For some time now, Caterpillar has been looking for ways to counter the need to rely solely on sales of new equipment as a pathway to creating a stronger and more reliable revenue stream.
The diversification of its business model is particularly important for the company as there are indications that some of its major markets show signs of strain. Caterpillar noted in January that its profits this year would rise less than expected, in part because of slower sales in China, where it traditionally makes up 10% of its sales. CFO Andrew Bonfield has said that, “Parts and services are the area where we can actually reduce some of the cyclicality.” Thus, the company has taken a new path and by so doing is emulating auto makers and dealers who make up a hefty part of their profit by selling service agreements with the sale of their vehicles. Caterpillar has determined that it can connect the machinery that it sells to the cloud and alert miners and builders when they need a tune-up or a new tire. In this way, Caterpillar anticipates helping its customers to get more usability out of its equipment, particularly in the mining industry where the large mining trucks can cost more than a million dollars each. The company also expects that the monitoring services and the sales of parts and repairs will create a steady revenue stream to compensate for the up and down movement of sales of new equipment, where those sales tend to be prone to the vagaries of the commodity and building cycles. Caterpillar earned $54.7 billion in revenue last year, up from $38.5 billion in 2016, but down from an all-time high of $65.88 a few years earlier. It was at one of its lowest points during the global financial crisis of 2009, garnering $32.5 billion. Analysts estimate that 25-30% of equipment revenue comes from the sale of parts. The connectivity offerings that it has begun providing are relatively inexpensive, per machine – ranging around $30. per month. Caterpillar has noted that it had 700,000 machines connected to its cloud services as of last summer. In addition to the new machines that come complete with cloud-enabled sensors that feed data to the company, Caterpillar is also making replacement parts that can also provide data feeds to the company, alerting the machinery operators or the company of the need for replacements or maintenance. For example, there is a $50 engine oil cap that can alert operators when more fluid is needed. Caterpillar has noted that, previously, everything in the field where the equipment was operating was a “reactive process” – when it broke, the new part was ordered and the old one replaced. Now, the company says, “We’re going to be able to predict what’s going to happen.” Caterpillar is counting on its dealers to make that sales pitch. One of the largest Caterpillar dealerships, Finning International, says that it intends to have 80% of the machinery that it has sold across Canada, the U.K., and South America connected to the company’s cloud services by year end. In addition to providing a new revenue stream, the cloud-enabled monitoring systems have allowed Finning to troubleshoot some equipment problems remotely, as opposed to the earlier need for sending a technician to a customer’s work site. So, in actuality, the monitoring process will likely turn out to be a cost-savings measure for customers in many instances – less costs expended for repair and less down-time of machinery waiting for parts.
Caterpillar has hit upon a realistic version of ALL THE MOVING PARTS, by ensuring that all of those parts – both in the company and in the products that it sells – work together.