The aftermarket revenue challenge
Rather than following a calendar- or operating hours-based OEM service program, the customer can – with a predictive and/or condition-based maintenance program – conduct service on only what is needed and when needed. As a result, the aftermarket revenues of OEMs would be curtailed.
The report goes further to describe how even digital innovators would struggle to ramp up their digital product revenues to match the pace of their dwindling service revenue. For OEMs, the aftermarket plays such a big part of today’s revenue and margin that even the most successful software products conjured up by the OEM could not compensate for the loss.
While this logic is all sound and good, it only captures the first-order implications of digitalization for OEMs. The second-order implications, particularly for multi-OEM service companies, can be quite different. Let me elaborate by using examples from Metso – the global mining, aggregates, flow control, and recycling technology OEM – where I work as Chief Digital Officer:
1. Higher share of aftermarket wallet
First, while predictive maintenance can certainly drive down the customers’ overall maintenance spend, a multi-OEM service company like Metso could still be capturing increasing revenue. How is that possible?
Well, for example, mining companies rarely run their comminution circuits with equipment sourced from a single OEM. When venturing into predictive maintenance, the mining operator has the choice of spending countless hours connecting, understanding, and modeling all those pieces of different OEMs’ equipment into sophisticated analytical models and building service processes around them. While some of the first-mover mining operators are already doing that, the vast majority of mining operators would rather rely on a third-party specialist to solve this puzzle.
An OEM like Metso, servicing multi-OEM equipment globally, is probably best suited to both understand the mechanical and process intricacies of all those equipment, and have scale benefits in ramping up this capability globally to serve hundreds of mining sites. Evidence from other industries indicates that companies providing high-quality predictive maintenance as a service to the customer are well positioned to capture a much bigger share of wallet of the customer’s overall service business. So while the customers’ total maintenance spend could drop by 10-20%, the service partner OEM may see a significant increase in their service revenue. This happens through a committed, loyal customer and a bigger (up to 100%) share of wallet.
Of course, if an OEM cannot service other than their own equipment, this second-order implication would play against it. Specialized multi-OEM service companies would be nibbling into their share of the cake.
2. Currently uncaptured latent demand
Second, not all customers will immediately move to a predictive maintenance model. Many customers will continue to operate with scheduled shutdowns or even run-to-failure strategies. For example, in the valves industry, it is hard to see how customers with continuous processes, such as oil refining, would shift away from major scheduled maintenance breaks.
However, digitally savvy OEMs can help customers better plan for those shutdowns as well as capture sales by addressing critical risks between them. For example, Metso collects data from smart valves and positioners, data that accurately forecasts the day-to-day condition of the valve. So when the maintenance break is planned, the data can be used to infer a set of 3rd tier valves that would require maintenance, even though according to a normal schedule they would not be maintained. Likewise, between maintenance intervals, there may be faster-than-planned deterioration in the valve condition, which could cause unplanned downtime if left unchecked. These all create service sales opportunities that would not exist without the data.
Hence, by unearthing currently uncaptured latent demand, the OEM can grow its service revenues. For the customer, this may mean an incidental increase in maintenance spend, but this is more than offset by not having to deal with the risk of unplanned downtime and the related costs.
3. Shift away from cheap copy parts
Finally, in many industries – like aggregates in Metso’s case – there is a significant offering of cheap copy and generic commercial parts on the market. Traditionally, OEMs have somewhat struggled to convince the customer that spending more money on quality OEM parts will, in fact, yield benefits in the long term.
When remote condition monitoring and predictive maintenance becomes more widespread, suddenly the customer’s focus is much more tuned into the long-term productivity and away from the short-term maintenance spend. With new digital dashboards, KPIs, such as mechanical availability (OEE), and process performance metrics, such as throughput, fuel efficiency, and cost-per-ton, come much closer to the everyday life of the plant managers and reliability engineers. If cheap parts start causing unplanned downtime or inferior process performance, the adverse impact can be experienced in real-time. Metso Metrics is an example of one such digital product.
If OEM parts really improve the mechanical availability and process performance as promised, more focus on predictive maintenance should drive preference towards OEM parts and away from cheaper copies. This is a big deal for OEMs!
What does it take to succeed in the digital game?
Hence, I would very much argue that digitalization is not a blunt game, where only the customer wins at the expense of all OEMs. Instead, there will be winners and losers – and probably significant first-mover advantages too.
And notice: none of the growth opportunities described above demands ramping up sales of standalone digital products (e.g., software sales). Instead, all growth happens in the realm of the already existing service business! So, there really is nothing mysterious about digitalization. It is just a new way of playing the same business game and winning by focusing on customers’ needs.
To succeed in this, the OEM needs to:
(1) Have a global service presence with people on-site, close to the customer
(2) Possess deep understanding of the customers’ processes and productivity levers
(3) Create skills and capabilities to solve the customer’s digital challenges with remote monitoring and advanced analytics, coupled with efficient backend and service processes and supported by easy-to-use digital sales channels.
On the first two accounts, Metso is already the leader in the industries that it serves. This makes it very well positioned to quickly ramp up also the digital capabilities and to capture the growth that digitalization offers.