Siemens AG Group recently reported its third fiscal quarter (the second quarter of the calendar year), which saw an overall slight decline in revenue.

In light of the global coronavirus pandemic, of course, this is not surprising. Siemens is neither the first nor the last company to report an impact due to the pandemic. What is interesting, however, is that the effect on Siemens is smaller than expected, and above all that Siemens’ software business surprised the industry with a double-digit growth.

Total revenue for Siemens’ fiscal year Q3 decreased by five percent compared to last year's corresponding quarter, down to €13.5 billion or $16.1 billion. 

For daughter company Siemens Digital Industries, the results and trends looked similar: in total, this side of the business covering PLM and automation attracted €3.67 billion, corresponding to $4.3 billion, a currency-adjusted decrease of five percent. However, there is one clear exception: Siemens Digital Industries Software, which showed double-digit revenue growth. It turns out that the acquisition of Mentor Graphics a few years ago—an investment driven and pushed through by CEO Tony Hemmelgarn—proved to be a hit.

In the FQ3 report, Siemens AG Group states that, "Digital Industries achieved double-digit growth in its software business, including a number of major contract gains for Mentor."

In total, the software company’s revenues landed just under €1.1 billion—equivalent to $1.3 billion. It should be noted that demand was generally lower in industries such as car and machine construction where revenues decreased.

So, what is it that makes Mentor stand out? Why did Tony Hemmelgarn want to buy Mentor in the first place back in November 2016? And how has this solution developed in Siemens hands?

I have focused today’s article on these questions, as well as a couple of other important aspects of Siemens’ FQ3 report, including the SAP partnership on the PLM side and the Xcelerator product realization platform.

Gaining Market Shares

Overall, Siemens AG's CEO Joe Kaeser claimed that the company is now gaining market share. As mentioned above, he was also forced to note a decline in revenue in the joint PLM and automation areas. Overall, this was cushioned by China's rapid economic recovery and the software/PLM side’s wins of some significant contracts, even while revenues in automation decreased significantly.

However, through cost savings and including the increase in revenue from the software side, Siemens Digital Industries could even show an increased profit.

A General Feature for the Program Company

As stated above, the investment in and purchase of Mentor has proven to be something of a stroke of genius for Siemens. During an interview with analyst and press, Siemens AG's CFO, Ralf Thomas, said that Mentor's excellent results were based, among other things, on a strong demand for semiconductors in the customer base.

“Just to give a little flavor regarding Mentor, the solution during the quarter has contributed about 40 percent to revenue development,” Thomas said, adding that as far as he could see, "the software parts of the company, from a sequential perspective, will be on a path marked by continued growth. ”

It’s not a bad achievement, given the current tough times. It also indicates a good rating and proof of the high value in Siemens' set of PLM tools, which the Siemens AG Group CEO, Joe Kaeser, was quick to point out.

“Our strategy for integrating hardware and software into what we call the ‘EAD system’ has paid off. What we especially see is that Mentor provides more and more value as the automotive industry shifts to electric constructions and how automotive in this age of digitalization is increasingly leaning towards simulation of electrical and electronics functions and other things. Even the semiconductor world has picked up Mentor in order to establish powerful IT support from us, as a company that understands automation. This is the trend we have seen over time and which is expected to continue, stated the Group's chief operating officer,” Kaeser said.

EAD stands for "Electrification – Automation – Digitization," which has been one of the company's slogans in recent years.

That said, we'll take a closer look at Mentor and its development and capabilities.

Siemens Plays an Aggressive Offensive

Few companies in the PLM market play as aggressive an offensive as Siemens Digital Industries when it comes to commercial and technical development. They have the technologies, the commercial muscle and the visionary leadership required to make sensible things out of their acquisitions and technological advances.

Siemens has also made a number of interesting acquisitions over the past five-year period, of which the acquisition of Mentor Graphics can be considered perhaps the most exciting in terms of development. Both technically and commercially, in Siemens' hands the Mentor solution has developed into a hit.

