Rather than just competing on price or on products, some companies in China are setting themselves apart from local and foreign competitors by providing value-added service offerings, revealed a recent Service Parts Logistics (SPL) conference.

The 2nd annual SPL conference, organised by the China Supply Chain Council (CSCC) and co-sponsored by Barkawi Management Consulting and Arvato Logistics, featured key global and local experts in after-sales service and spare parts logistics.

"There are a lot of differences between Europe and Asia," said Peter Klug of Briggs and Stratton, a small engine maker that has been negotiating its way through the Chinese market for several years. "The European strategy is to move from controlled distribution to a more multipoint distribution system. The priority is on safety stock and inventory allocation. In Asia, the priority is on order lead times and range of availability.

"In Asia we stay competitive by overstuffing our supply chain," said Klug, "which means higher costs but serves the function of offering higher levels of service."

Andreas Baader, managing partner at Barkawi, a global leader in after-sales service consulting, noted that the automotive sector is by far the largest market for after-sales service. With annual growth at nine percent per annum, he estimates the global market for after-sales service will reach close to US$3 trillion by 2010.

With profit margins in after-sales organisations typically three to five times higher than in product sales, this brings both opportunity and challenge.

"In the automotive world, volumes are growing as is complexity," said Baader. "Today 30-40 percent of the value of components in the car are electronic rather than mechanical and by 2012 this will increase to 50-60 percent.

"What this means is that supply chains for high-tech, computer and automotive components will become integrated, he added. "We expect more collaboration to occur since inventories to fulfill service will become less and less affordable and companies will look for ways to share the burden with their partners."

Baader said: "One of the key logistics challenges in China is that Chinese consumers have such high service expectations due to the availability of cheap labour, meaning that service networks in China are very dense. With price points in China much lower than in mature markets, this brings challenges for OEMs (original equipment manufacturers).

"To ensure success in your China supply chain, you need to have a complete offering, including parts and value-added service for clients," said Baader.

The increased focus on service in China makes sense in light of a report by Oliver Wyman Consulting, which notes that in the developing stages of auto markets, profits are primarily from sales of cars, while as the market matures, car prices drop and the focus of profits shift to after-market service. Auto sales figures in China have shown a steady decline in prices, which indicates the market is maturing quickly.

The idea of value-added services is to understand the customer's needs. Rather than just selling a machine companies can sell labour, technicians, operators as well as consumables and business advice. The key is to understand and support the customer's business through providing additional services.

Many companies have already seen the light that service is the key differentiator in a market where foreign companies are struggling to compete with both each other and with their Chinese counterparts, who don't always follow the rules. Rather than trying to control intellectual property, several foreign companies noted, they have shifted to focusing on offering value-added service to win and keep customers.