Only paying for machinery when it is used
Companies need not necessarily buy their production machinery in future, but could pay for its use instead. This also results in new financing forms – and generates a huge demand in crises such as the coronavirus.
Strict distancing requirements, closed national borders and demand suddenly plummets overnight – this situation is a nightmare for any business. This is even more the case if it has to repay loans for expensive production machinery despite the lack of revenue. It would be smarter if financing could be flexibly adjusted according to usage.
And this is precisely the idea behind the “asset as a service” model. In this leasing model, OEMs no longer sell their machines to customers, but offer them the machinery's services. Instead of calculating a one-time amount for a piece of production machinery, the manufacturer earns money every time the machine is in use. Sensors register all kinds of data for this: when the machine was turned on and off, how heavily it was used and whether a repair is necessary.
The machines automatically transfer this information to large platforms via the Internet of things, where it is assessed. Deutsche Bank is currently in a pilot phase, working on a model which uses such data to generate usage-based invoices. “Since we know exactly how the machines are used thanks to the granular data, we can generate invoices for the manufacturer, the amount of which is based on the exact usage of the machines,” says Álvaro Noreña, who is driving the project in the Corporate Bank division. “However, this is only possible because the machines are capable of automatically transferring this data to us via the Internet of things.”
Advantages in a crisis
This invoicing model is also known as “pay per use”. Companies could opt to pay by month, quarter or even by the hour using Deutsche Bank's instant payment solution.
In an unexpected situation such as the coronavirus crisis, the “asset as a service” leasing model enables businesses to adjust their costs to their actual productivity. If they do not use the machines much they do not pay much – and if they do not use them at all they only pay a relatively low base price. “This gives OEMs more security in planning repayment,” says Noreña.
“This gives OEMs more security in planning repayment”
If a company knows in advance that it will have periods of non-use, such as a winter or summer shutdowns, it can also agree payment suspensions with the manufacturer of its production machinery. “In the past it was very difficult to flexibly adapt companies' financing costs.“ ”This was particularly true if an unexpected crisis came up,” Noreña continues. “Such a situation means a lot of stress for everyone involved. We aim to alleviate this problem by offering the ,asset as a service` model.”
Making good use of data
All the data that the machines record and transfer enables manufacturers to gain insight, for instance, into what they need to do to improve or maintain their products. “Through the ,asset as a service´ concept, I can imagine that OEMs will someday know what a customer needs better than the customer itself,” says Noreña. “In this business model, manufacturers are ultimately selling their customers solutions rather than products.” In fact, this could mean a crane manufacturer informing a construction company that it only needs two instead of the three cranes it enquired about for the future construction project, but that it also requires three other machines as well.
“In this business model, manufacturers are ultimately selling their customers solutions rather than products”
Spreading the risk
If the “asset as a service” model poses too great a financial risk to the OEM, it could also pass on the risk above a certain threshold to investors. “If, for instance, an OEM only wants to lease ten percent of its machines under the ,asset as a service model`, we could seek investors for it that would be willing to share part of the risk and receive a stake in the revenue in return,” Noreña says.
He sees two more future benefits of this business model too – more sustainability and better marketplaces on the Internet. The data will enable manufacturers, for example, to more precisely identify when a particular piece of machinery needs servicing, thereby extending its useful life. “Since manufacturers are interested in leasing their machinery as often as possible, they attach great importance to their customers treating the machines well,” Noreña explains. “That is why they will share a lot of information they receive via the Internet of things with their customers.”
And those businesses leasing a machine under this model but not using it at a particular moment could offer this free capacity to other companies. This is possible because unlike before, the comprehensive data recorded ensures that both parties can now be certain the leasing transaction is a fair one. “Every company needs to decide for itself whether asset as a service suits its business model,” Noreña concludes. “But for those that want to be protected in any period of crisis, while also protecting the environment and tapping new sources of revenue will find asset as a service a great solution.”
This video gives further insights on the topic: