from assets to access report june 2016

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1 Maintenance model Service model Circular model From assets to access High potential transformation of the capital goods industry ING Economics Department • June 2016

2 Summary and conclusion From product sales to a service model: significant opportunity, significant change Industry shifting focus to services More product and market knowledge among Significant opportunity, requiring significant Increasingly, the technology industry earns its money manufacturers than customers investment There are increased opportunities for manufacturers to The transition from product sales to a service model must through provision of services. Whereas twenty years ago be undertaken step by step. This is due to the scale of the embrace a service model. While opportunities vary from one almost two-thirds of (earned) income came from production market to the next, money can be earned by improving: activities, that figure has fallen to around 56%. There are transition and the fact that it requires, among other things: opportunities for OEMs of capital goods in particular to technology that improves the • Maintenance: • Time and money to develop reshape their business model from production and sales to maintenance and use (utilisation) of capital goods; volume, increasing technical complexity and new technology mean that this is best performed by a manufacturer; a service model with an increased emphasis on providing • Investment in (sales) staff . The sales force has services. • Marketing: considerable experience in selling a product. The service a manufacturer knows its (second-hand) sales market model emphasizes the selling of a (customer) solution; , since the transition will require significant Capital • Customers want a care-free solution and flexibility better than the customer and globalisation has increased In a service model, customers benefit from further sales opportunities; liquidity in the first few years. This is due to the fact that a ‘unburdening’. Alongside maintenance, effectively already a manufacturer will receive a periodic fee instead of the full • Financing: the benefits of cheaper financing, if available to the standard service, the major advance in a service model is the amount for the sold product in one go. manufacturer, can be (partially) passed on to the customer; guarantee of performance of a capital good for a fixed fee. • Utilisation: The customer is thereby assured of use and performance, Service model important step towards circular by leveraging volume and applying new technology, a economy without ownership. This guarantee of a care-free solution manufacturer can optimise the use The service model is an ideal step towards a circular and flexibility is valued by many customers and reinforces of easily moved goods, the relationship between manufacturer and customer. economy. The service model includes provision for the return thereby reducing costs; (replacement) of the product. Control over the product • Care-free: remains with the manufacturer. Smart design can enable the customer is exposed to lower risk and can concentrate on core activities. far more effective disassembly, re-use or recycling. The value of the circular model is not (yet) expressed in a better Opportunities vary between markets, for example: procurement margin, however. It is important that demand • For manufacturers with customers in the public sector, in by large corporations and public authorities (including the education and healthcare sectors and/or ports and regulations) moves in the direction of a circular economy. airports, opportunities centre on providing a care-free solution and enhanced maintenance ; • For the transport sector, there is added value to be had in and marketing , terms of ; financing utilisation • Machinery manufacturers selling into the metalworking and rubber and plastics industries (with many SMEs) can . and maintenance financing add value in terms of 2 From assets to access • June 2016 ING Economics Department

3 Contents Introduction 4 Manufacturers increasingly provide additional services 4 From product sales to sustainable customer solution 5 1. The maintenance model: building a customer relationship 6 Maintenance model creates valuable relationship with user 7 Technology further enhances attractiveness of maintenance model 8 2. The service model: providing the customer with a care-free solution 9 Service model: a major step forwards 10 Financial implications – customer 11 12 Financial implications – manufacturer Capital not the only challenge 13 Transition in practice: Three examples 14 3. The circular model: the sustainable solution 15 Circular model as ultimate goal 16 Trend towards modular approach brings circular economy a step closer 17 Gradual move to circular model most likely to succeed 18 19 Annex 1 20 Special thanks to 3 From assets to access • June 2016 ING Economics Department

