Equipment as a service as a game changer in the leasing market - a KPMG perspective

Petr Thiel, CEO LECTURA, discussed with Bernd Oppold, Partner KPMG and Maximilian Eberle, Manager KPMG, about the company's solution called Equipment as a Service (EaaS) and its potential for the heavy machinery industry. KPMG believes that the solution can bring new payment methods and investment possibilities.

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Mr. Oppold, Mr. Eberle, please introduce yourselves briefly!

BO: My name is Bernd Oppold and I am a partner within the financial service practice of KPMG Germany. First and foremost, I lead KPMG's team for building regulated entities in the financial services industry. In this context, we have carried out some interesting projects around the topic of Equipment as a Service (EaaS).

ME: I am Max Eberle, manager in Bernd's strategy consulting team and responsible case leader for EaaS projects.

Today we want to talk about Equipment as a Service. What is meant by this?

BO: Equipment as a Service is about providing machines and devices to an end user in return for regular payments, where use, insurance, maintenance, and uptime is ensured via IoT for these assets. This can also be done, for example, as part of a "pay per use" model.

...and why is the topic of EaaS so exciting to you?

BO: What we see in the market is this: An EaaS contract has the potential to become a platform for selling additional services that provide real value to both OEMs and end customers. What's exciting is that EaaS is basically the B2B equivalent of B2C subscription models. Specifically, this means we are seeing the same paradigm shift for business customers from ownership to usage as we do in our personal lives.

That means EaaS is the Netflix of the leasing industry. Where does the trend of subscription models come from?

BO: Subscription models are about to change the B2C market for good. Digital companies like Amazon and Netflix have shown that subscriptions can work successfully. They offer a customer experience with a focus on customer value, e.g. discounted and expedited delivery, an intuitive user interface, personalized and on-demand content, etc. Customers associate these subscriptions with positive experiences and attributes such as "flexibility, convenience, and personalization," which they then expect in a business context as well.

End customers are willing to pay a premium for this added value in terms of convenience and flexibility. We are seeing that this B2C phenomenon can also be transferred to B2B applications. Our projects show that the foundation has been laid out for the EaaS market.

How can we now leverage the potential of EaaS solutions? Which technologies are key in this respect?

ME: The Internet of Things (IoT) will be the big enabler for EaaS. Here, assets use installed sensors to send data for subsequent analysis, forming the basis for how OEMs build, price, and monetize their products.

In general, we recognize that the IoT ecosystem will continue to grow; everything from home applications to cars and machines are becoming "smart". In addition, the market will benefit from economies of scale, i.e. sensors and other technologies will become cheaper and far more powerful. With the help of data analytics tools, the growing volumes of data can be evaluated in a structured and efficient manner.

Customer usage behavior as well as wear & tear indicators provide valuable information for maintenance, repair and next-generation product design. If these insights are utilized well, a company can create much closer customer relationships and build better products. Furthermore, smart networks via IoT enable new payment methods for the provision of equipment, e.g. pay per use or pay per part.

And that's really one of the key points here: OEMs will get to know their customers much better through increased transparency about usage patterns and increased personal contact - in the past, this was often limited to only a few interactions around the sale or delivery and perhaps disposal of a device.

And now let's go into detail: what specific (financial) added value do end customers receive? ...and what added value do OEMs receive?

ME: On the one hand, we have the OEM and/ or the service provider supplying the asset and taking some of the business risk from their customers.

On the other hand, the customer benefits from the fact that he or she does not have to make a high upfront investment. The customer bears no ownership risk and can return the asset at the end of the contract. Additionally, the customer can structure liquidity planning more efficiently and ensure scalability in production.

The relationship between the parties is essentially governed by two contracts - one for the use of the actual asset, which can be structured on a flat fee or pay-per-use basis; the latter can be structured based on time, volume of activity, or other measures. The second contract is for additional services such as design, installation, maintenance, disposal, etc., and in many cases can actually account for a large portion of the revenue from EaaS contracts.

Ultimately, all collected data is contractually owned by the OEM and/ or service provider, which can use the data to improve their respective customer relationships, maintain the equipment, or improve future equipment.

To gain an even better understanding, could you describe a specific use case in the market?

BO: In the market, we see some initiatives around Equipment as a Service. For example, a large insurance company is currently working with an equipment producer to offer a pay-per-part model for the manufacturing sector. Here, the insurance company finances a producer's equipment and makes it available to a manufacturing plant.

In the pay-per-part model, the manufacturing company pays, for example, a pre-agreed price per piece for a certain work step. An IoT company uses sensors on the assembly line to supply data on the number of pieces produced and thus ensures payment per piece. At the same time, these sensors make it possible to identify data on usage behavior, weak points and maintenance requirements of the plant.

Every stakeholder benefits here: The insurance company gets an investment opportunity, the equipment producer sells equipment and receives valuable information about his or her asset by means of IoT, and the manufacturing plant gets modern, flexible and scalable production capacities and does not have to worry about maintenance, repair or insurance itself.

Finally, a look into the future: where do you think the journey is going?

BO: We believe that Equipment as a Service is a forward-looking response to the challenges of an increasingly dynamic market environment. For example, business growth at a granular level and economic growth at a macro level necessitate costly investment in equipment, but the pace of technological innovation means that this equipment can quickly become obsolete. These issues can be elegantly addressed with the right EaaS solution, thereby delivering real value to both the OEM and the end customer.

Mr. Oppold, Mr. Eberle, thank you for your time!

BO: Thank you for the opportunity to talk about a possible future for EaaS.

ME: Thank you very much for your time, Mr. Thiel.

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Company overview

KPMG is a leading auditing and consulting firm with more than 12,000 employees at 25 locations in Germany.

Advice on leasing and equipment as a service topics is covered holistically from a regulatory, tax, accounting, legal and strategic perspective.