Aftermarket service gaps threaten competitiveness of Japanese manufacturers

Service operations can generate higher margins and stable revenue, but firms underperform globally.

Japanese manufacturers need to modernise their aftermarket service operations to boost revenue and competitiveness, according to a February McKinsey & Company report, highlighting gaps in current service strategies and practical steps to improve performance.

Aftermarket services that include parts supply, maintenance, digital support, and lifecycle solutions, now generate more stable revenue than product sales in many industries.

Leading companies typically earn around 47% of revenue from services, with profit margins up to four times higher than new equipment sales.

Firms with strong service operations also see nearly double the shareholder returns of peers with weaker services.

McKinsey analysed 109 large Japanese manufacturers across seven sectors, including automotive, heavy machinery, and medical technology.

Only 28% track service profit and loss separately, and average service revenue lags global peers by 28 percentage points, indicating untapped growth potential.

The report highlights three focus areas, namely commercial strategy, service delivery, and customer engagement.

Using digital tools and predictive maintenance can reduce service demand by 5% to 10% and improve technician productivity by 10% to 30%, whilst demand-based inventory planning can cut spare-parts needs by 10% to 20%.

Adoption of new business models, including equipment-as-a-service, subscriptions, and circular economy solutions, can extend customer lifetime value.

McKinsey concludes that Japanese manufacturers can leverage their reputation for quality but must overcome operational bottlenecks and adopt digital and AI tools.

Shifting from reactive to proactive, data-driven service models can strengthen profitability and expand global market reach, the report says.