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Amazon smashes Italy on R&D

Amazon smashes Italy on R&D

23-02-2021 | Spannende Zahlen
US tech giant Amazon single-handedly spent more on research and development (R&D) than Italy in 2019, and even more so in 2020.
  • Jack  Neele
    Jack
    Neele
    Portfolio Manager
  • Richard  Speetjens
    Richard
    Speetjens
    Portfolio Manager

Speed read

  • European countries keep falling behind in terms of R&D
  • The future of tech is set to transpire outside Europe
  • Europe’s demise is not irreversible but will take time to overturn

What has happened?

Amazon’s spending spree on innovation continues unabated. Having reached USD 35.9 billion (roughly EUR 30 billion) in 2019, the group’s R&D expenses rose to USD 42.7 billion (or EUR 35 billion) in 2020, up 19.0% year-over-year.1  By contrast, Italy’s total R&D spending stood slightly below EUR 26 billion in 2019, according to recent Eurostat figures.2 

Accounting experts may debate at length whether everything the US tech giant considers as R&D falls within that bracket, and whether the headline figure should actually be brought down. Yet, these numbers clearly illustrate one thing: the extent to which most European countries have fallen behind many other regions in terms of innovation.

European Union (EU) member states spent 2.2% of their gross domestic product (GDP) on R&D in 2019, slightly up from 2.0% ten years before. Optimists will argue that the EU’s R&D effort has been on the rise and that, after all, the bloc is not too far behind the US (2.8% in 2018). But this would be ignoring that other countries have been catching up much faster, in particular emerging ones. 

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Why is it important?

Underwhelming R&D spending is arguably one of the key reasons why European firms have been pushed into the global tech scene’s background, over the past couple of decades. Long gone are the days when companies such as Nokia, Ericsson, STMicroelectronics or Skype were stock market darlings.

This explains why the European tech sector accounts for such as small share of the continent’s equity markets today. At the end of 2020, the Information Technology and Communication Services sectors accounted for 11.5% of the MSCI Europe Index, versus 37.2% for the MSCI US Broad Market Index and 23.6% for the MSCI Japan Index, for example. 

Meanwhile, many emerging countries have been redoubling their efforts. China, for instance, has more than doubled its R&D spending as a share of – its fast growing – GDP since 2000, from 0.9% to 2.1% to in 2019. In the meantime, Chinese tech firms have spread their wings. For example, the number of Chinese ‘unicorns’ is more than double that of its EU counterparts collectively.

What does it mean for investors?

This means investors will durably look outside Europe in search for the winners of the digitalization trend shaping our world. From this perspective, emerging markets appear increasingly attractive. We see enormous opportunities at the intersection of two the trends upon which our Global Consumer Trends strategy in built: the digital consumer and the emerging consumer.

Of course, Europe’s descent may not be irreversible. For one, the EU’s EUR 100 billion R&D spending program, to be launched this year, is aimed at addressing the gap. But it will likely take many years, if not decades, to significantly catch up and witness a rise to a new generation of European global tech leaders.

1 Amazon presents its R&D expenses as “technology and content” expenses in its quarterly earnings.
2 See: 27 November 2020, “R&D expenditure in the EU at 2.19% of GDP in 2019”, Eurostat press release.

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