CAT Caterpillar Inc

Monitoring cloud-connected machinery and parts sales seen as steadier revenue

By Austen Hufford 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (April 9, 2019).

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.

Deerfield, 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.

Corrections & Amplifications Caterpillar is based in Deerfield, Ill. An earlier version of this article incorrectly said it is based in Peoria, Ill. (April 8, 2019)

Write to Austen Hufford at austen.hufford@wsj.com

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April 09, 2019 02:47 ET (06:47 GMT)

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