STOCKHOLM (Reuters) - Bearings maker SKF is overhauling its sales model in an effort to maintain margins and counter fierce competition and the threat from cheaper bearings sold online.
Victoria Van Camp, chief technology officer at SKF, said the company will focus on a subscription model for its products, which are used in everything from mining tools to wind turbines and cars.
The Swedish company plans to charge a recurring fee based on a pre-agreed performance level of its customers’ machinery rather than per bearing, Van Camp said.
Western companies have traditionally dominated the lucrative high-end segment of the market, but slow growth, improved quality from Chinese suppliers and greater transparency on online platforms such as Amazon and Alibaba are forcing a rethink.
That includes SKF’s biggest European rival, Schaeffler, which is seeking to boost its digital services in light of limited growth in the bearings market.
“If we just sit by and just watch this development, then this is not going to end well for us or any of the other makers for that matter,” Van Camp said.
The move is another step in the transformation of SKF under Chief Executive Alrik Danielson, who has cut thousands of staff and initiated a drive to modernise and automate its factories.
Handelsbanken Capital Markets analyst Peder Frolen applauded SKF’s move to drive service revenues but expressed reservations.
“I think it will be hard for this model to become a significant part of the company, given industry dynamics,” he said.
Van Camp also said that SKF has begun working with modular manufacturing techniques, increasing use of common components across a range of products.
“There we can see big savings, we can reduce our component line-up quite significantly,” she said.
The push for performance-based contracts is gaining good traction, Van Camp said, though customers can be reluctant to turn over responsibility for process control of their machinery.
“You have to build confidence by showing that it works step by step,” she said.
SKF has already worked with performance-based models in Latin America and says that improvements in technology are increasing its ability to monitor machinery remotely and thereby scale up that business globally.
Van Camp expects pure replacement sales to be fully automated in the next 10 years.
Key to the shake-up will be SKF’s global network of more than 7,000 industrial distributors, which accounted for 28 percent of last year’s sales.
The main challenge will be ensuring that distributors are more than just logistics channels, Van Camp said, adding that those working more like engineering businesses or partners to customers will make it hard for the big online platforms to compete.
“Performance contracts in different forms will be the way we do business, and in the other part we will hopefully generate good profits,” she said.
Reporting by Johannes Hellstrom; Editing by David Goodman