The construction machinery aftermarket refers to various derivative services centered on equipment usage after the equipment is sold. It covers all follow-up services addressing customer demands in after-sales support and equipment usage throughout the equipment's lifecycle from sale to scrappage, and is the general term for a series of transaction activities generated therefrom.
The construction machinery aftermarket includes repair, maintenance, parts supply, financial services, insurance, leasing, used equipment, overhaul and remanufacturing. Services based on customer demands also include refueling, finding operators and sourcing construction projects. In mature markets in Europe and North America, enterprises attach great importance to developing the aftermarket. It serves as a key link for construction machinery original equipment manufacturers and dealers to achieve service premium. Enterprises target an optimal profit structure, namely two-thirds of profits from the aftermarket and one-third from new equipment sales. In this way, when the new machinery sales market declines, revenue from the aftermarket becomes a vital guarantee for enterprises to survive.
Figure 1: Aftermarket Contribution Rate of Tromond Industries
Figure 1 shows the turnover and aftermarket contribution rate of Tremond Industries, a Caterpillar dealer. The dealer's aftermarket business contributes approximately 60% of total turnover and nearly 80% of profits. Its aftermarket absorption rate (the ratio of aftermarket revenue to the company's operating expenses) exceeds 100%. As a result, when the market declines, the company can weather the crisis without layoffs.
Why do customers churn in large numbers?
Compared with the aftermarket contribution rate in mature overseas markets, the aftermarket share of Chinese distributors remains extremely low (Figure 2). Some 80% to 90% of aftermarket service and spare parts businesses are diverted to independent repair shops, parts stores and "backpackers" (individual service providers). The closed-loop aftermarket service system built by original equipment manufacturers and distributors covers less than 20% of end users. A large number of customers are lost once the equipment warranty expires. Why does this happen?
First of all, the churn of after-sales market customers is an inevitable consequence of the short-sighted marketing policies adopted by OEMs. The four-trillion-yuan economic stimulus led to severe overcapacity in the industry. To absorb the excess capacity, various OEMs had to compete aggressively with commercial policies, such as zero down payment, free maintenance parts with the purchase of complete machines, lifetime free repairs, and so on. To boost complete machine sales, the after-sales business was given away to customers as a "free bonus", which clearly sent a message to both customers and employees: the after-sales market is unimportant. It can be said that the commercial policies of OEMs have disrupted the ecosystem of the after-sales market.
Second, the after-sales business model designed by original equipment manufacturers (OEMs) is a top-down, closed service model. Authorized agents hold manufacturer approvals and technical documentation (including human-machine interaction systems) and are only permitted to sell expensive original spare parts. Initially, users who purchased construction machinery and equipment from foreign brands could only buy spare parts from authorized agents when needed. With the rise of "Made in China", a growing number of domestic spare parts can serve as alternatives to original parts and offer better cost performance, which naturally changes customers' choices.
Third, the installed base of equipment in the Chinese market exceeds 7.5 million units. The closed service system of agents is simply unable to support such a massive equipment fleet. Coupled with OEMs' free service policies, after-sales service operations are almost universally loss-making. Under these circumstances, agents have neither the capacity nor the incentive to provide services for out-of-warranty equipment. Due to low service coverage, agents can usually only meet the demands of in-warranty equipment and struggle to guarantee timely service for equipment in remote areas and out-of-warranty units. Customer churn is therefore inevitable, and independent repair shops and roaming field technicians have naturally become an ideal supplement to the formal after-sales service system.
A few years ago, the construction machinery industry went through a multi-year market downturn, bringing an existential crisis to OEMs, agents and end users alike. Agents were preoccupied with their own survival and had little capacity to support customers. It was independent repair shops, roaming field technicians and parts retailers that helped customers get through the tough period. Customers inevitably shifted their service and parts purchases away from agents to independent service providers; otherwise, they could not keep their operations running.
After a careful analysis of the construction machinery aftermarket, the author holds the view that OEMs and agents have been operating in this fragmented, fully competitive aftermarket with a monopolistic mindset. They assume that since they sold the equipment to users, those customers belong to them and will naturally come to them for service and spare parts. Competing in a buyer's market with this seller's market mindset is bound to result in substantial customer loss.
The current state of the aftermarket ecosystem is largely attributable to OEMs' short-sighted new-machine marketing strategies. The aftermarket generates returns slowly and cannot deliver immediate performance targets. Marketing remains the overriding priority for many OEMs today, as can be seen by comparing their budget allocations for marketing versus aftermarket development. The management of these manufacturers only pays lip service to the aftermarket. Now, aggressive commercial marketing policies have returned, and price wars are intensifying. It is surprising how quickly the industry has forgotten the hardships of previous years.
The competitive landscape of the aftermarket has shifted.
