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Servitization in agriculture
Servitization has been helping companies across a variety of industries thrive. Now you can use it to free up more time to focus on what’s important and spend less time worrying about maintaining equipment. How could your farm benefit from more flexible payment schedules and less operational risk due to equipment breakdowns? This paper can help you to find out how to benefit from this trend – so that you can focus on your field and growing your future. Contents
What is Servitization and how does it benefit you? 3 Servitization in other industries 5 How does Servitization address farming challenges? 6 How can Servitization help farmers move forward? 7 Practical benefits and use cases of Servitization for farmers 9 How to take advantage of Servitization 12
November, 2019
2 Servitization in agriculture
What is Servitization and how does it benefit you?
Helps you focus on your field As a farmer, you spend a lot of time these days dealing with new regulations, environmental concerns and quality issues – which all distract you from what you do best, producing great crops. We can’t fix issues around new regulations, but we can help free up more time for the things that are important. How? Through Servitization. It reduces the time and worry involved in purchasing and maintaining your agricultural equipment, so you can focus on your core business. Servitization provides:
• More business flexibility • Access to state-of-the-art equipment and services • No financial and planning surprises • Focus on your field
Servitization meets changing needs The idea of Servitization is not new. In essence, Servitization is a way to get equipment and services easily and economically by combining both into a single contract. You use a Servitization approach every time you stream a TV show, movie or song. Or using independent contractors for services like spraying, baling or plowing. What is new is that Servitization is about to become the next big thing in agricultural equipment.
This approach is already making a splash across a wide range of industries, including automotive, materials handling and entertainment. Why is it so popular? Because it meets changing needs. In the past, a farmer might have bought equipment from a company. If it needed repairs, they fixed it themselves, or they went to a local mechanic or dealer. Today, many farmers are choosing to get all of the parts and services they need from one source – and sometimes through one payment. This lowers risk and operational hassles. It results in easy maintenance. And it makes everything more predictable.
Huge potential for agriculture That’s why this model is moving into the farming business. Even though things are changing, the use of Servitization in agriculture is still quite low. But it has huge potential– it can help farmers spend their time and money more wisely. These days, some farmers don’t want to invest in and own expensive equipment. Instead, they want ‘just in time’ access to equipment when and where they need it. Therefore, in close cooperation with dealers and manufacturers, financial solution providers are starting to offer just that.
This paper has been produced by AGCO Finance, an experienced global financial solutions partner in the agricultural sector, to share the knowledge we have gathered from our daily business as a strategic finance provider with our partners, dealers, manufacturers and – of course – farmers. Let’s look at some examples from other industries. How have customers benefitted from this trend?
3 Servitization in agriculture
Servitization in agriculture More business flexibility Servitization makes it easier to change machinery, select services and customize payment schedules to meet your business needs.
Access to state-of-the-art equipment and services Servitization makes innovation, like state-of-the-art equipment and Smart Farming services, affordable by reducing investment barriers and shortening payback cycles through all-in-one, long-term rental or leasing contracts.
No financial and planning surprises
Servitization can combine equipment and service for one fixed fee, with defined service levels and payment intervals to eliminate financial and planning surprises and increase your peace of mind.
Focus on your field Servitization frees up more time to focus on producing great crops, while spending less time worrying about maintaining equipment.
4 Servitization in agriculture
Servitization in other industries
Materials handling: flexible forklift access1 Let’s say a company needs forklift trucks. They don’t want to invest in their own fleet, but they also don’t want to jump from rental to rental. This is where a servitized solution can meet their needs: companies like Jungheinrich rent forklift access for a 12-month period. The customer tells Jungheinrich how many hours of forklift use they want, and Jungheinrich only charges them for the hours they use it. This brings many benefits. They get a full-service contract. They can change the number of hours they want to use the forklift. And they even get a phone app with GPS locations and information about how and when they use each forklift. In other words, this servitized approach gives them cost-effective and reliable access to equipment. They don’t have to make a major investment, and it is even cheaper than a short-term rental, with almost the same flexibility.
