It all worked fine for a while. But for many capital equipment manufacturers, the pursuit of higher returns on assets in the 1980s and ‘90s has led to systemic underperformance in recent years.
As OEMs shed assets and pushed work out through their supply chains in search of higher returns, their short-term performance received a big lift. But in the process, they transferred longer-term profits to their system suppliers, and, more significant, they began the steady erosion of their own strategic capabilities. It was a short-lived benefit.
Capital equipment OEMs are now feeling the adverse effects of strategic decisions made a generation or two ago. To reverse the damage, these companies need to take a fresh look at their supply chains and rethink which capabilities they need to own. Failing to do so, and quickly, means missing multiple generations of technology development—a prescription for disaster in long-cycle businesses such as capital equipment manufacturing.
A Short History of Asset-Light Supply Chains
The history of capital equipment is one of vertically integrated sectors. Aerospace, automotive, and power equipment, among others, all evolved as vertically integrated industries through the 1980s. System integrators are a more recent development.
In commercial airplanes, for example, Boeing, Douglas, and McDonnell (and their successor combinations) were all vertically integrated. Aircraft manufacturers sourced parts, of course, but all the major systems (except for engines, which evolved as its own—vertically integrated—industry) were developed and produced by OEMs.
Starting in the 1980s, capital equipment companies increasingly measured performance by return on net assets (RONA). In addition to working the numerator (the return, or profits), companies started to alter the denominator by shedding assets. Balance sheets looked much tighter almost immediately, and RONA soared. All kinds of asset-light business models followed: licensing deals, outsourced development partnerships, and risk-sharing partnerships, to name a few.
Na primeira década ou década e meia, esse novo paradigma parecia bom. As curvas de ativos foram maiores, as margens foram preservadas. O impacto na demonstração do resultado viria mais tarde. Eles estavam enraizados em dois fatores. Primeiro, os movimentos das décadas anteriores negociaram lucros futuros para o menor investimento atual e menos ativos no balanço. Segundo, os contratos de fornecimento criados continham uma falha crítica para os OEMs: eles foram escritos para as tecnologias existentes e não fizeram provisões para o que aconteceria se (ou quando) a tecnologia evoluiu e novos investimentos fossem necessários. Os mais críticos são estratégicos e financeiros, e são muito prejudiciais à posição e desempenho competitivos de longo prazo dos OEMs. Os lucros vêm de peças, não de serviço, e as peças estão ligadas a sistemas. Como os OEMs transferiram a responsabilidade de projetar e produzir sistemas para seus fornecedores, eles abandonaram o controle do mercado de reposição e dos fluxos de lucro associados. Essa transição tornou-se aparente à medida que as partes mais antigas (de propriedade dos OEMs) se desabarm e foram substituídas por novas partes- agora vendidas por fornecedores.
The Problems of Asset-Light Business Models in Capital Equipment
As the early 2000s played out, a number of problems arose (some might say inevitably). They were rooted in two factors. First, the moves of the previous decades traded future profits for lower current investment and fewer assets on the balance sheet. Second, the supply contracts that were created contained a critical flaw for the OEMs: they were written for existing technologies and did not make provisions for what would happen if (or when) the technology evolved and new investments became necessary.
Some of today’s problems (described below) are specific to capital equipment, while others are more general. The most critical are strategic as well as financial, and they are very damaging to OEMs’ long-term competitive position and performance.
Continually Shrinking Margins. For most OEMs, aftermarket profits are made in systems and subsystems, not in maintenance of the overall platform. Profits come from parts, not service, and parts are linked to systems. As OEMs have transferred responsibility for designing and producing systems to their suppliers, they have relinquished control of the aftermarket and the associated profit streams. This transition became apparent as older parts (owned by the OEMs) wore out and were replaced by new parts—now sold by suppliers.
