PLM Spending: A period of “Digestion” after two years of explosive growth
Verdi Ogewell posted on August 27, 2014 |

The PLM market is growing. After the 2009 recession, PLM investments from 2010 onwards showed a higher growth rate than most general IT spending. But there is a dark cloud - the growth rate fell by more than half in 2013.

 Here are some numbers from analyst CIMdata:

  • 2011: Overall investments in PLM was up 15.2% to $29.98 billion compared to 2010
  • 2012 - The PLM market grew 11.6% to $33.4B
  • 2013 - The growth rate fell by more than half to 4.8% for a total market size of just under $35B


After several years of double digits, the growth rate
of PLM investments fell in half in 2013 to 4.8%.
Is this a result of economic gloom or new technology
and business models?

Clearly the growth curve is flattening out.  But why? Is it a result of gloomy economics?  Or are there industry-specific explanations arising from new technologies, business and license models? The short answer is that it's a little bit of everything.

 

Many of the world's economies are still in recovery mode
The PLM market is not immune to fluctuations in the global economy. When the industrial activity in US, China or Germany slows down, it certainly affects IT and PLM investments. Generally speaking, many of the world's regions are still in recovery mode, including, "locomotive zones" like North America and Western Europe.  This leads to economic caution and fragile spending. That won't change until the economic recovery is well entrenched. To make matters worse, IT investments generally are made late in the business cycle.

Of the three major global economic regions, the Americas, EMEA (Europe, Middle East, Africa), and Asia-Pacific (AP), the first two showed growth in terms of PLM investments last year, while AP was slightly down. For 2013, the Americas and EMEA had around 35% each of the PLM market investments, while Asia-Pacific had 30%.

 


According to analysts, lower PLM growth figures in 2013
can be partly attributed to "digestion periods" for those
companies that made big purchases in 2011 and 2012.
Time to"digest" and develop effective use of existing PLM systems
Despite the weak economic conditions, PLM spending is still growing.  This trend will continue according to CIMdata. For 2014 they forecast a 5.5% growth and looking toward 2018, the analysts see an annual growth rate of 5.8% to $46.3 billion.

The growth figures are much lower than the "extreme" growth levels of 15.2% and 11.6% in 2011 and 2012, but by its nature, extreme growth is, well, extreme.

Gartner's Marc Halpern pointed out that, "The large companies have already made significant investments in PLM and they have less incentive to spend at the same levels as the past until they get the business value they expected from the investments they already made."  Marc's message is essentially that companies have bought what they basically need, at least in terms of software. It's now time to "digest" and develop effective use of those purchases. Normally a "digestive period" like this should have brought new opportunities to the service providers, particularly in the cPDM (collaborative Product Data Management) field. This time it didn't. "That cycle seems to be broken or to have less impact", CIMdata concludes in its August report.

There may be different spending patterns arising from different segments of the PLM market. Gartner's Halpern asserts that they have seen a higher level of inquiries from their clients about PLM vendor selection and implementation practices. "PLM software still needs improvements in usability to further advance its use outside of traditional technical user communities into areas such as sourcing, manufacturing, marketing, etc", he explains. This statement is in line with what Accenture's Senior General Manager, Eric Schaffer, claimed in an earlier ENGINEERING.com interview, "Large companies want to make the best use of the software like deeper integration to ERP and MES systems, as well as advanced solutions for program/project management, supply chain management, and more."

On top of this, software developers like Dassault Systèmes, Siemens, Autodesk and PTC have invested heavily in making their solutions easier to install and use, and more customers are using the out-of-the-box capabilities that are provided. This suggests that the types of services needed may shift away from installation to IT integration and connecting the value chain all the way through the life cycle, which is a focus of the large global companies.

 


Systems engineering is one of the "sub-trends" that
adds complexity to product development processes.
Siemens' LMS solution can help, but it still needs to be
fully integrated, according to their Industry 4.0 concept.
C-Level Executives take a cautious step-by-step strategy towards PLM
Changing processes can come slowly in large organizations. PLM is a good example. The first ideas around PLM surfaced in 1999–2000 (both Dassault and SAP claim to be the "inventors").  That was followed a couple years later by the first "partly" working connected software.  It was still a number of additional years before the systems reached a state of smoothly running large scale operations.

All together we're talking about a 10 year period to establish PLM.  PLM is not yet fully mature, especially in the areas of product development and manufacturing integration.

When you add the complexity of product development "sub-trends" like systems engineering, configuration management, master data management, service life cycle management and Internet of Things, it isn't hard to see why C-level executives are cautious about launching comprehensive technological ventures. They recognize that each of these sub-trends has great potential when it comes to accelerating future value in product development.  Yet the software required to support these sub-trends is still only first or second generation and/or in many cases is not yet integrated into the PLM suites. Eventually more robust PLM solutions will be offered, but for now the cautious step-by-step strategy seems to be the most prudent. 


Gartner analyst Marc Halpern: "With the right business
model the SMB market has much more potential for
growth"
In the meantime, PLM vendors may find more low hanging fruit. According to Halpern, "While design software has penetrated the SMB market with some success, PLM has not yet. With the right business model, the SMB market has much more potential for growth."

 

2013 market characteristics 
As stated above, the overall global investments in PLM related tools and cPDM solutions grew by almost 5% in 2012 to just under $35B.  Of that, around 65%, or $22.5B was invested in tools like CAD (product definition), CAE (simulation and analysis), EDA (electronic design automation), AEC (architecture, engineering, and construction), and ALM (application life cycle management). Around 35% ($12.4 billion) was invested in cPDM and Digital Manufacturing solutions.

