Data-driven \Asset as a Service\ business models are increasingly finding their way into the manufacturing industry and starting to disrupt the financial value chain. What role will the tokenization of industrial goods play in the future?
Tokenization of industrial goods such as tractors opens up new possibilities.
Flexible usage and billing models are a key trend of digitization. Hence, it comes as no surprise that they also becoming increasingly important in the manufacturing industry. More and more companies are no longer buying capital goods, opting instead to pay for their use within the framework of pay-per-use or subscription models. This is made possible by the use of IoT sensors that provide accurate usage data for billing.
Manufacturers of capital goods can tap into new revenue sources and customer segments, among other things, by developing corresponding \asset-as-a-service\ offerings. However, these benefit-based business models imply that parts of the capital goods produced are no longer sold, remaining on the manufacturers\’ balance sheets. This extension of the balance sheet leads to capital requirements that have to be covered by equity or debt capital.
\Asset-as-a-service” business models lead to capital requirements
The Austrian tractor manufacturer Lindner has recognized the opportunities of such a benefit- or data-based business model and, in addition to its sales offering, has built up a rental fleet of more than 70 vehicles for its customers. Telemetry units installed in the vehicles collect a wide variety of usage data and send it to Cash on Ledger.
The Cologne-based startup has developed a fully automated asset lifecycle management system that enables billing, payment, and accounting to run fully autonomously without human intervention. The resulting data streams form the basis for cash flow and return considerations as well as corresponding risk assessments and residual value calculations for each vehicle. At the same time, this data can form the basis for the necessary refinancing, both by means of debt and equity.
Refinancing via pay-per-use credits
Based on the continuously collected usage data, refinancing can be done via a data-based investment loan, also known as a pay-per-use loan. The repayment amount of such a loan is flexibly determined by the utilization of the capital goods: at times of lower utilization and thus lower sales, the financing installment to be paid is reduced by a certain extent, thus conserving liquidity. If capacity utilization rises again, the financing rate is again made payable in full or in excess. The utilization data required for calculating the financing rate must be agreed in advance and their – ideally automated – transmission to the bank must be ensured.
Refinancing via special purpose vehicles (\SPV\)
Instead of taking out bank loans, however, a new asset class can also be formed on the basis of the utilization data, which can subsequently be used for refinancing.
On the one hand, refinancing could be carried out by means of SPV structures. The capital goods, i.e. the tractors, are transferred to the fixed assets of the SPV, and the purchase price is refinanced on the capital market, for example, by issuing securities. The disadvantages of SPV structures are the enormous amount of work involved, the complicated construction, and the associated costs. They are therefore only economically viable when there are high capital requirements and a long investment period. This structure is generally aimed at large institutional investors. For private investors, these constructs are usually difficult to access, among other things, due to minimum investment amounts.
Refinancing via tokenization of industrial assets
Tokenization can be an alternative to securitization, where appropriate. According to the German Federal Financial Supervisory Authority, this is \the digitized representation of an (asset) value, including the rights and obligations contained in this value, as well as its transferability made possible by this.\
In this case, the assets of the single-purpose company would be digitally mapped in the form of tokens on the blockchain, with each token representing a company share and a claim to a portion of the cash flow of the underlying assets. Tokens can be transferred to another party at any time, digitally and without intermediaries, and the transaction history and resulting ownership are immutably stored on the blockchain. Distributions to shareholders can be automated using smart contracts.
An advantage of tokenization is that the investment amount can be as small as desired. This removal of minimum investment requirements means that different, and new investor classes, such as private investors, can be addressed. In addition, token investments are not necessarily associated with a long holding period due to their uncomplicated tradability, allowing for more flexibility and improved diversification.
However, a highly fractionalized investment could also be associated with an increased sales effort, as significantly more individual investors have to be approached and convinced of the profitability of the investment, as well as demonstrably educated in the case of private investors. And while the settlement and distribution infrastructures, as well as the regulatory framework, are already in place for established financing instruments such as asset-backed securities, the establishment of an ecosystem in terms of processes, structures, and standards for tokenization are still in their infancy.
Usage data enables new forms of refinancing for industrial goods
Companies and banks will soon be able to develop new, data-based financing approaches and business models through the tokenization of industrial goods. At the same time, new asset classes and thus opportunities for portfolio diversification are opening up for an expanded circle of investors.
However, there are still some prerequisites to be met before the benefits associated with tokenization can be realized. These include, for example, the establishment of a blockchain-based settlement infrastructure, the creation of suitable regulatory frameworks, and the development of a comprehensive understanding of tokenization and its opportunities and risks among all stakeholders. Pay-per-use loans, on the other hand, as well as the issuance of asset-backed securities, data-based refinancing options are already ready for use today.
Dr. Philipp Sandner, Head of Frankfurt School Blockchain Center (FSBC) at Frankfurt School of Finance & Management. Maximilian Forster, Co-Founder CashOnLedger Technologies GmbH and member of many boards and associations. Lukas Schmidt, SVP Strategy & Business Development CashOnLedger with over 8 years of experience in banking. Katharina Schott, Managing Consultant at the interface between IT and business, DLT Talent of the Frankfurt School Blockchain Center.