ATROFIA técnica. Após a transferência de um sistema do OEM para um fornecedor, a primeira integração é uma matéria relativamente direta, porque o OEM continua a ter uma compreensão profunda do sistema. Em certo sentido, o OEM ainda está supervisionando o desenvolvimento do sistema de maneira prática; A única diferença é que está supervisionando o trabalho terceirizado. Após uma ou duas gerações e a aprovação de 10 a 20 anos, no entanto, há um faturamento completo da equipe de engenharia e o conhecimento do OEM erode. Com o tempo, os custos de integração do sistema e os riscos relacionados aumentam - custos e riscos que são suportados completamente pelo OEM. Repetidas vezes, o OEM precisa intensificar para corrigir problemas gerados por seus fornecedores - fixos para os quais não é compensado. Capital equipment typically has a 5- to 15-year product refresh cycle. Following the transfer of a system from the OEM to a supplier, the first integration is a relatively straightforward matter because the OEM continues to have a deep understanding of the system. In a sense, the OEM is still overseeing the development of the system in a hands-on manner; the only difference is that it is supervising outsourced labor. After one or two generations and the passage of 10 to 20 years, however, there is a complete turnover of engineering staff, and the OEM’s knowledge erodes. Over time, system integration costs and the related risks increase—costs and risks that are borne completely by the OEM. Time and again, the OEM has to step up to fix problems generated by its suppliers—fixes for which it is not compensated.
Esse problema pode ser ampliado quando a tecnologia que era a base para a vantagem competitiva do sistema avançou. Por exemplo, não faz muito tempo, o sistema aviônico de maior valor em uma aeronave militar era um conjunto de medidores a vapor. Ao longo de algumas décadas, esses medidores evoluíram para sistemas eletrônicos complexos e cada vez mais digitais, com seus próprios módulos, atualizações e fluxo de peças. Como resultado dessa tecnologia avançada, a indústria aviônica se desenvolveu às custas dos OEMs de aeronaves. Os preços inevitavelmente aumentam. O comprador (o OEM) acaba pagando várias vezes pelos mesmos investimentos.
Having outsourced its technical capability, the OEM also loses the technical knowledge that is critical to its ability to negotiate effectively with the system supplier. Prices inevitably escalate.
Finally, as technology evolves, the supplier wants to be compensated not only for the investments required but also for the risks involved. The buyer (the OEM) ends up paying multiple times for the same investments.
Perda de controle sobre a curva de experiência. À medida que as empresas produzem unidades, elas ficam mais inteligentes e mais eficientes na produção de mais unidades. A empresa que torna as peças ganha uma melhor compreensão de como torná -las mais baratas e como projetá -las melhor. Ao permitir que os fornecedores produzam os sistemas complexos, os OEMs transferiram efetivamente o benefício total da experiência para os fornecedores. Agora é difícil para os OEMs compartilhar as melhorias de custos que a experiência dos fornecedores traz. Os fornecedores acabam obtendo mais lucros do que o OEM que assumiu a responsabilidade (e o risco) de desenvolver o programa em primeiro lugar. A complexidade adiciona custo diretamente e também indiretamente, na forma de aumento de inventários e nas despesas de atrasos e correções. O impacto é suportado quase completamente pelo integrador do sistema, pois em todos os casos, o OEM mantém o risco de programa. Portanto, quando as coisas dão errado com um fornecedor, o OEM interrompe e incorre no custo de fixá-lo. Os OEMs fizeram isso, dando aos fornecedores uma posição favorecida na plataforma que o OEM criou e no qual ainda mantém o risco. Mas quais? E em que circunstâncias econômicas? Três fatores determinarão a resposta. O primeiro é financeiro: quais sistemas e componentes geram fluxos de lucro substanciais de pós -venda? A segunda é estratégica: quais sistemas e componentes abrangem tecnologias críticas para a posição competitiva do produto - Today e no futuro. Os OEMs inteligentes reconhecerão que as tecnologias mais críticas do futuro nem sempre são as principais tecnologias de hoje. O terceiro fator também é estratégico: quais sistemas e componentes têm curvas acentuadas de experiência? Onde a perda de experiência e conhecimento tem um impacto adverso nos dois primeiros fatores? Esse caso pode envolver prêmios de aquisição ou grandes investimentos no desenvolvimento da tecnologia orgânica, por exemplo. Esta é uma pergunta mais difícil de responder. Requer uma análise de sistema a sistema e caso a caso. Vimos vários fatores entrarem em jogo, incluindo o seguinte: Capital equipment is an experience-based business. As companies produce units, they get smarter and more efficient at producing more units. The company that makes the parts gains a better understanding of how to make them cheaper and how to engineer them better.
