As she unveiled Hewlett-Packard's (NYSE: HPQ) first-quarter revenues to analysts this week, CEO Carly Fiorina promised more research and development (R&D). Even in the face of the technology downturn and deep cost cuts, HP will pony up a whopping $4 billion a year on its R&D.
Indeed, the world's top tech companies are cranking up R&D spending. That's great news for shareholders of HP, IBM (NYSE: IBM), Intel (Nasdaq: INTC), Microsoft (Nasdaq: MSFT), and other big players flush with cash. But it could be really bad news for investors of less prosperous companies struggling to keep up.
Face it, R&D matters. These days, most technology has a shelf life of a banana. Firms that can keep fresh products coming out of the development pipeline will be better positioned to attract more customers. When times are tough, companies can be tempted to cut back. Fools, take note: Those that cut R&D are in danger of saving today at the cost of growth tomorrow.
Believe it or not, networking giant Cisco Systems (Nasdaq: CSCO) has cut back slightly on R&D. That said, Cisco tends to beef up its technology with cleverly designed acquisitions. Just this week, it bought Hammerhead Networks and Navarro Networks, both privately held cutting-edge network specialists. Cisco funded both companies long before it announced plans to acquire them, and uses this strategy to perform R&D without spending a lot of money up front.
But other technology names could be in danger of shortchanging R&D.
Lucent Technologies (NYSE: LU), for one, slashed its R&D budget by 35% last year. No surprises there. Despite spending more than $ 4 billion a year on R&D since 1998, the company is only now showing slight evidence of profitability. Unless things improve overnight, its R&D center, the world-famous Bell Labs, as well as its competitive position could shrink further.
Then, there's Sun Microsystems (NYSE: SUNW). Still suffering more from the high-tech downturn, Sun faces pressure from Wall Street to trim its R&D. With its credit rating now falling to junk status, the job of keeping current R&D spending levels -- about 18% of sales -- will get tougher for Sun.
Sure, R&D expenditures do not tell investors everything. If it's misdirected, R&D won't have the desired payoff. That said, it's hard not to think that the odds of future profits are better for technology companies that boost R&D than those that slash it. The players that underinvest in R&D tend to get hurt.
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Motley Fool contributor Ben McClure hails from the Great White North. He doesn't own any shares of companies mentioned here.
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