4 << Contents Introduction Manufacturers increasingly provide additional services There is a clear shift in the activities from which Opportunities for capital goods industry Four business models Increasingly, European industrial companies earn money European industry generates its earnings This report is based on a conceptual framework comprising Change in share of (labour) income of capital goods four business models (see next page). with services related to a product. Whereas in 1995, 66% of (labour) income still came from production activities, industry* 1995-2011, EU15, percentage points product sales model A manufacturer can progress from a that figure has declined to around 56% twenty years later. production services to From to a Trends such as ‘from ownership to use’ and customer maintenance model , in which more technical services 140 Pre-productie demand for flexible solutions will strengthen this tendency such as installation and maintenance are provided. Section 120 1 describes features of supply chains in which this model in the coming years. Pre-production occurs and how new technology can strengthen the 100 Productie laagwaardig manufacturer’s role. This report focuses on capital goods manufacturers. Sales of 80 1 amount to approximately EU capital goods manufacturers Production low value 60 2,200 billion euros. This report focuses mainly on the transition to the service Productie hoogwaardig 40 model . Section 2 addresses the opportunities, challenges Productie high value and financial implications. Technology presents these manufacturers with new 20 Post-productie laagwaardig opportunities for evolving from the traditional product 0 Post-production low value jaar 4 jaar 5 jaar 6 jaar 1 jaar 2 jaar 3 cumulative sales model to a service model. However, the significant Section 3, finally, briefly examines the evolution to the opportunities are matched by significant challenges: the circular model . The manufacturer remains responsible Post-productie hoogwaardig switch from a product-oriented company to a service for the product throughout the entire product life cycle Post-productie high value provider is a major one. and actively focuses on (designing for) the reusability of -10% 10% 5% 0% -5% 5% -5% 10% -10% 0% products and/or components. Where the service model reflects the broader trend ‘from ownership to use’, the Source: Dutch Manufacturing Competing in Global Value Chains, circular model aligns with the trend towards sustainability. Marcel Timmer / Gaaitzen de Vries, University of Groningen, 2015, and underlying data received, *incl. metalworking Pre-productie Productie laagwaardig Pre-productie Defined as electrotechnical, mechanical engineering and transport 1 Productie hoogwaardig equipment manufacturers Productie laagwaardig Source: Oxford Economics Post-productie laagwaardig Productie hoogwaardig Post-productie hoogwaardig 4 ING Economics Department From assets to access • June 2016 -5% 10% 5% 0% -10% Post-productie laagwaardig Post-productie hoogwaardig 5% 10% -10% -5% 0%

5 << Contents Introduction From product sales to sustainable customer solutions The ‘stairway to circularity’ The following conceptual framework shows how stairway, the fewer the number of companies occupying manufacturers can evolve their business model. The higher it at this moment. In practice, every customer requires a tailor-made solution. A manufacturer must ultimately be up the stairway, the stronger the relationship with the customer, the greater the added value, the fewer concerns able to provide the services referred to in a flexible modular the customer has and, on the last step in particular, the format. A ‘service’ that is common to all forms is financing. greater the sustainability. Also: the higher the step on the Manufacturer-provided financing can occur in every model. A framework: The ‘stairway to circularity’ for capital goods manufacturers N.B. One service that a manufacturer can provide in each model is financing. What services are provided? Business model A sustainable solution • page 16-18 3 Circular model Disassembly, reuse of asset/parts and recycling + (Reverse) logistics + Service model ‘Taking care’ of the customer • page 10-14 2 Taking over risk (performance contract) + 1 Building a client relationship • page 7-8 Maintenance + Maintenance model Operations + Installation + Product sales None Source: ING Economics Department From assets to access • June 2016 5 ING Economics Department Circular model, service model, maintenance model, product sell De tredes van boven naar beneden: Disasembly and reallocation of parts/asset (Reverse) logistics Taking over risk (performance contract) Maintenance Operations Installation None En bij de cijfers: 1) Building a client relationship 2) ‘Taking care’ of the customer 3) A sustainable solution

6 1. The maintenance model: building a customer relationship • Maintenance model creates valuable relationship with user 7 8 • Technology further enhances attractiveness of maintenance model 6 From assets to access • June 2016 ING Economics Department

7 << Contents Maintenance model Maintenance model creates valuable relationship with user Overview: Maintenance model by manufacturer depends on supply chain, among other things Existing relationship with user is a good starting point for evolution to a service model It helps in the transition from product sales to a service Consumer Manufacturer model if the manufacturer already has an existing structural customer relationship. Aside from the margin • Private end user Maintenance model uncommon in use which manufacturers earn on maintenance, this • Long supply chain relationship is the key value in the maintenance model. In the case of ‘long’ supply chains with multiple links between manufacturer and consumer, there are few manufacturers An even closer relationship exists in specific markets with that opt for the maintenance model. An example is capital goods in homes, such as central heating boilers. Separate installation and maintenance contractors operate in this market, alongside wholesalers, the power company and (more) complex systems and installations, since the OEM can also have responsibility for day-to-day control. A good possibly the landlord. example is Vanderlande, which manufactures automated baggage handling systems, among other things. Roughly 80 Manufacturer Consumer people are employed permanently at Amsterdam Airport Schiphol to operate the system. • Private end user Maintenance model occassionally in use • Short supply chain Different supply chains, different relationships ‘shorter’ supply chains , such as in the automotive sector or large Not all manufacturers are able to provide maintenance The maintenance model is sometimes found in domestic appliances. It is then usually employed by financially strong manufacturers. The actual maintenance is then services. An important factor is the type of supply chain in which a manufacturer operates. The number of often performed in collaboration with (exclusive) partners. intermediary links to the end user is also a significant factor in this regard. The maintenance model is most Business user Manufacturer common in a business-to-business environment where the manufacturer’s customer is also the end user. • Business user Maintenance model commonly in use • Short supply chain In the case of capital goods with a business end use there is often a direct relationship between manufacturer and user. Examples include specialised machinery or buses. Maintenance is then often performed by the OEM or (exclusive) partner. The lower volumes (than in the consumer market) and short communication lines facilitate a (more) pronounced steering function for an OEM, and additionally present opportunities for evolving towards the service model. From assets to access • June 2016 7 ING Economics Department