In a business such as airplane, ship, or satellite manufacturing, it can be crippling to an OEM’s competitive position to lose control of experience curve benefits. In letting suppliers produce the complex systems, OEMs have effectively transferred the total experience benefit to the suppliers. It is now difficult for the OEMs to share in the cost improvements that the suppliers’ experience brings. The suppliers end up making more profits than the OEM that took on the responsibility (and risk) of developing the program in the first place.
Operational Complexity. With the shift toward the integration of complex supplied systems, supply chains have become much more difficult to manage. Complexity adds cost directly and also indirectly, in the form of increased inventories and the expense of delays and fixes. The impact is borne almost completely by the system integrator, since in all cases, the OEM maintains program risk. So when things go wrong with a supplier, the OEM steps in and incurs the cost of fixing it.
Deciding Which Systems and Capabilities to Bring Back In-House
We view the profits that the OEMs have ceded to their system suppliers as “leakage”—profits that the OEMs have enabled others to earn. The OEMs have done this by giving suppliers an advantaged position on the platform that the OEM created and on which it still holds the risk.
There is a very strong logic for OEMs to pull back some of their critical systems—and the associated technologies and capabilities. But which ones? And under what economic circumstances?
The first question for an OEM to ask itself is, Which systems and capabilities are most valuable to own? Three factors will determine the answer. The first is financial: which systems and components generate substantial aftermarket profit streams? The second is strategic: which systems and components encompass technologies that are critical to the competitive position of the product—today and in the future. Smart OEMs will recognize that the most critical technologies of the future are not always the key technologies of today. The third factor is also strategic: which systems and components have steep experience curves? Where does loss of experience and knowledge have an adverse impact on the first two factors?
The second question for the OEM to answer is, In which business cases does the value of bringing a system in-house offset the near-term costs of doing so? Such a case could involve acquisition premiums or big investments in organic technology development, for example. This is a harder question to answer. It requires a system-by-system and case-by-case analysis. We have seen multiple factors come into play, including the following:
- Tecnologias O OEM viu à frente de sua base de suprimentos
- Oportunidades de arbitragem nas quais o OEM reconhece que a plataforma tem uma vida útil mais longa do que seus fornecedores. situação e decidindo competir
- The OEM using control of a platform to favor its own systems
- The OEM spotting an abnormally profitable supplier situation and deciding to compete
- O OEM usando as idéias de uma decisão atenciosa de fazer ou comprar de negociar melhores termos de fornecedores
O caso de negócios também deve pesar adequadamente a assimetria nos riscos que o OEM urso e o custo operacional da complexidade de cadeias de suprimentos complexas. O governo permite que os OEMs obtenham uma margem sobre as compras e logística associadas aos sistemas de compra que são posteriormente integrados. Dependendo do programa, esse pool de margens pode ser uma fonte significativa de lucros para o OEM. Qualquer caso de negócios de integração vertical nos sistemas de defesa precisa ter uma vantagem que compensa a erosão dos lucros da taxa-on-bate. Há urgência nessa decisão. As tecnologias avançam cada vez mais rapidamente hoje em dia e, uma vez perdidas, o conhecimento e a experiência se tornam mais difíceis de recuperar. Os OEMs devem dar uma olhada profunda em suas cadeias de suprimentos e decidir se a configuração que eles têm hoje é a configuração que eles desejam para amanhã. Kelly Howe
As a proviso for defense system integrators, we should observe that “fee on fee” is a real issue. The government allows OEMs to earn a margin on the procurement and logistics associated with buying systems that are later integrated. Depending on the program, this margin pool can be a significant source of profits for the OEM. Any vertical integration business case in defense systems needs to have an upside that offsets the erosion of the fee-on-fee profits.
In our judgment, both the financial and strategic rationales for rethinking asset-light business models are compelling. There is urgency to this decision. Technologies advance ever more quickly these days, and once lost, knowledge and experience become harder to regain. OEMs should take a deep look at their supply chains and decide if the configuration they have today is the configuration they want for tomorrow.
