Mechanical engineering is the backbone of Germany’s industry. But will it stay that way? What does digital transformation mean for engineering companies, and what role does the service business play? We spoke with Bianca Illner, Managing Director of Management Services at VDMA.
Bianca Illner, German engineering companies are strong on exports, and business flourishes year after year. How much of this success derives from services?
BI: As things stand, companies make an average of 15 to 20 percent of their revenues with services. That means sales of new plant and equipment account for the lion’s share of revenues. Even so, new-machine sales are not as profitable as the service business, which enables organizations to build long-term relationships with their customers through repeat business with parts sales, maintenance and other support services. In the VDMA’s
Global Service Study, customers worldwide were asked to rate their satisfaction with services received. The German mechanical engineering sector received top marks for service, and fared much better in the rankings than providers in other countries.
What’s the average profit margin on services?
Key to data analysis: sensor (Image: iStock/zorazhuang)
Prompt, high quality service reinforces the value promise that customers expect of the German mechanical engineering industry. Service is perceived as genuinely adding value, and it’s something customers are prepared to pay for. According to the 2016 VDMA benchmarks, profit margins in the service business are now four times higher than in mechanical engineering as a whole. But the survey also indicates that profitability is strongly contingent on the size of a company, its products, customer base and business model.
Can the segment be expected to remain this profitable?
We estimate that revenues from services will grow to an average of 20 to 30 percent of total revenues over the next five years. And this is important, because the market environment is becoming increasingly volatile and risky. The service business is a valuable way to at least partly counteract fluctuating sales and dwindling profit margins in sales of plant and equipment. Against this backdrop, industry 4.0 is more important than ever.
Intelligent automated systems are coming.
Digital transformation can carve out competitive advantage on international markets though its continuous stream of innovation. There’s huge demand for digitally supported services that make machines work more smoothly and efficiently. Customers want quickfire responses to their needs. They want problems to be resolved as fast as possible. By staking out an clear-cut position as a solution provider, a mechanical engineering company can build stronger ties with its customers, and will be more resilient when times get tough.
Can you explain in more detail: what role will Industry 4.0 play in the future?
We recently surveyed our member companies for a study to find out what their customers expect of digitally supported predictive maintenance using sensors and big data. 80 percent anticipate an increase in production output and quality through greater operational security, better availability and a longer service life of equipment. 20 percent expect costs to decrease, for example because fewer repairs and parts will be needed.
But what we’re also hearing from many mechanical engineering companies is: yes, there are wide-ranging opportunities with new technology, but our customers are either not open to change or simply do not value the new services.
These cases do exist, but digitally supported services are viewed by a majority of companies as a way to differentiate their offering and drive sustainable service revenues. Our study on predictive maintenance shows that 80 percent of mechanical engineering firms expect new digital services to push growth by as much as 20 percent. 11 percent of respondents reported that they already had digital services in their portfolio, and 70 percent indicated they are working on it. The trend is clear: knowledge-based, intelligent, automated systems are on the up and up.
Digital transformation shouldn’t be an end in itself.
But these systems present vendors with major challenges. Engineering firms, particularly the smaller players, aren’t exactly known for their expertise in digital capture, analysis and processing of sensor data, right?
Knowledge-based, automated evaluation of physical and technical phenomena is indeed complex. And yes, the introduction of new digital services also poses risks – it can’t be allowed to compromise system operation or availability. In my view the way forward is to do a detailed analysis first, and figure out which projects are worthwhile, what to target, and how. It depends on an organization’s strategic direction, its customers and business model whether it will be able to leverage the potential of new digital services within a short timeframe, or whether it will take longer.
What specific action should companies take?
Digitally supported service is a USP (Bild: iStock/anandaBGD)
Many technologies for Industry 4.0 solutions are already available today. But the advantages of Industry 4.0 only really take effect when these technologies are blended into smart combinations. Digital networking across corporate boundaries is a complex challenge. One case in point: if companies are going to exchange and share data, they will need to cooperate in totally new ways – so new forms of collaboration will have to be developed. Issues of data security, legal compliance and intellectual property need to be addressed, and the technical infrastructure for digital networking has to be established. Other key competences are software development for digital platforms and apps, programming of machine and plant control systems and the analysis of complex data.
That’s a vast undertaking. Aren’t many of your member companies overwhelmed by the challenge?
That’s why VDMA is ready to help with advice and support. In general, we recommend starting with a smaller digital project with a selected customer as a way to gain experience. The organization can then analyze the outcomes and decide on next steps. Organizations shouldn’t expect too much at once. Digital transformation shouldn’t be an end in itself – it must always deliver value. Every organization has to adapt its processes, structures and people, and this won’t happen overnight. But I’m certain there’ll be a lot going on in the coming five years.
Finally, it would be good to have an example: in your view, which company is engaging wisely and well with Industry 4.0?
In principle, digital transformation is nothing new in mechanical engineering. It began around 25 years ago, for instance with remote diagnostics systems. With the advent of new communication and data analysis tools in recent years, the pace of development has quickened. In our brochure
Industry 4.0 in practice, we present over 50 VDMA member-company solutions, all of which highlight a particular facet of Industry 4.0.
Lead image: iStock.com/Kinwun
Sidebar: VDMA/Schaeffler Gruppe