8 << Contents Maintenance model Technology further enhances attractiveness of maintenance model Technology as driver Inspiration: Predictive maintenance at Maintenance: remote and predictive for optimum planning The leading opportunity in relation to maintenance and ThyssenKrupp deployment of capital goods is presented by the use of new • In 2013, board members of German manufacturer The advantage enjoyed by manufacturers in terms of ThyssenKrupp (turnover approx. €42 billion) and technology. technological knowledge also leads to opportunities for Microsoft met at a conference on the Internet of monitoring and maintenance. In most cases maintenance Technological complexity is increasing and ensures is still performed on a regular basis (inspection once a Things. project installation is a growth segment year) and reactively (if something breaks down). This is in • In 2015, the two companies together launched MAX, spite of the fact that electronics and integrated software Increasing technological complexity is widening the a predictive maintenance solution for ThyssenKrupp’s ‘knowledge gap’ between manufacturer and user. and sensors can supply the necessary information on a lifts. machine, enabling predictive maintenance. This allows • There are orders to have installed 180,000 units Manufacturers are presented with new opportunities machine downtime to be reduced and maintenance in 2017. A first step towards eventually making 12 in terms of service provision, starting as early as the planning to be optimised. It is worth noting that this can installation stage. Systems in modern factories are million lifts ‘smarter’ worldwide. be preceded by a period of many years, during which increasingly complex and link production and logistics, for data must be collected and the relevance of the data example, while also generating huge volumes of data. This Lift breakdowns translate to efficiency loss determined. drives project installation as a clear growth segment. MAX is designed to dramatically reduce the number of lift breakdowns. The tool acts as the service engineer’s right hand. It shows in real time whether, and which, parts need to be replaced, but its predictive capabilities make it particularly valuable. Data from the lifts is collected in real time and sent to the Microsoft Azure platform. An algorithm calculates the service life of key lift components. This yields efficiency gains not just in terms of planning and deploying engineers, but also gains for lift users since they are less inconvenienced by breakdowns or reduced lift capacity. Source: https://max.thyssenkrupp-elevator.com/assets/pdf/TK-Elevator-MAX- Report.pdf 8 From assets to access • June 2016 ING Economics Department

9 2. The service model: providing the customer with a care-free solution • Service model: a major step forwards 10 • Financial implications – customer 11 • Financial implications – manufacturer 12 • Capital not the only challenge 13 • Transition in practice: Three examples 14 9 From assets to access • June 2016 ING Economics Department

10 << Contents Service model Service model: a major step forwards Service Model Checklist Customer wants less work for itself and fewer risks Customers increasingly want suppliers to provide ‘care-free How can the manufacturer earn money in the service model? solutions’ by delivering additional services and assuming risks on their behalf. This is driven by the fact that the customer also finds itself in an increasingly complex world 1 Big data possibilities and volumes enable the manufacturer to perform monitoring and Maintenance with critical clients, rapid market changes, regulatory maintenance with optimum efficiency. Growing technical complexity and electronics also burdens and competitive pressure. A service model provided by the manufacturer is the perfect answer to this need. increase the customer’s dependency on the manufacturer. 2 Ownership with manufacturer and performance Marketing Better market insight and maintenance enable the manufacturer to market its product contracts more effectively than the customer (improved estimation of residual value) when the latter no longer uses the capital good. The service model goes significantly further than the maintenance model. A central element in the service 3 Financing The benefits of cheaper financing, if available to the manufacturer, can be partially passed of a capital good by retention of ownership model is the on to the customer. the manufacturer. The customer is only interested in use. This results in a shifting of risk and perhaps financing to the 4 Utilisation performance contracts manufacturer. In the service model In the case of relatively easily moved goods in particular, a manufacturer is able to are concluded under which the supplier guarantees or is paid leverage volume, market knowledge and big data to achieve better utilisation by different for a specific performance per unit (either manufactured or users of the capital good. used by the customer). 5 Assuming the (incident) risk (breakdowns), thereby providing the customer with a Care-free solution What price for meeting this customer demand? guarantee of access/use, has monetary value. In addition to this guarantee, it offers the Providing additional services and assuming risk come at an customer scope to concentrate further on its core tasks. The customer furthermore has extra cost also for a manufacturer. This will be factored into greater certainty about / stability in terms of expenditure. the standard fee paid by the customer in a service model. But, not surprisingly, an excessively high fee will impact on sales. It is important to consider on which elements margin Opportunities vary between markets, for example: can be made by the manufacturer, and when (see Service • For manufacturers with customers in the public sector, in the education and healthcare sectors and/or ports and Model Checklist overview). ; maintenance and enhanced airports, opportunities centre on providing a care-free solution ; financing utilisation , marketing and • For the transport sector, there is added value to be had in terms of • Machinery manufacturers selling into the metalworking and rubber and plastics industries (with many SMEs) can add value in terms of financing and maintenance . 10 From assets to access • June 2016 ING Economics Department

