Investment in innovation to grow at double-digit rate until 2026

Inflation is high, the economy is limping. Nevertheless, industrial companies around the globe are planning to massively increase their spending on engineering, research and development (ER&D) and thus innovation in the broader sense in the coming years. According to the report, global ER&D budgets in key industries such as automotive, energy and mechanical engineering could increase by an average of 10 percent annually until 2026. These are the findings of the first "Global Engineering and R&D Report" by international management consultants Bain & Company, for which more than 500 high-ranking executives from key industrialized countries worldwide were surveyed. Drivers and restrictions are highlighted, as are the reasons for outsourcing ER&D activities, which manufacturing companies across industries are increasingly opting for.

Greater importance attached to innovations

The fact that the willingness to invest is high despite the weak economy comes as no surprise to Bain partner and study author Daniel Suter: "Spending on innovations is now often at the heart of strategic considerations. It no longer only serves to develop and optimize products, but at the same time prepares the ground for further developing business models or even reinventing them in parts."

The greater importance attached to innovations is closely linked to ongoing digitization. According to the Bain study, ER&D spending on digital products and services will increase globally by an average of 19 percent per year until 2026 - almost twice as fast as overall investment. "Industrial companies in the DACH region should also push their activities in this area," emphasizes Suter. "Past experience has shown that investments in innovation during a downturn often translate into a sustainable competitive advantage. And recent job cuts in the technology sector make it easier to recruit digital talent."

Facing up to the shortage of skilled workers

In addition to innovative products and services, the most important thing is to invest in personnel. In order for industrial companies to drive their ER&D activities forward, they need highly qualified specialists and managers. But there is now a global shortage of these. According to the Bain study, 73 percent of respondents are talking about personnel bottlenecks. And the retirement wave of baby boomers has just begun. What's more, as engineers get older, they often move on to other roles, making the shortage of development personnel even greater.

Bain partner Michael Staebe, who heads the Industrial Goods and Services practice group in the DACH region, calls for a rethink: "In a time of global skills shortages, it is not enough to woo rare talent with elaborate campaigns. It is at least as important to create attractive framework conditions for the existing workforce, and especially for engineers, so that they can continue to develop."

Investing in innovation for results-oriented solutions

Only those who rise to this challenge and make appropriate offers will be able to meet the changing demands of the market. The focus is increasingly less on the products themselves and more on results-oriented solutions for which customers pay according to availability. "Industrial companies need to tap into new forms of value creation," Staebe explains. "If they don't invest in innovation or an improved customer experience, they risk being marginalized by more flexible competitors."

Those involved in the Bain study are well aware of this danger. This is another reason why three out of four respondents consider shortening development times to be a top priority. They attach almost as much importance to the integration of new technologies. This includes not least artificial intelligence. For German managers, dealing with the high cost pressure is also an urgent topic.

Defending technology leadership with partners

In order to achieve rapid development successes with scarce human resources, more and more companies are working with external partners. According to the Bain study, 60 percent of manufacturing companies plan to outsource a larger part of their innovation activities in the coming years. To date, the outsourcing rate of large companies has averaged 18 percent. Compared to the IT sector, for example, this is rather low. There, the outsourcing share now amounts to 46 percent. When choosing an external partner, expertise plays the central role. Costs are only the second most important decision criterion.

The fact that manufacturing companies around the world are increasingly outsourcing ER&D activities is a fundamental change in the view of Bain partner Suter: "Traditionally, industrial companies have done everything they could to drive developments for the core business in-house and only outsource upstream or downstream stages of the value chain. Now, even the core business is no longer taboo in this regard." The cooperations of car manufacturers with chip producers and Internet giants are just a harbinger, he says. For Suter, one thing is certain: "The industry in the DACH region can only defend its technology leadership by closing ranks with partners."

Source: Bain & Company