Warehousing: pay-per-pick2 Swisslog – a global warehousing company – is another example. They now offer picking robots that transport goods by themselves across large warehouses. They also offer a pay- per-pick solution –warehouse operators are charged the same amount for every robot pick- up. This charge includes costs for equipment, service, maintenance and repair. It also includes extra services like warehouse management systems and installation fees. The company gets access to state-of-the-art equipment and all the support needed to keep it running, making their operations more efficient, all for a fixed fee.
Construction: pay-per-cubic metre3 Imagine you run a government agency that is digging a new highway tunnel. Costs are important, especially as the project moves along. You might turn to Epiroc, who could provide you with a budget-friendly, servitized solution. For instance, a famous tunnelling project in Portugal paid Epiroc a fixed charge for every cubic metre they dug. This charge included equipment, service, maintenance and repair, as well as spare parts such as drilling heads. This way, total costs for the project were fixed and transparent. The agency could also make their payments as the project progressed, and only had to pay when machines were actually running – in other words, when the tunnel was being dug.
These examples are from areas that have used Servitization longer than the agricultural sector, and they describe solutions that combine equipment and additional services into a single package. They meet specific customer demands. And they provide more value than a mix of stand-alone solutions. The same can be true for farmers and agricultural equipment. Let’s explore the idea in more detail.
1 https://www.jungheinrich.co.uk/products/forklift-hire/power-buy-the-hour-144016
2 https://www.swisslog.com/en-us/warehouse-logistics-distribution-center-automation/products-systems-solutions/
asrs-automated-storage-,-a-,-retrieval-systems/boxes-cartons-small-parts-items/carrypick-storage-and-picking-system
3 https://www.epiroc.com/en-au/customer-stories/2016/pay-per-use-portugal 5 Servitization in agriculture
How does Servitization address farming challenges?
Servitization is not a one-size-fits-all idea. In agriculture, it focuses on helping farmers meet some of the most important trends and issues they face. On this page, we will first discuss some of these issues you might face in your business. On the next page, we will then show you how Servitization can help you overcome some of these challenges.
Accessing new innovations Digitalization4 is a global mega-trend that affects all industries – new digital equipment, products and solutions are entering the market faster than ever. You can see this in agriculture in the form of ‘Smart Farming’ and ‘Precision Farming’. However, the equipment and technologies farmers need for this are costly. This makes it hard for smaller farms to keep up with large, professional farms that have bigger budgets to work with.
Fewer skilled employees Farms are often closely tied to family, passed on from generation to generation. In recent years however, younger people are not as interested in taking over the family business. This isn’t just an issue for farmers – it affects all of us who depend on farmers and their work5. At the same time, other workforce changes mean that many farms find it harder to get skilled employees. Can they keep running their farms the way they used to?
Financial pressure On top of regulatory changes and the rising cost of skilled labor, every farmer needs to manage their day-to-day production dynamics. While financial pressure in the agricultural business is nothing new, it’s becoming more complex and riskier. This puts an extra burden on how farmers operate and manage their business. How does it affect small and medium farms? On the one hand, their budgets are tied up in assets such as farm inputs (fertilizers, seeds, etc). On the other hand, they need to consider spending additional money to comply with many new rules, like the ones for manure management. And, of course, they face pressure from larger operations with efficiency advantages. This makes it harder to free up capital to invest in new equipment, which in turn is critical to protect their farm’s future. And many farms are afraid of investing in the wrong expensive technology, especially with its long pay-back cycles.
Budget and planning security The unpredictability of agriculture is also a major challenge. Agriculture faces seasonal impact due to climate change and an increasing number of large outfits threatening smaller family farms. And there are always unknown issues that can make the difference between a good harvest and a potential crisis. As a result, many farmers are looking for ways to make their budgets more reliable and their planning more secure. They want to lower risk in areas such as seasonal changes and equipment breakdown. And they are desperate to stop wasting time on issues outside of their core activity – producing high-quality products.
