Financial Crisis in the Air. What about CAE Market?

The global economy regularly fluctuates between periods of expansion (growth) and contraction (recession). The next recession will sooner or later come. No one seems to know when it happens. This post is a brief thought experiment about some important aspects of the Computer Aided Engineering market (CAE market) related to the growth and recession. 

CAE Market

The CAE market is segmented into Finite Element Analysis (FEA), Computational Fluid Dynamics (CFD), Fluid-Structure Interaction (FSI), and optimization. Due to the increasing computational power and technology development, virtual prototyping gets cheaper, and as a result, the CAE market keeps growing (for decades). According to the GVR report, the global CAE market was valued at USD 6.65 billion in 2018 and keeps growing by 10%. There is a good expectation of keeping the growth, especially due to the outsourcing of manufacturing processes to emerging economies. Developed economies keep technology development. The integrated software solutions bring much effectivity in virtual prototyping and that leads to the elimination of the need for real prototypes and expensive measurements. At the low end of the market, there are developing alternating pricing and delivering models, such as Software as a Service (SaaS) pricing models and cloud computing, enabling customers to opt for a pay-as-you-go subscription plan. That helps market growing because it reduces costs related to hardware acquisition and software licensing, installation, and support. On the other hand, high-end customers appear to be quite conservative and they are more likely to adopt new technology, rather than new ways of delivery. Massive engineering workflow automation leads to democratization and the possible lack of knowledge is to be compensated by the rise of workflow-oriented consultancy services. Especially general-purpose codes need to be pre-chewed for the end users because general-purpose codes are losing in their competition with codes focused on a particular technology. That brings an interesting business opportunity to VARs (Value Added Resellers ). And finally, open-source solutions keep rapid development and they will be challenging the commercial codes more and more. … Well, that is it about the market, each of the above topics would deserve its own discussion. Let’s talk about the potential crisis effects.

Vendor lock-in trap

CAE market is a very special field, the big issue is that many companies have gotten caught in a trap of the super-expensive simulation software - a vendor lock-in trap. The annual-renewal business model of simulation software is, in fact, a way of renting. The end users have pretty much no choice but purchasing the same software year after year. That quickly leads to the issue of vendor lock-in. 

Value vs. Value/Cost Ratio

The last recession period, which started with the financial crisis in 2008, clearly showed that in most of the companies, the R&D departments are among the first who face the budget cuts. It is clear because R&D, by its nature, is an investment (long term investment) and it is difficult to defend such an investment during a recession. Budget cuts play a very important role here. During the expansion period, when purchasing, what matters the most for the companies, is the value. While during the recession it is the value/cost ratio what matters the most. Costs matter a lot during a recession. In fact, costs matter all the time, but in a recession more than ever.

No free lunches in crisis

When recession comes it is very often used as an excuse for everything. Especially - unpleasant decisions (sometimes waiting under the surface a long time) - which would be otherwise difficult to take during the expansion period. In a recession, many ideas that were looking crazy before are suddenly presented as very smart. And the other way around, what would have been a good idea before, in recession the answer is: “Great idea, however, it’s a crisis, you know ...” A crisis is the best excuse of all.

How to minimize the recession effects? Grow Assets, not Liabilities.

In my favorite book Rich Dad, Poor Dad, its author Robert T. Kiyosaki tirelessly emphasizes the difference between assets and liabilities. The primary difference between assets and liabilities is that asset is anything which is owned by the company to provide the economic benefits in the future, whereas, liabilities are something for which the company is obliged to pay for in the future. For prosperity, the author suggests growing assets as much as possible and avoiding liabilities as much as possible. Let’s take a look at possible assets and liabilities in the CAE related departments.

Employees - the greatest possible asset

Good people are an essential asset for every company. It is certainly not a product, it is people who keep the business running. CAE is a very special field in terms of employees’ quality. I will give you a little example, in manufacturing (consider for example an assembly line), the best worker of all in the house is let’s say 50% better than the average worker (by "better" I mean the value created for the employer). But in the CAE field, the best engineer of all is 500% better than the average engineer. That means the scale is huge. Good engineers are the greatest possible asset of each company. Difficult to train them, keep and motivate. But it's easy to lose them. 

Unique Know-how & Capability - asset

Every company has its unique know-how, experience and set of capabilities that make them successful. It is very important to keep know-how in-house, maintain it and constantly innovate. Unique know-how completed with experience is the top asset.

High Value-added Activities - asset

Added value is the basis of every business. The spirit of the economy. Focus on value-added activities is critical. Keep them under the roof. Never outsource them. Added value is never high enough. Top asset.

Renting Simulation Software - liability

Renting super-expensive simulation software is a big issue because so many resources are spent on it, which could be otherwise invested in innovation and assets. Annual software purchasing leads to vendor lock-in. It is a typical liability.

Outsourcing without Know-how Transfer - liability

Outsourcing is widely used in CAE, nonetheless, it is a double-edged weapon. When used properly (especially at low value-added activities), it is very reasonable and saves own valuable resources. When outsourcing is used poorly, it brings troubles in the long term. For example, if companies outsource CAE projects at consultancy providers and do not ask for the project details. Blind outsourcing leads to another way of vendor lock-in. Outsourcing is very common in the CAE market and always will be a part of any well-balanced strategy canvas. However, poor outsourcing without proper know-how transfer is a liability. 

Low Value-added Activities - liability

Low added value is the quiet killer of businesses. It is typical for activities with a lot of competition (red ocean). Where is low added value, the products reduce to commodities with almost no profit. Where there is no profit, there is a lot of trouble.

Too bad? Not at all

Recession will come someday, no doubts about that. Will it be easy? No. Too bad? Not at all. What to do? Grow assets and get rid of liabilities. Start as soon as possible. Always look for a smart, sustainable mix of solutions with high added value and lowest possible obligation for the future. Recession is not only a desperate fight with budget cuts - but also a challenge and a great opportunity to start something new. Something better. I wish all of us to manage the next recession, whenever it comes, to take full advantage of it to make our businesses a little bit better again.