Disruption manifests itself in different forms. Traditionally, entrepreneurs come up with a business model, investors who see the potential fund the enterprise, and eventually it sees enough success to exit. The baton is then passed from private market investors to public market investors and/or large companies who want to acquire the disruptor because it represents a competitive threat (Unilever and Harry’s shave club) or provides bolt-on growth (Teradyne and Universal Robotics).
Talk about blue ocean total addressable market (TAM) all you want, but disruptive themes almost always benefit by displacing other offerings. For example, robotics process automation is a blue ocean total addressable market cannibalizing all the Mumbai white collar sweat shops where recipe-driven back office activities are quickly being replaced by algorithms. Uber impacts taxi drivers, Airbnb impacts hotel chains, and electric vehicles impact gas-powered ones. Understanding what a disruptive technology will displace helps us understand how rapidly they can create value and how it gets accrued.
Dull Dirty and Dangerous
You won’t find many activists complaining about a lack of female brick masons, one of the four job profiles with more than 99% male participation. It’s always the more desirable jobs people demand representation for, and ways to make a living that are dull, dirty, and dangerous seem most suited for men or machines. You’ll see less social pushback when these jobs get automated away, and labor shortages for unappealing jobs further underscore the need for automation. Heavy equipment is often used in industries that would belong to the “three ds,” so automating operations and maintenance would be an intuitive use case for today’s advanced technologies.
Heavy Equipment Autonomy
People love to complain about capitalism using smartphones powered by the sweat of mineral miners across this globe. Mining might be the most dirty and dangerous job out there, and probably dull if you’re one of the 13,500 continuous mining equipment operators making $57,120 a year on average. That translates to a run rate of about $771 million annually, but pales in comparison to how much money is spent on construction equipment operators. Around 466,900 workers earn $48,290 per year for a run rate of $22.5 billion. That’s a runner up to the 852,200 material moving machine operators who use equipment to transport objects for an average salary of $32.7 billion. All this amounts to a TAM of around $56 billion for any company that can automate the operation of heavy equipment.
Automating just 10% of all heavy equipment amounts to a $5.6 billion run rate which is an attractive opportunity for startups like Built Robotics. However, large equipment manufacturers are taking their own steps to enable autonomous equipment starting with mining trucks. The world’s two largest manufacturers of heavy equipment – Caterpillar (CAT) and Komatsu (6301 T) – have deployed 550 and 525 autonomous mining trucks respectively which command 87% market share for a market opportunity they expect to reach $12.5 billion by 2031 (up from $1.6 billion in 2021).
It’s not just labor savings that provide a return on investment for autonomy. Komatsu reports a “40% improvement in tire and brake life” while Cat reports “productivity improvements of up to 30% versus manned mining trucks.” ESG types will approve of Cat not recording a single lost time injury in 90 million miles driven. That’s according to an excellent article by Inside Unmanned Systems which lists a handful of companies working on aftermarket solutions along with the top equipment manufacturers as follows:
All of the large heavy equipment manufacturers above are likely to be monitoring the success of aftermarket solutions while developing their own internally. In addition to automation, many of these firms are moving in the direction of electrification which also appeals to mining firms that need to put a green spin on all that pollution they emit.
Heavy Equipment Electrification
The appeal of electrification will only persist if electric vehicles cost less to produce. Current demand seems to be driven by mining companies that are trying to appease a black box of inconsistent ESG rules that differ by provider and demonstrate no correlation. Investors of all political persuasions are now seeing how useless ESG actually is both in increasing performance (it doesn’t) and helping achieve its stated goals (it doesn’t). Electrification needs to stand on its own two feet by showing operators a lower cost of ownership. Under the ground, electric mining equipment offers a “cleaner, cooler (87% less heat), and more efficient alternative to diesel-powered mining” which reduces the need for ventilation infrastructure. But many remote mines may not lend themselves to electrical infrastructure, and emerging market operators may not care about much except reducing costs.