11 << Contents Service model Financial implications of service model - customer x €1.000 How does the customer benefit? A sample calculation helps to explain the financial 133,3 140 140 implications of switching from a maintenance model to In the old situation, the customer purchases the machine, 140 thereby entailing a major outlay in year 1. The customer then a service model. 120 120 120 Onderhoud Onderhoud pays further annual fees for financing and maintenance. In 100 100 100 the service model, the customer pays six equal amounts or Sample calculation Financiering Financiering 80 80 instalments. With the manufacturer now bearing the risk for Introduction: switching from maintenance model to 80 Afschrijving Afschrijving 60 60 the machine (performance), the customer pays an annual service model 60 ‘care-free fee’, which is set at 1.5% in this example. Over a Jansen Machinery manufactures and sells 100 machines 40 40 40 period of six years the customer then pays 9% more under per year at €100,000 and provides the related maintenance. 20 20 20 the service model than under the maintenance model. In The financing and depreciation period of each machine is 0 0 return, the customer receives a (performance) guarantee six years. For a complete overview of the assumptions, see 0 jaar 6 year 4 year 5 year 6 Cumulative cumulatief year 3 jaar 5 jaar 4 jaar 3 jaar 2 jaar 1 year 1 year 2 jaar 1 jaar 2 jaar 3 jaar 4 jaar 5 jaar 6 cumulative for its machine and is assured of its continued operation as Annex 1 . Maintenance ■ Depreciation/use ■ well as stability in terms of expenditure. Financing ■ Care-free solution ■ The company notices that customers would like greater flexibility and a more care-free solution, and so considers Figure a. Old situation (maintenance model): Figure b New situation (service model) more stable switching to the service model. Jansen has already begun expenditure, ultimately higher costs due to all- immediate large outlay for customer, followed by to implement predictive maintenance, enabling it to ensure inclusive service (care-free solution) low costs smarter planning and execution of maintenance while also 140 x €1.000 x €1.000 Onderhoud continuing to guarantee the quality of the machines. 120 133,3 140 140 140 140 Financiering 124,3 Onderhoud 100 120 120 120 120 Afschrijving Financiering Onderhoud Onderhoud 80 100 100 100 100 Afschrijving Financiering Financiering 60 80 80 80 80 Afschrijving Afschrijving 40 60 60 60 60 20 40 40 40 40 0 20 20 20 jaar 2 jaar 1 jaar 4 jaar 5 jaar 6 cumulatief jaar 3 20 0 0 0 0 year 4 year 3 year 2 year 1 Cumulative year 6 year 5 jaar 2 jaar 1 year 1 year 6 Cumulative year 3 year 4 year 5 cumulatief jaar 6 jaar 5 jaar 4 year 2 jaar 3 jaar 3 jaar 5 jaar 1 cumulative jaar 6 jaar 4 jaar 2 ■ Maintenance ■ Purchase ■ Depreciation/use ■ Maintenance ■ Financing ■ Financing ■ Care-free solution From assets to access • June 2016 ING Economics Department 11 140 x €1.000 Onderhoud 120 140 Financiering 124,3 Onderhoud 100 120 Afschrijving Financiering 80 100 Afschrijving 60 80 40 60 20 40 0 20 cumulatief jaar 5 jaar 4 jaar 3 jaar 2 jaar 1 jaar 6 0 year 5 year 6 year 1 year 2 year 3 year 4 Cumulative ■ Purchase ■ Maintenance Financing ■

