How effective are the company's R&D efforts
"I am an eager reader of whatever Phil has to say, and I recommend him to you."
---Warren Buffett
This post will be about a topic I got stuck on while reading Philip Fisher's Common Stocks and Uncommon Profits. The book is great and elevates your thought process.
In the third chapter What to buy: The Fifteen Points to Look for in a Common Stock under Point 3. How effective are the company's research and development efforts in relation to its size? I got hung up on what I am used to in business, where we daily have these measures and KPIs versus how investors value the effort of Research & Development (R&D)!
The most common measure of judgment is of course how much a company invest yearly (or last 5 years) in R&D in total, R&D as of total Sales (especially compared to the competition) and how the trend is developing during a longer period (of course this probably depends on how long the Time-To-Market is, i.e. from Idea (or Design) to that the market is ready for the market and can be launched!
So if we start with the standard measures and look at Micron Technology (Ticker:MU)
From the latest 10-K that was released in October 2019, I got the following numbers
In 2019, MU spent $2.4 billion in R&D, which is around 10 percentage of Revenue. 2018 and 2017 it was $2.1 billion and $1.8 billion respectively, which is 7 percentage and 9 percentage!
If we want to make a first easy comparison to a competitor, I pick Intel (Ticker:INTC)! They did invest $13 billion in 2019 which is more than 6x as much as MU, but percentage-wise it was 18.5 percentage. Now Intel is not only a direct competitor in MUs field, i.e. DRAM and NAND, they do much more - but this gives me the first feeling of high or low numbers! Of course, now you could go on and compare it to the industry average etc., but let's look at another method!
In the book and the third point of that chapter, the thing was that you have to look at how efficient the R&D organization is and how well they are doing compared to others.
From my experience, the last 10 years R&D shifted into much smaller and Agile teams (5-15 people), which are autonomous and cross-functional, breaking up the development in much smaller pieces, and delivering a result every second to third week!
Here is a great report (R&D productivity in the semiconductor industry) by McKinsey, who analyzed more than 2000 projects at 75 different semiconductor companies with following results
"These findings point to the need for lean R&D organizations, where project teams are co-located, limited to only the optimal number of team members required, and kept staffed according to plan for the entire life cycle of the project."
From reading the 10-k, R&D is key for MU, and they are very cost-aware, e.g.
Micron Headquarter and biggest R&D site in Boise, Idaho
How many sites do MU have, as we read further:
"Our largest R&D center is located in Boise, Idaho and other product and process
development centers are located in Japan, China, Germany, Italy, India, Singapore, Taiwan, and other sites in the United States."
Time to market, which is the Point 4 above is as well addressed at MU, here visualized in the CEOs Investor Presentation for MU strategy from 2018
Overall I have a good feeling of that the R&D spending is well used and that they are close to the requirements of the ability to be efficient in R&D!
If we want to make a first easy comparison to a competitor, I pick Intel (Ticker:INTC)! They did invest $13 billion in 2019 which is more than 6x as much as MU, but percentage-wise it was 18.5 percentage. Now Intel is not only a direct competitor in MUs field, i.e. DRAM and NAND, they do much more - but this gives me the first feeling of high or low numbers! Of course, now you could go on and compare it to the industry average etc., but let's look at another method!
In the book and the third point of that chapter, the thing was that you have to look at how efficient the R&D organization is and how well they are doing compared to others.
From my experience, the last 10 years R&D shifted into much smaller and Agile teams (5-15 people), which are autonomous and cross-functional, breaking up the development in much smaller pieces, and delivering a result every second to third week!
Here is a great report (R&D productivity in the semiconductor industry) by McKinsey, who analyzed more than 2000 projects at 75 different semiconductor companies with following results
- Team productivity is strongly (and negatively) correlated with team size
- Each development site added reduces R&D productivity
- Don’t make assumptions regarding the ‘build or reuse’ question
- Consider the effects of time spent in all development phases, not just in design and verification
"These findings point to the need for lean R&D organizations, where project teams are co-located, limited to only the optimal number of team members required, and kept staffed according to plan for the entire life cycle of the project."
From reading the 10-k, R&D is key for MU, and they are very cost-aware, e.g.
- "We share the cost of certain product and process development activities with development partners"
- "We have had agreements to jointly develop NAND and 3D XPoint technologies with Intel."
By reading the 10-k, and without knowing it, I would guess that MU is one of the lowest-cost producers in the industry, which is another point in Phil Fisher book!
How many sites do MU have, as we read further:
"Our largest R&D center is located in Boise, Idaho and other product and process
development centers are located in Japan, China, Germany, Italy, India, Singapore, Taiwan, and other sites in the United States."
Time to market, which is the Point 4 above is as well addressed at MU, here visualized in the CEOs Investor Presentation for MU strategy from 2018
Overall I have a good feeling of that the R&D spending is well used and that they are close to the requirements of the ability to be efficient in R&D!
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