The designs utilized in industrial and construction equipment are constantly changing. New technology is increasingly entering the market. With these innovations, OEMs can improve equipment productivity and provide consumers with new product offerings that better fit their needs. Equipment-as-a-Service (EaaS) and Usership are changing the business. EaaS and Usership are effectively like the two sides of a coin.

EaaS is the technology and strategy from the perspective of the manufacturer that allows them to offer a service that is responsive to the customers need versus only a piece of construction equipment that the customer then tries to use independently to address their own needs. Usership is the customers strategy to move away from a focus on owning equipment and finding work to utilize the fleet, to a focus on having access to equipment and services optimized for the current project they are working on.

Several comments from senior leaders and CEOs of the world’s largest industrial & construction equipment manufacturers, including Caterpillar, John Deere, Komatsu, and Volvo, confirm what we see when we look at manufacturers and customers.  Both technology and changing trends in the way contractors acquire construction equipment for their projects are driving change. Whether you are a manufacturer, dealership, or customer, understanding these trends is essential to remain competitive. Let’s look at some of the specific trends that are developing and shared by the Agricultural, Forestry, Industrial, and Construction equipment segments of the industry.

Equipment as a Service (EaaS)

By the end of the decade, the bulk of OE Manufacturers will concentrate on offering “Equipment as a service” (EaaS). EaaS can benefit the manufacturer, dealer, and the customer by including servicing needs as a critical element of the product development process. This will be true for construction equipment and agricultural equipment. Doing this results in the following:

1. Improved customer satisfaction and after-sales revenue by being the trusted partner supporting all the equipment’s after-sales needs.
2. Reduced unplanned downtime by including machine maintenance needs in the product development process leading to reduced diagnostics and repair times and improved productivity for the customer.
3. Increased performance and efficiency due to a deeper understanding of how the machines are utilized and the ability to analyze that data to make improvements to existing and future machines.

The change in strategy results in the OEM designing a product to interface with it over the machine’s life instead of just building it and disengaging until it is time to sell a replacement.

Most OE manufacturers have some Internet-of-Things ( IoT – Internet-connected machines) product on the market based on a recent survey done by IDEATE Consulting Group of products produced by major manufacturers. Many products sold by OEMs, however, have their subscriptions lapse once promotional offers expire. When this happens, it is an indicator that the manufacturer’s development and marketing teams have failed to provide the full potential benefits of current technology to the customer by not delivering an appealing value proposition.

Over the next decade IoT-connected, sensor-equipped devices will be the standard, providing OEMs with the knowledge and insights they need to optimize product uptime and deliver “Equipment as a Service.”  Customers will come to understand the value EaaS brings to their business.

Attention: Industrial and Construction Equipment Design & Marketing Teams

If you are leading a product development team and want to understand why it is critical to guide your team to move in this direction, carefully think through the following points. Understanding these key points will impact your product line and the organization’s performance.

1. More Consistent Performance – Sales of equipment fluctuate more widely than sales of parts, service, and services. Equipment sales showed twice as much variation as service sales. Many customers only purchase equipment based on specific budget allocations or other infrequent events. Parts and services continue to be consumed by existing fleets.
2. Economic Cycle Stability – The success of machinery companies relies heavily on global economic circumstances, and the last financial crisis gave a significant test. While sales of equipment fell by 25 percent for American manufactured equipment in 2013, at the same time, sales of services decreased by only 10 percent. Companies that stayed connected with their customers did better during the downturn and also outpaced their competitors as the market trended upward.
3. Faster Rates of Growth – During the last economic cycle, most machinery firms managed some positive growth. Globally, the construction equipment market is expected to grow by 2.8% per year over the next 7 years. The “equipment as a service” (EaaS) market will grow much faster, averaging a compound annual growth rate of 20-35%, depending on the market segment over the next five to ten years. IoT Analytics expects the EaaS market to grow to $131B by 2025.  Rolls Royce, a provider of jet engines and related equipment, began offering EaaS as an option in 1997. They were an early adopter.   This change has helped its market share grow from 14% to 35% and generate additional revenue.
4. Improved Profitability – Usually, services (Aftermarket) are more profitable, too. Sales of equipment generate low margins, particularly if indirect costs such as commercial expenses and product development are included in the analysis. While there are differences in financial performance between types of aftermarket (service, parts, services…), aftermarket sales show significantly higher margins than other parts of the construction equipment industry. Parts sales have substantially higher average margins than wholegoods sales. Sales of equipment service and other services with few exceptions also have considerably higher margins than industrial and construction equipment sales.

Usership vs. Ownership

Why own construction equipment when you can use the right product for the right job? Usership

“Equipment as a Service” coordinates with new use models that are gaining interest. Until now, it was assumed that industrial and construction equipment was designed and manufactured to be sold to end-customers. Manufacturers can no longer assume that is how the equipment will be distributed to customers.

As consumers in general transition to user models (“usership”) instead of traditional ownership, industrial equipment customers expect the same business models once they understand the benefits. Many industrial manufacturers have released subscription models, such as Rolls-Royce, Caterpillar, GE and Atlas Capco, and others. We should expect many more to follow suit in 2021. To follow these trends, OEMs will have to implement new technology, facilities, and business processes.

