Germany’s technology sector – a sector of the future in evolution
A new Deloitte study reveals the most important growth trends in Germany’s technology sector. Particularly striking is the sector’s evolution from hardware to services.
Germany’s technology sector has huge relevance in the era of digitalization. Not only does the sector generate annual sales revenues in excess of €230 billion and one million jobs that account for nearly 7% of German economic output, but in the context of digitalization tech is a key innovation driver and business enabler that significantly impacts other sectors. Its products and services are laying the foundation across industries as facilitators of new digital business models. The new Deloitte study, entitled “Germany’s Technology Sector”, shows which trends will further advance Germany as a center of technology going forward.
Contrasting developments: hardware vs. software and services
Very strong growth: The results of the study reveal that sales revenues in the German technology industry will have grown by more than 20% by 2022, up to 280 billion euros. As a result, the technology sector will show a growth rate that is stronger by 7 percentage points than Germany’s nominal gross domestic product over the same period. This is good news, because ever since the 2000–2008 boom period ended, the sector’s growth as a whole has been rather muted. The explanation for this is one of the most important findings of the study, which shows great divergence within the industry: The software and services segments continue to grow rapidly, with the pace of growth expected to pick up in the future, while the hardware segment has been stagnant for years.
Technology is a broad field, and in the context of this study the sector includes the segments of computer hardware, semiconductors, communication equipment, consumer electronics, software, IT services, data processing, and hosting. The German technology sector, which used to focus more on hardware, is undergoing structural change, and new growth fields in software and services are becoming increasingly important. The hardware segment is seeing a general decline in prices, the loss of importance in conventional consumer electronics, and global competition from more favorable production locations, particularly in Asia. By contrast, software and services are benefiting much more than other segments from increasing digitalization in more areas. Overall, this explains the impending new boost to growth for the industry.
Convergence of innovation: integration with other sectors
But how do Germany’s technology innovators earn their money? Deloitte’s study indicates that business-to-business (B2B) sales in the technology sector account for more than 60% (as much as 68% in the software/services growth segments). While consumer products such as consumer electronics or PCs generate only small margins due to intense competition in today’s market, German tech providers are benefiting in particular from the growing demand in the more profitable business sector. For example, B2B technology products are in demand from customers in major sectors, such as mechanical engineering and financial services. The reason is obvious: The increasingly comprehensive digitalization of processes – which often covers entire business models – requires more extensive and more complex software solutions, frequently accompanied by related services.
Nevertheless, it is important to remember that almost half of hardware sales revenues also are also generated from business customers. This is particularly true of the mechanical engineering sector, to which technology companies supply even more hardware than software. The Industry 4.0 megatrend is driving growth for high-margin special hardware such as sensors, cameras, and robots. As a long-established sector of German expertise, mechanical engineering will continue to generate substantial growth in the future. The automotive sector also generates comparatively strong demand for hardware, though trends such as Connected Car and autonomous driving will push the share of software in this sector. Not surprisingly, software and services are also predominant in the financial services sector.
Global division of labor: international trade flows in the technology sector
Germany is a legendary global export champion. But what about the trade balance in the technology sector? At first glance this is sobering, with exports of €105 billion being offset by imports with a value of €107 billion. As a result, Germany’s technology trade balance is slightly negative against the overall trend. However, once again it is worth taking a closer look at the figures, as the Deloitte study shows. Both software and hardware imports and exports are more or less balanced. Yet hardware imports, for example, are mostly low-margin consumer products, such as those manufactured in large volumes at extremely low prices in Asian countries.
By far, the largest country of origin is China (17%), which is considered the “extended workbench” of the West for good reason. However, German technology companies primarily export special hardware in the B2B segment, which generates higher margins. Consequently, Germany plays a specific and highly profitable role in the global division of technology labor. The otherwise relatively even distribution of trade flowing among multiple trading partners is also interesting – software and services are supplied first and foremost to German-speaking neighbors. Overall, the picture suggests that foreign trade business will remain stable without too many one-sided dependencies. In addition to the exception of China, however, there is a second striking feature: The rather small economy of Ireland is Germany’s most important software supplier by far (17%). This is due to its distinctive position as the European headquarters of many international tech giants.
German technology in vogue: trend-setting mega-topics
The analysis clearly demonstrates that the situation in the German technology sector is a good one – and it will get even better in the near future. As the projection of the short- and medium-term prospects indicate, the sector is awaiting a new sustained boost to growth due to several technology megatrends. Not only are these trends lucrative areas of business in themselves; together, they provide a crucial impetus to enable a whole range of digital growth industries – such as automotive (Connected Car), biotech, fintech, InsureTech, E/M-Health, and smart cities – to exploit their huge potential. Three fields of technology are particularly important:
Megatrend 1: Internet of Things and 5G
According to Deloitte’s calculations, up to 750 million Internet of Things (IoT) endpoints will be in operation in Germany by 2020 – a fast-growing trend. IoT is an enabler for forward-looking business models, ranging from autonomous driving and telemedicine to real-time control and management of networked machines in Industry 4.0. This in turn fuels demand for specialized IoT hardware, software solutions, and related services. The introduction of 5G, the super-fast mobile infrastructure, will make a multitude of new, innovative services possible.
Megatrend 2: Analytics and AI
Due in large part to IoT and Connected Car, huge additional amounts of data flow through the network every year. Advanced self-learning analysis methods are needed to generate actionable information, value-add for customers, and profit contributions for companies. This is an area with potential for strong growth for German software developers and service providers in all industries. In the future, particularly advanced key technologies such as AI also will give small- and mid-sized companies opportunities to benefit from the new digital technologies without high start-up investments.
Megatrend 3: XaaS
Anything-as-a-service (XaaS) business models are already a booming field and an important business model—and not only in the technology sector. In addition to providing companies with predictable and renewable sources of revenue through cloud-based business models, they also offer deep insights into customer usage patterns. When these insights are taken into account, companies can shape a better customer experience and reduce operating costs, because of their ability to serve their customers on a large scale using a single platform.
Outlook for the technology sector: full steam ahead
The Deloitte study draws a clear conclusion: Thanks to its strong positioning, Germany’s technology sector has good prospects for a new boost to growth. However, this should not prompt companies to sit back and relax. To profit from the growth forecast in the study of sales revenues of up to €280 billion by 2022, German technology companies should proactively concentrate on five growth levers that will be decisive for success:
1. Focus on software, services and XaaS.
2. Concentrate on the B2B business where possible.
3. Increase investment in Analytics and AI.
4. Reinforce the high-margin special hardware business.
5. Collaborate with companies from other sectors to develop new business models in the area of convergence, particularly with the sectors of mechanical engineering and financial services.
If Germany’s technology sector continues to develop its successful model in these dimensions, there is every reason to expect a profitable and productive future.