4 This term is used broadly here to include Automatization, Robotics,
Autonomous vehicles and other innovations that rely on data.
5 https://www.rabobank.com/en/about-rabobank/food-agribusiness/future-of-farming/introduction/succession.html 6 Servitization in agriculture
How can Servitization help farmers move forward?
Chances are that some of these trends and challenges also affect your business. How can Servitization help? We have seen how Servitization has helped other industries. We believe that it can help farmers overcome the challenges they face too.
Makes innovation affordable Digitalization can help agricultural equipment manufacturers create innovations – such as self-driving tractors – with clear benefits for farmers. But wouldn’t a self-driving tractor be expensive? Wouldn’t this only help large farms with huge budgets? Not necessarily. What if the barrier to investing could be reduced through a rent-to-try scheme? Then, farmers could test the machine first, under real-world conditions. They could reap the benefits of efficiency right away. And they would be spending a fraction of their investment budget.
This approach would apply to both large and small investments. And this would change the game: investment in new technology would now help smaller farms too. “The pay- off on some of the smaller investments (like soil sensors) is usually very quick – 1 or 2 months,” says potato farmer Jacob van den Borne6. Jacob van den Borne is an “The key is to figure out the exact problem you internationally recognized front- have, and then find a technology to solve it. runner of applying precision For example, if you have small fields with many technology and precision farming corners and significant overlap, an investment on his farm since 2006. We spoke in GPS-technology or track-guidance systems to him in October 2019 and could make a big difference. Reducing overlap discussed, among other things, would help you save on fuel, seeds, fertilizers, the impact of digitalization and herbicides and working time – all at once. precision farming technologies on The investment would easily pay-off within one his farm business season.”
Helps attract the right employees Being innovative can also help farmers find the new skilled employees they need to succeed. Jacob van den Borne (quoted above) has built a valuable international reputation in this way. He uses new technology to attract talented workers such as interns and trainees. Then he picks the best candidates and trains them specifically for his potato business. Being innovative doesn’t just help him in the short term – it also builds a foundation for his farm’s future by attracting future employees through being on the forefront of smart farming.
Provides cost-effective access to state-of-the-art machinery Servitization also helps farmers gain guaranteed access to state-of-the-art equipment such as balers. A customized solution could enable them to rent the equipment seasonally – perhaps from July to September – and split payments across the rental period. When the season is over, the farmer could even keep the equipment on their property, while the equipment provider performs service, maintenance and even repairs. The equipment will be ready to use when the following season starts. With such models, finance providers, in cooperation with dealers and suppliers, can support farmers in getting the equipment they need. This is very different from a regular rental or a more traditional financing scheme. Here, the farmer doesn’t have to worry that he won’t be able to find a baler
6 https://www.vandenborneaardappelen.com/ 7 Servitization in agriculture
to rent when the next season starts. And they don’t need to make payments between seasons – payments will start again when the season starts, and income is generated. It helps protect farmers’ cash flow and ensures enough financial liquidity to run their farm.
Improves financial and planning security Farming can be a very stressful job because of the unpredictable conditions farmers have to deal with, including unforeseen machinery breakdown. Servitization and its full-service solutions can bring predictability and security to financing and operational planning. A transparent, fixed, single charge for agricultural equipment and supporting services provides this security. Farmers get everything they need around their agricultural equipment – at one rate, every month, so they always know the full amount they will need to pay. But Servitization can do much more than that.
