As companies, employees and investors nervously wait for Q4 2002 and year end results, Cambashi has brought together some of the existing financial and governmental information to look for possible patterns and emerging trends. We have also noted the concerns of those software suppliers who supply engineering companies over the continuing decline in both industrial output and investment in the UK. This is illustrated by the figures from National Statistics on both output and investment.

Output

Figure 1 shows the output of Production Industries in the UK over the last 13 months.

Figure 1 - Output of UK Production Industries

Whilst the 2002 Jubilee Effect is evident in the June figures, the worrying aspect for manufacturers is that Manufacturing output never rose back to the levels prior to June, and has continued to decline slowly since. There are much-debated reasons for UK manufacturing's decline - high interest rates, high labour-costs, an overvalued currency in Sterling - all of which have some bearing on our inability to respond to competition from Far Eastern economies, particularly Taiwan, Korea, and now, China.

However, it is important to remember that historical sector definitions used for these economic statistics do not necessarily define addressable market opportunities. So, for example, when manufacturing companies outsource elements of their design, manufacture or maintenance operations, the effect is to reduce the apparent volume of manufacturing activity (and increase the volume of services). For the IT vendor, this means that potential users of design and manufacturing software and services are still out there.

Investment

Decline in investment is a global phenomenon, which started in 2000/2001 and has continued to the present time. In the first half of 2002, overall investment (private and public) fell 2.9% in the USA, 6.4% in Germany, 6.2% in Japan and 3.3% in Italy. Comparable figures for the UK come out with a fall of 5.6% in the first 6 months of 2002.

Business investment in general has continued to fall in the UK in the first 9 months of this year. Total business investment, at constant prices seasonally adjusted, for Q3 2002 was 2.8% below the previous quarter and 12.4% lower than Q3 2001.
Manufacturing investment specifically was 7.2% down on the previous quarter and 11.7% down since Q3 2001 - see Figure 2. Most companies, it seems, are holding-back on key investments in manufacturing - be it for plant & equipment or for IT tools - until global economic uncertainty resolves itself, one way or the other.

Figure 2 - UK Business Investment - Manufacturing

Whilst UK companies complain about competition from abroad, loss of export markets, etc, it is difficult to hear their arguments without asking how, without investment, they will ever compete in the global marketplace? Or are we destined to become reliant on non-UK manufactured parts and evolve into a high-value added engineering and assembly economy? There are certainly concerns that the skill levels in engineering are not high enough for this to take place rapidly in the UK, and that many more engineering jobs would go as a result of such a change.

Out in the market …..

So, what is happening to current IT investment in design and manufacturing? Cambashi talks with many players in the Engineering Applications market as a matter of course over the year - vendors, resellers and customers alike. What we have found when talking with them is consistent with findings from other econometric models we have developed.

Vendors and resellers of Engineering Applications have reported a very quiet last 6 months in the UK. Unspent budgets are not being released without going through a careful examination of the potential returns to be generated against any competing investments. The customary end-of-year surge that vendors and resellers were hoping for appears to be missing this year, though most players are trying to generate some upturn, with upgrade and replacement deals that offer large discounts. Any vendor running at last years' sales levels is certainly ahead of the curve.

However, it is not all bad news, depending on your point of view. As the overall level of investment falls, manufacturers are left with improving the efficiency of their existing plant. What spending there is currently appears to be directed at improving parts of the design to manufacturing process, rather than investing in new applications per se. Instead, engineering companies appear to be buying document and data management systems, new network printing and plotting solutions, collaboration, workflow and viewing systems, integration with other systems (like ERP) and hardware projects, like server consolidation, for example, rather than new design, analysis or manufacturing software.

Engineering applications suppliers that can demonstrate support for the whole product lifecycle (aka PLM) and have large portfolios of products and services are more likely to survive and prosper in the current environment. Those who still rely on new systems sales in what are now commodity applications, like CAD, CAM, CAE or even PDM, may struggle. That is not to say that reasonable business opportunities do not exist for these applications vendors, particularly in small and medium sized businesses that are moving from 2D to 3D design. It is just that the margins available and differentiators between systems are eroding, making it harder to make a sale and a profit at the same time.

Initial Engineering Applications estimates

Putting it all together, we have developed some worldwide 2002 estimates, based on vendor revenues and inputs from public sources like EITO, National Statistics and PwC.

At world level, we expect to see a fall in Engineering Applications vendor revenues from 2001 levels of over 7%, even accounting for an expected rise in Q4 2002, which is looking less likely at the time of writing. Europe looks like being the poorest-performing region, with a decline of 10% in 2002 over 2001revenue totals; this follows a decrease of 2% in 2001 over 2000. Whilst the average European decline is 10%, anecdotal evidence from Germany suggests that the decline there is even steeper.

By comparison, N. America has fallen by 7%, following an increase of over 5% in 2001. Asia/Pacific growth slowed to 4%, following a rise of nearly 8% the previous year.

Initial findings from our UK-only model show a decline of nearly 7% in vendor revenues for 2002. This shows that the UK performed to/better than the European average. We will be releasing more information later in 2003 when figures may be revised as more Q4 and year-end data are released.

So far as 2003 is concerned, we have no indicators to suggest that sales and revenues of Engineering Applications are going to recover in any substantial way. Looking forwards, our advice to vendors and resellers is to search-out the parts of engineering processes in their prospects where investment will have a direct impact on their efficiency, costs, or manning levels, and so to the bottom line. Most buyers are looking for small-scale projects that can impact the efficiency of existing systems. New solutions sales opportunities are going to be rare.

Nick Ballard

nick.ballard@cambashi.com

A version of this article was first published in the February 2003 issue of MCAD.

CAD, CAM & CAE Market reports

The full Engineering applications market review (April 2003) is now available by completing the free information form.

The 2002 version of this report is available online: eng_apps2002.htm

Other Cambashi articles that may be of interest
Euroland and pricing transparency
Planning for 2003: still arguing over your 2003 quota?

back to top