Caterpillar Digs for New Services Revenue -- Update
08 April 2019 - 4:41PM
Dow Jones News
By Austen Hufford
Caterpillar Inc. wants to steady its boom-and-bust business with
more sales of parts and repairs.
To drum up the new revenue, Caterpillar is connecting machinery
to the cloud and alerting miners and builders when they need a
tuneup or a new tire. Caterpillar has said that helps customers get
the most out of equipment like its huge mining trucks that can cost
more than a million dollars.
Caterpillar executives also hope that monitoring service and the
added sales of parts and repairs that it generates will create a
steadier revenue stream than sales of new equipment that tend to
surge and sink along commodity and building cycles.
Diversifying its business is particularly important for
Caterpillar as some of its major markets show signs of strain.
Caterpillar said in January that its profit this year would rise
less than expected in part because of slower sales in China, where
it makes about 10% of its sales. Other U.S. manufacturers are also
reporting lower output as economic growth slows in many parts of
the world.
"Parts and services are the area where we can actually reduce
some of the cyclicality," Chief Financial Officer Andrew Bonfield
said last month. He said Caterpillar should emulate car makers and
dealers that sell service agreements along with their vehicles.
Peoria, Ill.-based Caterpillar earned $54.7 billion in revenue
last year, up from $38.5 billion in 2016, during the commodity
bust, but down from an all-time high of $65.88 billion in 2012.
During the global financial crisis in 2009, Caterpillar brought in
$32.5 billion in revenue.
Caterpillar wouldn't say how much revenue it derives from sales
of parts and services, or provide a target for growing that
business. Industry analysts estimate that 25% to 30% of equipment
revenue comes from parts sales.
Tractor-maker Deere & Co., a Caterpillar competitor on
construction vehicles, has said about 20% of its product revenue
comes from the sale of parts.
Some of the connectivity offerings are as cheap as a cellphone
plan per machine, less than $30 a month. Many are offered free with
service agreements. Dealers typically bundle those subscriptions
with other monthly fees for maintenance and repairs based on how
many hours a piece of machinery is expected to operate. In some
regions, customers are able to get free fuel for two years on a new
piece of equipment if they sign up for the cloud-monitoring
service.
Caterpillar had 700,000 machines connected to its cloud services
last summer, up from 400,000 in 2016. In addition to new machines
bristling with cloud-enabled sensors, Caterpillar also is making
replacement parts that can feed data to the company, like a $50
engine-oil cap that alerts operators when more fluid is needed.
"Historically, everything was very reactive," Tom Bucklar, a
director in Caterpillar's digital unit, said on a company podcast
last year. "We are going to be able to predict what's going to
happen."
Caterpillar is counting on its dealers to make that sales
pitch.
Finning International Inc., Caterpillar's largest dealer, plans
to have 80% of the machinery it has sold across Canada, the U.K.
and South America connected to the company's cloud services by
year-end, up from 68% in November.
The cloud-enabled services system has generated sales and
allowed Finning to troubleshoot some equipment problems remotely
rather than send a technician to a customer's work site, said the
dealer's chief executive, L. Scott Thomson.
Some customers that are paying to have their equipment monitored
for faults said they aren't sure yet whether the added cost will be
offset by more efficient operations and fewer breakdowns.
Ebony Construction Co., a road-building company in Ohio,
recently connected its Caterpillar pavers and Kenworth trucks to a
cloud-monitoring system run by Verizon Communications Inc. Amy
Hall, Ebony's president, wants to use the system to monitor whether
her vehicles are idling wastefully.
"They tell you all these wonderful things," she said. "But how
does it really translate at the end of the day to making us safer
and more efficient?"
--Bob Tita contributed to this article.
Write to Austen Hufford at austen.hufford@wsj.com
(END) Dow Jones Newswires
April 08, 2019 10:26 ET (14:26 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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