As a manufacturer on platforms — what does that mean in the long term?
Big (International) Players: Is the Amazon of engineering and manufacturing coming?
Let’s ask ourselves honestly: How many of the vendors you bought products from last year on Amazon could you actually name now?
I can tell you how it is with me: One, and that is Amazon itself. I also book rental cars via platforms and have already switched over to Sixt, Enterprise and Co. so often that I actually only associate rental car bookings with the platform I always book on. Hotels, shipping, graphic designer services, silicone membranes, workshop search, insurance: I don’t really know any of the providers, but rely on reviews and services of the platforms.
I would also like to put it honestly to the point: Almost all the products I buy are commodities to me. I don’t care who provides the service for me as long as it is sufficiently good (“good beats great”) and at a reasonable price. I notice the same in my professional life: The times of locally concentrated competence are long gone. Knowledge has also become a universal good and experience is now also being used in China, India and Co. (more). I work in a Fraunhofer Institute and even there I can see every day that the mantra of scientific development and/or technical innovation no longer applies. The scientific education level in our society is so high that companies can buy this competence cheaper and faster from small companies. You just have to find the right one to do the work for you.
And it is precisely this basic state of economic saturation that platforms are also based on in manufacturing: they convey industrially standardized services and make them available even to people who do not have a large (purchasing) network. The intransparency of prices — a key feature of profit maximization in manufacturing — thus dwindles significantly. As a rule, it is the platforms that determine the prices, which means that even for small series in manufacturing, for the first time, a clear buyer power in the negotiations becomes apparent.
Being online or not being online at all?
The question remains whether or not you want to play along as a paver. Or let’s put it another way: Do you have to be involved in order to still be in business tomorrow? Unfortunately, the paver manufacturer has no control over this: The engineers and technicians, who have known the Internet since childhood, are now reaching an age at which they become decision-makers in companies. They are used to buying online immediately and transparently. Long telephone calls, e-mailing a drawing or negotiating offers forever are not necessarily the preferences of this generation. 42% of engineers under 40 years of age in the USA already buy their components online.
Of course, larger companies have already recognized this change and are acting accordingly. With financial power, manufacturers are trying to position themselves early on in the young online environment. A study of the Bavarian economy is interesting in this respect, which provides some important key figures in relation to platforms in the B2B environment:
The companies’ overall assessment of the impact of the platforms on their profitability is positive or at least neutral. Only a small minority of just under 4 percent of companies report a negative impact on profitability. However, both direct and indirect effects are taken into account. The introduction of digital platforms is often accompanied by a modernization push or a fundamental strategic reorientation, which can certainly have a positive effect on profitability. The situation is different if a more narrowly project-related profitability analysis is applied. On average, the companies have not yet reached the profitability threshold. The costs incurred in setting up and using the platforms (9.3 percent of revenues) exceed the additional revenues generated (8.2 percent). The companies are still in the investment phase. A good 30 percent generate no or no revenues with the platforms. If the companies that have not yet generated revenues are not taken into account, this ratio turns around and the additional revenues are higher than the costs. In the future, the companies expect the platforms to become significantly more important in achieving their corporate goals. Hardly any company assumes a decreasing importance. Also, a rising share of value creation will depend substantially on platforms in the future. In five years, it is expected that 11.5 percent of the value added in the industries studied will depend substantially on the use of platforms. If the economic growth rate is similar to that of the last five years, this would mean a value creation volume in the area of industry and industry-related services of 227 billion euros. The drivers of this development are the companies that are already digitally mature today. In this group, the platform-dependent value-added share is expected to reach 22 percent in five years; in 2017 it will still be 14.3 percent. Those companies that already use sophisticated data-centric platforms today are estimating a similarly dynamic development.
Also interesting is today’s article in the German “Handelsblatt” which, with the headline “Amazon for business customers”, already points out the profound, upcoming change. Although the companies mentioned in the article mainly refer to raw material suppliers, the actual change also refers to the manufacturers. Why it should be assumed that Silicon Valley is supposed to be unrivalled is beyond me: Xometry is currently making major purchases in this country and is strategically preparing to supply buyers from Eastern Europe.
But the article recognizes one apparent conclusion: German companies (and especially larger corporations) do not want to be stuck in the backend, but develop platforms for their products themselves. I consider this to be an important and strategically correct decision, because especially in the B2B sector customer proximity, customer orientation and communication are crucial for success.
Medium vs. long-term effect of platform participation
No matter if it is online milling or the online shop for laser parts, all platforms try to bring the pavers to your site as an extended workbench. The manufacturing company degenerates into a pure contract service provider and is exposed to the market power of the platforms. As rosy as the announcements on sites like Spanflug or Laserhub sound and as often the word “partner” is mentioned, the worries of the pavers are always the same:
- “We’re building our own competition and even enabling it through our manufacturing capabilities.”
- “Not only do I lose communication with the customer, but due to the lack of loyalty, I lose any possibility of customer retention.”
- “We cannot win the price pressure from Eastern Europe or Asia.”
So, on the one hand, I would like to participate in the promising and huge online market in the short term, but on the other hand I don’t want to increase the risk of vertical integration of the platforms in the long term. Because once the platforms are large enough, they will certainly take the most lucrative pieces of cake and produce them themselves, but leave the crumbs and unprofitable orders for the manufacturers.
Online Shop Do it yourself or be eaten: A cost issue?
This already leads us to the immediate conclusion of this article: selling online will be indispensable in the future. The epochal change in buyer behaviour is too decisive and it is already to be experienced. The question is only how to do it. The possibility to act as a manufacturer “in the backend” of the platforms as a contract manufacturer seems convenient at first, but as the saying goes: “There is no free lunch”. In the long term, you build up a price-determining superiority that is able to adopt your own business model through vertical integration.
So the option remains: do it yourself. However, this requires very experienced IT people or a full-service agency to handle the job. The costs for the external implementation of a corresponding site including web design, strategy consulting and technical development with CAD analysis functionality in Germany are between 100,000–500,000 EUR depending on the complexity. Interesting are the figures of ibi, which were collected from 1.007 companies:
- 85 percent of the companies have implemented their own online shop — at least partially — with the help of a service provider.
- More than 50 percent have used an initial project volume of over 100,000 euros and 44 percent invest more than 50,000 euros annually.
So enormous future investments are pending. Unfortunately unavoidable investments. But how the high costs for specialized pavers come about is a mystery to me. An out-of-the-box solution for online quoting from Quote-X.com (Stuttgart, Germany) or Link3D (USA) costs less than 1,000 EUR per month (plus a setup fee) and is already a good start into the digital sales world. I very much hope that more manufacturers will set out in this direction, because the future will be digital. You can read more about the general implications for manufacturers and developers in my article about B2B platforms in manufacturing on my blog, if you are interested.
As always, I am looking forward to your comments or messages!