Until now, it has been customary to invest in a fleet that contains a mix of equipment that is likely to be productive on job sites similar to sites the business historically did jobs on.  When the task does not fit the construction equipment or conditions change, then it sits idle.

In a recent sample of excavators being auctioned by Ritchie Brothers, five-year-old excavators averaged 5,481 hours or 1096 hours per year. That means that these excavators averaged about four hours of operation per weekday.  Optimistically, that is 50% utilization on a single shift. Other types of construction equipment exhibit similar utilization levels. There are at least three reasons that contribute to the low utilization:

1. Idle Time – There was not work for the machine, or the contractor had less work than expected.
2. Downtime – The machine was not functional.
3. Not suitable – The machine was not a good fit for the job or did not have the required capability.

Even when the utilization is low, the full cost of the equipment was still absorbed by the equipment owner.  Usership can help address this concern for a contractor.  EaaS and Usership can help the business of the fleet owner in several ways:

1. Reduce Capital – Typically, subcontracting is one alternative used to limit capital, but then control is lost through that approach to outsourcing. With EaaS, equipment becomes an operational expense instead of CapEX and goes away entirely when the equipment is not being utilized for the project.
2. Lower Operating Costs – When operating with the EaaS model, the responsibility for maintaining, repairing, and updating the equipment is the responsibility of the organization supplying the equipment.  It is in that organization’s best interest to maximize uptime and minimize operating, support, and service costs.
3. Fleet Scaling – EaaS gives the business the ability to scale quickly based on available projects.

Why design construction equipment for usership? It’s not the same as rental.

As a product line manager or company executive, why is this the path forward?  Well, it is a better fit for the long term success of your organization and its customers.  This is not just a matter of equipment needing more manufacturer support because of complex technology onboard.  Here are four specific reasons to transition with your products and the supporting organizations, including dealers.

1. Increased Revenue – There is potential to increase revenue from the sale of each piece of equipment up to 400% in some cases over the product lifecycle. You are offering the customer a lot more than the machine, and there is more potential for incremental revenue long after the sale.
2. Fit customer’s Business Model – Because of a more dynamic environment, many businesses are moving from CapEx to OpEx to manage the business’s financial investments. Traditional purchases may be challenging to justify in an OpEx environment.
3. Improved Customer Insight – Guarantees manufacturer access to machine data, allowing more effective support models and a better understanding of the customer’s business. This information improves the ability to deliver an exceptional customer experience and offer services that provide value to the customer.

Even though this is a trend that is still in its early stages, there is clear evidence to support making a move in your organization when it is feasible. As contractors become more financially savvy and grow, the desire is to focus on projects that bring revenue to the bottom line not on managing fleets and tying up capital in construction equipment fleets.

Conclusion:

Can EaaS and Usership help corporate performance?

There are very specific benefits to Equipment as a Service  and Usership.  In the chart below are some of them.   As you will note, these benefits are not about convenience or the alour of technology but rather about delivering growth and financial performance for all parties. As we ask the following question “Is this something that finance teams at contractors will accept?” Remember that cutting fixed assets is a prefered strategy of most accounting teams. Usership is consistent with that strategy.

Where do Forestry, Mining & Construction Equipment Manufacturers see opportunities?

The transition of construction equipment and machinery manufacturers towards technology and service-focused companies is a trend with progressive organizations. A 2016 study conducted by the European Commission’s Market Innovation Observatory shows that 70 percent of machine manufacturers see services as a crucial competitive differentiator. The ultimate step when becoming focused on services is offering EaaS.

Machine manufacturers switching to service-based market models have seen annual business growth of 5 percent to 10 percent, with services producing 50 percent of their sales (source). The typical construction equipment manufacturer in the industry has seen growth below 4% annualized over the last few years.  Yet, when we look at products in the market and how they are distributed, we see that many companies have a far way to go to implement these concepts fully.

How are Forestry, Mining & Construction Equipment Manufacturers changing?

During your next few trips past or through construction sites, note the amount of equipment on the site that is likely rented versus purchased.  Recent studies indicate that using equipment that is not purchased (EaaS) and having a optimized fleet for each project is a growing trend. A traditional rental is only a point on the journey toward “usership” (EaaS). Think about subscription services and other more advanced models.

If you are still questioning if this is the future, review this example. Here is an example of EaaS within the industrial equipment sub-sector of mining equipment. Epiroc is one of the largest manufacturers of mining equipment globally. They offer an EaaS product called Batteries as a Service, which allows the customer to transition to a usership model.  In this case, it cuts capital expense and eliminates technological risks.

To insulate the customer from changes in battery technology and changing needs within their operation the customer has the option to use the appropriate battery for their electrically powered equipment as needed and adjust the subscription as needed. These transitions in the industry are already happening around us.

Customers, Dealerships, and Manufacturers can leverage Usership and EaaS to create a competitive advantage against their competition.

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