HERE IN THE UNITED STATES, the AEC software market is waking up to the fact that there is a rising new giant in the Nemetschek Group. But this giant doesn’t function or see itself quite like a global or US software giant. The Group functions similarly in the spirit of the German Mittelstand and hence is leveraging something that most tech giants don’t think about—the benefits that come from small and medium-sized enterprises (SMEs).
The Goliath in the AEC software industry is US-based Autodesk. Who gets to play the part of David has been up in the air for decades. In a global market worth billions, there are superb competitors operating globally who have tried to catch up to the leader. They have mostly failed.
Enter the Nemetschek Group.
German Mittelstand and Lessons From Smallness
Through a steadfast and long-term focus—which are core values of German Mittelstand companies—the Nemetschek Group has slowly but surely accelerated its growth beyond that of its competitors. Those competitors chiefly consist of Autodesk, Bentley, and Trimble, who along with the Nemetschek Group are, collectively, the titans of the AEC software industry.
The company’s recent financial annual press release may have surprised many for two reasons. The German holding company is now the second largest AEC software company when counting pure AEC software revenues. And second, the company is on target for 2020 revenues of EUR 600 million (728.USD million, at today’s exchange rate). To put those dollar values in perspective, the industry leader, Autodesk, has annual AEC revenues at approximately 867.USD million for its last fiscal year. ¹
The Nemetschek Group’s portfolio of companies are led by CEOs who each have decades worth of knowledge of their products, plus deep connections to their customers. Turning ourselves into a huge conglomerate focused on being the biggest in revenue is not our strategy…
Sean Flaherty, chief strategy officer, Nemetschek SE, says the Group itself is like a miniature Mittelstand, comprised of 15 excellent separate AEC software companies. “If you look at our portfolio and you consider aspects like BIM quality assurance, steel detailing, or structural analysis or design, we have global market leaders in those categories and very typically occupy the highest end of the market in capabilities and price.”
Flaherty tells a tale by saying that if a German Mittelstand company makes the world’s best ball bearings (and it’s likely they actually do) in American business philosophy one would say it should merge with the best carbide company and form a conglomerate. “But what the Germans believe is you get too far from your customer that way,” says Flaherty.
“The Nemetschek Group’s portfolio of companies are led by CEOs who each have decades worth of knowledge of their products,” adds Flaherty, “plus deep connections to their customers.” Being “customer focused” is another key Mittelstand value, as is “independence” which is built into the Nemetschek Group’s corporate philosophy with its subsidiaries. “Turning ourselves into a huge conglomerate focused on being the biggest in revenue is not our strategy,” he adds.
Growth Drivers—the AEC Workflow Stack
Claiming the number two spot at this present time might be delicate and contentious but one thing that is not contentious is the Nemetschek Group’s remarkably healthy double-digit growth rates. Averaging 17% or better since 2014, the Nemetschek Group could reasonably reach EUR 900 million by 2022. Today they only feel confident to project out to 2020.
Flaherty says there are several key growth drivers for the Group. The first one is their dramatically improved standing in the United States AEC market. “So the US will be our biggest market in the world very soon,” he adds. “A few years ago the US only constituted 7 percent of our revenue but now it rivals Germany at 30 percent today.”
Through a series of acquisitions starting with Bluebeam of Pasadena, the Group has propelled top-line revenues in its Build segment, with revenue growth in that segment greater than 31 percent annually. And most of the world is “blue ocean” for Bluebeam as it has largely been a US construction industry software standout. “Bluebeam has just been a tremendous acquisition for us,” adds Flaherty, “it is used by more than 90 percent of top construction companies.”
The company followed Bluebeam with acquisitions of engineering software companies SDS/2 and RISA. Both are US-based leaders used in structural engineering with the former being an industry segment leader by which all other competitors are measured against. These three companies are all dominant market players in the United States, the largest AEC industry in the world. Combined with the long-standing positions of Vectorworks, Maxon, and GRAPHISOFT, the Nemetschek Group now offers a wide-ranging product portfolio to American customers.
…we want customer choice and we see it as a means of buying…it shouldn’t define the product or our relationship with our customers.
Another driver behind its growth is the way these acquisitions fill in the gaps in the Group’s AEC software stack. When the company acquired Solibri it took ownership of a tool for BIM managers; when it acquired dRofus it took ownership of a BIM tool for building owners. Both are leaders in key emerging categories where new legal regulations for BIM will spike demand.
“There is enough success now in the BIM market where people are really sharing models among all the disciplines and stakeholders,” says Flaherty, “and this is supporting the growth of specialist BIM tools like Solibri and dRofus.” The latter tool is used extensively for megaprojects like hospitals and airports.
“When you look at the Nemetschek Group today you see we have an end-to-end workflow available for the AEC industry, from analysis and design to detailing and fabrication, to specialists BIM tools for specialist stakeholders and users.”
