I found interesting data comparing R&D spending among the largest Chinese and European construction companies in a recent Construction Briefing article. The Chinese giants easily led in dollars spent, dwarfing their European counterparts.
The leaderboard
Chinese state-owned construction giants invest billions of dollars annually in R&D. Here are some examples:
- China State Construction Engineering Corp (CSCEC): $6.4 billion, 2.1% of revenue
- China Railway Group: $4.2 billion, 2-3% of revenue
- China Communications Construction Co. (CCCC): $3.7 billion, estimated 3-4% of revenue
Europeans tended to be more modest.
- Vinci reports an R&D budget of €50 million ($58 million), which is 0.07% of its €71 billion in revenue.
- Another French conglomerate, Bouygues, invested €76 million, about 0.17%, in R&D.
- Austrian STRABAG spent €19 million on research, development, and innovation activities in the 2024 fiscal year, amounting to 0.1% of revenue.
The figures for large European companies’ spending appear low. It’s unclear whether additional R&D is considered part of construction projects or included in IT budgets.
76% not investing in innovation at all
If large companies are not major innovation investors, the EU’s construction sector does not shine either.
The European Investment Bank’s Investment Survey 2024 examined investment trends across EU industries, including innovation. Innovation activity in the survey was defined as an investment made during the last financial year to develop or introduce new products, processes, or services.
76% of EU construction sector firms reported “no innovation activities”; 18% reported “new to the firm” innovation activities; and 6% reported “new to the country/global market” innovation activities.
The figures for EU manufacturing companies were 61%, 28%, and 11%, respectively.
Construction companies face a profitability trap. They need to invest in R&D to stay competitive and address key issues, but they must do so efficiently and avoid unnecessary risks. If a tech company (25% margin) wastes 1% on poor R&D, it’s a minor mistake. However, if a construction firm (3% margin) wastes 1% on bad R&D, it wipes out 33% of its annual profit.
How much R&D is profitable?
How much investment in R&D is beneficial? A recent South Korean study examined 136 local construction companies with over 100 employees and dedicated R&D teams. The research linked R&D spending to increases in profit margins.
The research showed that Korean construction firms achieve the strongest financial performance when they invest around 0.47% of sales into R&D projects. Spending more than that yields diminishing returns. Also, maintaining about 2.25% of the workforce as R&D personnel is optimal.
Based on this study, Chinese firms may be overspending or inefficient, while European firms are significantly underspending. However, it is hard to draw definitive conclusions from a group of companies operating in very different business environments.
Can we learn from China?
Like South Korea, China is a totally different market from the EU. Still, there might be something we can learn from their approach to construction R&D.
China’s national planning creates a broad incentive environment. Companies that invest in R&D align with national priorities and may be better positioned to access public funding, licenses, or favorable treatment. Replicating this model in Europe is not feasible. The EU’s strict state aid rules prevent governments from favoring ‘national champions,’ and private European firms face shareholder pressure to prioritize short-term dividends over long-term national agendas.
Many Chinese companies utilize a ‘pre-tax super deduction,’ often deducting up to 200% of eligible expenses. While European nations like France also offer generous R&D tax credits, Chinese firms appear far more aggressive in structuring their operations to capture these benefits.
China has also been rapidly building up its scientific, engineering, and technical talent pool. The combination of government, academia, and industry creates a dense ecosystem in which innovation, R&D centers, and industrial firms intersect and cooperate.
In contrast, Europe faces a dual challenge: a severe skills shortage and a ‘siloed’ landscape where academic research struggles to find its way to the construction site. While China churns out engineers to fuel its infrastructure boom, European firms must make the industry attractive to an AI native generation.
What can the EU construction sector do?
The construction industry has immense potential to enhance its performance, sustainability, and profitability. Yet, most companies are failing to treat R&D as a strategic imperative. They attempt to solve systemic issues with limited tech pilots that don’t scale, viewing innovation merely as an expense rather than an asset.
For genuine returns, construction firms must manage R&D with the same rigor as any other capital investment. This means moving beyond isolated experiments and forming deep partnerships with academia, suppliers, and specifically, the startup ecosystem.
If European firms cannot match the massive internal budgets of their Chinese counterparts, they must outmaneuver them by leveraging the agility of startups. By investing in or partnering with young tech ventures, incumbents can “outsource” the riskiest phases of R&D. This is the capital-efficient way out of the “profitability trap”, integrating proven solutions without the heavy overhead of internal labs.
Some companies and many researchers have concluded that the era of isolated tinkering is over. We need to rethink, at a systemic level, how we approach construction.
Who will steer this transformation in Europe? Will it be the massive incumbents waking up to the startup reality, or will the 6% of true global innovators eventually replace them?
View the original article and our Inspiration here
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