Selling commercial off-road vehicles Key insights for OEMs, dealers and leasing companies. February 2018

Transcription

1 Selling commercial off-road vehicles Key insights for OEMs, dealers and leasing companies. February 2018

2 2 Roland Berger Spotlight Selling commercial off-road vehicles Following strong growth in the past and a general market decline in 2016, sales of most off-road commercial vehicles are now expected to grow moderately until While the agriculture segment is still at the bottom of a super-cycle, construction equipment is seeing the first signs of recovery. Given these prospects, companies have rightly switched their focus from aggressive growth strategies to making gains in process efficiency. But which specific areas should companies be focusing their efforts on? What are the key success factors when it comes to selling off-road commercial vehicles and how do they differ between the United States and Europe? In this paper we present the results of our recent investigation of this important topic and hear directly from those working in the industry. On the basis of this data we then present our specific recommendations for OEMs, dealers and leasing companies operating in the off-road commercial vehicle market. Market developments in the US and Europe Our investigation focused on the three key segments of the off-road commercial vehicle market: vehicles for material handling (such as forklift trucks), agricultural machinery (tractors, combines), and vehicles for the construction and mining industry (backhoe loaders, dozers, excavators). The markets in the US and Europe differ, so we treat them separately below. 01 The US market for off-road commercial vehicles is growing only at slow rates. Annual growth in vehicles for material handling is expected to be 3.4% in the period , down from 4.5% in Sales of agricultural equipment will remain largely flat until 2020 as crop prices stay low and farm incomes stagnate. The construction equipment market will contin- ue to grow, with infrastructure investments rising and the US tax reform freeing up resources for construction projects. With markets stagnating or growing only moderately, competition for market share between manufacturers in the US will become increasingly fierce. Improving dealer performance will become more and more important, and understanding the key success factors for dealers will be critical. Developments in the European market for off-road commercial vehicles are somewhat different. The material handling equipment sector (forklifts and the like) is expected to grow by more than three percent a year between 2016 and 2020, driven in particular by the continued expansion of online retailing. Agricultural equipment sales may have bottomed out in 2017 after falling more than 8% p.a. from 2012 to Despite the expected slight increase in sales through 2020, we do not expect the pre-financial crisis levels to be reached again. Construction equipment is forecast to remain more or less flat through Key insights from the study We asked people working in the industry representatives of OEMs, dealers and leasing companies in the US and Europe and experts in all three vehicle segments about the current state of the off-road commercial vehicle market and where they thought things were headed. We were particularly interested in their insights in the key areas of selling, financing, leasing and renting. Where, we asked them, were they focusing their energy when it came to improving process efficiency? Many of the ideas they came up with will be familiar ideas that your own company may have discussed in the past but not acted upon, perhaps fearing that they would not deliver the expected gains. Here, a gradual approach can be particularly successful. Rather than waiting until you have identified one reengineering action that will bring above-average returns, it is possible to select between six and eight smaller ways to improve sales and financing and bundle these together. Experience shows that in the crucial area of sales and financing, where mistakes can have serious consequences, combining smaller steps in this way may actually be more effective than going for a major overhaul in one fell swoop.

3 Selling commercial off-road vehicles Roland Berger Spotlight 3 Figure 01: Market development by segment and region. Commercial vehicle sales ['000]. +5.7% +3.9% % % MATERIAL HANDLING % +1.4% AGRICULTURE % +2.7% % % CONSTRUCTION +3.0% +1.0% , Electric rider trucks and internal combustion engine trucks only Source: Yengst; AEM; Roland Berger US EU Cover photo: William Andrew / Getty Images Sales: Aftersales support and service are key Off-road commercial vehicles are sold through a number of different channels: directly from OEMs, through independent dealers, or via used equipment dealers. In each of these channels, sales approaches vary widely depending on whether the sales are carried out by the OEM's own sales force, a single-brand dealer or a multibrand dealer. Our research found that the key customer purchasing criteria differ between the US and Europe. 02 However, superior service and availability of spare parts are important everywhere and vital for developing and maintaining customer loyalty. Price is important but not decisive, as the market is generally moving toward a total cost of ownership (TCO) model and full-service offerings.

