Nordic Industrial Aftermarket and Services – Trends and outlook for 2019

Overall, Nordic industrial manufacturers (OEMs) have thrived in 2018. Most find themselves at a high point of the global business cycle with increasing sales, high margins and an expanding installed base to be leveraged by their service divisions. In 2019, we will most likely see sales plateau or even decline, though perhaps not as much as the recent drop in share prices would indicate.

Observations in the aftermarket

In the aftermarket area, we see three major trends. Organizationally, we see the transfer of service development and marketing roles away from the product structure and out to regions or customer segments. We welcome this development in general, as we have long advocated moving services closer to customers (see our White Paper “Same, same but different”). However, once a pendelum swings it tends to reach too far before it stops. We see indications that the benefits of a consistent global service portfolio, which has taken many years to achieve, may be sacrificed in the process.

The second observation deals with online commerce. Private digital connections in large B2B relations have been in place for decades through EDI and extranet solutions. Public ecommerce solutions, too, are at least two decades old and one would think that uncertainty should be have been reduced and market positions cemented by now. Still in many industries, adoption of open ecommerce solutions has been confined to generic parts and consumables. OEMs have generally been slow to develop their own eshops, and even more reluctant to offer their assortment online through 3rd party eshops, fearing to upset current distribution channels and create harmful price transparency in the market. In parallel, ecommerce specialists like Amazon have built capabilities for B2B ecommerce that could potentially disrupt most industry verticals. In 2019, we may have hit an inflection point where OEMs need to make firm decisions on which path to go forward. A passive approach may lead both to lost business and missed opportunities.

The third, and by far the most powerful trend is the accelerating development focus on IoT and digital services. By 2019, most technical and cost hurdles of connectivity have been removed and many OEMs are in the process of actively trying to connect at least their new customer installations. However, firms are struggling to find the right path of development from this point on. There are a number of connectivity issues that are now facing OEMs across industries:

Connectivity issues

1. Polarized customer behavior. To fully capture the potential of connectivity, customers will need to accept a service model that allows the supplier to access and analyse their data, and they also need to be willing to pay for the results of the analysis. In many industries, the jury is still out on how large this market will be. Just as with current politics, customer buying preferences are getting more polarized. On the one end, some customers are indeed actively pushing suppliers to take more responsibility. These customers are also increasingly open to more servitized pricing arrangement like all-inclusive, subscription or even pay-per-use. This segment has grown from a low level, spurred partly by the general servitization trend in consumer markets. Buyers have discovered the benefits of subscription models as consumers and are more willing than before to try similar models also at work. Here is fertile ground for introducing smart, connected services.

However, on the other end, some customers are going all-in on a procurement-driven approach. More and more spend categories are being transferred to global procurement teams, including MRO items like spare parts, consumables and even some services. The sourcing strategies resulting from this approach may differ somewhat from case to case, but in general the main themes are consolidation of spend volumes, debundling of supplier offerings, and heavy price focus. In this environment, offering advanced and integrated service offerings with new price models will be a hard sell.

2. Catch 22 for development. The uncertainty of the area creates some dilemmas for development efforts. Firms are now starting to collect and analyze data to find out what customer value could be delivered through smart connected services. Before you know the value, you cannot realistically charge the customer. However, once you find out the value, the service has already been delivered for free to the pilot customers. If your addressable customer base is too small (see above under 1), it will be hard to start charging when you have already offered the service for free in the market. Also, development resources have to be hired before we know the customer value and the market potential of their efforts. Industrial firms are not used to signing recruitment approvals based on business cases that are little more than leaps of faith.

3. How to acquire analytical capabilities. Even if firms manage to get investment approvals, there are still challenges to overcome. The skills needed to crunch huge amounts of customer data and build models for predictive maintenance, logistics optimization or operations improvement based on these data, are in very scarce supply. Most industrial firms are struggling to acquire the right competence, as they are competing not just with the entire IT industry, but also with B2C firms who have similar needs for data scientists in the rapidly evolving Marketing Automation area.
Partnering is of course an option, but there is a growing fear among OEMs about what analytics firms will do with the data and insights they gain from joint projects. Not long from now, the main source of competitive advantage in industrial markets will not be superior stand-alone products or services, but the ability to create most value from customer data. This insight is beginning to sink in not just with OEMs, but also with firms like SAP, IBM/Watson and Microsoft. Will they resist the temptation to leverage their expertise and potentially push OEMs back from the end customer interface?

4. Are the basics in place? Connectivity has the potential to enhance core service offerings like spares availability and troubleshooting. Most firms, however, have ambitions to offer smart connected services that are located much higher up on the staircase of offerings. These services introduce a number of new required capabilities like advanced pricing, contract risk management and data analytics. In many cases, they will be built on a foundation of existing services. If the lower stairs are not solid, the whole staircase may collapse like a house of cards under the pressure of connected services. Finding the right balance of development will be key to success.

5. Increasing channel complexity. Connectivity, along with the slow but inevitable growth of public ecommerce solutions in industrial markets described above, creates obvious channel issues for OEMs. Current dealers and distributors are generally too small to take the lead towards their customers in connected services or ecommerce. OEMs need to be proactive and find ways to reach end customers digitally, while retaining a sound working relationship with the distributor channel.

Summary

In summary, 2019 may be a year for Nordic OEMs when important strategic decisions will have to be made. Whether it is about increasing proactivity in the ecommerce area or finding a clear path to monetization of connectivity efforts, it will require some firm bets to be put on the table. For those who are facing a downturn in business activities, it may be a good time to reflect and regroup for the next growth wave.

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