Podcast #83: A Veteran's Perspective on the Changing Role of OEMs

Good day everyone, and welcome to the latest Momenta podcast. My name is Leif Erikson, Insights partner here at Momenta, and our guest today is Alan Berger OEM CTO and business leader. Alan has over 25 years of international product development experience in the highway vehicle industry, including most recently as CTO at CNH Industrial. Prior to CNH he spent 9 years at Volvo Construction Equipment in progressive roles, and over the course of his career Alan has been at the frontlines as OEMs look to make their products smarter and deliver new levels of service.

Today we’re going to discuss what digital transformation means for machine builders, and how the next decade might play out. Thanks for joining us today Alan.

I’m really happy to be here Leif.

Let’s start by providing a little bit of professional background, how did you get into product development and service, and the off-road vehicle industry, and maybe tell us a little bit more about where the industry has come from, and where it sits today.

Yes, and I think conveniently enough my career arc and industry arc in terms of services and connectivity are quite inter-related. I came into the highway vehicle industry through CASE construction equipment, one of my earliest management roles, and the role was about bringing electronics into the construction equipment industry, just when electronics was flowing into the vehicle world, it was already certainly present in cars becoming more common in agricultural equipment, and then construction equipment kind of typically follows the technology.

Sorry to interrupt Alan, that was how many years ago when that process started?

That was in the late nineties. Very quickly from there we went from ‘Let’s start putting some electronics into these products’, to, ‘Facilitate certain functions on the product’, to, ‘What’s a technology road map?’ On the technology road map, we had connectivity, telematics, we could actually see some value in that, but we also at that very moment couldn’t see a way to do it in an economically viable way. So, we sat there and watched the economics for a few years, and finally found a partner that would work with us and could get enough volume leverage to get the cost picture right. So, we put together one of the very first fleet management systems, almost 20 years ago launching it.

From there I went to a few other places, but then came into the off-highway vehicle industry, and at that point we’d made the transition from OEM technologists understanding the technology, seeing the value and being able to explain it to a customer if you showed it to them, to customers starting to really see it, and start to pull the technology. That’s evolved from there into not just about managing the fleet, which was what these early systems were about, but into customer applications as well, in the most recent systems I’ve been involved in.

So that’s in the last few years, is that where we’ve got to at that point?

Yes, exactly.

I imagine the cost picture has changed dramatically over the years.

It has, as has the value picture. Early-on customers were skeptical, they could only see the value if you showed it to them, held their hand through it. But now, particularly when you get into helping them with the work they do, and not just with managing the fleet of vehicles, they have a much better picture value, and therefore can see their way to spending more on such systems.

Are companies in the industry charging customers for this additional value? Is that an up-charge, or is that part of the service contract, how does that work?

There’s a number of models out there, and it’s still very common that some level of service is provided for, 1, 2, 3 years with the product, as part of the cost to the product, and that’s typically done just to get the customers to start to use it and understand it, as we’re still at adoption curve. Typically, these add-on capabilities is more connected to your end application things that are charged for.

If you think about the industry as a whole, what would you say the percentage of customers are taking advantage of this just in general? Roughly speaking is it a quarter, is it a half, is it three-quarters, what percentage or portion of customers in this industry is taking advantage of the data, and the additional services that the data can provide?

I think it’s still relatively low, probably in the quarter, maybe at most half range, there’s still quite a bit to go in terms of adoption.

Very interesting, and so what would you say the next decade looks like for vehicle OEMs, and the broader ecosystem of partners, distributors, customers, and how do you see digital technology playing a role in these various sectors? Is there going to be some advertence or changes in the industry as a result of that? Will there be winners and losers? How do you see it playing out over the next decade?

One thing I think is important, this is an evolution. As I already mentioned, some degree systems and services have been around for 20-years already, and it’s still working its way up an adoption curve. One of the things about off-highway vehicle applications typically, it’s a fairly conservative industry. That said, even though it’s a bit of an evolution it doesn’t mean that there won’t be some fairly dramatical changes when you look at the end, they’re just going to come a little more slowly. Things I’m thinking about here include, a continued commoditization of the machinery itself.