Improves peace of mind Servitization also helps farmers get better service from their dealerships to improve planning security. A servitized service and maintenance contract could include remote equipment monitoring and inspection from a trusted dealer. For example with activated Valtra Connect7, if the tractor transmits a fault code, the service technician is notified automatically at the same time. Using a fault detection tool, the service technician can review the tractor’s performance data leading up to the fault and in many cases repair the fault or cancel the fault code, also remotely. Farmers would receive efficient service and maintenance for their equipment, exactly when they need it. Or if a tractor breaks down, a special service package like Fendt Care Platinum can guarantee that operations will not be disrupted for more than 24 hours. If the machine is not repaired by then, farmers will be provided with a replacement machine or – in worst case - financial compensation8. This combination of equipment and services would truly increase farmers’ peace-of-mind.
Shifting investment budgets to (new) flexible financing structures “AGCO has a proud heritage of To recap, a servitized solution: assisting farmers through high tech solutions. By combining these • Lowers investment barriers and shortens high-tech solutions with service payback cycles innovations, AGCO enables farmers • Helps farmers become a technology to deeply focus on their core activity: frontrunner and attract new highly skilled Agriculture. Together with our trusted employees joint-venture partner AGCO Finance, • Makes equipment expenses more stable we offer machine, agronomy and and predictable, with no more unexpected financial services out of one hand, surprises which equips farmers to fully seize the • Makes operational planning go more opportunities of modern farming” smoothly to increase peace of mind for farmers Torsten Dehner, Vice President Global Parts and EME Parts & Services, AGCO International GmbH These developments and potential benefits are now creating a ‘slow and steady’ shift from owning to using. It is already quite common among professional agricultural contractors, as they replace equipment and look for the latest technological features with the best performance for their fleet. The increasing consolidation and professionalization of farms is also shifting the focus from equipment costs to the total cost of owning and operating a fleet. This includes issues such as downtime, maintenance and repair costs, cash flow impact and more.
7 https://valtrateam.valtra.com/en/tractors/valtra-connect-communicates-between-the-tractor-owner-and-service/
8 https://www.fendt.com/int/fendt-connected-services 8 Servitization in agriculture
Practical benefits and use cases of Servitization for farmers
Some farmers may at first be sceptical about Servitization. They may hesitate to move away In 2018, AGCO and AGCO from traditional product ownership. But there Finance ran a survey with 84 are clear benefits to using a product instead of farmers and contractors about owning a product – and the responsibilities and their equipment finance needs. risks that come along with it. Let’s look at four The quotes in the following of them. sections come from this survey.
Focus on your field The first key benefit for farmers is an increased focus on core activities. Let’s say you operate a dairy farm. You want to produce milk of the highest quality. You want to treat your cattle in the best way possible. And you want to produce or buy the best quality food for your livestock. Your core business is not to look for agricultural equipment, compare prices, worry about downtime and spend hours on maintenance and service. Here’s where a servitized offer from your financial partner, in cooperation with your dealer or brand of choice, can help. They can offer full-service packages for agricultural machines, including service and maintenance contracts, uptime maximization for equipment, insurance and warranty, and other complementary services. “It would take some of the load off our shoulders. By ‘load’ I mean Imagine a dealer that can log-in to your time spent in maintenance, costs equipment and read data remotely, lowering of maintenance, etc. I would both time and costs for service and maintenance not have to worry about the and even stopping problems before they occur. ‘What if?’ instances of vehicle Or imagine guaranteed access to fully functional breakdowns or maintenance equipment when the season starts – with no costs.” need to worry about service and maintenance or payments in between seasons when incomes Farmer and AGCO Finance customer from are low. What if you had a guarantee that if your the United Kingdom. machine breaks down, it will be fixed, or you will get a temporary replacement within 24 hours. And otherwise you will receive financial compensation for your ‘down hours’. These types of ‘peace-of-mind’ packages let you focus on what’s really important.