The benefits of electrification for heavy equipment manufactures seem marginal. Offering machinery that’s powered differently may involve swapping out machines powered by fossil fuels, but that’s just cannibalizing existing machine placements (unless they’re displacing competitors). Providing charging equipment and batteries creates possible recurring revenue services, but fleet won’t be replaced unless companies are guaranteed a reduction in total cost of ownership that results in an ROI within a reasonable time frame.
Whether heavy equipment is powered by electricity or diesel, it still needs to be maintained. That’s where digital twins can provide operators a bigger picture of how all their assets are performing.
Heavy Equipment and IoT
This theme might be the least compelling if we believe it primarily benefits equipment operators. IoT sensors mean that equipment operators can anticipate problems and reduce downtime while extending the life of their vehicles. In other words, proper maintenance increases the length of time between orders for equipment manufacturers. It’s clear how this might benefit operators, but how can the manufacturer make money on that? Offering maintenance-as-a-service would be the best way to capitalize on the efficiencies being created when digital twins are created from heavy equipment. Moving to fleet management then leads to more efficiencies which also allows autonomous vehicles to be more easily integrated into the mix.
Automation alone would be a reasonable enough thesis to believe that heavy equipment manufacturers will outperform other subsectors of the industrial industry. Our piece several years back on Mining Technologies For the Mines of the Future talked about how Komatsu’s AHS technology enables a single operator to command thirty trucks at a time. The real momentum for autonomy should be right around the corner as hardware costs decline and software continues eating the world.
Investing in Heavy Equipment
An article by the FT several years back talks about how Cathie Wood of ARK Invest “staked her faith in Japan’s ability to lead a tech-centric global industrial revolution. She has done this through a substantial investment in Komatsu.” Woods referred to the firm as a consistent pioneer that enables machines with “the kind of communications, data-gathering and data-processing tools that make their operations more efficient now and could ultimately lead to many of them becoming human-free.” Ultimately, Woods sees heavy equipment produced by Komatsu morphing into robots that move us towards constructions sites where dirty, dull, and dangerous jobs are far and few between. “Robotics, energy storage, artificial intelligence. Those are all being embraced by Japan,” she said, helping to explain why she’s bet so heavily on Komatsu.
ARK’s thesis holds water, and more alpha might be generated by investing in a market leader as opposed to buying shares of the The Industrial Select Sector SPDR Fund (XLI) which contains more than 300 constituents dabbling in everything from HR software to railroad cars. In the top ten holdings we see two of the world’s largest producers of heavy equipment – Caterpillar and John Deere.
For retail investors, we think Caterpillar offers a much more accessible, and possibly more beneficial, method of investing in heavy equipment. Most importantly, if this whole autonomy / electrification / IoT thing doesn’t work out, Caterpillar is a company you’d be happy to hold anyway. According to Statista, Cat was the leading construction manufacturer worldwide in 2022 with a 16% market share compared to Japan’s Komatsu ranked second with a market share of 10.7%. Further down the list you’ll find John Deere (DE), a company that offers exposure to agricultural equipment which is an interesting thesis on its own. Per The Fool, Deere projects that software subscriptions will make up 10% of its revenue by the end of the decade which represents 85% gross margins vs 25% for equipment.
In a coming piece, we’ll make a case for Caterpillar being the best way for retail investors to benefit from the impact of technology on heavy equipment.
Conclusion
Autonomy in heavy equipment seems like the biggest opportunity for equipment manufacturers who may start providing holistic solutions that reduce the need for $56 billion of operator salaries in the United States alone. Offering autonomous machines as a service would allow heavy equipment manufacturers to move towards more predictable recurring revenue streams which will be ascribed higher valuations. Using IoT sensors to maintain equipment should reduce downtime and create an additional service offering while it remains to be seen if electrification will prove to be more than a window dressing for mining firms to appease the ESG types.