Having a solid Knowledge-Intensive Business Services (KIBS) sector in a territory is instrumental for servitization processes to unfold among local manufacturing firms. This message is more applicable than ever in the context of social distancing and contactless solutions. For this context makes smart services and the like increasingly important. Both to support product sales and to develop service business and corresponding revenue streams.
As such, we believe that the time for smart servitization is now. And it may particularly strike root in places where manufacturers-expanding-into-service business are surrounded by KIBS providers that can help them change their ways.
Against this backdrop, the AS-Fabrik project set out, among others, to take stock of the supply (KIBS) and demand (industry) side to advanced services in the metropolitan area of Bilbao and the Basque Country as a whole. Hereafter, we give an appraisal of the point of departure in the Basque Country to foster servitization trends among its manufacturing industry.
Since 2008 the weight of KIBS employment amidst the total active population has grown steadily in the Basque Country, representing a little more than 11% of total employment in 2017. While this stays below the EU-27 and EU-15 averages, the Basque Country is catching up. Particularly if we compare its evolution with Piemonte and Baden-Württemberg; two other regions with a strong industrial character, where the relative weight of KIBS employment has even retroceded over time.
In terms of absolute employment there are three KIBS “disciplines” that stand out. These are ICT activities, Legal and Accounting affairs and Engineering and Architecture. At the same time, we see how Consulting activities as well as R&D services underwent the strongest growth in employment between 2004 and 2016.
When looking at the number of KIBS establishments, their sales and gross value added (GVA), it becomes clear that the Basque KIBS sector is made up of micro-enterprises. In all disciplines the average number of employees per establishment is below 10. The R&D branch is the only exception to this rule, employing a bit more than 15 persons per establishment on average. This absence of “economies of scale” is a certainly an issue to look after.
If we look at the geographic destinations of KIBS sales, we see that the Basque KIBS sector relies chiefly on sales to the domestic (= Basque) market -just like Basque manufacturing firms recur for the lion share of their KIBS needs to local providers. Nonetheless, especially if we look at the split between KIBS sales to the rest of Spain and on foreign markets, we see how sales on foreign markets have clearly gained ground since 2015. Altogether, this gives reason to think that the Basque KIBS sector is improving its international market position and that it is evolving from a local-for-local supplier into a moderate international player. At the same time, we suspect that while the Basque industry is highly internationalized and sells more abroad than at home, industrial exports only provide limited foreign trade spillover effects to KIBS. Therefore, it would be good if local KIBS-industry relationships could generate more piggy-backing opportunities into foreign markets for Basque KIBS providers.
As is typical in developed economies, we also see in the Basque case that the tertiary (service) sector is the most important client of KIBS providers. However, the lead that the tertiary sector had over the industrial sector as a source of demand after KIBS has reduced over time. This insinuates that the Basque KIBS sector is increasing its entanglement with the manufacturing world. Hence, this should be positive for manufacturing firms’ intents to embrace Industry 4.0 and smart servitization.
If we look at the development and offering of (advanced) services on behalf of Basque manufacturing firms, we see how service business only represents a minor share of their revenues. In fact, despite the increasing importance of services over time, it only represents close to 2% amidst the overall revenues of industry in 2017.
This is largely because many industrial firms obtain no income from services whatsoever. According to our estimations, this may be the case for 75% of all manufacturing companies in the Basque Country. At the same time, we suspect that these companies do offer services, but that they don’t charge for any of them. In other words: they treat services as a cost centre and not as a profit centre.
This impression is strengthened if we look at the charging and pricing tactics that Basque industrial firms apply to their services. Whereas straightforward selling of goods is the norm, leasing or renting of assets is a lot less. Similarly, pay-per-use, performance / outcome-based contracts or build-operate contracts are only used by a small minority of Basque industrial companies. Also, the stages during which they are actively providing services seems to undermine the potential of generating income from services. In fact, we detect a strong concentration of service business in the pre-sales stage (to raise the chances of selling products), whereas a hands-off posture is adopted in the post-sales stage. Thus, we believe that many Basque firms can still gain substantial ground during the post-production sales stage. To do so, it is recommendable to make use of and provide smart customer services and assistance in an on-line manner. In this regard we also see much room for progress among the Basque industry as only a tiny share of its manufacturing firms obtains a noteworthy part of its service income from digital services.
To assess whether Basque industrial companies underperform in terms of generating income services, we asked them with which percentage they thought their service business could grow if they monetize their customer services in a better manner. The reactions to this question clearly pointed out that there is a huge space for improvement.
To improve this point seems more necessary than ever. Since the current context may lead industrial clients to postpone orders, certainly of durable goods and capital equipment. This implies that product business may severely suffer. Service business, though, tends to be less cyclical and is more apt for generating recurrent revenue streams.
At the same time, the circumstances for change may (unfortunately) be quasi-ideal: the receptivity from the market towards production companies making advances in the field of services may have never been higher, while the readiness of technologies underpinning the provision of digital services is improving rapidly, and also the willingness to embrace all sorts of novelties got a serious boost through the corona-crisis.
Evidently, many types of advanced services need multi-party efforts and a fluid interaction between KIBS providers and industrial companies wanting to bolster and modernize their service business will be very opportune, therefore. Particularly for smaller manufacturing firms that lack the internal resources to add a digital dimension to their service business.
Bart Kamp Negozioen Nazioartekotze eta Zerbitzutze arloko ikertzaile nagusia da Orkestra-Lehiakortasunerako Euskal Institutuan. Enpresei nazioartean beren merkatu hobietan buru izaten laguntzen dieten lehiatzeko estrategiak aztertzen ditu, baita manufakturako enpresen zerbitzutze prozesuak ere.