12 << Contents Service model Financial implications of service model - manufacturer Delayed profit Service model offers greater potential This fee might even become negative after some time, so Rolling out the service model means that Jansen has to wait Based on this calculation, the service model is not that customers have a better ‘product’ than in the past at x €1.000 for its revenues to come on stream. It sells 100 machines a lower cost. compelling in itself. However, Jansen understands that 4.000 4000 year. The six-year depreciation period means that after six it must be able to generate residual value. The company 3.000 3000 years the (maximum) number of machines - 600 - are in use. additionally expects to see a boost in its maintenance margin level. The inclusion of the performance guarantee The net profit will be negative for the first few years as only 2.000 2000 the income from the first few contracts to be concluded flow in the service model provides a stronger incentive than in 1.000 1000 the past to structure this maintenance as efficiently as in. The net profit turns positive from year three, however, and 0 0 possible. Lastly, as a healthy OEM, Jansen Machinery enjoys will eventually be higher than in the old model. -1.000 -1000 favourable financing conditions, particularly compared -2.000 -2000 Significant negative cash position creates financing with the multiple smaller businesses in its sales market. -3.000 -3000 By passing on some of these benefits to the customer, it is challenge year jaar 14 jaar 12 jaar 11 jaar 10 jaar 9 jaar 8 jaar 7 jaar 6 year year year year year jaar 13 jaar 5 year year jaar 4 year year year year year jaar 3 jaar 2 jaar 1 year 5 1 11 6 12 3 13 7 14 10 8 4 9 2 possible to reduce the ‘care-free fee’ toward the zero mark. The negative profit in the first few years is undoubtedly a financing challenge. As is the case in the maintenance ■ Maintenance model ■ Service model model, manufacturing the machines requires pre-financing. Figure a. Figure b. Net profit initially very negative under Service model presents financing Additional financing is needed to allow for the fact that in challenge due to negative cash position, although the service model income is generated over a far longer service model, later rising to become sustainably better cash position prevails after several years period. Compared with the old model, the cash position is higher compared with maintenance model better after thirteen years, and increases even further in x €1.000 x €1.000 15000 subsequent years. 4.000 4000 15.000 10000 3000 3.000 10.000 5000 2.000 2000 5.000 0 1000 1.000 0 -5000 0 0 -5.000 -10000 -1000 -1.000 -10.000 -15000 -2.000 -2000 -15.000 -20000 jaar 6 jaar 5 jaar 4 jaar 3 jaar 2 jaar 1 jaar 12 jaar 13 jaar 11 jaar 10 jaar 9 jaar 14 jaar 8 jaar 7 -3.000 -3000 -20.000 year year year year year year year jaar 14 year jaar 13 year jaar 12 year year jaar 11 jaar 10 year jaar 9 jaar 8 jaar 7 jaar 6 jaar 5 jaar 4 jaar 3 jaar 2 jaar 1 year year jaar year year year year year year year year year year year year year 9 1 4 5 6 7 8 3 10 14 13 2 11 12 1 12 4 11 14 10 2 9 13 8 5 7 6 3 Maintenance model ■ ■ Service model ■ Maintenance model ■ Service model 12 From assets to access • June 2016 ING Economics Department x €1.000 15000 15.000 10000 10.000 5000 5.000 0 0 -5000 -5.000 -10000 -10.000 -15000 -15.000 -20000 jaar 13 jaar 1 jaar 2 jaar 10 jaar 11 jaar 12 jaar 8 jaar 7 jaar 9 jaar 6 jaar 5 jaar 4 jaar 3 jaar 14 -20.000 jaar year year year year year year year year year year year year year 1 12 11 4 5 6 7 8 2 10 14 13 9 3 ■ Maintenance model ■ Service model

13 << Contents Service model Capital not the only challenge Financially strong parties moving to service model In addition to the attractions, the sample calculation also highlights an immediate concern market segment, are (capable of) moving towards a service model. But capital is by no means the only factor determining the likelihood of success of a service model. Below is when transitioning to the service model: the necessary capital. While this can be alleviated somewhat by a gradual transition, the fact remains that the switch requires an investment. a (non-exhaustive) list of factors which are necessary or help to implement a successful This is a principal reason why financially strong parties in particular, often leaders in their service model. What is necessary and what helps when transitioning to the service model? What helps? What is necessary? Technology Introduction of a new product Having an existing relationship as a Sales Firstly, technology must be sufficiently foundation The service model represents a major The introduction of a new business model can be made to coincide with the advanced to enable a manufacturer to change for sales staff. Selling a total A pre-existing (good) customer concept and customer solution calls for a make real steps in the area of predictive relationship, often rooted in the introduction of a new product. The sales maintenance and/or more efficient use process then does not centre on the new maintenance model, can accelerate different approach and insight than selling of (movable) goods (asset sharing). This a capital good together with its (technical) product, but rather the solution being the transition to a service model. The benefits of this model can be explained performance. This requires manufacturers offered to the customer, with related fee. relates in particular to the aspect of big data and retrieval of relevant data. during talks with the customer. A possible to invest in their people. Modified laws and regulations inhibiting factor in terms of customer Clearly measurable performance (tendering rules) willingness is customer lock-in, a term that It is crucial that the delivered service is The (semi)public sector is a major is used to signify when the customer is customer for capital goods. As a service heavily dependent on its supplier. For the precisely measurable. The shifting of risks model, particularly when part of a circular manufacturer this is a valuable aspect of in the supply chain already introduces an the service model. But the question is how element of complexity in terms of how the model, often also involves new forms of cooperation and concept development, contract is structured. But if the delivered far a customer is prepared to go in this regard. there is a possibility it may be at odds with service is not clearly measurable and tendering rules. leaves too much scope for interpretation, the task becomes almost impossible. ING Economics Department From assets to access • June 2016 13

