Key takeaways

The European engineering market comprises businesses that are engaged in the planning, design, development, advisory and implementation of a wide range of objects and assets. The type of engineering services provided in a given project depends on the characteristics of the asset, such as infrastructure, residential and commercial buildings, energy-related structures or mechanical systems. As such, we have segmented into: (i) generalist, (ii) construction, (iii) infrastructure, (iv) energy & offshore, (v) environmental and (vi) industrial.

The European engineering market is characterised by its fragmented nature. While there are leading generalists such as Groupe Bouygues, STRABAG Group and Skanska as well as large infrastructure players including VINCI, ACS Group and Eiffage, the market is primarily composed of smaller players with a national focus. Due to the fear of a recession and high financing costs resulting in more expansive M&A activity, we do not expect the engineering market as a whole to consolidate much more in the near future. However, in the medium term, the market may show increased consolidation as interest and inflation rates level out as well as the need for players to acquire expertise (e.g. engineering software; CFA Worldwide, November 2023).

Overall investor interest has been limited, with ~30% of identified European assets receiving financial backing (as of February 2024). The main deterrents for investors comprise low profit margins resulting from price pressure induced by tenders to win projects, project-based revenue streams, limited differentiation opportunities and the high cyclicality of the industry. Favourable factors attracting investors include exposure to various end markets, long-lasting client relationships, and the fragmented nature of the market, which offers ample buy-and-build opportunities.

ESG topics primarily relate to environmental and social factors. Herein, players have a direct influence on the environment by implementing sustainable design and construction processes. As such, they increasingly focus on energy-efficient projects that follow modular designs and reduce emissions during operation. Social benefits arise from improved access and safer infrastructure (e.g. roads) as well as worker safety during the construction phase.

Company benchmarking

Market growth

According to Arcadis (December 2022), the global infrastructure, water, environmental and building engineering services market generated >$1.5tn in sales in 2021 and is forecasted to reach >$2.0tn by 2026 (+6% CAGR 2022-2026)

The global construction market is forecasted to grow from ~$3.8tn in revenue in 2022 to ~$4.9tn in revenue by 2027 (+5.3% CAGR 2022-2027; Technavio, December 2022)

In 2022, the EU was a net exporter of architectural, engineering and scientific services, with ~€32.0bn in exports and ~€22.7bn in imports. The largest exporter was Germany at ~€7.1bn, followed by France (~€6.1bn) and the Netherlands (~€4.7bn; Eurostat Data Browser, February 2024)

Positive drivers

Growth opportunities in the growing investment in renewable energy & offshore and nuclear projects due to more stringent environmental regulations result in increased demand for such projects (interview by Gain.pro). Since mid-2020, the renewable energy market outpaced that of fossil energy and is expected to further accelerate (DNV, October 2023)

The growing global population, increasing number of single households and rural flight serve as long-term growth drivers for residential buildings and infrastructure. By 2050, the global population is expected to reach ~9.8bn people, with an average of ~1.6m people migrating to cities per week over this time which combined with people living more alone, will multiply the need for buildings (Arcadis, December 2022)

The emergence of new technologies, such as AI, IoT, drones and other systems, allows incumbents to decrease operational costs, improve project timelines and lead to safer working conditions, thereby improving revenue growth and bottom-line profitability margins (OCCMS, February 2024). To illustrate, McKinsey & Company (July 2023) reported that digital twins can cut total development times by ~20-50%

Negative drivers

Structural shortages of qualified engineers paired with salary increases pose a threat to profitability margins and growth illustrated by the need for retired nuclear engineers to teach younger generations (interview by Gain.pro; Reuters, October 2022)

The negative economic climate in Europe with the high cost of debt, negative investor sentiment, soaring construction costs and the fear of a recession reduce the demand for building construction. As a result, fewer players pass through these higher costs to clients as demand for a decreasing number of projects increases, thereby impacting bottom-line profitability margins (ING, September 2023)

Growing geopolitical instability threatens engineering service providers through project and supply chain disruptions following recent missile attacks on (freight) ships in the Red Sea and the wars in Ukraine and Gaza, which increase project lead times and costs (ASME, June 2023; Power Technology, February 2024)

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