I’ve write a lot about the fusion of manufacturing and services. In the most recent, I explicitly mention the concept of “servitization” — where a company sells as product as part of a service. In many cases, this takes the form of a after-sales service contract. But here is the counter-case of a successful strategy that specifically eschews the servitization model, from a recent Strategy+Business article “China’s Mid-Market Innovators”:
China’s rapid expansion of buildings and infrastructure has involved widespread subcontracting, with work on all sizable projects shared among a chain of hundreds or even thousands of small businesses. Most of these Chinese construction subcontractors think in the short term. They want equipment that is good enough to do the immediate job, and that will then be written off after five years or less. They are not interested in expensive, feature-rich products with a long life span supported by service contracts.
This type of segment is hard to penetrate for non-Chinese heavy equipment manufacturers, such as Caterpillar (U.S.), Liebherr (Germany), and Komatsu (Japan). These manufacturers follow well-established business models with buyers who, supported by long-term financing, think on a 10- to 15-year time span. Equipment must both last a long time and have the service needed to keep it operating with as few interruptions as possible.
Meanwhile, upstart construction equipment manufacturers have emerged to serve China’s fragmented construction industry. They sell low-cost machines that typically do not get expensive servicing, but are replaced when they wear out. The manufacturers focus on only a small range of related products, and keep their prices ultracompetitive by restricting investment only to functions and features that are strictly needed. Their versions of multinational products might not pass muster in Canada or Denmark, but they are considered superior in China.
Having said that however, the article hints that this “throw-away” strategy may be just an interim phase as they move into other markets:
Already, some of these mid-market construction equipment companies are becoming global powerhouses. For example, Sany Heavy Industry Company — founded in 1994 in Changsha, the capital city of Hunan province — became the world’s largest concrete pump manufacturer in 2009; its total revenues in 2010 approached $8 billion. In 2012, Sany announced that it would acquire the second-largest producer, the German company Putzmeister, and it has built plants in the U.S., Brazil, India, and Germany, as well as a major R&D center near Cologne. Other construction equipment manufacturers expanding outside China include ZoomLion (also based in Changsha), XCMG (a state-owned company headquartered in Xuzhou), and Shandong Heavy Industry Group. They all got their start by selling to China’s fragmented construction industry.
Even if the companies eventually abandon the throw-away strategy, its success in China raises an interesting point. Will there always be a market for pure manufactured goods, not tied to services? I think there will be. After all, many people are happy to just buy a fire alarm/smoke detector without signing up for a security monitoring service. We need to keep in mind that the I-Cubed Economy runs on multiple strategic models.
What is common, however, is the role of intangibles. Even pure manufacturing as an output requires intangibles as an input. The reason why the Chinese equipment company strategy works is because they have a clear understanding of exactly what features their customers want — and have the design and engineering capabilities to provide for that want. It may not be a high value added product compared to some of their competitors. But it is an appropriate value added product. And getting to that point of being appropriate takes a lot of knowledge (intangibles) inputs.