Markets

VDMA / McKinsey study (2015) on perspectives of the German engineering / manufacturing industry: What’s the role of services?

TA2  The German mechanical engineering and manufacturing industry (excludes the automotive sector) has impeccable credentials:  > 200 bill. € in revenues, accounting for 11% of global and 40% of European turnover, largest global exporter, > 1 mill. employees. Nevertheless a recent study conducted by McKinsey & Co. on behalf of VDMA (the German mechanical engineering and manufacturing association) did not identify any major servitization trends in spite of the attention paid to the topic by academics, consultants and even governments.
The study did identify 10 self-defined “success patterns” through a survey (incl. operational excellence, stringency of business model/focus on (narrow) core business, management structure etc) which also included two service relevant issues: i) while demand for “solutions” is growing faster, product business is significantly more profitable and ii) after sales service is important -mainly to compensate for low/declining profitability of the product business. The statements are rather contradictory, but provide food for thought. After sales profitability is driven mainly by spare parts. If products are more profitable than solutions then it points to some lack of capability (investment?) in putting together and delivering solutions profitably.
Regarding after sales service here are some data:
– 15% of revenues on average (12% for product companies, 16% for solutions companies) – which is actually pretty low, but 25% for large companies (> 1 bill. € t/o).
– Companies with high service content are NOT more profitable than others -even within the same industry.
– Most companies see after sales service as a way to drive sales. 37% see it as a competitive tool. 28% have no separate management accounts for service, so that it can be tracked (let alone managed).     22% track only costs, 42% manage service as a profit center. The big bulk of offerings revolve around spare parts and repairs. Any kind of advanced offerings are few and far between.The companies that rely most on services seem to be those that are facing declining product markets (textile machinery, prrinting and paper machinery etc) – so a purely defensive strategy to generate revenue in declining markets. Surprisingly companies in growing markets (robotics, automation etc) tend to offer services for free (package cost in product) to drive product sales.

Following reasons are given by companies for not pursuing services business more strongly:

– lack of willingness to pay by customers
– infrastructure/capabilities, qualifications etc are not sufficient to pursue a service strategy
– in some markets installed base is too new to require a lot of service and… customers do NOT really accept remote services
– Competition by third party service providers is too strong
– many customers prefer to do services on their own

One comment would be that a survey done 10 or even 20 years ago would not have produced a very different result.

Another reason for the low levels of servitization might be that the vast majority of German manufacturers are, in fact, niche component manufacturers rather than system integrators or OEMs (perhaps in contrast to Nordic manufacturers) and servitizing simple components (widgets) might be more difficult. Some reflections on that, as well as on the other reasons given will be in following posts.

More on the study at VDMA 

Categories: Markets

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