Society is changing from one that is economy of scale created by mass production which is ownership oriented and based on industrialization based on tangible asset into one that is de-industrialized which is use-oriented and intangible asset based. This change is accelerating servicization of the manufacturing industry.
As a result, business models are also switching from providing products to services. This trend, where new profit is created through new business models focusing on services, is called “servicization of the manufacturing industry”.
Because it became difficult to distinguish brand only by their products due to standardization of technology, manufacturing companies are trying to create new values and reinforce competitiveness by combining the aspects of product and service.
Servicization of the manufacturing industry provides multiple business opportunities such as distinguishable products and services, diversification of profit sources, enhanced customer loyalty, and improved environments. Today, I would like to share a couple of cases about this new trend.
Aviation companies face great loss when there are canceled flights or accidents due to faulty engines. To keep their flights safe, they spend exorbitant amount of money on good engines. On the other hand, engine providers have a hard time managing human resources because it’s difficult to predict future engine sales or maintenance schedules.
“Jet engines as a service” is a new business model created as a joint venture by GE Aviation and Accenture (IT consulting company) in order to solve these problems.
For more stable air service, they changed their billing method for engines to be based on hourly use, while analyzing sensor information from engines so that faults can be identified early and flight routes and maintenance schedules can be adjusted accordingly. The following diagram shows how the new system works.
Another similar case is Total Care™ by Rolls-Royce, the world’s second largest engine provider. Their annual profit from engine rentals reaches up to $ 1.5 billion.
These business models can be used for businesses providing expensive equipment which can cause significant damages to clients and require large investments for maintenance. Equipment providers and IT service providers can collaborate and create new values while improving these issues.
In order to break through the ship building industry crisis caused by global economic recession, vessel providers are trying hard to create new sources of profit. Hyundai Heavy Industry, the world’s third largest ship builder, realized that cost reduction wouldn’t be enough to stay in the competition, and developed a smart vessel with eco-friendly sailing and monitoring functions.
Hyundai Heavy Industries began to develop the Connected Smart Ship in accordance with Accenture in 2015. Unlike existing vessels which focus on eco-friendliness, safety, and economic feasibility, Connected Smart Ships make it possible to optimize sailing operations and maintain the ship based on vessel status predictions found by providing various cargo transportation-related information such as vessel, harbor, land logistics data, in order to create new sources of profit. The following diagram presents how these changes were made.
This model is considered an innovative attempt that will bring new values to all parts of the marine industry including ship owners, operators, and logistic companies through IoT big data analysis technology and satellites.
Unlike in the past when only a product’s quality was the basis of a company’s success, these days the level of servicization of manufacturing business determines its competitiveness. This trend of manufacturing companies servicizing their business through cooperation with IT service companies began due to limited growth in the manufacturing industry, standardization of technology and tougher price competition, new movers with lower prices like China, and limits of product-based competition.
Leading companies in the U.K. and Germany experiencing similar crisis have also changed their business models toward servicization to provide comprehensive services according to customer needs.
① The United Kingdom
The U.K. suggested a method to reinforce their manufacturing businesses through a policy called “The Future of Manufacturing” in 2013. This policy proposed servicization of the manufacturing industry to respond its changing value chain.
The U.K. government realized that their manufacturing industry used to focus on products, production, transaction, suppliers, and elements, and that the future industry will be based on solutions, results, relationships, network partners, and ecosystems. They forecasted that the industry will create new values through intangible assets such as knowledge and information, and have been supporting efforts to develop the industry through these assets.
The U.K. is creating new values and sources of profit by providing services such as product development and maintenance before and after manufacturing products through value chain expansion in its manufacturing industry. 39% of all companies with over 100 employees created new profit with manufacturing services in 2011, which is much higher compared to 24% in 2007.
The service aspect of businesses is also making up a larger proportion in manufacturing companies: Rolls-Royce 49%, ST-Ericsson 28%, Atlas Copco Group 43%, Tyco 40%, Alstom 26%, and Arcelor Mittal 29%. Servicization becomes more important and widely needed when products are more complicated and expensive.
Germany is expecting its businesses to face Industrialization 4.0 through which ICT and machinery industries are combined for complete automation of manufacturing and optimization of production. Controlling and monitoring smart factory machines and production is executed through software, and business models change based on software modifications resulting in heightened productivity and better services.
The focus of the German servicization is the use of smart factories and software to automate production and provide remote management services. The German government is promoting this plan through its Industrie 4.0 policy, and directly supporting servicization of its manufacturing industry by funding a BMBF project called product service convergence R&D.
The graph above presents that the level of servicization of the Korean manufacturing industry is at 17.7%, which is lower than the average in other leading countries (30.1%).
Once manufacturing companies collaborate with IT service companies to create new service-oriented added values and the government supports this plan systematically, the manufacturing industry will soon find its new growth engine.
Written by Wonjoon Yoo, LG CNS