R&D drives on

At technology companies across the US, travel budgets have been slashed, hiring has been frozen, advertising has been put on hold and perks have been reined in. But there's one expense too important to cut: research and development.

Despite the deep sales slowdown facing high-tech companies, executives know they can't lose sight of the prize. No matter how much it hurts today, being prepared with the latest and greatest technology for tomorrow's rebound is a necessity. Indeed, some firms are putting more money into the research kettle.

Just last week, Microsoft (MSFT) Chief Executive Officer (CEO) Steve Ballmer said his firm would invest US$4.5 billion in R&D during the next 12 months, an increase over last year. For the fiscal year ended in June, the R&D bill was $3.87 billion.

Microsoft has plenty of company. Despite disappointing Wall Street with weak second-quarter results in February, Cisco Systems (CSCO) bumped its R&D budget to $981 million from $602 million a year ago. That swallowed 14.5 percent of sales, a slight uptick from 14.3 percent in the first quarter.

The strength of this spending bodes well for the economy. During tough times, R&D is an easy target - cuts can be made with little impact on current operations. But since that isn't happening, it suggests that companies see an end to the economic slump. "Tech companies have learned over the years that to not invest in next-generation technology is to surrender," says Arnold Berman, a market strategist at Wall Street firm Wit SoundView.

Among chipmakers, however, the message is mixed. Most are maintaining R&D budgets but are whittling down outlays for new plants and equipment - without which the new semiconductors can't be produced. In late February, Texas Instruments (TXN) said its R&D spending would climb slightly to $1.7 billion from $1.6 billion last year, but its capital spending would fall 29 percent to $2 billion. With the soft demand, the company wants to "take control of the market and not be a victim," says COO Rich Templeton.

Even Intel , which had vowed to spend aggressively through the downturn, is showing some caution. Two weeks ago, it snipped just $100 million from this year's planned $4.3 billion R&D budget, which is up from $3.9 billion in 2000; the company said capital spending would remain at $7.5 billion, an increase from $6.7 billion last year. Last week, however, Intel slowed investment at a new plant in Ireland and delayed the start of manufacturing there until 2003.

But since a downturn can turn market competition into a fight for survival, research and development offers one lifeline: Only new products can turn into new streams of cash.

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