Question: When is a fall in revenues also a rise? Answer: It depends where you're looking from!

On 1st January, 2003 one Euro (€) was worth 1.05010 USD ($); on 31st December, 2003 it was worth 1.25570 USD. This had the effect of turning a single-digit percentage fall in 2003 EMEA Engineering Applications vendor revenues in local currency, Euro, into a double-digit percentage rise, when converted to USD. So far as many US HQ organisations are concerned, it may look like EMEA is back and revenues are rising; to many EMEA sales managers, this certainly appears a misguided view, as they are the ones fighting for every Euro in a diminished pot.

Cambashi has a rolling research program, tracking vendors of Engineering Applications (CAD/CAM/CAE & PLM) and analysing their results to produce a quarterly and annual EMEA review. Our model uses public information from companies where available; revenues of private concerns are estimated and validated with the companies concerned, if they are able, or willing, to comment.

2003 Summary
It is certain that 2003 was a roller-coaster year for vendors. Globally, we saw war and pestilence, though the other Horsemen of the Apocalypse (famine & death) were never far away. At the start of 2003, business sentiment was clouded by a very poor previous year. In 2002, only Asia had provided some light, and this was soon dimmed by the SARS outbreak. The coalition attack on Iraq only increased uncertainty in the first half of 2003.

In EMEA, the key factor was demand in Germany, the economic power-house of the Eurozone. Our EMEA model showed a steep decline in first quarter 2003 revenues measured in local currency (€), with the second and third quarters showing little improvement; the expected final quarter spike helped save some blushes but was still down on 2002. Final revenue figures for EMEA in 2003 showed a decline of over 6% to €1.80bn, from €1.92bn in 2002. Even at constant currency (using 2002 average exchange rates), EMEA € revenues remained largely flat compared to 2002.

Some commentators point out that, with Eurozone software importers paying in $, their profitability should have improved - less € are required to pay for their products. However, potential customers have often used the competitive economic environment to demand better terms from their suppliers, negating to some degree the gain from a low $. Low $ prices may seem good for buyers - and in the short-term, that may be the case - but most other reseller costs, like wages, pensions, business rates, energy and communications costs are denominated in € and these do not go down. Static or falling € revenues are not the best basis on which to start new business lines or grow enterprises. A prolonged period of low $ rates against the € could bring about a deflationary environment in the Eurozone; exports are more expensive, imports are cheaper, prices spiral down and there is less money in the economy to go round.

Prospects for 2004?
Looking at our econometric model, there does appear to be some relief for Engineering Applications vendors in EMEA, with end-of-year 2003 results for a number of companies better than analysts' forecasts. The late 1990's boom (and subsequent bust) left many engineering companies with IT investments which are only now starting to pay off. Companies were promised much greater and quicker returns. It is not surprising that, in 2002 and 2003, they were cautious about further investment, before the last tranche had been written-off. However, with profitability improving and interest rates still low, companies are once again looking favourably on investments that improve productivity.
Changing manufacturing landscape

China & SE Asia is now the source of many manufactured parts and goods, previously made in Europe or the US. This presents a new set of problems for engineering companies to grapple with. Whilst much volume production may have shifted, most engineering companies retain design activities plus manufacturing and assembly processes, which incorporate their IPR or require specialist knowledge to add higher value. This new landscape requires IT solutions which allow for greater control and visibility of dispersed resources across international and company boundaries.
Tools to meet these challenges?

Managing the whole design-to-manufacture process is taking on strategic importance for many engineering companies. We expect to see IT investment rise in this area over the next couple of years to account for this change. More outsourcing will be the norm; a vital function for design will be in developing work-packets that can be easily sub-contracted, whilst project and programme management tools will help to maintain sight of the overall design objectives. Increasing the number of participants in the design chain may yet be the catalyst for wider implementation of the PLM (Product Lifecycle Management) and collaborative applications that vendors have been pushing for the last few years.

As a pure design tool, 3D CAD is increasingly replacing, or complementing 2D, and we expect this trend to accelerate in 2004 and beyond. In the mechanical world, the 3D digital model allows greater flexibility in the design process to try different ideas before committing to production, involving various disciplines like FEA & dynamic analysis, simulation and prototyping. Managing the interfaces and design changes between disciplines becomes more important. Document and product data management applications then become more attractive investment options. These prepare the ground for easier implementation of PLM elements later - such as parts libraries with supply-chain integration - and links to enterprise applications, such as production planning, procurement and sales order processing. Regulatory pressure, in the form of end-of-life initiatives in the EU, for example, will also drive companies to re-examine their products and designs. This should bring design and assembly/disassembly issues back to the top of management thinking in manufacturing companies.

In the building & construction field (AEC), the move to 3D does not look so compelling or immediate, as the master model approach demands fundamental changes in the way the industry operates, rather than just individual companies. Let us not forget that 3D in mechanical engineering took at least 20 years to mature; it would be optimistic to presume that AEC will accept 3D in a much shorter time-scale.

The instant consortia that AEC companies form for each project have different processes to bring their designs into reality. Whilst mechanical products may be digitally modelled, prototyped and refined prior to production, buildings and plant are effectively prototyped as they are constructed. Each party uses tools appropriate to the task in hand - for instance, reinforced concrete detailing uses 2D technology, whilst the architect may have used 3D to develop the initial concept. The value to an occupier of a 3D as-constructed model may be apparent; it is not so apparent to a sub-contract draughter. Uptake of workflow, project workspace and management solutions still offers companies potential efficiency savings, regardless of the underlying technology used. We would expect these areas, rather than 3D building modelling, to receive a better hearing in 2004.
Projections for 2004

As well as renewed interest in the areas we have noted above, indicators from the likes of Reuters/PMI, Ifo and Insee show business confidence returning to most of EMEA. Projections on general investment also point to increases compared to 2003 of up to 2.5%, although we have noted that there is often a lag of some months before this is seen as increased orders for IT and applications. Taking these considerations into account, we predict growth of between 4% and 7%, at constant local currency, in Engineering Applications revenues in EMEA. Cautious optimism remains our take on 2004.

Nick Ballard

A version of this article first appeared in MCAD in March 2004.

Other articles from Cambashi:

Ripe for Change

Ripe for Change part 2

Engineering Applications in 2003 - boom or gloom?

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