R&D Takes Back Seat Amidst Chip Shortage—But It Shouldn’t

Estimated reading time: 5 minutes

As the global chip shortage continues, companies may be tempted to put research and development on the backburner to conserve capital and prioritize production. A primary area of focus has been on increasing production capabilities to meet demand. In this drive to increase capacity, R&D has fallen to the wayside as some companies consider scaling back to refocus on the expansion of manufacturing capacity at current technology nodes. This is a hard choice to make for any company, and even R&D giants like Apple, known for its dedicated investments in innovation, have had to cut R&D budgets below original projections¹. 

At NextFlex, we’ve heard from partners developing additive manufacturing and advanced packaging capabilities who have had to divert their focus to simply getting product out the door. While this reprioritization is understandable in the context of the shortage, pausing R&D needs to be done with caution. 

Research: Difficult to Start and Stop
A spark of creativity can be difficult to reignite. A pause in research and development, especially for an extended period of time, may result in talent leaving or being dismissed. Again, these are tough decisions for all that even giants like Google have had to make with its research centers². When talent leaves though, details of processes or ideas could be forgotten, and institutional knowledge will generally erode. Plus, needing to restart or re-acclimate to a process can exacerbate lead times. This can be especially problematic for chips, since they have an average lead time of 26.6 weeks, which has stretched to 52 weeks at times due to supply chain issues. 

It is possible to scale back R&D efforts without entirely stopping, such as by prioritizing incremental research over exploratory or pausing a limited number of projects or departments. However, extreme cuts or a full stop may not be possible to come back from in a meaningful or timely way without massive overhauls. Talent may need to be rehired, processes may need to be relearned or recreated, and new materials may need to be sourced, all of which require significant investments of time and money. 

Whether it be a full pause or operating at a reduced capacity, companies make such decisions with careful consideration. It may be necessary in the moment, but it should always be done in recognition that the immediate benefit may mean sacrificing something in the future.

Missing a Product Cycle Can Be Deadly
In high tech, the effects of missing a product cycle can be devastating to a company’s outlook, or result in a long, expensive catch-up process. There can also be a domino effect of racing to catch up while trying not to fall further behind on other projects or developments. By pausing R&D, a company may limit both their ability to keep up with current developments and their ability to be on pace for future ones, as some forward-looking projects may require years of foundational work. 

However, working with reduced resources does not have to have dire consequences. As I’ve previously discussed with regard to the chip shortage, having a dynamic research and development program can help mitigate issues and prevent them from recurring. It can also generate creative solutions and fresh ideas in the face of less-than-ideal circumstances, such as how those created by the current pandemic-have affected production downturns.

Prioritizing R&D Makes a Business Resilient
Often, conserving capital is the reason behind cuts to research and development, since the returns come in the future, and eliminating the cost looks like an immediate boost in profit. While this short-term boost can be useful or alluring, there can be long-term detriments. It can be more expensive in the long run, as scaling back up, including rehiring or updating equipment, costs more than maintenance. Further, investors may be reticent to back a company that does not have a robust R&D program due to a perceived lower ceiling for growth. Finally, companies that conscientiously invest in innovation are also more likely to successfully navigate a recession or other challenging times.

For the chips industry based in the U.S. specifically, it’s also important to remember that we’ve been losing ground on the international field, falling from approximately 37% of manufacturing in 1990 to 12% in 20203³. Even as we’ve historically dominated research and development (and still do, in terms of pure dollar amount), we are being matched in percentage of investment. On average, U.S.-based companies reinvest 20% of profits, while Chinese companies reinvest 23%⁴. The signing of the CHIPS Act does signal some positive signs for the future, with major companies investing tens of billions of dollars into manufacturing and a federal allotment for R&D⁵. As we look to regain ground, we want to ensure we’re not overcorrecting by surging production while cutting back research. 

Conclusion
The balance between manufacturing and R&D is a delicate one that ebbs and flows depending on circumstances. Specifically, the current era of supply chain issues, the chip shortage, and efforts to combat a decline in market share have presented a unique set of obstacles OEMs are facing. However, that doesn’t mean we should take our foot off the R&D pedal. As vital as manufacturing and infrastructure are, we need to be cautious to still conscientiously invest in research and development to stay ahead of the curve on new technology. If, in an effort to regain lost ground, we miss developments in flexible hybrid electronics, additive manufacturing, advanced packaging, or other emerging technologies, we’ll find ourselves in the same bind—and possibly worse off for it. 

References

1. “Apple to Slow Hiring and Spending for Some Teams Next Year,” by Mark Gurman, July 18, 2022, Bloomberg.com.
2. “Google Cuts R&D Projects at Area 120 in Half, Layoffs Imminent: Report,” by Marvie Basilan, Sept. 14, 2022, International Business Times.
3. “Congress Is Giving Billions to the Chip Indstury, Strings Are Attached,” The New York Times.
4. “Silicon: Are Chinese chipmakers spending enough on R&D?” by Stewart Randall, Sept. 10, 2021, Technode.
5. “Biden Signs Chips Bill, Unleashing Funding for US Production,” by Jenny Leonard and Jordan Fabian, Aug. 9, 2022, Bloomberg.com.

Malcolm Thompson is executive director of NextFlex.