German industrial group Siemens is to raise research spending and expand activities with start-ups to help to keep its innovative edge as industry rapidly turns digital.

The trains-to-turbines group said it would raise research and development spending by 7 percent this year to 4.8 billion euros ($5.2 billion), with the bulk of this flowing to its major strengths of automation, digitization and energy systems.

The Munich-based group has been instrumental in the development of the telegraph, X-ray machines and the trolley bus and depends on its ability to keep innovating to maintain pricing power and outpace the markets in which it is active.

“Innovation is part of our DNA,” Chief Technology Officer Siegfried Russwurm told analysts and reporters at a capital markets day.

But Siemens increasingly has to compete with software companies who can develop technology faster without the legacy of physical machinery or the complexity of eight different industrial businesses that Siemens has to manage.

About 5 percent of its 350,000 staff are software engineers.

To become more nimble, Siemens said it would bundle and expand its activities with start-ups into a kind of incubator that would be a consultant, promoter and risk capital provider for businesses and projects.Siemens Venture Capital has invested more than 800 million euros in start-ups over 20 years. They include Munich-based energy-management technology company Caterva and Stuttgart logistics technology provider Magazino.

Siemens also said it would create a new, three-year fund of 100 million euros for employees to develop their own projects, establish a new research center for 100 people in Munich and hire 300 new R&D staff in China.

The increase in R&D spend is slightly above the “moderate” sales growth Siemens expects for its current fiscal year and keeps the proportion of sales it spends on research at around 6 percent, comparable with arch-rival General Electric.

European peers ABB and Schneider Electric spend 4 and 4.9 percent respectively.

Chief Executive Joe Kaeser said Siemens’ quota would probably remain at around 6 percent for the next years, but would presumably rise over time.

One of the areas where Siemens wants to invest is decentralised energy systems, the smaller power-generating units and smart transmission technology gradually displacing the large turbines in which Siemens held a cutting edge.

Its acquisitions of Dresser-Rand and Rolls Royce turbines and compressors over the last year have already strengthened its position in this area, helping to redress the balance after GE won a battle to buy Alstom’s power business.

Siemens said it had won a 900 million-euro order to supply technology for a new power line linking Germany’s industrial south with northern windfarms, a market in which it sees huge potential as renewable power sources proliferate.

(This story corrects Schneider R&D percentage in paragraph 11 to 4.9 percent to give it as percentage of total spending rather than of net cost figure)

(Reporting by Georgina Prodhan; Editing by Maria Sheahan and Jane Merriman)

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