4 4 Roland Berger Spotlight Selling commercial off-road vehicles Figure 02: Indicative profiles of customer purchasing behavior by segment and region. Customer purchasing criteria for new equipment. Criteria US MATERIAL HANDLING AGRICULTURE CONSTRUCTION Price Brand Customization Quality/reliability Services/aftersales support Maintenance cost Product range Equipment productivity Financing offers Trade-in options Criteria EU MATERIAL HANDLING AGRICULTURE CONSTRUCTION Price Brand Customization Quality/reliability Services/aftersales support Maintenance cost Product range Equipment productivity Financing offers Trade-in options Source: Roland Berger

5 Selling commercial off-road vehicles Roland Berger Spotlight 5 Our investigation revealed that salespeople need to develop a personal touch. They require a deep understanding of customers and technology, and need to be able to deliver tailored solutions based on their understanding of the different niche segments and markets. This, combined with the right data and sales training, will help them build a compelling product and service offer based on the company's portfolio and the customer's needs. In addition to developing a personal touch, sales staff should be encouraged to think like entrepreneurs, and be rewarded when they do so. On the front line with customers, it is salespeople who have the greatest potential to come up with new ideas about how to increase revenues such as providing a new aftermarket service or improving delivery of spare parts. "A longstanding and trusting relationship between the sales personnel and the customer is key." Head of sales at a material handling manufacturer "Digitization cannot replace the personal relationship between a customer and a sales employee." Owner of a local construction dealer Financing: A growing factor in the world of commercial vehicles For many buyers, financing options are a decisive factor in the purchase decision. This is particularly true in the construction and material handling equipment sectors. If OEMs do not provide a competitive financing offer, dealers act themselves. At the same time, customers expect a growing level of flexibility for financial service products. Ideally, they want their lease payments to be linked to their own cashflows. In general, European customers are still more interested in buying, while US customers prefer to use financing or leasing for their purchases to a much larger extent. The US preference for financing has to do with a desire to hold asset-light balance sheets in the aftermath of the financial crisis. In Europe the figures varied by country in our investigation: 90 percent of buyers in the United Kingdom wanted financing compared to 65 to 85 percent in Germany and just 50 percent in Austria. OEMs and many dealers, too have three basic options for offering financing: a captive business that offers financing through their own company with a banking license or their own standalone financing company; a collaboration with external banks or leasing companies in the form of a joint venture or with white-label financial products; or an exclusive partnership with an external provider of financing. When the OEM is actually the provider of the financing, it benefits directly from the ongoing relationship with the end customer. This can lead to future revenues, for instance from service contracts and remarketing. OEMs can also provide complementary financing offerings beyond vehicle sales and aftersales in this way. OEMs typically choose their model based on their analysis of the volumes they can achieve and perceptions about the profitability and risks of the financial services business. A majority of OEMs have a financial services unit. Often it comes down to whether the OEM sees itself as a producer of machines or a provider of integrated solutions for customers. One benefit of the captive model for OEMs is that they can then offer risk-adjusted pricing, if they get their algorithms right. Customers with higher ratings can be offered better prices than those that pose a greater risk. In this area many OEMs with a captive model have room for improvement, as they are still using a digital "yes/no" algorithm to decide whether to make an offer. This means that the rate offered is the same, no matter how good or bad the customer's credit rating. Ultimately, this can lead to poor risk selection compared to non-captive banks and independent leasing companies that use more sophisticated algorithms for pricing.

6 6 Roland Berger Spotlight Selling commercial off-road vehicles How the financial offering is marketed is also of critical importance. To achieve more captive financing, OEMs with an in-house function can emphasize the relevant products in their marketing and push their offerings via dealers. Companies that choose to bring the function in-house should first consider the refinancing costs as- sociated with their own financing arm, as well as how they will incentivize and train dealers to use their financing offers. OEMs must also keep in mind that many dealerships have their own financing capability and will actively avoid OEM financing so they don't erode their own business. "A tailor-made financing solution can only be identified together with the sales force." CEO of an independent leasing provider "ly customized financing products are requested by customers, especially for specialized vehicles." CEO of an independent leasing provider Leasing: Next-generation business models required Our investigation found that OEMs are demanding more flexibility to offer clients tailored financing packages integrated solutions branded by the OEM. Leasing companies serving OEMs should consider setting up online platforms that they can use to offer cost-efficient white-label solutions customized to the OEM's specific requirements. The offering must be deeply integrated into the OEM's IT system and work processes to be competitive. FinTechs and startups are already offering clients the ability to directly compare prices. When it comes to highly customized vehicles, such as tree harvesters and horse lorries, leasing companies still have the edge. For horse lorries, for instance, leasing companies buy specialized vehicles not from OEMs but from niche market players that have converted vehicles for this specific purpose. For such vehicles, financing is not usually available, creating a niche for leasing companies. Going forward, leasing companies have various options to grow their businesses. Strategies include seek- ing white-label partnerships with Asian brands that are entering the European market and growing the leasing pool by helping OEMs offload products that might be risky to hold, such as machinery linked to a commodity with low prices. OEMs may also be interested in reducing inventory via sales to leasing companies, given the credit impact of holding high inventory levels. Another key issue for leasing highlighted by our study was the upcoming implementation of the international accounting standard IFRS 16. This will eliminate the distinction between "operating" and "financing" leases. When the regulation comes into force, leased assets will have to appear on the customer's balance sheet, except for contracts of less than EUR 5,000 or lasting less than 12 months. Given that one of the things that makes leasing attractive is the ability of financial services companies to carry leases on their books rather than them appearing on the customer's balance sheet, this could have a negative impact on the leasing market. "Customers increasingly consider only the total cost of ownership instead of purchase prices." CEO of a bank-affiliated leasing company "Products with matching cashflows are very popular a substantial leasing payment is due after the harvest season." CEO of a captive financing function at an agricultural equipment manufacturer