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No more financial or planning surprises A second, closely-related benefit is the elimination of financial surprises. Owning machinery brings the huge risk of unknown expenses. If machinery breaks down during the peak harvesting season, you may have to spend large amounts of money for fast service or repair. You might also suffer losses from an interrupted harvest. Servitization significantly lowers this risk by providing supporting services such as the highest quality maintenance and repair using original spare parts from a reliable partner. Or free replacement equipment. All without incurring unplanned costs. Knowing the full costs of using equipment – transparent “I had to pay €1,400 for the and fixed for the entire contract – allows you to last service. That’s a lot at once. make more reliable budgets and clearly estimate It would have been good to the costs and benefits. integrate this amount into the finance offer. In all cases, we need to maintain and service the machines, so a full-service offer would allow me not to care about it anymore.”
Farmer and AGCO Finance customer from France.
Access to state-of-the-art machinery The third benefit of Servitization is access to state-of-the-art machinery for the highest possible efficiency and output. The increasing pace of technology means that the life cycle of many products is becoming shorter. And keeping up with the latest improvements is expensive. This can lead to a gap – large farms with large investment budgets can buy the latest “This could be interesting in the machinery, while smaller farms lose out. But future as machines get more they don’t have to: Servitization makes state- and more expensive. Typically, of-the-art machinery affordable for all farmers, it is hard to buy a lead tractor. by breaking down the equipment costs into a In addition, even if you can buy tailored payment plan. And rent-to-try schemes it, you need to be able to use it. are an affordable way to test machinery in real- Owning a machine means that life conditions – without committing investment it is costly, even if it is not in use. budgets. This way, both small and large farmers This [full-service] solution could be can benefit from the efficiency and increased interesting to a farmer who has output of new equipment. issues in getting payback for his machines”.
Farmer from France.
10 Increased flexibility The fourth benefit of Servitization is increased flexibility. Traditional ownership means that farmers are tied to a piece of equipment for years. Farmers need to reflect this on their balance sheet, while dealing with depreciation. This means that switching to a different machine – or even a different brand – can raise costs and hamper cash flow.
Servitized product offerings help. They make it easier to change machinery, providers, service levels and even payment schedules. They have shorter contract terms, and can include pay-per- use options. They can also match equipment payments to seasonal revenue, allowing you to adjust equipment needs for steadier cashflow. And for larger fleets, they can provide you with the tools to monitor and manage all of your equipment in one single place, regardless of the type or brand. With Next Machine Management, farmers can process and document all their “If you use some specific equipment data from different manufacturers, machines only 15 days a year, [a and have a central management platform9. This servitized offer] does represent gives farmers the flexibility to manage their fleet a convenient solution, as you as efficiently as possible. don’t have to buy it. For instance, I asked my dealer if I could rent a square baler but it wasn’t possible, so I had to buy it while I only needed very limited usage”.
Farmer and AGCO Finance customer from France.
9 https://www.nextfarming.com/products/next-farming-live/next-machine-management-live/ 11 11 Servitization in agriculture
How to take advantage of Servitization
It’s clear that Servitization will play a key role in helping farmers succeed in the future. Here are a few tips to help you take advantage of it for your farming enterprise.
Shift your mindset At AGCO Finance, we are seeing a real shift “I usually finance my tractors. It in mindset. More and more farmers now just makes sense under the cur- want to ‘buy what appreciates and lease what rent financing conditions” depreciates’. They want to benefit from new equipment that provides efficiency gains, that is Jacob van den Borne cost-effective and that gets the job done more Van den Borne Potatoes, easily. They don’t need to own the equipment – Reusel, Netherlands which might become outdated – at the end of the contract. Instead, they want to move on to the next best available equipment and finance that. As potato farmer Jacob van den Borne says: “Precision technology can support your daily farming business and help you make better decisions. But it does not do the farming for you.” In fact, farming is more about human intuition and experience. The farmers who can shift their mindset based on the changes going on around them will be able to open new opportunities for their business.
