R&D Spending in the German Automotive Industry

The automotive industry is one of Germany's largest investors in research and development (R&D) funding, but a study by Booz Allen Hamilton revealed a 20% productivity gap compared to Japanese original equipment manufacturers (OEMs). "If you compare the best-in-class OEMs to the worst-in-class within Germany, that productivity gap widens to 50%," explains Munich-based Booz Allen Senior Associate Thomas Goldbrunner. "In industries throughout Germany, R&D money is not always spent with the best efficiency." For the purposes of this study, Booz Allen defined R&D productivity as the ratio of weighted number of product launches to R&D expenses — revenue aspects were excluded.

"The Japanese automotive OEMs do a very good job with front-loading in the development cycle," says Goldbrunner. "They spend the effort in defining the concept of a car and really execute it against the original plan so they spend less time in engineering loops and develop fewer prototypes. In contrast, German OEMs spend more time developing cars and have more engineering loops." Goldbrunner also observes that the Japanese OEMS typically work more efficiently with their suppliers compared to the European manufacturers.

German passenger car OEMs have higher R&D spend levels (6.1% of total net sales) compared to their Japanese (4.7%) and other European (4.8%) competitors. The German OEMs began increasing their R&D expenditures in 1998 to fuel a product offensive launch that included new models, niche cars, and variants of bread-and-butter cars. That product offensive was also enabled by a significant increase in R&D productivity improvements. "If you look at the figures, the OEMs averaged a 10% productivity improvement annually between 1998 and 2002," explains Goldbrunner. "The best companies saw an improvement as high as 15%." He partially attributes the productivity improvement gains to the OEMs' platform strategies.

Booz Allen advises that senior-level management ask the following questions when making R&D decisions:

• Will R&D performance support the overall corporate strategy?



• How can I maximize the productivity of the product-development process?



• How can I ensure that I leverage R&D resources appropriately?



• How can I optimize product cost without compromising the function and quality of current and future products?



• Does my company's R&D organization utilize internal capabilities and capabilities in the extended enterprise?

"By implementing a turnaround program in product development, OEMs can realize a 30% improvement in effectiveness," says Goldbrunner.

For More Information

Booz Allen Vice President Gregor Harter and Vice President Steven Veldhoen also contributed to this study. For more information, please contact Senior Associate Thomas Goldbrunner.

story posted November 13, 2003