In a post on this blog a couple of weeks ago, Franz-Josef Deuring, a consultant from Germany, urged companies to consider strategies where product margins are zero and the profit is made in services. This proved to be rather timely. According to an article in Bloomberg Business, Metso Oyj CEO Matti Kähkönen recently said he’s resigned to just breaking even in the market for manufacturing mining equipment as the Finnish company’s emphasis switches to offering more profitable services. The reason is mainly the collapse in the market for metals and minerals (end of the “supercycle”) causing demand for new equipment to collapse as well -by over 70%. Services and flow control equipment (mainly sold to a very difficult oil and gas market) now -essentially by default- account for 85% of Metso’s revenue, as equipment sales fell from €1.4 billion in 2011 to €45 million in Q1 2015. Metso estimates that it services only 1/3 of the equipment operating in the field (it is not clear whether this refers to own installed base only) and reckons that it can grow the service business by 5-10% a year.
Of course in situations like this a strong focus on service become necessary, even urgent, as other revenue streams dry up. Whether this is a viable strategy is another question. In such cases it is common for managements to fall into a trap: They overestimate service market potential and underestimate costs, investments and effort required to exploit what is there. If a company like Metso (with strong service capabilities and presence) is only addressing 1/3 of the market it is probably not for lack of trying. Numerous (hungry) competitors are usually already operating in these markets, including product competitors, big product-service providers (e.g. GE), pure play service contractors and customers themselves. Intensification of competition in service markets drives down prices and therefore margins, as do, at least initially, the investments required to expand and upgrade service capacity and offerings. In addition the shift in technology towards the Internet of Things is creating new opportunities for new players and threatening OEMs with loss of contact with their installed base -as we have argued in a previous article. Service is best built from a position of strength not weakness. A “focus” on service is a necessary, but not sufficient condition for success. Metso must drive a strategy and make the investments to build new service strengths under shifting circumstances with an eye on new competitors playing the game by different rules. It will not be an easy ride.
According to the Inquirer, Hitachi Rail acquired analytics company Pentaho to support its “trains-as-a-service” outcome/performance based contract through Agility Trains, a Hitachi majority consortium. This is a multi-billion pound, 27-year contract for the upgrade, electrification, supply of rolling stock and maintenance for the Great Western Main Line in the UK. Compensation is based on reliability of the trains -with expected “miles-between-failure” at 60,000 miles (we recently wrote a Brief on Outcome Based / Performance based Services, which included the example of the government facilitated railway industry’s service transformation in the UK). Remote monitoring and analytics will play a major role for cost effectiveness: Hitachi will “replace the maintenance trains which run on the network at night testing the state of the track, the points and the line. Hitachi’s trains do that analysis from the passenger trains” achieving significant cost savings. The analytics acquisition is required to “make sense of and utilize” the massive amounts of data to be generated and Hitachi joins a list of OEMs making such acquisitions that is becoming longer and longer (GE, Caterpillar, Schneider Electric and others).
Which countries are ready for the Internet of Things
A study by Accenture, a management consultancy, found that the US, Switzerland and the Nordic countries have the best foundations for the Internet of Things, with UK and Germany somewhere in the middle and China beating Brazil, India and Russia by a wide margin. Given that the IoT is supposed to drive productivity (and requires significant sophistication) it has implications for future growth and competitiveness.
Ford and Mobility Services
According to BuzzFeedNEWS, the Ford Motor company has been experimenting with an app-based “dynamic” shuttle service that utilizes a fleet of Ford vehicles to pick up and drop off passengers along a route determined based on the demand of the users. And it’s nearing commercial viability. Furthermore Fontinalis Partners, a venture capital firm co-founded by William Clay Ford Jr. — the executive chairman of Ford, is participating in a new Lyft (an App-based mobility service and main competitor to Uber) funding round. Another example of an OEM experimenting with service business models.
U.S. Air Force taps 3D Systems to Transform Manufacturing of Aerospace Components – US $1.3 million contract to use 3D printing to manufacture the most advanced heat exchangers ever made. Our Brief on 3D printing looks at how the technology will eventually transform the spare parts market.
Google might launch an operating system for the IoT targeting low power devices with as low as 64 or even 32MB RAM. As yet it is not clear what an IoT OS will look like, however also Microsoft is releasing a version of Windows 10, called Windows 10 IoT Core that is meant to run on ATMs, ultrasound machines and wearables. Huawei has also announced an IoT OS and Samsung a series of chips designed for IoT devices.