How Blockchain-Based Pay-Per-Use Is Transforming Long-Standing Ownership Models in the Manufacturing Industry
The manufacturing industry and its suppliers are heading for difficult times. Several emerging global developments in recent years are creating considerable pressure on competition and costs. The effects will be particularly noticeable in areas with a high deployment of mechanical equipment. If machines remain unused due to a downturn in the order situation, they merely generate high costs instead of contributing to the company’s profitability and value creation. This unfavorable circumstance potentially can be solved by new ownership models, such as the concept of pay-per-use. Especially pay-per-use in conjunction with blockchain technology offers producers a variety of possibilities to better hedge their business against emerging external influences of the global economy and at the same time to significantly improve internal performance indicators.
Authors: Thomas Faber, Benjamin Schaub, Philipp Schulden, Philipp Sandner
External developments exerting pressure on the supplier industry
Currently and immediately external impact factors exert considerable influence on the worsening order situation of the overall manufacturing industry. Persistent trade conflicts between the world’s major economies are a major contributing force to this development. On average global production dropped by 5% comparing H1/18 to H1/19 (Fig. 1).
Trade-related indicators signal a worrying trend in world trade based on global export orders and economic uncertainty (WTO, 2019). Britain’s withdrawal from the European Union could further increase market uncertainty as the United Kingdom were to leave the European Union without a withdrawal agreement, the consequences would further undermine an already fragile global economy. Looking at the automotive industry rising costs for R&D and an expected consolidation of the market are additional factors influencing declining performance figures in the industry such as the profit margin (Fig. 2).
Making industries more resilient: from traditional ownership toward pay-per-use
The political and economic developments described above call for creative action since suppliers have to prepare themselves for significant drops in profit. To maintain or reincrease profitability levels, suppliers should secure sufficient financial flexibility for strategic investments that generate long-term returns. Due to the capital-intensive nature of the industry, the effective management of working capital is crucial. Capital-intensive industries have a high ratio between fixed and variable costs and hence require a substantial volume of production to provide an adequate return on investment (ROI). Due to this operating leverage, slight changes in turnover lead to over proportional changes in profits and ROI which makes these industries much more susceptible to economic downturns when compared with industries dominated by labor cost.
This raises some interesting questions: How can these industries mitigate this impact when struggling through economic slowdowns? Or more specifically, how can the fixed costs such as the depreciation on the equipment be transformed into variable costs? An interesting idea that has existed for decades has now been given new impetus by trends like the internet of things and technologies like blockchain: consumption-dependent payment schemes, mostly called pay-per-use concepts.
In a typical pay-per-use scenario, the user of industrial equipment does not purchase the product but pays a fee that is dependent on the use which is measured by specified parameters that suit the context of usage. With today’s state of technology, sensors can easily track usage data and transfer it securely to the equipment provider.
How pay-per-use meets today’s industry demands
In the traditional world, the acquisition of new equipment requires high upfront capital expenditures. Liquidity is, therefore, significantly constrained by the large lock-up of capital. Pay-per-use is able to overcome these economic obstacles significantly. What makes the concept of pay-per-use so interesting is that it offers economic incentives for equipment manufacturers. From a user’s perspective, the advantages are very clear. No upfront capital investment is required which accordingly also eliminates the risk associated with the acquisition. Accompanied by substantially less capital being tied-up and, therefore, lower capital expenditures, the leeway for operating expenses is significantly greater. While in the traditional world liquidity was limited by high upfront investments, the pay-per-use model is based on the premise that only the actual usage of the machine is being paid. The user fee is dependent on previously defined parameters such as output or other indicators which can be measured through sensors.
With the ever-increasing amount of usable data that sensors can collect, additional services and business models become possible (BNP Paribas, 2019). This is especially true when the integrity of data is ensured by blockchain technology, so that manufacturer and user can trust the aggregated data. PayperChain developed a pay-per-use concept in combination with blockchain technology which facilitates a variety of additional features through the collection and distribution of tamper-proof data. Leveraging blockchain technology and smart contracts to automate processes (e.g. invoicing, payments) saves further resources for manufacturers and users of machines. The aspect of maintenance is another very interesting field for a blockchain-based pay-per-use solution. By collecting and analyzing usage-related machine data, predictive maintenance becomes possible. As a result, the risk for production downtimes could be reduced for users and producers and, therefore, increase the lifecycle of such equipment (Heinert and Sandner, 2018).
