Exploring the financial consequences of the servitization of manufacturing

Abstract

Commentators suggest that to survive in developed economies manufacturing firms have to move up the value chain, innovating and creating ever more sophisticated products and services, so they do not have to compete on the basis of cost. While this strategy is proving increasingly popular with policy makers and academics there is limited empirical evidence to explore the extent to which it is being adopted in practice. And if so, what the impact of this servitization of manufacturing might be. This paper seeks to fill a gap in the literature by presenting empirical evidence on the range and extent of servitization. Data are drawn from the OSIRIS database on 10,028 firms incorporated in 25 different countries. The paper presents an analysis of these data which suggests that: [i] manufacturing firms in developed economies are adopting a range of servitization strategies—12 separate approaches to servitization are identified; [ii] these 12 categories can be used to extend the traditional three options for servitization—product oriented Product–Service Systems, use oriented Product–Service Systems and result oriented Product–Service Systems, by adding two new categories “integration oriented Product–Service Systems” and “service oriented Product–Service Systems”; [iii] while the manufacturing firms that have servitized are larger than traditional manufacturing firms in terms of sales revenues, at the aggregate level they also generate lower profits as a % of sales; [iv] these findings are moderated by firm size (measured in terms of numbers of employees). In smaller firms servitization appears to pay off while in larger firms it proves more problematic; and [v] there are some hidden risks associated with servitization—the sample contains a greater proportion of bankrupt servitized firms than would be expected.

Appendix: sample business descriptions

Bosch: Bosch is a worldwide name in a large number of areas. These include, for example, electrical and electronic automotive technology, power tools, thermotechnology, household appliances, security systems and broadband networks as well as automation technology and packaging technology. The small ‘workshop for precision mechanics and electrical engineering’ which Robert Bosch founded in Stuttgart in 1886, and which soon specialized in ignition systems for motor vehicles and engines of all kinds, has now become the Bosch group, which is active worldwide and is one of the largest companies in the Federal Republic of Germany in terms of turnover, which amounted to EUR 35 billion in 2002. The international orientation of Bosch started at the end of the nineteenth century. The first agencies were set up abroad at that time. At the beginning of 2003, the Bosch Group had approximately 224,000 employees, more than half of which were outside Germany. The company has around 250 subsidiaries and associated companies in over 50 countries. A total of 236 manufacturing sites, 179 of which are located outside Germany, support the international activities. A key part here is played by the efficient sales and customer service organization with 9,000 Bosch Service centers with approximately 60,000 employees in 130 countries. An essential component of Bosch’s corporate policy is the maintenance of its innovative force which is based upon the knowledge and competence of experienced employees. Worldwide, Bosch has around 20,000 scientists, engineers, and technicians working on the improvement of the function and reliability of existing products and on the development of new products and systems. As a result of their work, Bosch applies for over 2,000 patents each year. This number places the company at the top for the entire automotive industry. The Bosch Group concentrates its business activities on the development, production, and sale of products featuring a high technical standard. A significant share of the Bosch turnover is allocated to maintaining this position. Expenditures for Research and Development totalled around EUR 2.5 billion in 2002. Bosch reserves considerable funds for expanding production capacity and for production engineering. In 2002, expenditures in tangible fixed assets totalled around EUR 2 billion. The Bosch group differs from other companies not just in the width and variety of its product range, but also through its constitution under company law. Bosch has been one of the largest industrial foundations in the Federal Republic of Germany since June 1964: Robert Bosch Foundation owns 92% of the nominal capital of Robert Bosch GmbH. Its constitution is based on the will of Robert Bosch. The foundation manages the company assets in accordance with non-profit principles, and uses the funds it receives from the profits of Robert Bosch GmbH for public-benefit purposes. The areas sponsored by the foundation include science in society, health and humanitarian aid, international relations, and youth, education and civic society. The foundation’s international activities are focused on France, the USA and the countries of central and Eastern Europe.

DaimlerChrysler: DaimlerChrysler is engaged in automotive, transportation and services. Its passenger car brands include Maybach, Mercedes-Benz, Chrysler, Jeep, Dodge and Smart. Commercial vehicles are produced under the Mercedes-Benz, Freightliner, Sterling, Western Star, Setra, Thomas Built Buses, Orion and American LaFrance brands. It offers financial and other services through DaimlerChrysler Services. DaimlerChrysler has a global workforce, a global shareholder base, a global brand awareness and a global outlook. DaimlerChrysler’s strategy rests on four pillars: Global Presence, Strong Brands, Broad Product Range, and Technology Leadership.

PetroChina Company Limited: PetroChina Company Limited (the ‘Company’) was established as a joint stock company with limited liability under the Company Law of the People’s Republic of China (the ‘PRC’) on November 5, 1999 as part of the restructuring of the China National Petroleum Corporation (‘CNPC’). The American Depositary Shares (the ‘ADSs’) and H shares of the company were listed on the New York Stock Exchange, Inc. and the Hong Kong Stock Exchange (‘HKSE’) on April 6, 2000 and April 7, 2000, respectively. In the restructuring, CNPC injected into the company most of the assets and liabilities of CNPC relating to its exploration and production, refining and marketing, chemicals and natural gas businesses. The Company and its subsidiaries are principally engaged in a broad range of petroleum and natural gas-related activities, including: the exploration, development, production and sale of crude oil and natural gas; the refining, transportation, storage and marketing of crude oil and petroleum products; the production and sale of basic petrochemical products, derivative chemical products and other chemical products; and the transmission of natural gas and crude oil and sale of natural gas.

