The ER&D service industry is getting closer to a spending inflection point
The performance of major ER&D service vendors showed great diversity in Q2. Alten showed, as always, very solid growth (+ 12.4% at CC/CS) and so did HCL Tech (+13.3% at CC).
Other vendors had mixed performance: ÅF, now the industry’s third-largest vendor, disappointed (+2.5% at CC/CS), still impacted by its Energy and Industrial & Digital Solutions divisions; Akka was only up by 5.1% at CC/CS, with its German operations moving into revenue decline. In the automotive space, Bertrand and EDAG issued profit warnings.
The cause of this mixed performance is client-specific: in a given industry in a specific country, spending conditions vary from client to client. This is true, especially in automotive, with certain OEMs reducing their ER&D spending, while others keep on increasing it. Thay me the case in aerospace in the future, with uncertainty around Boeing, while spending with Airbus remains strong.
The implication is clear: ER&D vendors will quickly need to shift their commercial focus and delivery units from one client to the other. They will also need to ramp up their digital capabilities and move their mature offering offshore. In other words, vendors with a diversified client base across verticals and geographies, and with a significant offshore presence are better-equipped to current market conditions.
Among vendors, we therefore vendors such as Altran, Alten and HCL Tech. Vendors with a too heavy client concentration such as Bertrandt and EDAG, along with Akka (with its exposure to German automotive and Boeing) are at risk.