The competitive pressure is increasing worldwide in the mechanical engineering sector. Germany is still in a very good position overall. For example, the export value of German machinery and equipment increased by a factor of 2.5 between 2000 and 2020, from 87.4 billion US dollars to over 223 billion US dollars.
On the other hand, it cannot be overlooked that global competition is intensifying. One example: China replaced Germany as world export champion for the first time in 2020. In that year, German mechanical engineering companies still accounted for 13% of global exports, while their Chinese competitors were already one percentage point ahead. China scores particularly well in the export of high technology. From 2000 to 2020, the Chinese market share rose by a full 23% from 3.6% to 23.8%. In the same period, the share of German machine and plant manufacturers dropped by 1.1 percent to 5.6 percent, which is less than that of the USA or Japan, which saw a decline of 12 and 7 percent respectively.
The question still arises: how can machine manufacturers gain an advantage in global competition?
It is clear that machine manufacturers from Germany cannot compete against rivals on the basis of cost: Since 1990, the producer price index value for German machinery and equipment has risen continuously, by 17.5 percent since 2015 alone. This trend is likely to continue. In the PwC Engineering Barometer for Q4 2022, it is stated that the continuing rise in cost pressure is the biggest obstacle to growth for 80 percent of respondents - alongside the shortage of skilled workers - even though almost two thirds have already implemented measures to improve energy efficiency in the wake of the Russian attack on Ukraine.
Own service network as a competitive advantage
One way out is to expand innovative, product-related services. Such a strategy has many advantages:
- It opens up additional sources of income. Each product can only be sold once. But for every car sold, there are around 13 cars that are already on the road, for every new train there are around 22 trains that are already on the rails, and for every new plane there are around 15 that are already flying. And money can be earned from all of these in after sales.
- It leads to increased sales. After all, a service network can generate revenue along the entire product cycle.
- It increases customer loyalty to the company. As part of a determined optimization of the customer experience, a service network provides services that customers need - wherever and whenever they may be required. And satisfied customers become loyal customers in the long term.
- It improves your marketing. By standing out from the competition, your brand improves. And that attracts new customers.
In order to benefit from such a service strategy, however, you need to build up your own global service network. Only such a network can ensure the geographical proximity of the solutions offered to your own installed base. And only with a global footprint can you recognize customers as a competitive service provider.
So how should you proceed?
1. Divide the installed base into geographical clusters.
In order to set up a service network, you must first divide the locations of the installed base, i.e. the installed machines and systems, into appropriate geographical clusters. Attractive services can only be offered if the locations of the service network are close to the installed base. If your own machines are stationary and installed at fixed locations, it is relatively easy to plan your own service network.
Moving objects make planning more difficult
If, on the other hand, your own machines are so-called moving objects - such as commercial vehicles, mobile cranes, construction machinery, agricultural machinery, ships, etc. - or if your own machines are installed on such moving objects, planning your own service network is more complicated. In this case, the movement profiles of the installed base must be determined.
2. Evaluate the clusters according to their service potential.
It will not be worth setting up a service location everywhere. You can identify interesting clusters via their annual monetary service potential, whereby this potential can be estimated based on the average annual revenue of the installed machine types. When estimating the average revenue, you should set the periods under consideration so that they include prescribed statutory inspections. Larger inspection orders are often placed before such inspections.
3. Plan the route to market.
Once the geographically attractive regions and the theoretical revenue potential have been determined, the question of the best set-up needs to be clarified.
Collaboration with third parties is cost-effective but risky
The first decision concerns the provider: Should the local service be offered by a service provider or by an in-house branch office?
The argument in favor of working with a service provider is that it is a good way to build up a large service network relatively quickly and cost-effectively. However, this type of collaboration also involves risks. After all, today's service providers can quickly become tomorrow's biggest competitors in local service.
If you opt for this option, it is important to define red lines in good time - even before day-to-day business gets underway - with regard to technology and know-how transfer, for example. Otherwise you run the risk of unplanned transfers occurring in the heat of day-to-day business. And once transferred, it will be almost impossible to get it back.
When setting up a new company, observe market entry regulations
On the other hand, if you decide to set up a branch office, a second important question arises: should you set up the branch office yourself or through acquisitions?
Setting up your own branch office leaves a lot of room for maneuver. The downside, however, is that special legal regulations may need to be observed when entering foreign markets. These include the requirement of a local sponsor, local content regulations, but also regulations that specifically affect joint ventures or wholly foreign-owned enterprises.
Acquisitions as an alternative
An alternative to setting up your own branch is to acquire a local service provider. One of the advantages of an acquisition is that you gain relatively quick access to the local market and local specialists. On the other hand, local service providers rarely have large order backlogs or large fixed assets. And the know-how does not lie in any patents, but in the staff. However, employees can leave the new owner at any time if, for example, the corporate culture is unfamiliar to them. Before an acquisition, it is therefore critical to have a well thought-out and robust "deal rationale". Otherwise, you won't know what exactly you're buying.
4. Stock up on spare parts.
Customers have high expectations regarding first pick availability, i.e. the availability of a component at the time of the order, as well as delivery times. For the service provider, this means a demanding optimization task that seeks the best balance between geographical storage locations, spare parts inventories and delivery costs. Spare parts should be prioritized. After all, these are often the most profitable products for a mechanical engineering company. Solving this task for the service business is often critical to success.
Conclusion: Setting up a service network gives mechanical engineering companies a competitive advantage
The competitive pressure in mechanical engineering is high. Companies can gain a competitive advantage by establishing their own service network. A global service footprint
- increases brand awareness,
- strengthens customer loyalty,
- increases sales along the product cycle and
- taps into new sources of income.
The main challenges in setting up such an offering are:
- analyzing the potential of the geographical regions,
- the development of a route-to-market strategy and
- the optimization of the relationship between delivery costs, spare parts inventories and storage locations.