7 Selling commercial off-road vehicles Roland Berger Spotlight 7 Renting: Customer proximity is key The rental business for material handling and construction equipment vehicles is all about the immediate availability of machines within a reasonable physical distance of the customer. Accordingly, companies entering the rental business must invest in large fleets and extensive service infrastructure. For many OEMs and dealers, the rental business makes sense because customers are willing to pay a premium for short-term rentals. In addi- Based on our analysis of market developments and the insights gathered from the industry representatives and experts we interviewed, we can now make a number of recommendations for action to be taken by the three major types of players in the market: OEMs, dealers and leasing companies. Of course, our recommendations will not apply to every player in every segment of the market in the US and in Europe. You should choose which actions are appropriate and feasible for you, given your own particular situation and strategic goals. If you are an OEM, consider enlarging your product and service offering so you can provide customers with a "one-stop shop". You should aim to develop regional scale so that you are in a position to provide superior services and secure sales of new vehicles. Strengthening your key account management (KAM) capabilities will be beneficial for meeting the needs of larger clients. At the same time, you should take a stronger vehicle lifetime perspective and use remarketing to drive profits. We also recommend offering risk-adjusted pricing to sell more vehicles, and declining fewer financing requests. Dealers would be well advised to offer full-service solutions. This will help you retain clients as well as opertion, having a rental pool allows OEMs and dealers to sell used and refurbished vehicles. Re-importing, which is commonly practiced by OEMs in some parts of the automotive sector, could also be an option for commercial vehicles. However, companies will have to weigh up the benefits of re-importing against the costs of transporting heavy vehicles such as tractors and bulldozers. "You can't offer competitive rental and service offerings if you don't have critical mass and regional coverage." Head of sales at a construction equipment dealer Act now! "New products and billing systems are becoming more important. In the construction industry, some want billing per working hour." CEO of a captive financing function at a construction equipment manufacturer ate profitably. Like OEMs, you should consider enlarging your product and service offering to provide a one-stop shopping experience for customers. You can establish joint digital rental platforms to push your rental business. We also recommend developing ways to provide consulting services for clients along your value chain. Our advice for leasing companies is to become fully integrated into the sales processes of the OEMs and dealers that you work with. This will help you avoid price competition and maintain direct access to clients. You can finance complete business solutions by bringing together assets from different OEMs. Developing risk assessment expertise in niches to avoid competitive pressure from captives and regular banks will pay dividends. Another possible strategy is to set up a white-label online platform to win business via partnerships with smaller OEMs. The market for commercial vehicles is in a process of consolidation, and companies that do not grow their share of this shrinking pie may find themselves going hungry. In previous decades, players could rely on market growth for their own growth. Now the focus must change to improving process efficiency by means of decisive action in the areas of selling, financing, leasing and renting.

8 WE WELCOME YOUR QUESTIONS, COMMENTS AND SUGGESTIONS AUTHORS Dominik Löber Senior Partner, Frankfurt Financial Services Competence Center Frank Pietras Principal, Munich Automotive Competence Center PUBLISHER Roland Berger GmbH Sederanger Munich Germany We are grateful to co-authors Martin Höft and Simon Kuhn for their contribution to this study. Walter Rentzsch Principal, Detroit Automotive Competence Center walter.rentzsch@rolandberger.com Carsten Küst Project Manager, Munich Financial Services Competence Center carsten.kuest@rolandberger.com More information to be found here: Disclaimer This publication has been prepared for general guidance only. The reader should not act according to any information provided in this publication without receiving specific professional advice. Roland Berger GmbH shall not be liable for any damages resulting from any use of the information contained in the publication ROLAND BERGER GMBH. ALL RIGHTS RESERVED.