To some degree these services can provide productivity benefits that are much greater than you can generate by improving the machinery itself, machinery is critical. One of the things about off-highway equipment in particular, and we’re talking mostly here agricultural equipment and construction equipment, is the physical machinery is needed to do the job, and there’s not really a substitute for that, for the most part, I’d say that’s 80 percent true.

We still live in a physical world, don’t we! That’s the reality.

Exactly, doing physical work you can’t just digitize that, even though you could evolve technologies behind that. So, it won’t go away, but if you can generate more productivity through the data-driven service, then the profits are going to flow to those that are creating those services, and away from the vehicles. This is not a theoretical business school discussion, it’s been happening, and there are already products in that industry that are commoditized.

That’s interesting, it seems to be common across a lot of industries. Do you see in this off-road vehicle industry, similar dynamics or similar scenarios that get talked about? I don’t think we’re there yet and say the airline industry where they talk about basically selling jet engines as power by the hour. Or, utilities where they talk about selling gas turbines in a power by the hour scenario. Is there a usage model that plays out at some point here?

Yes, the discussion I think is similar in off highway, the discussion there is, there are customers and OEMs experimenting a little bit with those. The capability is largely there, it shifts risk around, and it certainly impacts the capital structure of the industry significantly in terms of who owns the assets.

That’s maybe an evolving picture. That’s a good segue into defining the types of organizations that will do well. In your experience, what kind of organizations have responded well to the introduction, maybe both on the OEM side and the customer side, because I think you’ve sat in between that, to the thread of digital disruption, and which ones haven’t responded well in terms of characteristics, I’m not looking for companies, but the characteristics of organizations that do well, and those that don’t do well.

Exactly. One thing I think is important is, everyone in the industry I think has read The Innovator’s Dilemma, by Clayton M Christensen, and I know you talked about it on your last podcast; everyone knows about the risk of disruption, so I don’t think any major player in the value chain is not paying attention, and not trying to do something. That said, there are differences, the larger players are fully engaged, some of the smaller players are not as engaged. So, there is a distribution in terms of who is working harder, and who is just trying to play along I’d say. By working harder, I mean really trying to watch where they could be disrupted, where the value is moving, do they need to transform the business to follow that value.

That’s interesting, is working harder enough though? We see in other sectors, companies that have worked hard so to speak such as GE and others, investing in digital technology, and it hasn’t always gone the right way. Is that enough, or do companies also have to look at how their structure, and how they approach this whole arena of digital technology?

That’s a great point, and certainly there’s a degree of work harder, or work smarter, or maybe both. It’s not the case from my perspective that if you need to be completely vertical integrated, and build the entire digital platform yourself as a player somewhere in this value chain, what you need to do is figure out where value is moving, what is really going to drive productivity, or drive a close connection to places. Whereas an OEM, you’re already making most of your money, and you’re uniquely positioned to capture that value if you make the right moves and own those pieces. Then probably it’s better to go and acquire the other pieces if you can, from people that’s their lifeblood.

That’s a good point. I think there’s a tendency or a desire to own it all I guess, that’s one of the challenges, right? Do it all.

There can be, especially in the noise of everyone trying to find their place in the industry. There’s certainly a desire for control, and you do need the industry structure to shake itself out a little bit, which I think is really happening right now.

Yes, so we are going to see some structural changes, that’s interesting on an industry-wise basis. Do you think that companies themselves have to be structured differently to your reference to Clayton Christensen, and The Innovator’s Dilemma? Do traditional organisational structures support innovation? Can they support innovation, or do you have to approach innovation differently, and does that have an impact on how the organization is structured?

First, I want to expand the comment about structure, because I think a lot of people who hear that word ‘structure’, they get obsessed with who reports to who, and whilst that’s not unimportant, it’s one tool in terms of how the organization runs, so the organisational structure, the processes that people use in that organization, and the governance or the decision-making mechanism. Of those three I think the physical structure of who reports to who is probably the weakest of the tools.

If you look at that entire space, I think mostly if you look at the OEMs, you look at their larger suppliers, they’ve been doing innovation for a long time. So, they have some way to do that through their systems and things like that, so it’s not that they can’t innovate. But what the digital system and the connectivity brings is this connection from a vehicle which is where they’re used to innovating, to services via some sort of cellular or satellite connection something like that, in what sometimes is called offboard side of the system, is unique. These companies are not used to innovating there, into operating there, and not used to such a tight connection between those points.