For equipment manufacturers, the implementation of pay-per-use makes sense for many reasons. On the one hand, it is possible to maximize revenues during the product life cycle and generate steady cash flow. The latter represents an enormous improvement, especially in cyclical industries. In the conventional world, it is difficult for a machine maker to find customers in times of economic downturn. By applying pay-per-use, this situation can be significantly alleviated, as the user of the machine continues to produce in difficult market conditions, however with lower volumes. Furthermore, machine builders can benefit from securing long-term relationships with their customers through a pay-per-use model. And even after the machine has been successfully paid off, it can generate revenues by providing helpful data from the connected sensors for the user. In addition to that, new customers can be addressed and acquired by offering pay-per-use. This is especially the case for machine builders of highly innovative products, as pay-per-use significantly reduces the entry barriers for potential customers.
Conclusion
The concept of pay-per-use is not a new one. However, existing solutions do not always make sense and are limited in accurately measuring the usage and therefore matching payments. In combination with blockchain technology, PayperChain brings this concept to a completely new level. While the concept of pay-per-use makes sense for many reasons, this is particularly true for economically difficult times in which investments are massively declining. PayperChain solves this exact problem across industries as manufacturers and users of machines receive data in real-time and in a transparent way that has not been possible before. The collection and distribution of tamper-proof data on an industrial scale through blockchain technology is a cornerstone for an almost infinite number of services (e.g. automated invoicing and payments).
Remarks
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Thomas Faber is a research fellow at the Frankfurt School Blockchain Center and a project manager at the International Token Standardization Association (ITSA). He holds a B.Sc. degree in Management, Philosophy & Economics as well as a M.Sc. degree in Management with a focus on digital business models from the Frankfurt School of Finance & Management. You can contact him via email and LinkedIn.
Benjamin Schaub is a project manager at the Frankfurt School Blockchain Center (FSBC) and Chief Operating Officer at Plutoneo. His interests include blockchain regulation and governance as well as blockchain use case development. You can contact him via mail (benjamin.schaub@fs-blockchain.de) or on LinkedIn (www.linkedin.com/in/benjamin-schaub).
Philipp Schulden is chief operations officer of the Frankfurt School Blockchain Center at the Frankfurt School of Finance & Management. In the blockchain environment, he has supervised numerous international projects and research initiatives. He also possesses expertise in the field of application possibilities of blockchain technology in the area of the Industry 4.0. He completed his studies in Management (M.Sc.) in Germany, Russia, Peru and South Korea. You can contact him via mail (philipp.schulden@fs-blockchain.de and LinkedIn (https://de.linkedin.com/in/philipp-marcello-schulden).
Prof. Dr. Philipp Sandner is head of the Frankfurt School Blockchain Center (FSBC) at the Frankfurt School of Finance & Management. In 2018, he was ranked as one of the “Top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. Further, he belongs to the “Top 40 under 40” — a ranking by the German business magazine Capital. The expertise of Prof. Sandner, in particular, includes blockchain technology, crypto assets, distributed ledger technology (DLT), Euro-on-Ledger, initial coin offerings (ICOs), security tokens (STOs), digital transformation and entrepreneurship. You can contact him via mail (email@philipp-sandner.de) via LinkedIn (https://www.linkedin.com/in/philippsandner/) or follow him on Twitter (@philippsandner).
References
Lazard, Roland Berger: “In the heat of the mobility revolution How automotive suppliers can master the industry’s transformation”, released at 29.08.2019, https://www.rolandberger.com/en/Publications/Overcapacities-and-declining-profitability-put-automotive-suppliers-in-a.html.
World Trade Organization: “WTO lowers trade forecast as tensions unsettle global economy”, released at 01.10.2019, https://www.wto.org/english/news_e/pres19_e/pr840_e.htm, last accessed at 02.02.2020.
BNP Paribas Leasing Solutions: “How to offer IoT solutions on a pay-per-use basis?”, released at 08.01.2019, https://leasingsolutions.bnpparibas.com/en/how-to-offer-iot-solutions-on-a-pay-per-use-basis/ last accessed at 03.02.2020.
Heiner, S. and Sandner, P.: “Mit Blockchain auf dem Weg zur Smart Maintenance”, released at 10.09.2018, https://medium.com/@philippsandner/mit-blockchain-auf-dem-weg-zur-smart-maintenance-3e53625b4244, last accessed at 05.02.2020.
