The Age of Smart Iron
Digital transformation is not typically associated with the construction industry. Think about the last time you walked past an active construction site. Most of the activity was probably centered around the heavy machinery performing rather basic functions such as digging holes or moving heavy objects from one place to another. Between all the dust in the air and the sheer physical nature of a construction site, it’s hard to imagine that this is a hotbed for a major digital transformation. When you think about leaders in the digital space, it may take a while before you come to a company that also happens to make excavators. The company driving digital transformation in an industry projected to surpass $250 billion by 2021  doesn’t provide a search engine or a social media platform. It makes big, yellow machinery (see Figure 1). Caterpillar (NYSE: CAT) is a $46 billion global leader in the manufacturing of construction and mining equipment  and they are fundamentally changing the way the construction (and mining) industry operates.
Caterpillar machines are extremely expensive, conservatively ranging from $100,000 to more than $5 million . However, the functions they perform are typically high-value activities whether it’s in construction or mining. The cost of a construction timeline delay is high and in mining, there is a direct cost resulting from the loss of production volume of the resource being mined. The lost production in mining has been estimated to be more than $180,000 per incident that causes a couple day delay . Spare parts are often kept on site in case of failures and if the failure were to be catastrophe (not fixable), then a replacement machine would have to be shipped to the site. Complicating this, mining operations especially are in remote locations that are not easily accessible. Consequently, downtime due to mechanical failures can be devastating. On the other hand, underutilized assets also represent a significant opportunity.
To better address the needs of its customer, Caterpillar has aggressively embraced digital technologies. In April 2016, Caterpillar announced their digital strategy which they dubbed, “The Age of Smart Iron.” This articulated Caterpillar’s commitment to become a leader in bringing digital solutions to their customers to improve productivity, efficiency and safety. They introduced a suite of hardware and software products, called Cat Connect Technology, designed to help customers achieve greater visibility (through data) into their machines to better anticipate maintenance needs and drive performance improvement. The ultimate vision is to bolster these software and service offerings and to have entire fleets of Caterpillar machines at a job site to be connected and sharing a single technology platform . From a business model perspective, Caterpillar is positioning themselves to not only sell equipment, but the software solutions and services that optimizes that equipment.
To deliver on this ambition and customer promise, Caterpillar has invested in partnering with companies like Trimble, a software developer, to accelerate the development of their digital solutions . They have also opened their first office in Chicago that will specifically house their Digital & Analytics team . These investments reflect the company’s recognition that to become a digital leader, they must operate differently including partnering with startups and innovators along with hiring different kinds of talent that are focused on building out their analytics, data and digital capabilities.
Caterpillar has positioned itself as a leader in the digital space. By connecting their machinery and collecting various kinds of data on machine health, usage and productivity, a significant opportunity has emerged. Going forward, I recommend the following:
- Continue to innovate and build out the connected ecosystem. As of 2014, only 15% to 18% of machines sold included any sort of digital monitoring system . Caterpillar should continue to leverage partnerships with digital technology innovators and aggressively increase the amount of their fleet that is connected to Cat Connect Technology.
- Pilot new business models. The digital transformation of Caterpillar’s fleet will enable new types of business models where the company may look more like a SaaS business than a manufacturer of equipment. Caterpillar should pilot new ways to engage with customers such as selling, for example, software service subscriptions that may include automatic maintenance or component orders and additional data that can directly impact productivity and/or cost.
- Explore additional data monetization opportunities. There will be ample opportunities to monetize collected data in nontraditional ways. It could also be used to forecast demand, reduce inventory and drive product development based on usage data. Further, all the data collected at construction sites will be very valuable to construction project managers as they monitor their progress. Lastly, the global construction and mining activity data would likely be valuable to other players in these value chains.
 Construction Equipment Market by Construction Equipment Type, Construction Application, Mining Equipment, by Mining Application, and Region (Asia-Pacific, North America, Europe, and ROW) – Global Trends and Forecast to 2021, Markets and Markets, July 2016.
 Caterpillar 2015 Year in Review (Annual Report)
 CatUsed.com, accessed November 16, 2016.
 Unplanned Downtime Causes & Costs for Surface Mining, Gates, https://www.gates.com/~/media/files/gates/industrial/power-transmission/infographics/gatescorporationunplanneddowntimecausesandcostssurfacemining.pdf, accessed November 16, 2016.
 Caterpillar Introduces “The Age of Smart Iron” – Digital Technology Designed to Transform Productivity, Efficiency and Safety on Job Sites, Caterpillar Press Release, April 2016.
 CAT and Trimble to strengthen mining technology collaboration, mining.com, Accessed November 17, 2016.
 Caterpillar expands digital operations with first permanent office in Chicago, JournalStar, Accessed November 17, 2016.
 Heavy-Machinery Makers Push Tracking Tools, Wall Street Journal, July 27, 2014.
Student comments on The Age of Smart Iron
The integration of digital and the construction industry is fascinating, and I completely agree that it opens up entirely new opportunities for organizations like Caterpillar. I am very curious to see how Caterpillar evolves its business model going forward, and if it adopts a strategy similar to that of General Electric, who has created an entire model around the collection of data itself. It will also be significant to see if Caterpillar will face any backlash from end users for collecting their data. I wonder if it begs the question of who ultimately owns the data that each purchased machine generates?