Siemens: Siemens is a German based multinational corporation with a balanced business portfolio of activities predominantly in the field of electronics and electrical engineering. The Group’s business segments are as follows:—Information and Communication Networks (ICN)—ICN develops, manufactures and sells public communication systems, private business communication systems and related software, and provides a wide variety of consulting, maintenance and other services. This includes circuit switching and communication access equipment, private branch exchange systems, voice and data public telecommunication elements, and broadband network products for carrying data over the Internet. It also provides Internet core network switches, routers and related services.—Information and Communication Mobile (ICM)—ICM designs, manufactures and sells a broad range of communication devices, applications and interfaces, and mobile network products and systems including mobile, cordless and corded fixed-line telephones and radio base stations, base station controllers and switches for mobile communications networks as well as mobile and intelligent network systems.—Siemens Business Services (SBS)—SBS provides information and communications services to customers in industry, in the public sector, and in the telecommunications, transport, utilities and finance industries. SBS designs, builds and operates both discrete and large-scale information and communications systems, and provides related maintenance and support services.—Automation and Drives (A&D)—A&D produces and installs manufacturing automation systems, drives systems, low voltage controllers and distributors, and process automation products and instrument systems.—Industrial Solutions and Services (I&S)—I&S provides a range of facilities systems and services, including general contracting, to raw materials processing companies and infrastructure customers.—Siemens Dematic (SD)—SD supplies logistics and factory automation equipment. It designs, engineers, manufactures and supplies turnkey facilities and the associated components, systems and services for electronic assembly systems, logistics and factory automation equipment as well as postal automation systems. SD was formed in May 2001, following the merger of the former Group Siemens Production and Logistics Systems and Mannesmann Dematic Systems.—Siemens Building Technologies (SBT)—SBT provides products, systems and services for monitoring and regulating the temperature, safety, electricity, lighting and security of commercial and industrial property. In addition, it provides full technical facility management services within selected markets.—Power Generation (PG)—PG provides customers worldwide with a full range of equipment necessary for the efficient conversion of energy into electricity and heat. It offers a broad range of power plant technology, with activities that include: development and manufacture of key components, equipment, and systems; planning, engineering and construction of new power plants; and comprehensive servicing, retrofitting and modernizing of existing facilities.—Power Transmission and Distribution (PTD)—PTD supplies energy utilities and large industrial power users with equipment, systems and services used to process and transmit electrical power to various points along the power transmission network, including end users.—Transportation Systems (TS)—TS provides products and services for the rail industry, including signaling and control systems, railway electrification systems, complete heavy rail systems including rapid transit systems and locomotives, light rail systems and other rail vehicles.—Siemens VDO Automotive (SV)—SV designs, manufactures and sells integrated electrical, electronic and electromechanical systems and modules and individual components used in automotive applications. Its product range includes components and systems used in automobile powertrains, body electronic systems, safety and chassis systems, electric motor drives, information and cockpit systems, and driver information, communication and multimedia systems. SV is the result of the merger in April 2001 of the former Siemens Automotive group with Mannesmann VDO.—Medical Solutions (Med)—Med develops, manufactures and markets diagnostic and therapeutic systems and devices such as computed tomography, magnetic resonance imagers, ultrasound and radiology devices, and hearing instruments as well as information technology systems for clinical and administrative purposes. It provides technical maintenance, professional and consulting services.—Osram—Osram designs, manufactures and sells a full spectrum of lighting products for a variety of applications such as general lighting and automotive, photo-optic and optosemiconductor lighting.—Infineon Technologies (Infineon)—Infineon’s products include discrete and integrated semiconductor circuit and systems for wireless communications, computer networks and for use in automotive and industrial applications. Effective December 2001, Infineon is no longer consolidated but instead accounted for as an investment using the equity method.—Siemens Financial Services (SFS)—SFS, the Company’s international financial services segment, provides a variety of customized financial solutions both to third parties and to other Siemens business groups and their customers.—Siemens Real Estate (SRE)—SRE owns and manages a substantial part of Siemens’ real estate portfolio and offers service portfolio specializing in real estate development projects, real estate disposals, asset management, and lease and service management.

Yue Yuen Industrial: Yue Yuen Industrial (Holdings) Ltd is a largest branded athletic & casual footwear manufacturer in the world with production facilities in China, Vietnam & Indonesia. The company is an original equipment/design manufacturer (OEM/ODM) for major international brand name companies such as Nike, Addidas, Reeboks, Asics, New Balance, Puma, Timberland & Rockport. Founded in 1988, Yue Yuen has been listed on the Stock Exchange of Hong Kong Limited since 1992 and named as one of constituent stocks of Hang Seng Index (HSI) and Morgan Stanley Capital International Standard Index in June 2003.