But what has made the Mentor purchase such a success? There are several reasons, but above all it comes down to the Mentor solution’s handling of what in recent years has become one of the most dominant elements in almost all products, not least of which includes aerospace and automotive. Mentor is about advanced electronics, Integrated Circuits (IC), Printed Circuit Boards (PCBs) and more, all related to electrical and electronic product development.

It doesn't stop there; no one today can buy a solution, fix some integration work, and expect that it stays static. Technology development is at an extremely dynamic stage, and those who aim for growth and commercial impact with customers must constantly pursue improvements and sharpen their capabilities. This is exactly what Siemens has done, and the case of Mentor Graphics is an excellent example. The acquisition of this solution has, in short, unleashed a creative force in Siemens' PLM product development area.

The Long and Winding Road to Best in Class Improvement

In addition to the usual adaptations to the company's product development platforms, such as Xcelerator, Siemens has purchased add-on solutions and constantly added what is necessary to meet market needs and customer requirements—in this case, in electronics and thus under the EDA umbrella, Electronic Design Automation.

“The acquisition of Mentor Graphics was just the first step in our strategy around EDA,” said Hemmelgarn, when the German giant announced its purchase of Solido around a year after the Mentor acquisition. “With this acquisition we strengthened the arsenal of product development in IC and through Solido's solutions, we add important capabilities to Mentor's technology for IC design and verification.”

More specifically, why did Hemmelgarn want Solido’s technology? To provide some background, variant-driven construction is one of the fastest growing areas in product development. Both in general, and when it comes to specialized areas such as electronics and semiconductors. Of course, this is connected to several things, not least of which is that the products have become more complex, "can do more" and are filled with electronics and software to work.

This is not the only fact that complicates the issue; equally important is that the functionality must be able to be varied. For example, depending on things such as capacity differences in product models. A consequence of this is that variation creates effects in the designs of integrated circuits, which tends to get extremely complex when working with advanced nodes. Therefore, it is important to get it right from the start in its variation-driven design and "characterization" of software.

In this, IC designers are painfully aware of how variation effects affect the silicon material in circuits, thus creating a need for more and better analysis and design efforts to provide chips at acceptable levels.

This is where Solido comes into play.

Valor: Measuring and Analyzing Electronics in Real Time

In this way, things have since rolled along in the environment that has been built around the electronics design side and Mentor. For example, Mentor has also been linked to the production and IoT environments, and in 2018 Siemens launched a solution called Valor IoT Analytics. This is a big data and Business Intelligence (BI) platform that monitors and manages the manufacturing of electronics in real time with an eye toward Overall Equipment Effectiveness (OEE). The Valor platform is powered by Siemens’ IoT software MindSphere.

With Valor IoT Analytics, you can capture and examine complete material, quality and process data for circuit boards and assemblies. In this, the software measures and analyzes how resources are used, in real time and with parallel full traceability. Valor also handles data from all manufacturing sites and production lines, including analysis of machine performance and use. This gives circuit board manufacturers, production line managers and manufacturing engineers a sharp tool for optimization.

The Semiconductor Journey Goes On with SoCs

Siemens’ journey has continued. As recently as June of this year, Siemens took a few more steps on its electronics odyssey and bought British company UltraSoC. With this, Siemens sharpens the Xcelerator portfolio's capabilities when it comes to solutions for product life cycle management of systems-on-a-chip.

System-on-a-Chip, or SoCs, can be described as a system of circuits which contain several different types of processors and function blocks connected to a system. In this context, semiconductor technology has changed, with electronic functions—which previously required separate chips—now able to be accommodated on a single chip.

The whole thing is rather complex, and the design work requires knowledge of the entire system's function and can involve several people, companies or projects. To get one or more subsystems together or to reuse systems from previous projects, excellent digital tools are required. This is where the acquisition of UltraSoc enters the spotlight.