14 << Contents Service model Transition in practice: Three examples Better use of capital goods: transport equipment aking over services from (semi)public sector New products offer opportunities for new business T models One of the ways of increasing margin is more efficient The more care-free the solution a customer seeks, the more lucrative the service model becomes. The (semi)public sector Major global challenges in the fields of healthcare, food supply, utilisation of capital goods. Making optimum use of goods that offers multiple opportunities for achieving the service model. are easily movable, such as vehicles and other transportation mobility, climate and energy require responses with new technology. Energy transition is already gathering pace in Of particular interest are services related to all manner of means, is a specialty of its own. That’s the reason vehicle capital goods that are used in (air)ports, the healthcare and rental and lease companies have existed for decades and may the fields of mobility and transport. The introduction of new education sectors, or other government departments. products also offers immediate opportunities for delivering a be better positioned than manufacturers to provide further, service model. enhanced services. Example: Aebi Schmidt Nederland BV, part of ASH Group Example: TIP Trailer Services Example: VDL Enabling Transport Solutions VDL ETS was established in 2015. The company’s objective is to ASH Group is Europe’s leading manufacturer of spreaders for TIP Trailer Services provides trailer leasing and rental from de-icing operations. The Dutch market is notable in that most develop hardware and software solutions in the field of electric locations in Europe spread over sixteen countries. In addition to transport and related matters such as battery technology, value is generated not through sales of products but rather trailer leasing, the company also provides maintenance, repair, charging infrastructure and simulation software for guidance and fleet management, as well as other services. through the services provided in relation to those products. In Transportation customers increasingly want flexibility and care- addition to advice and maintenance, the company provides and navigation. The implementation of large-scale electric bus free solutions. Cost savings and improved efficiency are primary transport for Connexxion’s South-East Brabant concession from training on carrying out de-icing operations. UIn a new drivers in this sector, in which margins are low on average. TIP is move, Aebi Schmidt has begun offering a complete service the end of 2016 represents an important milestone. model: the customer (several contracts were recently signed deploying new technology in the area of telematics to further optimise trailer use and maintenance. In addition to the with public authorities) pays a fixed fee for the use and The switch to the new bus transport mode also calls for a availability of winter maintenance equipment. In return, Aebi benefits of predictive maintenance, paying solely for usage new business model. Transport providers are expected to Schmidt offers a guarantee of 100% availability and 100% ultimately adopt a model based on payment per passenger. per kilometre promises to be a valuable model in the future. deployability. Contracts have even been signed specifying The transport providers in turn expect their suppliers to Trailers are fitted with technology being developed in-house for recording relevant data. Research conducted over many provide a comprehensive solution with guaranteed mobility. delivery of comprehensive performance. Given the increasing knowledge advantage of Aebi Schmidt, and the fact that years into the right data and related algorithms is intended The challenge for VDL and its partners is to deliver a complete public authorities must work with lower budgets, this model to ensure customers can make the right decisions at the right package of buses, guidance and navigation, charging offers opportunities. Clear benefits for public authorities time. This prevents unnecessary idle time, allows available infrastructure and a stable and secure power supply. capacity to be further optimised and ensures the customer The further structuring of the necessary eco-system and the are a care-free service, guarantees and stability in terms of division of operational risks among the parties involved in expenditure. only pays for actual trailer usage in the future. TIP expects to be able to achieve cost savings of up to 15% as a result. contracts, as well as in practice, continues to require a tailored approach. From assets to access • June 2016 14 ING Economics Department

15 3. The circular model: the sustainable solution • Circular model as ultimate goal 16 17 • Trend towards modular approach brings circular economy closer • Gradual move to circular model most likely to succeed 18 15 From assets to access • June 2016 ING Economics Department

