jose Mercury News (San Jose, Calif.)

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