Developments in the AEC sector in Germany and Italy by 2025

NET Engineering International was a partner in the research carried out by the Centre for Strategy and Scenario Planning of the HHL Graduate School of Management, Leipzig. The intention of the research, conducted by Kristian Kersting for the Master in Management, was to indicate the current features and potential evolution in the engineering service market in Italy and Germany. A brief summary of the results of the survey are presented below.

The architecture, engineering and construction (AEC) sector in Germany and Italy was marked by stagnant productivity and a low degree of digitalisation. Recent technological progress and the developments of the market have challenged this status quo. Assessing how this sector will be involved in those changes is therefore not just a question of interest but also of survival for many stakeholders.

Establishing what the future holds isn’t easy as the AEC sector (and most, if not all, industrial sectors on this subject) and its market dynamics feature a high degree of complexity, ambiguity and volatility. The combination of these three dimensions generates great uncertainty that can be defined as the inability of the individual to predict the future with care. Ignoring or underestimating the uncertainty poses a substantial threat to the success of businesses, leaving them unprepared before environmental change or unaware of the potential opportunities for growth. Therefore, uncertainty must be taken into account in the preparation of every strategic plan, something which can be facilitated in different ways, e.g. through the ‘analysis of  scenario’.

This survey intends to indicate the potential development scenarios for the AEC sector in Germany and Italy for 2025. The research is based on a quality and quantity survey conducted on more than 160 internal and external stakeholders, including sector operators, clients, statutory bodies and banks, and aims to indicate the development factors that will impact the two markets. The grouping of the results starting from the feedback of stakeholders showed 40 political, economic, social, technological, ecological and legal factors that were assessed on a scale from 1 to 10 in relation to their impact force and degree of uncertainty.

Photo by Ricardo Gomez Angel – unsplash.com

The impact factor

Figure 1 shows the results of the feedback from stakeholders in the AEC sector in Germany and Italy. The factors in the top right-hand corner feature a high degree of uncertainty and strong impact on the industrial sector.

Figure 1: Impact/uncertainty grid for the German and Italian AEC industry in 2025

Critical Uncertainty Factors in the AEC sector in Germany are:

1. Growth in salaries (economic)
2. Approval of the project (social)
3. Level and complexity of laws (legal)
4. Level of digitalisation (technological)
5. Economic stability (economic)
6. Development of key technologies (technological)
7. Political stability and elections (political)

The same process applied to the Italian AEC sector leads to the indication of Uncertainty Factors that are partly overlapping and partly different:

1. Speed of bureaucratic and administrative processes (economic)
2. Level of digitalisation (technological)
3. Development and availability of key technologies (technological)
4. Prosperity of companies and homes (economic)
5. Approval of the project (social)
6. Attraction of the market for investors (economic)

Evolutionary scenarios

By grouping these critical uncertainties by thematic affinity, two dimensions can be seen which could be a feature of evolutionary scenarios in the two markets: (1) feasibility of projects, determined by social-political-economic factors, and (2) speed of digitalisation of the sector, guided by technological developments and their adoption.

The research thus indicates 4 different evolutionary scenarios per each of the markets in 2025:

Figure 2: Scenario evolution matrix of the German and Italian market in 2025

SCENARIO A: Increase in the feasibility of projects with high speed of digitalisation

This is the best scenario and sees a real Digital Boom in Germany where the farsightedness of the public sector and industrial stakeholders indicates the need for long-term investment to ensure growth and prolonged stability, and is adequately supported by players in the engineering sector who manage to invert the trend of stagnant productivity through a process of progressively faster digitalisation.
In Italy, a period of stability with advantageous social-political-economic conditions also generates stable economic growth, with the reabsorption of the national debt and an increase in investment and productivity in the sector. Courageous reform policies drastically reduce the bureaucratic brake on projects and increase their social acceptance. At the same time, sector players invest in a radical digital renovation. The Italian AEC sector moves towards a notable period of stable growth – new hope.

SCENARIO B: Increase in the feasibility of projects with stagnation of the digitalisation process

In this scenario, the AEC sector isn’t able to provide an adequate response to the successful political/economic/social trends because significant technological innovations haven’t been adopted. There is continuous stagnation of productivity which substantially increases construction costs. This situation generates a false sense of security in Italian AEC players, who prefer to implement cost policies, also through sub-contracting in low-cost countries for the work which can be most standardised thus remaining vulnerable to a possible inversion in the macro-economic trends. This situation reflects the German one where players benefit from the considerable increase in demand which, not being tied to a parallel increase in productivity, causes a general increase in construction costs; the AEC sector stays fragmented and loses the guarantee of a control of the market price which was represented by the professional tariff (HOAI); a carelessness which is very dangerous in the event of an inversion of social-political and economic trends.

SCENARIO C: Decrease in the feasibility of projects with stagnation or even a halt in the  digitalisation process

This is the worst scenario where both dimensions are in the negative quadrant. In Germany, the boom is followed by a collapse. The substantially positive social-political-economic situation of the years before 2020 gives way to a period of political instability and economic recession; the AEC sector undergoes increasing financial pressure which means that the yearned-for digital investment is no longer feasible. In turn, this causes significant slowing down in the sector and players who haven’t invested in productivity try to implement cost policies – sub-contracting, an increase in unpaid overtime, and a reduction in the quality level of projects.
An even more radical situation occurs in Italy where there has been stagnation for a number of years. The sector is gripped by profound resignation.

SCENARIO D: Decrease in the feasibility of projects with a speed-up in the digitalisation process

This is a scenario in which the general economic recession hits the AEC sector less incisively. Despite the difficulties, it has invested in technological innovation and the resulting increase in productivity is balanced by a price war that’s a feature of the market because of the stagnation in demand. This is a situation of Digital Collapse or at least Digital Recession, in which the AEC sector in both Germany and Italy suffer greatly but have the features that may favour a future upturn.

 Strategic implications for AEC players

The research ends with the indication of a portfolio of strategic choices by AEC players able to influence (albeit only marginally) the dimension of the feasibility of projects and, however, define a clearly marked positioning on the digital investment axis.

What are the choices that will reasonably bring greater advantages?

• Investing in Productivity, becoming leader in digital innovation, the new laser-scan technologies of 3D survey and rendering, standardised and integrated management (also at supply chain level between engineering-contractor-client) of computer databases;
• Promoting organisational excellence, with innovative and ‘marketing-oriented’ HR management (remote working, flexibility, etc.) which enables the best professional resources to be attracted and retained, and the establishment of partnerships with schools, universities, start-ups and training centres of excellence. Structuring the business so that responsibilities and decision-making processes are clearly reflected, keeping hierarchies flat and fluid in favour of agility and the opening of ‘organisational silos’;
• Increasing recognisability of your brand based on a ‘vision’, a set of values and a portfolio skills that are coherent and distinctive compared with competitors and notified through all contact channels for clients and stakeholders;
• Improving your competitive positioning, trying to earn new market shares, enter new markets with your existing portfolio of services, and diversifying it by introducing innovative products and services with higher added value.

To find out more about these and other strategic options, see the summary of the research in the 2019 special NET NEXT ‘Living change in challenging times’.

The complete original document of the Master’s thesis (available in English) at the Leipzig School of Management can also be seen at the following link.