16 << Contents Circular model Circular model as ultimate goal circular model, capital goods manufacturers that deliver to goods can still be put to more than adequate use in many Circular model: opportunity and responsibility for the countries, so it makes sense from an economic viewpoint, these companies can support customers in improving the manufacturer sustainability of their operations. It is therefore expected While the switch to a service model is significant, the as well as from the perspective of sustainable use, to do so. transition to a circular model is even more significant. In The fact remains that re-use or recycling of capital goods that business demand for circularity in capital goods will increase. at the end of their (technical) useful life still leaves much to addition to freeing the customer from worry, it also marks be desired. Extended control and a sense of the potential of an important step on the path towards sustainability. In the The item is also creeping up in the agendas of public circular economy products and materials are re-used and sustainability on the part of a manufacturer are essential to raw materials retain their value. Product design plays a key authorities. In December 2015, the European Commission enable a different approach in this matter. presented a package of measures to stimulate Europe’s role in this regard. transition towards a circular economy. These guidelines Large corporations and governments adopting a will be translated into national legislation in the coming circular approach The circular model requires the manufacturer to retain years. More regulations are expected to be introduced in the control over the product throughout the entire life cycle, Demand for circular products amongst consumers is coming years to support the circular economy further. still very limited. Nevertheless, sustainability has an while the service model ‘ends’ on the return of the product. In practice, a product is often given a second lease of life increasingly high profile on corporate agendas, particularly amongst large, well-known companies. By adopting a after return through resellers or otherwise. These capital ING Economics Department ING Economics Department For a detailed analysis of the circular economy in the broad sense and the implications Rethinking finance in Rethinking nance in for financing, see the report a circular economy a circular economy Financial implications of circular business models ‘Rethinking finance in a circular economy’ . From assets to access • June 2016 16 ING Economics Department

17 << Contents Circular model Trend towards modular approach brings circular economy closer Modular approach = circular approach An important trend that is bringing the circular model closer Practice rapid wear or change, since a product that is not used is the modular design approach. In order to meet the need Philips: each supply chain requires a unique circular relevantly impedes or complicates re-use. An important learning point in the transition to a circular model is that approach for efficient (standardised) manufacturing while delivering a In the B2B market, Philips medical equipment and lighting customer-specific solution in a flexible manner, capital goods this cannot be effective if (product) design is taken as the are increasingly designed on a modular basis. And since activities represent two sectors with circular potential. (sole) essential factor. The proposition to the customer these modules are easily disassembled, replacement, re-use serves as the starting point and basis for working towards As both markets differ considerably, however, the steps or recycling is also much easier to undertake. Where a capital a product (and service) design. that can be taken in relation to the circular economy also good is re-used, the value of the design is also preserved and dif fer. not just the (more limited) value of the material. Medical equipment Lighting Medical equipment (CT, MRI scanners) also presents Additional margin on procurement thanks to circular Offering ‘light as a service’ is a major step towards a opportunities, although the transition to a circular model is still some way off economy necessitates some important choices. There is circular economy in this sector. Technology, in particular By designing components or modules more smartly it ought the development of LED lighting, sensors and the internet, a well-established large second-hand market for medical to be cheaper to re-use them than to manufacture new equipment, for example, which entails a loss of control by opens up new opportunities. In 2015, Philips launched a modules. Especially if adequate maintenance ensures their manufacturers over their products. However, this control collaboration with Schiphol Airport, which was keen to long-lasting quality. In practice, however, this procurement is essential for the circular model. At the same time, purchase a circular product: a pilot project to provide light benefit is not yet, or is only scarcely, achievable. For as a service. Philips effectively delivers the service model, refurbishment is also an important and valuable issue decades manufacturing processes (for new goods) have but with an emphasis on applying circular economy for Philips, and the company is increasingly focusing on been optimised to the point that costs are now very low. principles. By retaining ownership, Philips has control ‘design for re-use’ and modular production. The relocation Furthermore, raw material prices are currently at such a low of the refurbishment line from Veldhoven (NL) to the over the product. Smart design enables the lighting level that purely in terms of procurement and manufacturing production line in Best (NL) is a good example of how the fixtures to be re-used elsewhere, or at least recycled, in new ‘sustainable’ activities are becoming increasingly an effective manner. A challenge in designing the lighting costs, the circular model is presently no match for the ‘linear’ is assessing correctly which components are subject to model in most cases. integrated with the ‘traditional’ activities. From assets to access • June 2016 17 ING Economics Department

