Distinctive growth patterns: services, software, and hardware
Extremely robust growth: the study projects that industry revenue will rise by more than 20% to EUR 280 billion by 2022, with the technology sector expanding at a rate that is 7% faster than Germany’s nominal GDP growth during that time. This is encouraging considering the industry’s overall growth has been quite muted since the end of the boom period, which lasted from 2000 to 2008. One of the study’s most significant conclusions is that there is a significant industrial divergence to blame for this: the hardware sector has been stagnating for years, while the software and services sector is growing rapidly now and will continue to do so in the future.
Thank you for reading this post, don't forget to subscribe!Structural shift: the rise of software and services
After years of concentrating mostly on hardware, the German technology industry is currently undergoing a structural shift that is giving rise to new growth areas in software and services. According to this viewpoint, the broad field of “technology” comprises the following subsectors: semiconductors, computer hardware, consumer electronics, software, IT services, data processing, and hosting, among others. The hardware industries are being negatively impacted by a general decline in costs, the decline in significance of traditional consumer electronics, and international competition from less expensive production sites, especially in Asia. Conversely, software and services stand to gain disproportionately from the growing digitization of an increasing number of domains. In the grand scheme of things, this explains the industry’s impending fresh growth spurt.
Interaction with different fields: innovation convergence
However, how precisely do these inventors of German technology make a living? According to the Deloitte report, over 60% of their company’s revenue comes from business-to-business transactions (the percentage is nearly 68% in the software/services growth group). Due to fierce competition, consumer goods like PCs and consumer electronics now only make small profits, but German tech companies are particularly benefiting from rising demand from the more lucrative business sector. Customers in industries like banking and mechanical engineering are in demand for B2B technology products. The reason for this is clear: when business processes—all the way up to entire business models—become increasingly digitalized, more broad and complicated software solutions—often paired with matching services—become essential.
The hardware sector’s continued importance
However, it is important to remember that business clients account for over half of the hardware industry’s income. Here, mechanical engineering is especially common, and hardware needs are even greater than software demands. Robots, cameras, and other highly specialized, high-margin-specific hardware are among the products driven by the megatrend Industry 4.0. Germany’s long-standing expertise in mechanical engineering will continue to see rapid expansion in the next few years. Similar to other industries, the automobile sector is mostly focused on hardware, but software will account for a large portion of this growth, especially in light of emerging trends like linked and autonomous driving. Lastly, it should not be shocking that software and services dominate the financial industry in the first place.
Global division of labor: trade flows between countries in the technology industry
Germany is an exporting nation; the local economy there is renowned for its export prowess. However, how does the trade balance seem in the IT industry? It is depressing to see that 107 billion euros in imports countered 105 billion euros in exports. Hence, in contrast to the broader economy, the balance is even marginally negative. However, as the Deloitte analysis shows, a closer examination of the numbers is beneficial. While software and hardware imports and exports are roughly equal, a significant share of hardware imports is made up of low-margin consumer goods, such as those made in huge quantities at incredibly low costs in Asian nations.
China (17%) is by far the greatest country of origin and is widely regarded as the “extended workbench” of the West. In contrast, the majority of German hardware exports are made up of the specialized gear used in the previously mentioned B2B industry, which enables higher profits. Thus, Germany plays a particular and highly lucrative role in the global division of labor in technology. It’s also noteworthy to see how trade flows are distributed among numerous trading partners, with software and service exports to German-speaking neighboring nations ranking highest among them all. The overall picture points to stable foreign trade free from too strong one-sided dependency. Apart from China, which was noted earlier, there is another unusuality: Ireland, with its relatively tiny economy, is Germany’s primary supplier of software (17%). This is explained by its unique position as the primary hub in Europe for several global internet and technology conglomerates.
Megatrends driving the future of German technology
Mega-Trend 1: 5G and the Internet of Things
By 2020, there will be up to 750 million network-enabled gadgets in use in Germany, according to Deloitte’s estimates, and this trend is expected to continue. Forward-thinking business models are made possible by the Internet of Things, including telemedicine, autonomous driving, and Industry 4.0’s real-time machine control. The need for specialized IoT hardware, software, and related services is being driven by this. The launch of the blazingly quick 5G mobile infrastructure will make a plethora of fresh and creative services possible.
Mega-Trend 2: Artificial Intelligence and Analytics
Every year, the amount of data passing across the network gets bigger and bigger, in part because of the Internet of Things and connected cars. Advanced and self-learning analytical techniques are required to produce information that is pertinent for action, additional value for clients, and profit contributions for businesses (https://www2.deloitte.com/de/de/pages/trends/data-analytics.html). For German software developers and service suppliers across all industries, this is a huge development area. Advanced critical technologies, like artificial intelligence in particular, will provide medium-sized and small businesses with the chance to reap the benefits of new digital technologies in the future without having to make large initial investments.
Mega-Trend 3: XaaS
Even outside of the IT industry, as-a-service business models are a rapidly expanding field. Through cloud-based business models, they not only give businesses access to reliable and sustainable revenue streams, but they also give them comprehensive insights into the usage patterns of their clientele. These insights, when considered, not only improve customer satisfaction but also lower operating expenses because they allow businesses to serve their clientele on a large and scalable basis through a platform.
Technology industry outlook: full steam ahead
The Deloitte study’s conclusion is unambiguous: the German IT sector has a decent chance of experiencing a new development surge because of its advantageous posture. But this shouldn’t be an excuse for businesses to take a break. German technology companies should concentrate on five growth levers that are critical for success in order to capitalize on the study’s forecasted sales rise to 280 billion euros by 2022:
- Put software, services, and XaaS first.
- Concentrate as much as you can on B2B business with the plan.
- Increase spending on AI and analytics.
- Enlarge the market for high-margin specialty hardware.
- Create innovative business models in areas of convergence in collaboration with businesses from other sectors, including the financial and mechanical engineering industries.
All signs point to a promising future for this thriving economic sector if the German IT industry keeps building on its successful model in these areas.