Here's how CIMdata ranked the "PLM Mindshare Leaders" in terms of revenues:

 

Direct and Partner Revenues 2013

1. Dassault Systèmes $4.231 billion    (Direct revenues $2.702B)  
2. Autodesk                 $3.746  billion   ($2.098B)
3. Siemens PLM         $3.640  billion   ($1.999B)
4. PTC                         $1.808  billion   ($1.300B)
5. SAP                          $1.462  billion   ($0.989B)
6. Oracle                      $0.788  billion   ($0.620B)

(Source CIMdata, 2014 Market Analysis Report Series, Aug 2014)

 


PTC's CEO Jim Heppelmann:
"Although revenue increased
year over year... the economic
environment remains uncertain."



Autodesk's CEO Carl Bass:
"Recent indicators point to
a slow economic recovery
and suggest a mixed trend."



Dassault's CEO Bernard Charles:
"Uncertain business environment"
Generally the big PLM players have performed well, but no doubt they have all felt the impact of the global economy, "The past five years have been characterized by weak global economic conditions, tight credit markets, reduced liquidity, and extreme volatility in many financial markets. Although revenue increased year over year in each of 2010, 2011, 2012 and 2013, the economic environment remains uncertain. If the economic environment does not improve or deteriorates, our business may be unfavorably impacted", PTCs CEO Jim Heppelmann explained in the company's annual fiscal 2013 report.

Autodesk's CEO, Carl Bass, reasoned in similar terms (fiscal 2013), "As our business has expanded globally, we have increasingly become subject to risks arising from adverse changes in global economic and political conditions. The past several years have been characterized by weak global economic conditions …While some recent indicators point to a slow economic recovery, on the whole indicators continue to suggest a mixed trend in economic activity among the different geographical regions and markets."

Even Dassault's CEO and President, Bernard Charles, in the 2013 annual report confirmed the trend captured by CIMdata, "In an uncertain business environment, and after two years of record results, we delivered a total revenue growth of 5% … compared with 2012".

 

The tricky problem of establishing solid licensing models
One problem in assessing PLM investments during 2013 and beyond has to do with the changing licensing models, a matter which to some extent is connected to merging technology platforms, like the Cloud.  "Yes, it's tricky", says Marc Halpern.

Increasingly, vendors are moving from paid-up licensing models to subscription models. The paid up licensing models have annual maintenance fees in the range of 18-22% of the license purchase price. The subscription models demand payment each year that is in the range of 30-40% of today's list software pricing. "While most of the software in the market today is paid-up", Marc continues, " I see subscription offerings growing and the vendors are motivated to grow the subscription model rapidly because there is less pressure to sell new licenses. If subscriptions grow as fast as the vendors would like, the increase in revenue would not necessarily reflect real growth in the number of users. Each user would be paying more, with software vendors possibly selling fewer new licenses."

Furthermore the Gartner analyst asserts that, "The vendors are trying to convince customers that the subscription model will reduce internal IT costs since subscriptions mean that software version upgrades happen automatically. So, end users theoretically pay more to the vendors but overall costs drop. I am undecided whether or not I believe this. It is an area of research for me. But, if the subscription model works, we will see higher spends on PLM in 2014 and 2015".

 


PLM in the Cloud – not a success, yet, "but it has potential".
The Cloud hasn't turned out to be a goldmine, so far...
Has the hype around PLM in the Cloud resulted in customer investments? So far, the answer is no. In fact, it may be the other way around, "the Cloud has affected the pricing and results on the on-premise market negatively", claims CIMdata. While many PLM vendors have offerings, most are yet to see any real returns on their investments.

Meanwhile, the discussion of SaaS (Software-as-a-Service) has created expectations of, if not lower, at least more effective pricing models. This picture may change quickly if the new business models for delivery and support of PLM act as triggers for greater investments. "If SaaS for PLM succeeds, then more SMBs will invest", says Gartner's Halpern, adding that concerns about hacking, cyber terrorism, and (for companies outside the US) concerns about US government sanctioned monitoring of internet traffic passing through US owned servers, might delay these ventures.  "But if software vendors overcome these inhibitors and the business models succeed, users will be spending more on PLM software which will lift revenues even if the number of users remains the same."

Marc points out a couple of other potential growth drivers over the next 18 months:
1. Potential breakthroughs in PLM for software-enabled products (better mechatronics support) and products that fit within the scope of emerging Internet-of-Things (IoT). This also relates to greater spend during the service life of products (e.g. PTC's business bet).
2. Greater spend in emerging markets (e.g. BRIC countries, maybe parts of Africa). This, however, could be inhibited by current political and economic tensions.

 


The development of new processes has begun, but it will
take years to achieve smooth practices
Can new technologies trigger PLM investments?
Most of the large global OEM's have started their journeys into the new business opportunities created by trends like the Cloud, mobility, product-as-a-service, IoT, 3D printing etc. Product innovation is regarded by many as the best way to grow.  PLM strategies and software can be key investments to support the "innovation-fueled" growth.

However, the hype surrounding these global trends may lead readers to conclude that there will be imminent investment to implement new software, methods, processes, and new business models. That would be an incorrect conclusion. Global product innovation and development processes are highly complex. The development of new processes has begun, but will take years to achieve smooth practices, and just as long to complete the full investments in related PLM software. The uncertainties in global and regional economies are another limiting factor.

That said, we can all see in which direction the market is heading.  Eventually the investments related to PLM, ERP, MES, ALM, SLM and M2M software will occur.

My take is that we will see an exponential investment growth; things are going to move faster than PLM has in the past.

Also, even in the early phases we are going to experience closer cooperation between developers, service providers and users to evolve these new solutions. After all, nobody wants to go through another "PLM like" installation/implementation loop.

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