Pictures of the Future     Fall 2006

Innovation@Siemens: Expenditures and Results

Money spent on research and development (R&D) is an investment in the company’s future. This principle applies to every company, but it’s especially true for a high-tech company like Siemens, which has set itself the goal of growing twice as rapidly as the worldwide gross domestic product and occupying leading market positions in all areas as well as achieving sustainable profitability. In pursuit of these goals, Siemens is in tune with the megatrends of urbanization and demographic change and the challenges they pose with regard to energy and the environment, automation and industrial and public infrastructures and healthcare. For almost 160 years now, innovation has characterized development at Siemens. That’s why the innovation strategy that is best suited to Siemens’ business strategy and history is that of a trend­setter (see Pictures of the Future, Fall 2005, Interview with Prof. Weyrich). It involves achieving technological leadership, global presence and a comprehensive portfolio of patents that will enable the company to help define the major trends regarding products, systems and services, and to offer its customers important added value.

In fiscal 2005, Siemens invested a total of 5.2 bill. € in R&D—more than the amount spent annually on research by the European Union. That puts Siemens at the top of the global electrical engineering and electronics industry (see  table). In a ranking of the 1,000 companies with the highest R&D expenditures that was carried out by business consultants Booz Allen Hamilton (BAH) in 2005 ( Interview Steven Veldhoen), Siemens occupies seventh place. In recent years, Siemens’ R&D expenditures relative to its sales have been between 6.7 and 6.9 %. In the years before 2001, when Siemens still owned an R&D-intensive semiconductor business unit, these expenditures were even higher (today the semiconductor unit is an independent company called Infineon Technologies AG).

With an average of 6.8 % of sales invested in R&D and its broad portfolio, Siemens is performing well in the areas investigated in the BAH study. For example, companies that manufacture industrial goods spend about 2.3 % of sales on R&D; for companies in the computer and electronics industry, that figure is 7.6 %, and for software and Internet companies it is 12.7 %. A direct comparison with competitors in key business areas (tables at top right) shows that Siemens’ R&D expenditures generally occupy a solid midrange position. For their respective industries, they are neither much too low nor too high—with either extreme being potentially detrimental, according to the BAH study. If a company invests a great deal in R&D, it risks squandering its money, because high R&D expenditures are no guarantee of a high return on investment. On the other hand, a company that skimps on R&D is limiting its ability to meet the challenges of the future.

This development is also reflected in the fluctuations of the workforce over time (see  graphs). In 2005 some 47,200 people—over one tenth of all Siemens employees—worked in R&D around the world. About 30,000 employees work on software development—more than most of the major software companies. If one looks at the worldwide distribution of researchers and developers, it becomes clear that the company has been a global player for a long time. Almost 53 % of Siemens’ R&D employees work outside Germany at about 150 locations in more than 38 countries, including China, Spain, France, India, the U.S., Israel, Russia and Brazil.

The reasons for this are simple. A company must have active research and development teams in the biggest growth markets and the countries where innovation is most dynamic, so that it can quickly respond to regional requirements by coming up with new solutions. In addition, Siemens is always on the lookout for highly qualified young people. It currently employs more than 103,000 college graduates with degrees in the natural sciences, IT or engineering— and each year more than 10,000 fresh college graduates are hired. A key role in this regard is played by Siemens’ close contacts with top universities all over the world, which include the approximately 1,000 cooperative research projects Siemens launches every year with universities and research institutes ( Learning Together ).

Output Indicators.According to a well-known saying, research initially transforms money into knowledge, but the aim of all R&D investments is ultimately to produce innovations—new products, systems, production processes or services that, in turn, transform knowledge into money because they bring a company business success on the market. However, it’s not easy to quantify the effectiveness of investments in R&D. That’s because R&D expenditures take a long time to pay off—in many cases, only after years of intense, risky work on technologies and products. In the process, many things can go wrong that have nothing to do with research and development. For example, if associated production processes turn out to be too expensive or inflexible, or the sales team is ineffective, or the marketing campaign takes the wrong approach to customers, or the people involved are not constantly communicating with one another, even the best R&D results can flop when they’re brought to market.

Nonetheless, there are a number of indicators of good R&D work. An obvious one is the number and the value of patents generated. Since the early 1990s, and in particular since Siemens’ first patent initiative (which started in 1993), the number of inventions and patent applications has doubled and tripled (see tables on the right). In business year 2005, Siemens researchers came up with 8,800 inventions—about 40 each working day—and patent applications were submitted for roughly two thirds of them.