Boeing and Mentor’s Commercial Impact

What does this technology and the ongoing work to expand the capabilities look like in terms of the commercial impact?

Let’s take the aircraft giant Boeing as an example of what Mentor has brought along in terms of "dividends."

As it stands, the aerospace industry is definitely in one of the toughest positions today, with heavy crisis situations for the major manufacturers such as Boeing, and competing European counterparts such as Airbus. The likely exception is the military side, where state-funded aircraft investments belong to the type of long-term contracts that are not too badly affected by short-term effects of a low economy.

Civilian aircraft production is a bit different, and under the weight of the coronavirus pandemic has been exposed to the effects of an unusually dramatic global drop in air travel. However, aircraft manufacturing is an activity that is of significant importance from a socio-economic point of view. It is so important that bankruptcies seem almost unthinkable, as this would have extremely dire consequences for industries employing hundreds of thousands of workers in the countries around the world.

Therefore, in the short-term, it is necessary to both maintain production, and also strive to streamline, rationalize and adapt both the products and the product realization operations of a giant such as Boeing.

Having the sharpest PLM tools possible is needed to accomplish this. In times of crisis, however, there is pressure to manage and invest in cheaper alternatives, which normally means that the bets are directed to the tools and platforms you already have when modernizing. But this does not apply to all tools; some are more important than others and Mentor is of the latter kind—which has consequences.

A few years ago, Dassault Systèmes signed what the press called the "PLM contract of the century" with Boeing. The 30-year agreement for Dassault's 3DEXPERIENCE platform (3DX) was said to be worth $1 billion. According to an interview I had with Kenny Swope, senior director of Boeing's business integration, the goal for Boeing was "to replace the set of PLM software with 3DX-related equivalents within a couple of years." Other solutions would in themselves be allowed to remain for the time being, but would be phased out as soon as possible.

The PLM reality is more difficult than expected, and Swope's statement undeniably contradicts how things have developed. According to my contacts related to Boeing, there is very little happening when it comes to the introduction of the 3DEXPERIENCE platform. This, of course, impacts Dassault's revenue from Boeing.

At the same time, we should note that as recently as the end of 2018, Siemens' PLM department signed a contract with Boeing to use Mentor, which goes against the airline's previous message about how it planned to phase out solutions outside of the 3DEXPERIENCE platform.

Instead, this agreement with Boeing expanded the installation and use of Siemens’ PCB and IC software, Mentor.

According to Siemens' press material in connection with the deal, Mentor is now "part of Boeing's initiative, Second Century Enterprise System (2CES)." The latter is a program that aims to transform the company and thus also the aviation industry to meet "the challenges of this century."

"As the world's largest airline, Boeing is ready to lead the industry for the next 100 years with Siemens as a partner, offering a set of technologies to enable the next generation of design and manufacturing through increased automation and digitization," stated the press material.

In what is also nearly a slap in the face to Dassault Systèmes, the press materials added that the decision to invest in Siemens "follows a comprehensive analysis of available solutions, including current and future opportunities, technology flexibility to meet changing demands in real applications and overall business value to Boeing.”

So, this is how it can be in the PLM industry: nothing is carved in stone.

Today, we see in Siemens' FQ3 report that the Mentor solution has not only been transformed into an essential technological part of the company's toolkit for industry, but also, as a result, a great financial success.

A Promising Platform for Application Development

How did the other well-known Siemens PLM software perform in comparison to Mentor? Here the comments were not as noticeably enthusiastic from the company management. Kaeser said that the IoT operating system MindSphere is certainly an important piece of the puzzle in the company's program portfolio, "but has not contributed much to growth."

With regard to another of the solutions in Siemens’ PLM portfolio, Xcelerator—namely, the low-code platform Mendix—Kaeser added, “we are satisfied with Mendix even though this program has not yet had a strong material manifestation in terms of revenue and earnings, but we are well on the way to developing its value in our internal processes, supporting applications that are then based on MindSphere and the like.”

