Tech giants Microsoft, Google and Apple invested more than five times the amount spent by five of the largest US defense companies on research-and-development (R&D) projects in 2013

May. 26, 2014

By MARCUS WEISGERBER

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WASHINGTON — Tech giants Microsoft, Google and Apple invested more than five times the amount spent by five of the largest US defense companies on research-and-development (R&D) projects in 2013, according to data compiled by a noted defense analyst.

But the five defense companies — Boeing Defense, L-3 Communications, Lockheed Martin, Northrop Grumman and Raytheon, all of which were in the top 10 of the 2013 Defense News Top 100 defense companies list — collectively spent about $800 million more on internal R&D in 2013 than they did in 2012, according to the data.

In all, the three big tech companies spent $18.8 billion more than the defense companies on these R&D projects in 2013, according to data compiled by Byron Callan, an analyst with Capital Alpha Partners. Over the same time frame the five defense companies spent a total of $4.1 billion on R&D projects, while Google spent $8 billion, Apple $4.5 billion and Microsoft $10.4 billion.

“Those numbers kind of just stagger me that some of the tech giants are spending more than the five major primes combined,” Callan said.

“I just find it very intriguing that there’s such a misalignment between what these big guys are spending in absolute terms and what the US sector is spending,” he said.

One reason for the disparity in R&D investment could be that the Defense Department has relatively few cutting-edge, major programs starting in the coming years, Callan said.

In some cases, the Pentagon has opted to slow or cancel new programs, due to shrinking defense spending. Congress has also signaled it will not allow DoD to cancel certain programs, thus preventing the Pentagon from freeing up funds that could have been invested in R&D projects, Callan said.

“If you keep money in these older, legacy programs or you haven’t freed up money for some of these newer things that would see a promise of a payoff if someone takes some risk, then this a dog chasing its tail,” Callan said.

Company R&D spending has been closely monitored by DoD in recent years, particularly as the Pentagon sees its own development coffers come under pressure as defense budgets tighten.

Last year, Frank Kendall, DoD undersecretary for acquisition, technology and logistics, challenged the defense industry to spend more money on R&D projects. The reaction from primes has been mixed.

For smaller companies, the reaction to the R&D challenge has also been mixed. Some medium-sized companies argue that having less cash on hand than larger companies could limit the pace at which they conduct R&D.

Callan said the size of the company does not necessarily determine how much the firm will invest in R&D.

“I don’t think it’s necessarily a small-to-mid-sized company phenomena,” he said. “It’s kind of a sector phenomena.”

William Lynn, the CEO of Finmeccanica North America and DRS Technologies, said his company saw its revenue fall as the US decreased its war spending. Still, it has protected its R&D spending.

“You can’t spend too much, but we try to balance protecting our margins and protecting our future, and we try not to stray too far in one direction or the other,” he said. “We’re willing to take some short-term decline in margins, modest, to protect our longer-term competitiveness.”

For a company like DRS, which builds sensors and other types of high-tech electronic equipment used by the larger prime contractors, being on the cutting edge is key, Lynn said.

“If we don’t stay up with the technology, the government or the primes won’t come to us,” he said. “It’s a death spiral for us and so we do have to protect that [but] you can’t go to zero margins either; you’ve got to balance it.”

Callan argues there is a misalignment between DoD and what it wants industry to do. “There is a need for a better path of programs or prototypes where we could recover some of the money invested,” he said.

“They’re not creating the lanes to encourage firms to take more risk and put more of their own skin in the game,” he said. “I think it’s fruitless in some ways to ask for industry to spend more money without at the same time pushing much harder to make sure that there’s some competitive programs that that investment might have some promise of return.”

One way to help the small companies could be for DoD to align more toward DARPA R&D programs or prototyping projects, Callan said. DARPA’s 2015 budget request of $2.9 billion is $136 million, or roughly 5 percent higher than fiscal 2014 enacted levels