CEO Daily: Monday, December 21

Dec 21, 2015

Regular readers of this newsletter know I am no fan of the DuPont-Dow merger, which will reduce research spending at both companies. Nor do I care for the jack-up-prices-and-slash-research business model of pharmaceutical companies like Valeant and Turing. Those moves are celebrated by activist investors, who argue much R&D spending isn’t “efficient” – by which they mean it isn’t putting money in their pockets quickly enough. The demise of R&D by U.S. companies, compounded by cutbacks in government R&D spending, has led to a notable decline in R&D spending in the U.S. in the last decade, measured as a share of GDP.

In the January issue of Fortune, my colleague Chris Matthews takes a deeper look at this phenomenon. We are publishing his story today online. He notes that DuPont labs provided us with such products as Velcro and Teflon (how could we live without either!), while Dow was the creator of Styrofoam. Other proud labs of yore included AT&T’s Bell labs – its ex-campus is now a mixed-use, urbanist real estate development in New Jersey -- and Xerox PARC, where the computer mouse was born.

One of the issues here is what counts as R&D spending. The activists want research that quickly translates into profits. That has meant a reduction in basic research. Matthews cites a study by three economists showing the percentage of publicly traded companies that published research in scientific journals dropped two thirds from 1980. “Corporations value basic science less and demand less of it” than they did 35 years ago, says Ashish Arora, one of the authors.

Meanwhile, Chinese companies, goaded by the government, are bulking up on R&D. The Chinese commitment to R&D has doubled since 2008, If current trends continue, China will surpass the U.S. as the leading R&D spender by the end of the decade, according to the OECD.

Does it matter? Only if you care about the future.

More news below.

Alan Murray
@alansmurray
alan.murray@fortune.com

Top News

Shkreli: Charges Are 'Baseless'

Pharmecuticals executive Martin Shkreli on Saturday said securities fraud allegations that resulted in his arrest this week were "baseless and without merit." Federal prosecutors alleged Shkreli was running a Ponzi-like scheme at his former hedge fund and a company he headed before he took the helm of Turning Pharmaceuticals. It was at Turing that Shkreli became infamous for jacking up the price of a life-saving AIDS drug. Reuters

Toshiba unveils restructuring

Toshiba announced a plan to cut nearly 7,000 consumer electronics jobs after a $1.3 billion accounting scandal, part of an overhaul to streamline the tech conglomerate into a company that focuses on chips and nuclear energy. Due to restructuring costs, Toshiba says it expected to post a net loss of around $4.53 billion in the fiscal year ending in March. The company is angling to regain trust with shareholders after admitting to overstating profits for several years, news that has sent the company's stock down about 40% since details first emerged in April. Reuters

Air France plane diverted

An Air France plane that was headed toward Paris over the weekend was diverted to Kenya on Sunday after a suspicious-looking item was discovered onboard. The airline has since confirmed that the package was not an explosive, though the false alarm follows a plane crash in Egypt this past October that was linked to a bomb. Terrorism has become a problem for the airline industry: airlines have reported losing sales after the Russian airliner crash and a recent terror attack in Paris led Air France to say it had lost over $50 million worth of business. Fortune

SpaceX plans rocket launch

SpaceX CEO Elon Musk confirmed plans for the private space company to launch a modified Falcon 9 rocket tonight that would be SpaceX's biggest and most powerful yet – and also the first commercial launch since the company's rocket blew up just after liftoff in June. The company has made several modifications since the failure in June, and also notably hopes to land its reusable rocket on actual land in Florida, rather than on a barge in the ocean. Wired

Mild winter threatens drillers

A mild North American winter isn't just hurting apparel retailers hoping to sell coats and boots – it is also stinging drillers, especially gas giants like Chesapeake Energy, by curbing seasonal demand for heating of homes and businesses. The weather has been a headwind for energy companies, which are laden with debt and reeling from a 17-month collapse in oil prices. Two Texas-based drillers even filed for bankruptcy the past week, while Chesapeake is mulling moves to restructure debt or sell assets. Reuters

Around the Water Cooler

Cook talks taxes on '60 Minutes'

Apple CEO Tim Cook was interviewed by CBS's Charlie Rose on Sunday’s 60 Minutes, expressing dismay about the state of the U.S. tax code. "This is a tax code, Charlie, that was made for the industrial age, not the digital age," Cook told Rose. "It's backwards. It's awful for America." Cook adds that the real reason Apple has $181 billion parked overseas is that he doesn't want to pay 40% in taxes it would cost for Apple to bring it back. When asked about a purported scheme to pay little or no taxes on revenue held overseas, Cook sternly refuted such claims. The entire script of the interview can be found here. Fortune

'Star Wars' rules box office

Star Wars: The Force Awakens brought in $238 million during its first weekend in theaters, officially the biggest opening in North American box office history. Globally, Star Wars brought in $517 million – a figure that doesn't include China – and one analyst said the film could bring in $2 billion by the time it leaves theaters. Fortune

How Bezos helps the Post grow

It has been over two years since Amazon.com CEO Jeff Bezos bought the Washington Post for $250 million and in that period of time the e-commerce executive has been busy helping shape the publication's digital transformation. An important milestone was recently achieved: the Post has surpassed the New York Times in unique Web visitors two months in a row. Bezos hasn't weighed in much on the paper's journalism but he has been hands-on with its technology and instrumental in making it a more data-driven company. Bloomberg

Regulators may thwart rail merger

Canadian Pacific's $27 billion offer to buy Norfolk Southern (repudiated repeatedly by the takeover target) hasn't garnered a ton of national media attention but we think it is an important deal to keep an eye on. The New York Times dives into why: noting that the number of rail operators in North America has shrunk to seven from 56 over a three-decade period through 2001. It was that year that spurred a new rule to make rail mergers harder, after a series of deals in the 1990s led to complaints of lost cargo, derailments and billions of dollars lost to taxpayers. New York Times (subscription required)

5 things to know this week

GDP, Nike Earnings, and Christmas — 5 Things to Watch in the Week Ahead. This week's story can be found here.

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