Subscription, Choice, and Benefits for Switchers
Nemetschek companies are starting to integrate subscription licensing options for its customers, but the Group is taking a different approach. “We definitely take a different strategy with subscription licensing than say Autodesk,” adds Flaherty, “we want customer choice and we see it as a means of buying…it shouldn’t define the product or our relationship with our customers. And in fact, we are staging our introduction of subscription licensing among the brands to minimize financial risks.”
One of the brands that introduced a flexible subscription option recently was GRAPHISOFT with its ARCHICAD software; after a successful small pilot in Australia and New Zealand, subscription for the popular architecture BIM software became available in the United States.
“Subscription is ideal for switchers,” says Flaherty, “it is the best way to get new customers because you take the upfront investment risks away and it makes it much easier for the end user to come over to your solution.” In its recent annual report, the Nemetschek Group says it has only 10% share of the global AEC software market. That leaves the company with tremendous growth opportunity. Vectorworks is also in the process of piloting a subscription model for their software lines in Australia.
Feathering in subscription alongside existent licensing options protects both the end users’ businesses and the software companies’ businesses. “I’m not sure if you know this, but in the CAD industry typically 40-50 percent of companies sales are new units,” says Flaherty. “So when you only recognize one-twelfth of that revenue each month there is going to be a big dip in revenues. And then on top of that of forcing it…. We just have no desire to make our existing customers angry with us.”
Interestingly, while subscription is coming to the Group’s many brands in a staged roll-out over time, Flaherty made the final point that besides being great for reducing risks to try new software, many customers are telling them that they can bill the monthly costs of software to their clients but not if it’s a capital investment.
Looking Ahead—Assumptions and Risks
One of the core ideas in this article is that AEC software revenues are strictly measuring software and do not include hardware and equipment but do include attendant services associated with such software. “We don’t count construction hardware such as scanners and total stations, for example,” adds Flaherty. “Measuring our revenues against our competitors takes some effort but the information is out there.”
While the German holding company is more highly focused now on the AEC market in the United States, its annual report states that the Group is also targeting infrastructure, which according to Nemetschek equals 20 percent of the total AEC industry (80 percent belongs to buildings). Its ALLPLAN software line is a world leader in concrete, for example. And that company is bringing its ALLPLAN Engineering tools (not its architecture solutions) to the United States this year.
So the US will be our biggest market in the world very soon. A few years ago the US only constituted 7 percent of our revenue but now it rivals Germany at 30 percent today.
The push for ALLPLAN Engineering in the United States is likely related to President Trump’s infrastructure spending bill. That is legislation that has not actually been defined, much less passed. Still, from Japan to the United States, global infrastructure in developed countries is in dire need of improvements and is getting attention worldwide. Building out its infrastructure and engineering offerings well positions the company for years to come.
While the Nemetschek Group has logged consistent financial growth year-after-year and looks to continue that success for at least three more years (2020), the company is hardly risk-free. Its largest competitors are both innovating and making smart acquisitions. This spring Trimble announced its plans to acquire Viewpoint, a large and important cloud software player in the critically important common data environment (CDE) segment.
There are critical advances being made by numerous visualization companies, from the formidable Chaos Group, to Abvent, to the “game engine” companies who are now bringing their bleeding edge technology to the professional markets. And then there are the emerging next-gen tech categories—algorithmic design, VR and AR, and of course developments in AI (artificial intelligence) and its use in AEC and manufacturing.
I think there is a lot of interesting things out there, particularly with connecting the [BIM] model to the construction process. We have some research in that area but it remains unannounced.
Flaherty insists that Nemetschek Group companies are highly engaged in forward-looking technologies still out on the edge. “As a group, we tend not to take those leading edge items to the market early,” he adds reminding me of GRAPHISOFT’s recently announced machine learning tech behind processing and the work with Google’s TensorFlow that sister company Vectorworks presented at their last Design Summit.
“I think there is a lot of interesting things out there, particularly with connecting the [BIM] model to the construction process,” he adds. “We have some research in that area but it remains unannounced. Obviously, there is a whole field based around this.”
As chief strategy officer for the Group, one of Flaherty’s goals is to investigate how Nemetschek can do incubation and innovation at the group-wide level. This is a tough challenge because it may not fit the Mittelstand model to have, for example, a group-wide innovation lab. Yet labs in rival companies to Nemetschek are often touted and made very visible.
On this last point, visibility—or more precisely the capacity of the Nemetschek Group to showcase the full depth of its innovative offerings—does appear to have some limitations at the group-wide level. The optics—or how things look—can be subtle “force multipliers” for investor and end-user confidences. After all, financial growth marries well with the story of innovation.
One only needs to look at the recent years of criticism of Apple where—despite its formidable earnings—not looking like it had a leg in on the future innovation curve dampened critical perception and its stock price. But then again, we noted earlier that “independence” and “steadfastness” are values of Mittelstand companies. “Optics” is not.
- Autodesk’s third quarter fiscal earnings announcement listed out five consecutive quarters of revenues per industry segment, with AEC revenues equaling 867.USD million. It’s highest quarterly AEC revenue was 215.USD million in Q3 2018. Its lowest revenue was 197.USD million. See here.