18 << Contents Circular model Gradual move to circular model most likely to succeed highlighted in the service model, must be Move in one jump not necessarily easier really watertight. Practice towards a circular model in the longer run. The increasing embrace of circular models While direct customer demand has yet to is no measure for their success. Companies Relatively expensive lease concepts or Vanderlande: moving towards a materialise, Vanderlande has identified that immediately introduce a circular ‘return deposit constructions’ sometimes circular model Vanderlande is an industrial company latent demand for the new model. The create too many barriers for customers model in the interest of ‘sustainability’ face and the global market leader in baggage- intrinsic motivation driving the company a considerable challenge. The transition and prevent the successful marketing of also plays an important role in its further handling systems for airports, and sorting from product sales to service model is a concept. It remains essential to take the considerably challenging enough in itself. commitment to a sustainable future. proposition to the customer as the starting systems for parcel and postal services. The company is also a leading supplier of point. For capital goods manufacturers When implementing the circular model New working method, new partners in one go it is important that design, in particular, the move towards a circular warehouse automation solutions. It has more than 4,000 employees. return logistics and re-use of products model is more likely to succeed if it follows The path towards the circular model is the path of maintenance model followed by Vanderlande is certainly no longer just a a gradual process. The company gained also are well aligned and organised. The service model. customer proposition in particular, which is valuable experience with the development manufacturer. It generates added value through research, development, design and of BLUEVEYOR, a conveyor belt designed delivery, resulting in innovative systems. It according to circular principles, meaning Gradual transition to circular model it is easy to disassemble and is made of additionally takes care of maintenance and in some cases (airport baggage-handling components which facilitate maximum Circular model re-use or recycling. This requires systems, for example) operations on behalf Vanderlande, as well as its suppliers and of customers. Vanderlande also predicts customers, gaining a deeper insight growth opportunities through selling more Contribution to circularity: projects according to the DBFMO principle: into, and knowledge of, the materials Service model Product re-use (components) involved. Setting up a system of reverse Design, Build, Finance, Maintain, Operate. logistics, determining when the product Customers increasingly want peace of mind, particularly in terms of risk is to be replaced/removed, is another Contribution to circularity: Maintenance model important change. As this requires new management. The concept of ‘payment Product return partners, Vanderlande has entered into by suitcase’ is becoming increasingly collaboration with several companies, commonplace in large investment projects Contribution to circularity: including waste recovery and treatment at airports. Vanderlande sees this service Product sales Retain quality, extend life model as a stepping stone on the path specialist SUEZ. Source: ING Economics Department From assets to access • June 2016 18 ING Economics Department

19 << Contents Annex 1 Assumptions in sample calculation pages 11-12 Maintenance model Service model Selling price/Fee (incl. maintenance) 23.7 102.0 Term of contract (years) - 6 Margin on maintenance 20% 20% Costs of purchase (% turnover) 50% 50% Staff costs (% turnover) 20% 20% Other operating expenses (% turnover) 10% 10% 25% Tax rate 25% Depreciation of plant, machinery and equipment 10% 10% Maintenance investments in plant, machinery and equipment 10% 10% Debt in connection with purchase of plant, machinery and equipment 5000 5000 Annual debt repayment 833 833 3.5% Interest on debt 3.5% Opening balance of cash resources 400 400 # days inventory 75.0 75.0 # days accounts receivable 60.0 60.0 # days accounts payable 60.0 60.0 From assets to access • June 2016 19 ING Economics Department

20 << Contents Special thanks to Remko de Lange Vanderlande Brink Industrial Wido van den Bosch Jurgen Geiger McKinsey Markus Laubscher Philips Intergas Harry Bosscher Nynke Floor Zehnder Zehnder Rick Bruins René Wolfkamp Wadinko Frank Scherphof Voortman VDL Enabling Transport Solutions Menno Kleingeld Menko Eisma Trumpf Nederland Arjan Ester Aebi Schmidt Eric Visser TIP Trailer Services 20 From assets to access • June 2016 ING Economics Department

21 Author [email protected] +31 (0)6 8363 5786 ING Economics Department Jurjen Witteveen Editorial Board [email protected] +31 (0)6 2700 6624 ING Sector Management Bert Woltheus ING Grootbedrijf IJsselland Olaf Breden Jarco de Bruin ING Asset Based Finance ING Corporate Investments Matthijs de Bruijne ING Economics Department Gerben Hieminga ING Sustainable Finance Team Gerald Naber Jordy Streng ING Corporate Investments ING Corporate Clients Guy Walraven Disclaimer This publication has been prepared by ING (being the commercial banking business of ING Bank N.V. and certain subsidiary companies) solely for information purposes. It is not investment advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. The information contained herein is subject to change without notice. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. This publication is not intended as advice as to the appropriateness, or not, of taking any particular action. The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions. Copyright and database rights protection exists in this publication. All rights are reserved. ING Bank N.V. is incorporated with limited liability in the Netherlands and is authorised by the Dutch Central Bank. Any person wishing to discuss this report or effect transactions in any security discussed herein should contact ING Financial Markets LLC, which is a member of the NYSE, FINRA and SIPC and part of ING, and which has accepted responsibility for the distribution of this report in the United States under applicable requirements. ECD 0616 © ING Bank N.V. The final text was completed on 30 May, 2016.

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