Monopoly relies on barriers, whether technical barriers or market access barriers. Even though OEMs frequently revise part numbers and tightly restrict access to all kinds of technical documentation, they have failed to establish sustainable technical barriers in the aftermarket. The era in which manufacturers could buy components from suppliers, rebrand them, and sell them at several times the cost is over. Once equipment warranty expires, original parts that lack exclusive barriers are no longer the default choice for users.
After decades of development, products labeled "Made in China" have achieved increasingly higher quality and stronger cost competitiveness, as evidenced by the growing export volume of domestic equipment. The same applies to spare parts. In the past, when people thought of spare parts stores, they would immediately picture small family-run shops selling counterfeit goods. Today, however, many spare parts stores are pursuing high-end, high-quality branding, featuring better product quality, larger business scales and more scientific management practices. It can be said that the quality of aftermarket parts is getting closer to that of original equipment manufacturer (OEM) parts, and they may even offer better cost performance (Figure 3).
The same trend holds true for maintenance services. Previously, we all believed that authorized agents provided more professional and reliable services. Nevertheless, the free service policies of original equipment manufacturers have resulted in low status for service technicians at agent shops. During the market downturn in recent years, many service technicians left the agents and became freelance field technicians. A friend told me privately: "Freelance field technicians can hardly survive without solid maintenance skills." This occupation relies heavily on reputation; technicians cannot earn a living if customers do not trust their capabilities. Technicians who lack confidence in their skills usually choose to stay at agent shops to gain experience rather than start their own businesses.
Table: Comparison of service and spare parts capabilities between authorized agents, freelance field technicians and spare parts stores
The table above presents the author's comparison of competitiveness between dealers and backpack operators/parts stores. Contrary to common perception, dealers are at a disadvantage not only in pricing but also in the overall competitiveness of the aftermarket, which explains the substantial customer churn. After the adage "Cheap goods are not good; good goods are not cheap" ceases to hold true in the aftermarket, it comes as no surprise that numerous customers have shifted to backpack operators and parts stores.
How can original equipment manufacturers (OEMs) and dealers win back customers in the aftermarket?
Many have not truly grasped that abandoning the aftermarket means abandoning customer loyalty and the future. Without the aftermarket, dealers cannot achieve sustainable development. Such a high customer churn rate is fatal to dealers. Without repeat purchases and word-of-mouth referrals from existing customers, new equipment sales must start from scratch, incurring high costs while carrying greater risks associated with new customers.
The author holds that for OEMs and dealers to retain customers in the aftermarket, they must first abandon the current short-sighted marketing strategies, rebuild a sound ecosystem for the healthy development of the aftermarket, and attach importance to the value of customer service. A fundamental question in rebuilding the aftermarket ecosystem is: should we develop the market around the production capacity, sales volume and market share of OEMs, or around customer demands? For example, in a market where only 1,000 units of construction machinery are required for projects, what will happen if an OEM oversells 2,000 units through various promotional tactics? The equipment utilization rate will inevitably drop sharply, fierce competition will make it difficult to raise hourly rental rates, and customers will lack the funds to afford high-quality repair and maintenance services. Once the aftermarket ecosystem is damaged, no party can benefit from it.
Therefore, OEMs and dealers should carry out marketing activities centered on customer demands. The number of units sold and the market share captured are merely outcomes. Artificially inflating market demand runs counter to economic laws and will eventually be punished by the market. Dealers have limited service coverage. Why not leverage backpack operators and parts stores to extend their service networks and deliver timelier and more convenient services to customers? Why cannot OEMs cooperate with domestic brands to develop their second-tier or third-tier branded parts to better satisfy customer needs? OEMs and dealers cannot monopolize the aftermarket. If enterprises truly take meeting customer demands as their top priority, they will inevitably explore every means to satisfy customers and cultivate more loyal clients, instead of merely catering to their own production capacity needs and engaging in cutthroat price wars and commercial incentive battles in the red ocean of new equipment sales.
In 2004, Professor Michael Porter from Harvard University told a fascinating story during his visit to China. There used to be many Indigenous hunting tribes on an island in northeastern Canada, yet only one tribe survives today while all the others have perished. Professor Porter wondered what allowed this tribe to survive. Research revealed that other tribes would scout for areas with abundant prey before heading out to hunt. This particular tribe, however, followed an unusual ritual before hunting: they burned animal bones over fire and determined the direction of prey based on the cracks in the bones. Professor Porter argued that this almost shamanic ritual set their hunting practices apart from those of other tribes. It was this differentiation that spared them from competing in the red ocean with rival tribes and enabled their survival to this day.
The aftermarket landscape has changed. What should OEMs and dealers do? They may choose to continue waging price wars and competing on commercial terms while surrendering the aftermarket, only to exhaust their last bullet - profits. As Albert Einstein put it: "Insanity is doing the same thing over and over again and expecting different results." The author believes OEMs and dealers must transform. They need to deliver differentiated services tailored to customer demands, help customers generate profits, win more loyal clients, and expand market share through customer accumulation. So, what is your choice?
