The numbers
The RORC, calculated for each company annually, provides some insight into how the differing R&D policies have performed:
| Ford | Toyota | Honda | |
|---|---|---|---|
| 2005 | 4.34 | 5.37 | 6.07 |
| 2006 | 1.41 | 5.82 | 6.58 |
| 2007 | 4.06 | 6.34 | 7.01 |
| 2008 | 2.31 | 5.78 | 6.92 |
| 2009 | 2.51 | 2.36 | 4.73 |
| 2010 | 5.00 | 2.97 | 4.43 |
| 2011 | 4.58 | 2.86 | 4.38 |
| 2012 | 4.09 | 2.69 | 3.73 |
Higher RORC = better R&D investment payoff. Clearly, Toyota Motor Corporation (ADR) (NYSE:TM) and Honda Motor Co Ltd (ADR) (NYSE:HMC) have suffered huge declines in returns to their R&D efforts – proof that high R&D expenditure does not necessarily mean a high RORC. Before committing to an investment, savvy investors may want to see if management at either company takes any specific measures to counter the diminishing returns to R&D. Whatever the executives decide, investors should know that Toyota Motor Corporation (ADR) (NYSE:TM) and Honda Motor Co Ltd (ADR) (NYSE:HMC)’s shares are currently very near their all-time highs – can the share price be justified despite a declining RORC trend?
Conversely, Ford Motor Company (NYSE:F) looks better than its competitors in terms of RORC trajectory, and has produced strong sales while also maintaining a leaner R&D department. If this article were a research paper, I would try and explain how and why Ford Motor Company (NYSE:F) execs made this improvement – but in brief, just know that the RORC figures suggest that Ford Motor Company (NYSE:F) has benefited from changing its R&D strategy.
In any event, Ford’s vehicle lineup compares surprisingly well to Toyota Motor Corporation (ADR) (NYSE:TM) and Honda Motor Co Ltd (ADR) (NYSE:HMC) in terms of MPG, though it definitely lacks the bleeding-edge green technology like Toyota’s advanced battery patents or Honda’s zero-emission fuel cell vehicles. I’ll go ahead and venture a guess that Ford execs believe that these leading green developments are still a bit too pricey for the mainstream market; for this reason, the company may be wise to forgo similar expensive R&D endeavors.
While it is impossible to say whether Ford, Toyota, or Honda has the better strategy, the point remains that RORC figures in the industry have shifted significantly in recent years. That said, if you own or are considering shares in any of the aforementioned companies, I’d recommend looking into the implications that this shift may have on your portfolio. If you have never used any sort of return on R&D analysis, the RORC metric can give you a great way to evaluate how well (or poorly) design innovations translate into sales. Try it out.
Andrew Gill has no position in any stocks mentioned. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. Andrew is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article If You Like Fuel Efficiency, You’ll Love R&D Efficiency originally appeared on Fool.com is written by Andrew Gill.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
