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1/2/2018 | 2 MINUTE READ

R&D Spending in Automotive Could Spur Demand

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OEMs are investing more in R&D as they explore new technologies, a trend that bodes well for processors serving this market.

At Gardner Intelligence, we work diligently to provide our readers with information that connects economic data with current and expected business conditions. To accomplish this goal, we collect both economic data and equities data from Wall Street firms. By monitoring and reporting data from both domains, we create a more comprehensive view of what is and will happen in the specific manufacturing spaces covered by Gardner Business Media, parent company of Plastics Technology Magazine.

In recent months we have called attention to declining car sales and flattening truck sales. Yet this broad-brush picture misses critical dynamics of the industry, such as how the introduction and mass placement of new technologies and new drive trains is creating significant demand for equipment in the automotive industry.

For this reason, Gardner Intelligence recently examined the financial statements of 14 major automotive OEMs to discern possible industry trends in capital expenditures, net property plant and equipment, and working capital. We selected these 14 OEMs because of the richness of the quarterly data they have provided during these years in their Security and Exchange filings, and then indexed this data to build a representative model of the industry.

What we found was that between the fourth quarter of 2012 and the third quarter of 2017, capital expenditures grew at a nominal annualized rate of 4.7%. Unadjusted for inflation, the industry—as represented by our data—is spending 25% more on capital expenses than it did at the end of 2012. Additionally, net property, plant, and equipment data, which includes a broader range of purchases, including equipment but also depreciation of old equipment, has growth even faster during this time, with annualized growth of 17%. The result is that net PP&E today is nearly 70% higher than it was in 2012 .

Working capital between 2012 and 2015 was relatively stable until 2016, when it fell more than 20% from its level at the end of 2012. At present, the 14 firms for which we have data are holding 73% of the working capital they did at the end of 2012. Although working capital has diminished during these years, we see that major OEMs are spending more on R&D as a percentage of revenue than they have in the past.

Honda and Daimler, respectively, spent over 5% and 3.7% of revenues on R&D in the third quarter of 2017. This is significantly more than was spent just two years prior, when Honda spent 4.25% and Daimler 3.25% of revenue on R&D in the third quarter of 2015.

While increasing sales in recent years has certainly bolstered some of these figures, it is important to realize that the new technologies coming to market in the next few years will require investments that will create sustained demand and industry growth for advanced automation, machinery, tooling, composites, and plastics. All OEMs understand that the significant changes their industries are and will be undergoing in the next few years will result in significant purchases of more technically capable and complex equipment.

ABOUT THE AUTHOR: Michael Guckes is the chief economist for Gardner Business Intelligence, a division of Gardner Business Media (Cincinnati, OH). He has performed economic analysis, modeling and forecasting work for nearly 20 years among a wide range of industries. Michael received his BA in political science and economics from Kenyon College and his MBA from The Ohio State University. mguckes@gardnerweb.com


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