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Major telecoms vendors Ericsson, Huawei, and Nokia have invested heavily in R&D over the past few years, much of it driven by 5G; but there are indications that this R&D spend may become more diverse and decentralized.

Overall R&D-to-sales ratios for the big three vendors has been remarkably consistent over the past two to three years, and looks to continue at this level, with Ericsson's annual R&D-to-net-sales ratio hovering around 20–21%, Nokia's around 18%, and Huawei's around 14–15%.

Ericsson and Nokia's R&D-to-sales ratios may look stronger than Huawei's, but Huawei is spending considerably more in real terms: in 2018 Huawei's R&D expenditure was around $14.8bn, while Nokia's was around $5bn, and Ericsson's around $4bn – and it should be remembered that Huawei's R&D spend has to be spread across a wider range of business areas.

As a point of comparison, some of the largest global spenders on R&D in 2018 were Amazon at almost $23bn, and Google's parent company Alphabet at $16bn. Interestingly, Amazon has an R&D-to-sales ratio of less than 10%, and Alphabet's is less than 12%. Clearly, they can manage with a lower R&D-to-sales ratio than those required of telecoms vendors.

There is more to innovation than the size of a vendor's R&D. Research by PwC suggests that there is no inherent link between R&D spend and sustained financial performance. Other factors are just as important, such as how well focused and efficient the R&D is, and how effective the company's innovation processes are in bringing new products and business models to market. Amazon, for example, has been adept at maximizing its core competencies and spreading its innovation activity across the organization rather than keeping it centralized.

There are signs that the telecom vendors may also be adopting similar best practices; for example, Ericsson has for the first time given its Managed Services business area its own R&D budget. This is part of a wider shakeup in its Managed Services business area, and the launch at the start of this year of its Ericsson Operations Engine. Another of the vendor's new strategic priorities is dedicated R&D investment in AI and automation, with end-to-end customer use cases as a focus.

Huawei, following the merger of the Telecom Software business unit with its Global Technology Services (GTS) division in 2018, has also established a dedicated GTS R&D department, and the company is also channeling dedicated investment into AI.

At Nokia as well, automation and cognitive operations are being targeted for R&D investment.
The increasing focus by these vendors on AI and automation R&D is only one example of new R&D priorities. What makes it particularly interesting is that it shows how vendors are prepared to spread innovation more deeply into the organization by allocating dedicated R&D budgets, and how they plan to use their services arms to maximize R&D effectiveness.

R&D can be organized in a variety of ways, whether centralized, decentralized, or federated; but ultimately it needs to be aligned with the strategy being pursued by the organization if it is to be effective. So, there is a logic to aligning R&D more closely with innovation at the business group level. 

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