PPG Annual Report and 10K 2019

10 2019 PPG ANNUAL REPORT AND 10-K Research and Development ($ in millions) 2019 2018 2017 Research and development costs, including depreciation of research facilities $456 $464 $472 % of annual net sales 3.0% 3.0% 3.2% Technology innovation has been a hallmark of PPG’s success throughout its history. The Company seeks to optimize its investment in research and development to create new products to drive profitable growth. We align our product development with the macro trends in the markets we serve and leverage core technology platforms to develop products for unmet market needs. Additionally, we operate laboratories in close geographic proximity to our customers, and we customize our products for our customers' end-use applications. Our history of successful technology introductions is based on a commitment to an efficient and effective innovation process and disciplined portfolio management. We have obtained government funding for a small portion of the Company’s research efforts, and we will continue to pursue government funding where appropriate. We own and operate several facilities to conduct research and development for new and improved products and processes. In addition to the Company’s centralized principal research and development centers (See Item 2. “Properties” of this Form 10-K), operating segments manage their development through centers of excellence. As part of our ongoing efforts to manage our formulations and raw material costs effectively, we operate global competitive sourcing laboratories. Because of our broad array of products and customers, we are not materially dependent upon any single technology platform. Raw Materials, Energy and Logistics The effective management of raw materials, energy and logistics is important to PPG’s continued success as PPG uses a wide variety of complex raw materials that serve as the building blocks of our manufactured products. The Company’s most significant raw materials are epoxy and other resins, titanium dioxide and other pigments, and solvents in the coatings businesses and sand and soda ash in the specialty coatings and materials business. Raw materials include both organic, primarily petroleum-derived, materials and inorganic materials, including titanium dioxide. These raw materials represent PPG’s single largest production cost component. Most of the raw materials and energy used in production are purchased from outside sources, and the Company has made, and plans to continue to make, supply arrangements to meet our planned operating requirements for the future. Supply of critical raw materials and energy is managed by establishing contracts with multiple sources and identifying alternative materials or technology whenever possible. Our raw materials include bio-based materials as part of a product renewal strategy. While prices for certain raw materials typically fluctuate with energy prices and global supply and demand changes, such fluctuations are impacted by the fact that the manufacture of our raw materials is several steps downstream from crude oil and natural gas inputs. We are continuing our aggressive sourcing initiatives to broaden our supply of high quality raw materials. These initiatives include qualifying multiple sources of supply, both local and international, including suppliers from Asia and other lower cost regions of the world, adding on-site resin production at certain manufacturing locations and reducing the amount of titanium dioxide used in our product formulations. We are subject to existing and evolving standards relating to the registration of chemicals which could potentially impact the availability and viability of some of the raw materials we use in our production processes. Our ongoing, global product stewardship efforts are directed at maintaining our compliance with these standards. Changes to chemical registration regulations have been proposed or implemented in the European Union and many other countries, including China, Canada, the United States (“U.S.”), Brazil, Mexico and South Korea. Because implementation of many of these programs has not been finalized, the financial impact cannot be estimated at this time. We anticipate that the number of chemical registration regulations will continue to increase globally, and we have implemented programs to track and comply with these regulations. PPG has joined a global initiative to eliminate child labor from the mica industry, and the Company is continuing to take steps, including audits of our suppliers, to ensure compliance with PPG’s policy against the use of child labor in our supply chains. We typically experience fluctuating prices for energy and rawmaterials driven by various factors, including changes in supplier feedstock costs and inventories, global industry activity levels, foreign currency exchange rates, government regulation, and global supply and demand factors. For 2019 versus 2018, we experienced a deflationary movement in costs, particularly in the second half of 2019, driven by a general slowdown in industrial demand affecting the global supply and demand balance in several of our key purchasing categories. This was in addition to pricing decreases in most of our key feedstocks throughout 2019. In contrast, average raw material costs rose by a mid-single-digit percentage in 2018 versus 2017 due to the rise in feedstock prices, acute shortages in key raw materials and the impact of Chinese environmental regulations. Given the continuing volatility in certain energy-based input costs, particularly the volatility in oil and oil-based derivatives, and foreign currencies, we are not able to predict with certainty the 2020 full-year impact of changes in raw material pricing