As the construction machinery industry enters a saturated market, dealers are facing increasingly difficult times, resorting to downsizing, salary reductions, layoffs, lawsuits, and exits. The path forward for the dealership system is narrowing. What are the underlying reasons?
Some say it's a market downturn, others say it's a price war. Those who say this know these reasons are untenable. Mature markets also experience downturns and price wars. Why is it that overseas dealers' aftermarket contribution exceeds 50%, while many Chinese dealers' is less than 10%? Focusing solely on selling equipment for quick profits and neglecting to invest in service inevitably costs dealers.
Don't always say it's a different situation in China; that's just an excuse for not thinking things through. Chinese construction machinery dealers are definitely doing something wrong.
In a cost-driven world, companies only focus on revenue and costs. Selling complete machines generates revenue quickly and is naturally popular; repair and service costs are high, and the revenue generated is minimal. According to cost accounting principles, this is something that must be strictly controlled and significantly reduced. Therefore, dealers tend to prioritize equipment sales over customer service.
The cost accounting standards widely used by enterprises originated over 100 years ago and are no longer suitable for the needs of today's service economy. Service activities are fragmented and high-cost, and according to cost accounting standards, they need to be cut. The president of an OEM once proposed learning from the Santana car model, letting the social repair and parts network handle services, focusing on whole-machine sales to earn more money, and avoiding unprofitable services. This approach, like a general on a march not chasing a rabbit, sounds reasonable but reflects a limited understanding.
In 1984, Israeli management guru Dr. Goldratt introduced the Theory of Constraints (TOC), creatively proposing the Throughput accounting standard. Throughput refers to the rate at which a system makes money through sales. In fact, a company's value is not reflected in revenue, but in throughput.
For example, a dealership purchases equipment from the OEM, then resells it to end users, providing services and parts. Dealer A achieved a sales revenue of 1 million this month, with equipment procurement costs of 980,000. Aftermarket revenue included 30,000 from parts (cost 20,000) and 10,000 from service fees. After deducting variable procurement costs, the dealer's effective output was only 40,000 per month (20,000 for complete machines, 10,000 each for parts and services). After deducting operating expenses of 40,000, Dealer A did not make a profit this month and may even have incurred a loss. This reflects the predicament many dealers face today.
While 1 million in equipment sales seems substantial, 980,000 of that is effective output contributed to the OEM (Original Equipment Manufacturer), having no impact on the dealer's effective output or profit.
Conversely, Dealer B also had operating expenses of 40,000. This month, they sold 1 million worth of equipment, with 60,000 in parts revenue (cost 40,000) and 40,000 in service fees. The sales revenue ratio between the two dealers is 104:110, not significantly different, but the effective output ratio is 1:2, the profit ratio is 0:4, and the aftermarket absorption rate ratio is 1:3-a stark contrast.
The aftermarket absorption rate is calculated by dividing the effective output by the dealer's operating costs. Achieving an absorption rate exceeding 100% is the most important health indicator for dealers.
Dealer A has an absorption rate of 50%, while Dealer B has 150%. If equipment sales are zero this month, Dealer B can still profit from the aftermarket, while Dealer A will not be so fortunate.
Many dealers in China are large but not strong; they have high revenue but low effective output and a low contribution from the aftermarket. Profit and value originate 100% from effective output; the higher the effective output, the stronger the dealer's indispensability.
During periods of rapid market growth, both sales revenue and profit are high, and dealers operating within a cost-driven environment naturally neglect the high-cost aftermarket. However, once the market matures, the effective output per unit sold may plummet from 100,000 yuan to 5,000 yuan.
Low effective output in the aftermarket indicates insufficient value creation for customers, leading to customer churn. Original parts are being replaced by aftermarket parts, and after-sales service is being replaced by independent repairmen. The indispensability of dealerships in the eyes of OEMs is constantly decreasing.
Dealers are always questioning OEMs' direct sales strategy. It's not that OEMs don't want to use a dealership system, but rather that excellent dealerships are too scarce. OEMs and users don't need dealerships that only buy and sell, creating too little value (effective output) for customers.
Sometimes OEMs have to bypass dealerships and sign contracts directly with major customers because if they go through dealerships, their price advantage disappears, and the deal falls through. OEMs and users are asking themselves a painful question: "Why do I need a middleman to make a profit?"
Dealers should also ask themselves: "What core competitiveness do I have that customers and OEMs would make them choose to cooperate with me?" If the answer cannot convince yourself, you are unlikely to escape your current predicament.
Being in the equipment distribution chain, neither customers nor OEMs need middlemen who don't provide service and offer no value. Dealers must become service providers, using equipment as a medium to create more effective output around customer needs and pain points.
Stop worshipping sales figures! According to the Theory of Constraints (TOC), the key performance indicators (KPIs) that business managers should prioritize improving are: 1) Effective output, 2) Inventory, and 3) Operating expenses.
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