STOCKHOLM: “Good enough” might not make for a marketing slogan, but some of Europe’s top engineering companies, which have made their reputation on the quality of their products, are hoping it will make for a profitable strategy.
That is largely because the ‘Goldilocks’ market for industrial equipment — not as pricy as these companies’ premium products nor as cheap as the often shoddy offering from budget manufacturers — accounts for a huge part of Chinese domestic demand and is also growing further afield, even in the developed economies of the West.
Those who see the potential include German engineer Siemens, which has addressed this segment with an entry-level product portfolio called SMART — simple, maintenance-friendly, affordable, reliable and timely to market.
“If you want to be the market leader, you need to be in this segment,” said Ronnie Leten, Chief Executive of Sweden’s Atlas Copco, the world’s top maker of air compressors, which can be used to fill gas cylinders or power pneumatic tools.
The lure is obvious. In, for example, the $22bn market for metal-cutting tools, where Swedish tooling and mining equipment maker Sandvik operates, about a third of the business is in the middle segment, it estimates.
And it’s a market with rare growth potential in a sluggish global economy.
“We are not doing this just to position ourselves right. It is also because this is going to be good business for us,” said Jonas Gustavsson, head of Sandvik Machining Solutions, which has lined up three main brands — Dormer, Carboloy and Pramet — for its push into the mid-market.
But with lower selling prices and fierce local competition, companies need to reconfigure their business models.
Sandvik created a separate organisation to drive the mid-market brands, and divorce them from the premium maker’s habit of making steadily more advanced products.
With tools based on existing technology from older premium product generations, Sandvik can limit research and development costs for its offering to a minimum, helping to keep its margins up. It also offers a slimmer product portfolio and sells solely through distributors, all helping keep a lid on costs.
For Sandvik, the difference between premium and mid-market products includes product endurance, surface treatment or temperature tolerance.
For SKF, which makes bearings used in jet engines, cars and wind turbines, mid-market versions would be suitable for items that don’t need to operate at such high speeds or where higher levels of noise and vibration are tolerated.
“It’s like going to a fast-food restaurant,” said SKF Chief Executive Tom Johnstone. “You still expect good food and good quality, but you don’t expect the same exotic quality in a pizza place as you would get in a Michelin star restaurant.”
For all, the appeal is not just market expansion. It also protects their premium products by creating a tougher market environment for - and giving them an opportunity to learn more about - their upcoming rivals. “One of the benefits we get is that it enables us to go head to head with some of these players and understand how they are developing,” said SKF’s Johnstone.
This is particularly important in China, which is moving up the quality ladder in the machinery market under the auspices of the government’s 12th five-year plan and as state-owned enterprises are restructured and privatised, improving the status of the private sector.
Reuters
