The business model has always been to produce a product, sell it, and then ship it. Anything after the sale is the customer’s responsibility, with the exception of occasional support and maintenance contracts. Customers were responsible for owning, operating, and using products to achieve their business objectives. There was an abrupt paradigm shift. The emergence of cloud computing, SaaS, and open-source technology completely transformed the landscape of digital transformation. Enterprises now spend less than $2000 setting up digital processes for managing business operations, and vendors maintain used solutions. Original equipment manufacturers and equipment users are experiencing a paradigm shift today. The shift is Equipment-as-a-Service (EaaS).
The Equipment-as-a-Service concept: What is it?
EaaS utilizes bundled products and associated services to rent out equipment to customers. A subscription-based business model eliminates the need for high upfront capital investments. In addition, it allows clients to enjoy the flexibility of subscription-based pricing. An EaaS-based subscription order-management strategy helps original equipment manufacturers (OEMs). It also helps their partners redefine revenue generation. Further, OEMs can also take advantage of the significant change occurring in sales, finance, and customer management.
There are several types of EaaS pricing models, such as time-based or usage-based pricing and operational or financial outcome-based pricing. In the end, the company and its customers must agree on how they will assess, measure, and report the value of the equipment. Adopting this business model is one of the biggest obstacles for vendors.
Benefits of Equipment-as-a-Service
Cost Savings: Generally, the provider of EaaS is responsible for updating equipment, software, firmware, or hardware. As a result, manufacturers can cut down on their operational expenditures. In addition, they can focus on their core responsibilities of manufacturing.
Increased Revenue: Purchasing equipment as a service can generate revenue for OEMs and manufacturers who wish to lease equipment to their clients. The OEM can generate income by offering manufacturing SMEs subscription packages that meet their financial needs based on leftover stock. A manufacturer can lease dormant equipment to third parties seeking such services. However, equipment that remains idle after production is complete can remain inactive.
Capital expenditure reduction: Many manufacturers struggle with the capital-intensive expense of purchasing manufacturing equipment. In the past, SMEs dealt with these higher costs by outsourcing specific components to contract manufacturers. In addition, they can leave them without any control over the manufacturing process. EaaS empowers SMEs to convert CapEx into OPEX. Further, it ensures that the process and quality of the product remain in the company’s control.
Enhanced Data Reliability: Equipment as a service involves providing benchmark production and equipment data to manufacturers. In addition, in order to increase machine productivity. SMEs are more likely to incorporate data-driven strategies that improve productivity if benchmarked data is accurate.
The Reasons for the Market’s Growth
Astute Analytica’s published report on the global equipment-as-a-service market indicates that the market is forecast to grow at a compound annual growth rate (CAGR) of 11.5% during the forecast period from 2022-2030. The Equipment-as-a-Service (EaaS) market is experiencing significant growth due to digitalization, the Internet of Things (IoT) industry, and other technology-driven influences.
Other Factors that Influence Growth
Low setup costs: Almost all EaaS business models depend on accurate measurements of equipment performance and usage. Consequently, EaaS providers are compensated based on this data (for example, compressed air users pay the compressor manufacturer per cubic meter of air produced). Recently, IoT-based solutions have reduced costs associated with monitoring equipment performance and usage. As a result, connecting the unconnected and offering equipment as a service has become economically feasible. It is possible to create and deploy new EaaS business models in less than two years using IoT technologies and financial partners instead of the traditional 3-5 years.
Financing options: As traditional banks are often unable to provide OEMs and their customers with the products and services OEMs and their customers require to move to EaaS, managing cash flow during the transition to EaaS is a challenge for many companies. In recent years, there have been a variety of financiers specializing in EaaS business models. In some instances, governments have even started funding EaaS projects that reduce energy consumption (e.g., Energy Service Companies). For example, Siemens Financial Services finances Siemens’ customers’ equipment as part of a service contract, including energy performance contracts.
The new accounting standards: The accounting regulations of IFRS 16 and ASC 842 have changed the accounting treatment of leases. EaaS business models can be attractive to corporate end-users who traditionally lease equipment to minimize their balance sheet assets. As a result, it adheres to the new regulations while minimizing its assets on its balance sheets.
In the near future, EaaS models will fundamentally alter how industrial equipment manufacturers conduct business. In spite of the fact that these models may not be suitable for every segment or asset category (e.g., those with high customization and low volumes). However, they can be profitable in a number of domains (e.g., those with low customization and high volumes).
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