The Real Economy

Equipment as a service—a potential capex alternative in a slowdown?

Jan 04, 2020
Economics The Real Economy

From streaming videos to music services and food preparation, today’s world is rife with on-demand subscription models. And at a time when uncertainty is stalling capital investment by businesses, a similar idea might be just the ticket for manufacturers looking to support ongoing, new or experimental projects, while keeping a lid on costs.

Known as “equipment-as-a-service,” this twist on a rental concept isn’t new. Rolls-Royce has long offered its expensive aircraft engines on a “powerby-the-hour” basis. The idea is now gaining traction among manufacturers as connectivity facilitated by the internet of things comes to industrial equipment, affording operators the ability to remotely monitor their machinery.

Here’s how it works: Instead of making an outright purchase, manufacturers pay a comprehensive periodic fee for machinery uptime based on consumption or outcomes. Unlike traditional lease arrangements, the amount varies, and is based on the extent of use tied to a particular asset. Think of it as taking a taxi as opposed to leasing a car.

Since the user—a manufacturing company—does not own the equipment, the supplier is responsible for service, repairs, spare parts, service-level agreements and related costs for the duration of the contract, which is generally long term.

The growing focus on EaaS has been prompted by digital technologies: internet-enabled smart machines or legacy machines retrofitted with these capabilities. These allow producers to monitor equipment on a realtime basis for performance, usage and billing data. EaaS helps suppliers as well through sustained customer engagement and critical data insights that would enhance the product design and service offerings. The predictive maintenance capabilities allow suppliers to manage repair costs by addressing concerns early on before a machine breaks down, and to schedule service based on use rather than hew to a fixed schedule.

Of course, shifting to an EaaS model requires a cultural shift within the organization, including a commitment to retraining. But if a full-blown capital outlay for new equipment is not on the table, this alternative may be worth considering.

RSM contributors

  • Shruti Gupta
    Shruti Gupta
    Industrials Senior Analyst

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