Think beyond equipment to services that will improve your business More farmers are now buying the value-added services offered by dealers and manufacturers. This includes value-added services for equipment (such as auto-guidance systems, GPS location services, and so on), as well as for financial solutions (such as including service and maintenance contracts, insurance and/or extended warranties). Why? Because it allows them to choose a tailored, pre-defined offering. Yes, it might require a little extra strategic planning. But it also adds clarity and predictability to their total cost of operation. Our advice is to ask yourself what data or technology could help you run your business better and look for creative ways to finance it with your partners.
Reduce your business risk As farmers demand it, we are expecting bundled solutions of products and services that enable them to benefit from the usage of agricultural equipment while reducing the risks of ownership – think for instance about the risk of missing out on productivity gains from new state-of-the-art technology. Or meeting the latest emission regulations. New Smart Farming technologies, for instance, have the potential to put you at the forefront of farming. However, investing in these technologies is often costly. New financing solutions, such as full-service leases, makes these investments more affordable and reduce the business risk for farmers.
Match payments to seasonal cashflows
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More farmers are going to start demanding the lower risks that new, innovative financing and sales solutions offer. These can go as far as pay-per-use models that allow customers to match payments with the output. Another example are customized payment plans that match the revenue stream, like the ones offered by ACGO Finance10. This will reduce pressure on liquidity and help businesses focus on strategic investments rather than cash for operational activities. Any piece of equipment that is standing still for 3 months or more, is a good contender for this sort of approach.
Ready to put Servitization to work for your farm? • Thinking about minimizing or avoiding unexpected impact on your budget from equipment breakdowns and other issues? • Do you want to know full costs of your equipment – per month, per hour - everything included? • Looking for ways to better match your equipment expenses with the seasonal cashflows of your business? • Interested in the opportunity to test new equipment under real conditions on your farm – without immediately committing to buying it? • Trying to benefit from new, smart technologies that can have an immediate impact on your bottom line? • Do you want spend more of your valuable time on producing great crops, instead of worrying about your equipment?
Whatever you decide, we know one thing for sure: Servitization has the potential to make a real impact on your daily business of running a farm and producing a great quality product. It provides:
• More business flexibility • Access to state-of-the-art equipment and services • No financial and planning surprises • Focus on your field
Want to know more? If you answered yes to any of these questions, you should get in contact with your equipment dealer or your local AGCO Finance representative (find the representative nearest you via our website: www.agcofinance.com). There are a wide variety of servitized solutions available today that can address your needs. And it’s not one-size-fits-all. You are in the driver’s seat. Think about what services and contract conditions would really benefit your business. You want to start slow and try one of the benefits? Or do you want to go full-throttle and transform your equipment fleet and how you manage it? Either way, the wide variety of available services allows you to cater any servitized contract to your requirements.
10 https://www.agcofinance.com/en/finance-solutions/overview
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In the coming years, we expect to see a need for more bundled “finance contracts in the market, including services like repair and maintenance, extended warranty and all kinds of connected and data services for the contracts. Next to this trend, we see a growing market need in the agricultural segment for more and more innovative finance solutions like usage-based and rental products“ Rob van den Heuvel Managing Director EME, AGCO Finance
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Growth through trusted partnership
AGCO Finance is a global provider of financing solutions for agri- cultural equipment. The company has its origins in the UK, where it was founded in 1990 as a joint venture between global financial solutions partner DLL and AGCO, one of the global leaders in the design, manufacturing and distribution of agricultural equipment. That makes AGCO Finance a reliable financing company and an ex- perienced expert for agriculture business. For 30 years, we have been providing tailor-made and sustainable products to flexibly finance the high-performance equipment of our well-known brands including Fendt, Massey Ferguson and Valtra.
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AGCO Finance B.V. Vestdijk 51 Postbus 652 5600 AR Eindhoven Nederland
For more information please contact your AGCO Finance representa- tive or email us: [email protected]. To learn more about AGCO Finance visit our website agcofinance.com or follow us on LinkedIn