The deal doesn’t close with a car sale

Revenue for automobile manufacturers and suppliers does not stop with the sale of vehicles; it continues throughout its life cycle due to spares and service. Today, the percentage of revenue from the ‘after market’ (AM) segment as a portion of overall revenue is in single digits for manufacturers. But it is possible to double it in the long run with meticulous planning, investments and execution.

There seems to be a paradoxical belief in some quarters that revenue from the AM segment could mean poor quality of parts. This is not true. All parts have limited life due to wear and tear. If a manufacturer can predict the life of critical parts using physics-based or analytical models and backed by field data where possible, there is an opportunity to be tapped. This could translate to a regular revenue stream from replacement of parts nearing the end of their life.

Revenue from AM sales can be much more predictable and steady compared to new product sales. It would not be lumpy or driven by external factors. Asset-intensive industries typically have a high share of revenue in developed economies, sometimes selling new products at break-even and making up with spare part sales and service from their installed base throughout the life of the asset. Manufacturers in India are now realising this and we see executives leading this relatively new function.

The situation in India is to use an automobile and its parts as long as possible, without looking at its performance. It is considered economically sound to squeeze a part as much as possible. Not replacing a critical part in time can lead not just to degraded performance of the vehicle but also affect the performance of other related parts. This can then lead to irreparable damage to the environment and unexpected breakdown of the vehicle, resulting in much more damage in terms of unavailability and high costs of maintenance.

How many of us allow the technician to replace a part as the vehicle manual instructions when we take our car to the dealer for regular maintenance? How many times have we seen creaky old trucks broken down on the road billowing smoke? Maybe, the government should intervene and bring in regulations to enforce timely replacement of key components as part of emission checks and ensure environment friendly disposal of vehicles at the end of their life.

It is possible to develop AM as a robust function with meticulous planning starting with IT systems and engineering models, all the way up to the supply chains. Machine-to-machine communication (M2M) or the Internet of Things (IoT) can make automobiles a closed loop model, with regular feed of vehicle parameters from the field using sensors and a transmission network. The day may not be far off when standards for onboard vehicle diagnostics become ubiquitous in all Indian cars with, for example, cars sending an SMS for oil replacement due in a few days.

Dealer management systems can keep the manufacturer updated on service visits, part replacements and overall performance. Enterprise level IT systems such as product lifecycle management, enterprise asset management and service lifecycle management can provide the big picture.

Physics-based models available with design and engineering teams coupled with empirical data from the field can help in building a business model for after-market sales. With a well-equipped supply chain ready to handle this demand and a network of service shops, the market can be catered to until the last mile. Car owners would be more than happy to get a transmission belt or an oil filter replaced proactively during a regular maintenance visit.

Increase in revenue share from AM can make the entire ecosystem more mature. Spare parts are usually sold at a premium and can earn better margins. Focus on predicting and improving part life can lead to innovation and advancement in part design, material, manufacturing processes and design of supply chains.

Spurious markets can be handled by fool-proofing (like the chip on printer cartridges), advanced materials, features and functionalities difficult to imitate, a responsive supply chain and so on.

The writer is the principal research manager of Manufacturing Insights, IDC India

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