Servitization to address the auto industry slow down

The automotive industry sees a challenging year ahead in 2020 for growth. Ratings agency Moody’s has forecasted a year of negative growth. S&P has predicted light-vehicles sales to decline by 1.2% year-over-year in 2020. The industry has been hit by macro-economic, consumer preference and technology factors at the same time.

At a macro level, there are regulatory and environmental concerns. Stringent fuel standards and electrification of vehicles need investments for both the vehicle maker and the buyer. They could have pushed interested customers to delay their purchase of vehicle. Mobility-as-a-service is becoming popular. The World Economic Forum calls it the “sharing economy” - “organized interactions in which individuals or entities exchange with others the untapped “surplus” or “idle” capacity of their assets, typically for some type of payment or service”. According to WEF, the Chinese government wants such an economy to contribute upto 10% of its GDP in 2020.

One more manifestation of the macro-economic trend is a “circular economy”. In order to enable such a closed-loop economy, industry leaders are planning to ask for incentives for vehicle scrappage, according to media reports. Instead of using a vehicle once and dumping it, its end-of-life can become part of an organized industry. Valuable materials can be recycled. Vital parts can be refurbished to be used again. Mahindra & Mahindra has formed a 50-50 joint venture with Metal Scrap Trading Corporation to setup Cero, a division for recycling automobiles at the end of their lifecycle. The number of such vehicles is estimated to be 26 million in India.

Ellen McArthur Foundation pioneering the circular economy considers the following as the pillars of circularity – i) circular product design, ii) reverse cycle or supply chains for value from products after their usage, iii) an ecosystem and a iv) business model. Servitization is a powerful business model for enabling circularity. It is a pay-per-use way of working where products and services are bundled. It is also referred to as mobility-as-a-service in the automotive industry. According to Hyundai India, 5% of its revenue in 2019 is from such a revenue stream. The car maker expects it to increase 2 to 3 fold in the next 3 to 4 years. Hyundai India’s new ad campaign is apt in depicting this shift from products to services:

“Once upon a time Hyundai was a car company”

At the micro level, consumer preferences are changing from paying upfront to own an asset such as a car to using it when required and paying according to usage. This could be because of high investment required for the products. Policy makers are aware of this situation. According to Finance Minister Nirmala Sitharaman,

"The automobile and components industry has been affected by BS6 and the mindsets of millennial, who now prefer to have Ola and Uber rather than committing to buying an automobile“

But vehicle makers cannot make an overnight shift from selling products to a servitization model that sells services. The change has to be planned and gradual. It needs a cultural transformation for sales teams who are used to selling products. Capabilities in emerging technologies such as the internet of things will be required. The increasing affordability of technologies such as IoT and sensors, Artificial Intelligence and embedded systems has given a strong push for usage based billing models.

From a recent study finding we conducted among Industry 4.0 and IoT leaders, the focus on aftermarket revenue and servitization is low. In my opinion, car makers cannot afford to not focus on servitization. This will slowly extend to other products too. Business leaders need to proactively plan for this business trend. One way for implementing Servitization will be to follow the Industry 4.0 template or approach. Both can be considered as two sides of the same coin. Industry 4.0 is internal facing, for connected assets inside an enterprise. Servitization is external facing, for connected products at the customer location. This was a recent IKI article on this topic. Product makers may not call servitization a big initiative or call it by other names. But it will have to be gradually adopted to manage the upcoming challenges beyond the automotive industry.

Note: All opinions and points-of-view expressed above are that of the author and do not represent that of any other individual or organization

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