We should add that Mendix, which engineering.com previously reported on in several articles, plays a key role on Siemens' Xcelerator "product development platform," where the solution is one of the latest additions.

Big Hopes for the Future Around Mendix

Xcelerator itself is an integrated PLM portfolio of software and services, with solutions such as Teamcenter, NX CAD, Simcenter for CAE, and more. In this, Mendix is ​​characterized as a platform for application development; a kind of core for, for example, creating and keep track of the digital thread.

Mendix is ​​usually referred to as a low-code platform, which means that the complexity is "below the surface" and anyone who wants to use the software for its primary purpose—to build apps—does not need to code in the programming, hence the categorization "low code." The software does the coding, while the user only needs to "drag and drop," and can build a dashboard in a custom app.

This dashboard provides current status reports, access to 3D models, BOMs, Operational Technology (OT) data and other data from all software and machines that are part of a company's configuration of software and devices in the production apparatus. Dashboards can also be equipped with measures related to various alerts and things that need maintenance or repair. All this can be accomplished without the need for a lot of coding.

The point of the Mendix solution is that it ties together and combines not only the entire portfolio of Siemens’ software for design, construction and manufacturing, but can also do the same thing with third-party solutions such as ANSYS or SAP.

Given this, it is no exaggeration to say that Siemens expects great things from Mendix. A qualified guess, based on the solution's good capabilities, is that Mendix will lead to strong growth in both existing customer segments and what comes in via Siemens' customer base.

Siemens management also believes that Mendix will accelerate the growth of the company's current cloud, IoT and Digital Enterprise software (e.g. the PLM/PDM Teamcenter system).

The Partnership with SAP

We should also add that the partnership with SAP on the PLM side came up during both Siemens’ analyst and press interviews.

“The partnership with SAP is groundbreaking and aims to develop an integrated solution for end-to-end management of products and assets throughout their lifecycle. This partnership will drive digitalization and deliver a comprehensive solution for the fourth industrial revolution (Industry 4.0),” Siemens stated.

Not so useful in terms of news and accuracy, per se. The whole arrangement with SAP came as a surprise when the partnership was launched during the holiday period. Of course, there will also be a lot of speculation about this collaboration, where quite a bit has been revealed about where it will lead. It is certainly a feather in the cap of Siemens’ Teamcenter platform to have SAP become a reseller of this solution. The matter creates a certain amount of uncertainty in the SAP world among the customers who have SAP’s PLM solutions; for example, as product development support.

However, PLM & ERP News' qualified guess is that over time we will see a phasing out of some of SAP's PLM solutions.

No Immediate Settlement

We should note that such a phasing out does not have to mean that the SAP solutions disappear immediately. The words "phase out" may seem like a harsh conclusion, so let's put it this way to clarify:

In the not-too-distant future, SAP will stop further developing several of its PLM-related solutions and instead switch to a common strategy when it comes to products on the way out—that they only maintain them. Dassault Systèmes did this, for example, with its own SmartTeam solution, but despite this SmartTeam is still used, even by some big companies.

Existing customers who use SAP's PLM solutions—such as the SAP Engineering Control Center (ECTR)—will certainly be able to continue with these solutions, but should over time not expect much more than maintenance. Of course, users who have invested large sums in these solutions will not immediately, and perhaps not even over time, stop using them.

It is like a Siemens Metaphase product; it is maintained for the customers who continue to use the solution, but is not "developed" in an innovative sense. On the other hand, a customer can switch to Siemens Teamcenter to be able to use solutions for increasingly modern design requirements. In the same way, it seems to relate to some of SAP's PLM modules—they are maintained, but not developed. In some sense, this is tantamount to the product being phased out as a dynamic solution that stands on its own two feet.

But as I said, this is all speculation; what the more precise way forward looks like, we will only become aware of as time goes on.