Trend No. 1: “EaaS allows companies to monetize a larger part of the value chain.”
There are some specialized VARs (Value Added Resellers) especially in the IT industries who were successfully reselling OEM EaaS to end customers over the past years.
OEMs are increasingly starting to win back some of the market share from those VARs by offering EaaS themselves, thereby eliminating third-party intermediaries. Support and other services, such as maintenance and replacement of spare parts, are now carried out by the OEMs themselves, resulting in higher margins for the OEMs. This means they can monetize a larger part of the value chain and protect their existing service revenue from being lost to third parties.
One example outside of the IT industry is the energy sector: Industrial equipment manufacturers like Siemens, Schneider Electric and Honeywell have set up ESCOs (Energy Services Companies) to sell their EaaS, which pay for the equipment through savings related to lower operating costs (i.e. water and electricity).
Trend No. 2: The Sharing Economy Inspires New Financing Methods for OEMs
Customers in numerous industries already prefer to rent their products rather than buy them. This is reflected in a few examples, such as the rentable e-scooters in countless cities. The megatrend of the sharing economy has already started.
There are some car manufacturers who already offer Pay-Per-Use financing and customers only pay the kilometers actually traveled instead of the full leasing fee. While it will be easier for some industries to establish pay-per-use financing, there is a risk in other industries that traditional sales structures are not prepared to meet the changing requirements of customers.
Trend No. 3: New accounting standards affect EaaS business models
Two recent accounting standards affect the way leases and service contracts are treated on the balance sheets of many corporates:
- Realization of revenue and profits: New rules on contracts with customers (IFRS 15 & FASB ASC 606) had a major impact on the realization of revenues and profits concerning service contracts.
- New leasing standards (IFRS 16 and FASB ASC 842): the new regulations for lease accounting are effective by January 1, 2019 and require nearly all leases to be reported on lessees’ balance sheets as assets and liabilities.
This has a major impact on certain financial key figures, creating certain challenges for their companies’ CFOs.
Corporates will therefore actively push OEMs to offer alternative solutions which are outside the coverage of the regulations above.
Trend No. 4: IoT applications are increasing
The increasing popularity of PPU is supported by the trend towards full-service contracts. More and more corporate customers are relying on a complete package that includes both the capital goods and complementary services from financing, through maintenance and customer service to final disposal.
In doing so, the data involved plays a decisive role over the life of the machine. Significantly more manufacturers will equip their products with sensors to support the new services and business models. In both the B2B and B2C segments, pay-per-use concepts are becoming increasingly important. For them, sensor data from machines or devices is recorded via the Internet of Things.
In the mechanical engineering sector for example, the process looks like this: The productive runtime is recorded directly in the machine control and then transmitted to an IoT platform, where the data is analyzed and processed for further use cases.