In the annual rankings of the patent offices, Siemens has occupied a top position for years now. In 2005, Siemens held first place in Germany and second place at the European Patent Office, right behind Philips (which applies for patents directly at the European Patent Office rather than in the Netherlands), as well as ninth place in the U.S.—three places ahead of its competitor General Electric. Even though GE and Philips launched their own patent initiatives a few years after Siemens, they still lag far behind Siemens when it comes to first patent publications.

Nor should Siemens’ support of start-up companies all over the world through venture capital be underestimated. To date, Siemens Venture Capital has invested around 700 million euros in more than 100 companies and 30 venture-capital funds, primarily in the U.S., Europe and Israel, but also increasingly in China and India. These start-up companies also give rise to valuable cooperative projects in high-tech areas, and these in turn generate innovations in Siemens Groups.

Now that the number of inventions registered by Siemens has reached a constant high level, the focus is on the quality of the patents and the development of strategically significant key patents that govern access to important technologies or global standards. Siemens’ 53,000 or so active patents and patent groups amount to a very extensive and valuable portfolio, and that is reflected especially clearly in cross-licensing agreements with other companies. Licensing agreements provide protection against patent claims by other companies. If not for such protection, a certain percentage of sales would normally have to be paid out as licensing fees. By avoiding these costs, Siemens enhances its return on investment from intellectual property.

The high esteem in which Siemens holds its patents is also reflected by the "Inventor of the Year" prize awarded annually to around a dozen successful inventors within the company. There has also been ample recognition from outside the company. For example, for two years in a row, Siemens employees received the German Future Prize— a 250,000 € award from the office of the German President. In 2004, Siemens shared the prize with the Fraunhofer Institute for Silicon Technology and Infineon for a "bio-laboratory on a chip," and in 2005 it shared the prize with Robert Bosch GmbH for piezo injectors for diesel and gasoline engines.

Siemens medical technology has also received its share of awards. In 2005, a revolutionary imaging technology for magnetic resonance tomography (TIM technology) brought Siemens developers the coveted Innovation Prize of German Industry. And Siemens energy technology has matched this pace. In the summer of 2005, the President of the Council of the Russian Federation honored Prof. Klaus Riedle for the highly efficient Siemens gas turbines developed under his leadership by awarding him the Global Energy International Prize, which is endowed with $1 million—the equivalent of the Nobel Prize in the field of energy technology. Riedle shared his prize money with Russian Nobel laureate Zhores Alferov (Innovators (Riedle)).

The example of MR also shows that the successful market launch of an innovation can change the market itself. Before 2003, the number of magnetic resonance tomographs sold by Siemens still clearly lagged behind the figures for General Electric, but soon after the launch of Siemens’ revolutionary TIM technology, Siemens was able to catch up with GE and eventually it became the market leader. The Computer Tomography division has been equally successful and innovative. That’s reflected in the number of jobs in these two divisions, which increased by about 20 % in only two and a half years.

Similar progress is being posted by other divisions, such as Industrial Automation Systems, which has long been the global market leader thanks to its highly innovative products. In the past ten years it has increased its market share considerably and approximately doubled its sales. Here too, the number of employees has increased significantly, by almost 30 % in two and a half years. And when it comes to earnings, all three of these divisions are major profit-makers for Siemens AG.

Even more impressive, the introduction of piezo injection for diesel vehicles actually created a new market. Today, over 17,000 people work in this area at Siemens, Bosch and the related suppliers. Another example comes from the field of power generation. In the past 20 years, orders for innovative Siemens gas turbines have increased significantly. In the 1980s the Siemens plant in Berlin produced about ten gas turbines a year, but today it turns out between 45 and 55 annually. Admittedly, the number of employees at the plant has increased only slightly in absolute terms. But the percentage of highly qualified employees has reached 80 % of the plant’s 1,000 person workforce; ten years ago, that figure was around 65 %. This too is helping to safeguard the future of Germany as an innovative business location.

Overall, analyses show that there is a clear connection between the technological position of a division, its market position, its profit and the extent to which it safeguards and expands its workforce. Siemens divisions that combine an outstanding technological position—in other words, innovative strength—with a good position in the world market (number 1 or 2) also achieve excellent earnings and offer secure jobs.
                                                                                                 Harald Hassenmüller