Software isn’t eating Caterpillar’s world, just spicing it up

SUMMARY:

Is software eating the world? Heavy equipment maker Caterpillar is adding subscription services to connected products, but isn’t changing its core business

Caterpillar CAT Grade Control 3D 370pxIt often seems that the Internet of Things and driverless vehicles are a new thing. But a conversation with heavy equipment giant Caterpillar soon corrects such misconceptions.

The company started introducing telematics and autonomy into its products as long ago as the 1990s. Its self-driving dumpster trucks are an established feature with customers in the mining industry. Sensors in its products routinely collect and report back information for use in servicing and performance optimization. Software directs its earth-moving engines as they prepare construction sites around the world.

With connected products and intelligent operation a big part of its offering these days, Caterpillar almost seems to fulfil Marc Andreessen’s 2011 prediction that software is eating the world. But for all its usefulness, software isn’t eating up Caterpillar’s core heavy equipment business, points out Tom Bucklar, its Director of Innovation & Digital:

For us, digital is how we enable that customer and that industry that we already serve — versus, we’re gonna go try to build another business around software. We’re not a software company.

Our goal is to still be the leading manufacturer of earth-moving equipment and engines into the industries we serve. But we know that the only way to continue evolving and build more value around those products is these types of site-level systems and services … and so obviously it’s an expansion of what we do.

Connected products

That expansion is mostly driven through Cat Connect, a family of solutions that combine connected technologies and services with data from connected machines. It’s not only about increasing performance and uptime. By collecting data from sensors around a construction site and integrating into the customer’s other systems and processes, Cat Connect can contribute in fields such as safety, sustainability and productivity. Bucklar comments:

With having all of our machines connected, one of the things it’s allowed us to do is sit down with our customers and say, we’re going to create value around the machine.

We’re going to leverage digital technology and Cat Connect to make sure the machine has maximum uptime, maximum availability, maximum fuel efficiency and some of those things. But now all of a sudden we’re also going to help impact the customer’s job site because of the connectivity of the machine and the information off the machine.

Applying the technology in this way helps the customer “lean out” their processes, says Bucklar, by automating previously manual activities, such as the driverless dumpsters in the mining industry. Another example comes from the construction industry, which has used Caterpillar’s technology to eliminate the process of marking out a site with wooden stakes as a guide for operators when leveling the ground. Instead of having a survey crew go in and physically place thousands of wooden stakes, the site is now marked out virtually using GPS technology. It’s safer for the surveyors and makes the process more efficient, Bucklar explains:

Now the survey crew can stay away from the heavy equipment. They continue to do their validation and their quality prep — there’s still a role for them. But they’re off the job site, and we can grade 30% more efficiently. We can do it into dusk and even into dark, we don’t need line-of-sight to those stakes anymore.

So we invest in the digital technology to help that customer build the road faster. Nothing different than what we’ve done for 90 years, right? We maybe built a bigger machine, we maybe went from a dozer to a tractor-scraper, to an excavator and a loader — different product solutions to help build that road faster.

Digital’s just another extension for us to invest in to help build that road faster, more efficiently, and in a much safer manner.

Subscription services

These digital solutions are often sold on a subscription or pay-as-you-go basis, taking Caterpillar into the realms of the XaaS (everything-as-a-service) business model. But Caterpillar has no plans to start selling its heavy equipment bundled up into a subscription service, says Bucklar. Instead, the subscription services are sold alongside the equipment, through Caterpillar’s established dealer channel.

Our primary business model is not changing. Us building and selling earth-moving equipment or engines to a dealer channel [who sells] to a customer, that progression is not something that’s changing right now.

But that’s not to say some customers aren’t changing their own business models to embrace XaaS principles. Caterpillar has developed new finance and rental offerings to support those downstream requirements, without changing its own route to market, he explains.

We’ve had to create Cat Financial, for financial services, to provide options. We’ve created our Cat Rental services through our dealerships that provides different ways to acquire. And we do get into cases with a group called Job Site Solutions, where we start to sell more power by the hour and [by] outcome. We have dealers that work with customers to have more outcome-based contracts.

That independent dealer network, through which Caterpillar has traditionally sold its distinctive yellow CAT brand equipment, is where more innovative business models are most likely to arise, he suggests:

That’s been one of our biggest competitive advantages, to have a very strong, local-owned, localized channel that understands the customer, that can serve the customer, that can develop, quite frankly, innovative services based on customer needs in that region.

In digital, Cat Connect is what we’re taking through the dealers because we want to enable that dealership that really knows the customer better and lives with them everyday, to be able to have solutions to take to that customer and that region.

Caterpillar’s partnership with subscription management provider Zuora helps it support those offerings to the dealer channel, he adds.

We’re now to the point we have over half-a-million assets that are connected. We had a very manual process to go out and do the billing and invoicing for those telematic space subscriptions.

We’re rolling out to automate the process between us and our dealers, to be able to do the billing, subscription tracking, all the way through. The [Zuora] system has that flexibility and capability for us to leverage it for the relationship between CAT and the dealer, and then for the dealer to be able to take that out to their customer.

In the future, Bucklar sees an increasing role for analytics and machine learning in developing and enhancing services, with more and more data being collected not only from the machines themselves but also from their surroundings. Caterpillar also has a venture group that works with start-up companies and keeps an eye on innovation in the consumer world as well.

My take

Caterpillar’s story provides an important reality-check on the progress of subscription business models and the trend towards everything-as-a-service (XaaS).

For a manufacturer of substantial physical products like Caterpillar, there’s little benefit in turning the capital cost of the product into a subscription. But the utility and value of the product is considerably enhanced by collecting data from the device that can form the basis for delivering software-based services over its lifetime.

So Caterpillar is getting into the software business and XaaS delivery models, but only as a supplement to, not a replacement for, its traditional way of doing business.

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Image credit - CAT Grade Control 3D via Caterpillar

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