Caterpillar CEO - ‘We have to lead digital. By the summer every machine will be connected.’

Profile picture for user ddpreez By Derek du Preez April 24, 2016
Caterpillar is the world’s leading provider of machinery and after another set of poor results, the company is looking to smart data and connected products to drive growth.

One of the world’s largest manufacturers of machinery and engines, Caterpillar, has delivered another set of disappointing results and has lowered its expectations for the year ahead.

The company is now looking towards digital and data to drive growth through the company, although CEO Dough Oberhelman admits that some of its customers will need a helping hand in understanding what the benefits are to their business.

It’s arguable that Caterpillar has been slow to realise the benefits of connected assets and machinery, given that other companies in similar industries have been seeking to address the problem for a number of years now.

However, Caterpillar holds an advantage in the Internet-of-Things space, as I believe that it is the companies that own/manufacture the assets (such as the machinery) that are going to win big in the connected and data driven world.

But let’s first deal with the results, which were out late last week. Caterpillar said that its first quarter 2016 sales and revenues were $9.5 billion, down from $12.7 billion in the first quarter of 2015. Equally, first quarter profit per share for 2016 was $0.46, down from a profit of $2.03 per share in the first quarter of 2015.

Caterpillar also lowered the midpoint of the outlook for 2016 sales and revenues about 2 percent. It said that sales and revenues in 2016 are expected to be in the range of $40 to $42 billion with a midpoint of $41 billion. The previous midpoint was expected to be $42 billion.

The company has blamed lower transportation sales, lower mining sales and weaker price realization.

CEO Oberhelman said that despite the disappointing numbers, the company would be focusing on things it can control. At the centre of this will be a data and digital resurgence inside of Caterpillar. Oberhelman also said that everything Caterpillar manufacture will eventually be connected across one core data platform. He said:

While first-quarter results were about as we expected, sales and profit were well below the first quarter of 2015. Sales declined across the company with substantial reductions in construction, oil and gas, mining and rail. While many of the industries we serve are challenged, we remain focused on what we can control: the quality of our products, our market position, safety in our facilities and continued restructuring and cost reduction.

While many of the industries we serve are challenged today, we’re looking ahead and investing for the future.

Our digital strategy is an exciting investment for the long term. We’re hard at work, inside Caterpillar and with our digital partners, developing the data architecture and applications that will make our products smarter and help our customers improve productivity and safety. Our goal is to help customers be more productive, better manage their fleets and make more money with Caterpillar than they could with our competitors.

Our approximately 400,000 (and growing) connected assets mean entire fleets and job sites – from machines to tablets to drones – will eventually share data on one common technology platform in the age of smart iron. One thing that I am certain of is that it’s times like these when the Caterpillar team demonstrates the innovation and ambition to be the leader in all we do.

The Age of Smart Iron

As I noted above, Caterpillar has been somewhat slow to realise it could hold a competitive advantage in the Internet-of-Things space within its market. Other manufacturers of expensive assets (cars, commercial printers, industrial goods) have realised that because they own the assets, they can easily connect them up, build a data platform and sell a serviceable product, as opposed to an item you just purchase once.

Caterpillar could, I’m sure, also find interesting ways to monetise the data it held on all of its customers activities across a variety of markets, once it shifted towards connected inventory.

It seems that the penny has now dropped internally at the company, with Caterpillar CEO Oberhelman telling investors that all products will soon be connected up. He said:

We intend to be the leader here in terms of asset management, product health, productivity, safety, sustainability and predictive analytics, which is coming.

Today, we've got 400,000 connected assets and growing. By this summer, every one of our machines will come off the line being able to be connected and provide some kind of feedback in operational productivity to the owner, to the dealer and to us, where improvements down the road the idea being to get to a point where we can show the customer on his iPhone everything going on with his machine, his fleet, its health, its run rate, its productivity and so on.

And we're – we'll be very close to that. We've got over 100 customers on an experimental basis with that right now. Several dealers participating, and a lot of pull from the marketplace for this, which is quite exciting.”

Bauma 2016

Caterpillar attended Bauma in Munich this month, which is the world’s largest trade show for the construction, building and mining industries, to showcase its commitment to connected assets and the use of data to drive productivity for its customers.

It took the opportunity to put technology and data at the centre of what it does, in an attempt to highlight it’s commitment to being digital-centric. Caterpillar said that the next three years are going to be critical to its digital journey, despite some of its customers not yet realising the benefits to be gained.

George Taylor, Caterpillar's Marketing & Digital Division vice president, said that Caterpillar needed consider how the likes of Amazon impacted its business. He said:

I think digital is important, customers are still trying to understand what that means. But they see how it impacts their lives in the B2C world and they are trying to figure out how they bring this together in their world to drive productivity, to improve safety, improve sustainability. It’s a bit of a challenge for them, because they are just starting to visualise what the impact of digital is to their business.

So Caterpillar is really a customer experience company and in partnership with our dealers for the past 90 years we have delivered superior customer experiences. And I think with the world changing and evolving, where the most trusted brand in the world today is Amazon, it just speaks to the need to increasingly focus on digital aspects of business relationships and financial relationships. I think it really is driving us towards the marriage of silicon and steel, diesel and data. And really delivering insights to customers that improve their ability to drive productivity.

Equally, CEO Oberhelman said that Caterpillar had no choice but to be the leader in digital in its industry.

He said at the event:

I walked around this morning and had a look at the competition and we are presenting something very much different from everyone else. Our focus on the technology has come a long way from three years ago. Three years from now it will only be technology that we will be talking about. I make a comparison to the iPad with our industry.

The iPad is coming up on 10 years old, imagine the first day that people received their iPad. I remember when I first got mine and stumbled around with it. Then think about three years later and six years later how the world changed. That’s what we are going to do and we are going to lead our industry. There is so much more coming. I think we are on the verge of this big breakthrough and Caterpillar will be in the lead.

We have to lead digital. It will be the only way our customers act in a few years. Today, let’s face it, there are a fair number of our customers that aren’t into digital. We’ve got to be able to talk to them as well. We have got to push the envelope and we have got to drive for more digitisation, because it leads to owning lower operating costs. As long as we can do that we win.

My take

Slow to move, but the realisation that data could be central to their business is good. Let’s see what happens over the next three years…