So here I think companies are really struggling to find the right structure, and I actually don’t know if any of them have really found that correctly.

That’s probably true, at least in our experience across a range of industries. Let’s take a hypothetical company in this industry, one that is like most companies fairly rigid and change resistant. What is the first thing that needs to be done to make progress, and create a more agile culture, and what’s the second thing and so-on. So, in other words, from your perspective, what do companies have to do, what are the steps they need to take to get to a more agile culture?

The good thing about this kind of change is, it’s not really different from any other major change activity. I think the… we’ll call it standard science, behind change management does apply, which starts with creating that compelling vision, that need from the very top of the company. If the top of the company is not committed to this, it won’t happen, especially to the point I said just before where you need to create new pathways in the company that haven’t been there in really any industrial company.

So you need to do that, you need to create the need, you need to be able to explain to all of your stakeholders why things need to be different to the point we talked about earlier; I think this commoditization risk, and the value moving around in the value chain really creates that story for you. Then you really need to get some thought leaders that will buy into this, to quickly start demonstrating some success and show that something can be done, this company can succeed in a new space. Then leverage that, talk about that and leverage that into getting more of the organization a little more excited, and then get more successes, and build it up so you’re spiraling out into the broader part of the organization, getting everyone a little more onboard.

I think doing this all without being prescriptive about truly where you’re going, as I think you need significant agility to see what works, learn from it, and change as you go. That’s at least a much faster learning cycle than a typical industrial company is used to.

That’s interesting. There’s a professor collaborated with Clayton Christensen, Rita McGrath out of Columbia University, it talks about the concept of business leaders needing to embrace a concept of optionality. So, when a decision is made you need to be aware that there are other option there, there’s other strategies that may be better, you’re constantly having to think about that. I think that ties into what you’re saying, and it’s not necessarily a boil the ocean scenario, it’s an iterative thing.

Exactly, exactly, and it doesn’t mean you can’t use some of your traditional processes, but you shouldn’t over plan.

Good point. Let’s drill a little bit deeper into some of the technology aspects, specifically about data, and the role of date, different types of data. I think we conflate, or sometimes the outside world conflates the data that’s typically ingested by a Google, an Amazon, or a Facebook, versus the kind of data that we find in the industrial world. I think there’s a greater degree of diversity of types of data in the industrial world, and that creates its own challenges.

What are your thoughts, is one type of data more important than the other, connection data versus the maintenance history, or service history? And are there any issues in this industry with ownership of that data, because some of that data comes from the operators, the owner-operators, and some of it comes from the OEMs. So, who ultimately owns it, does it really matter, and how does that play out going forward?

Maybe I’ll work backwards here and talk about the ownership piece first. I think in the vehicle industry this is reasonably well settled at this point, it’s one of the few things that I think is stabilizing. Data is generated on a vehicle, or maybe by other systems that are connected into your system. This is the customer’s data, and it’s up to the customer to decide who has access to it. Typically, the customer is granting the service provider, we’ll say in this case the machine OEM, access to that data at least in aggregate in return for services. Part of those services is actually just creating a way to get to the data, so data travels from machines, typically through a cellular or satellite connection, into a cloud service somewhere, and present back to the customer with some processing, turning it from data information. So, generally they’re granting access to it in that process.

And going back to where you started, in terms of the types of data, importance of data, it really, I think depends on who you are. The way I look at is really three major categories, there’s a set of data that is about the machine itself, it’s health, and here the vehicle OEM is typically the one best positioned to transform that data into information, and inform the owner of maintenance needs, or possibly an impending repair.

There are three kinds of data, and this is mostly about where the equipment is, and maybe how is it being used, and this of course will be most interesting to the owner of the collection of vehicles, possibly the service providing the [23:14], typically dealerships. So, they can help find the vehicles, and maybe go plan that service, and do a service when they know the equipment is not going to be used, and where it is.

Then finally data about what the machine is doing, the operation it’s doing. So, the easiest example here maybe is in the agricultural space, this would be about how the vehicle is performing if you’re harvesting, what kinds of yields are you getting. If you’re planting, where did you plant, what did you plant? And that of course can then be combined with data from other sources, say satellite imaging or something like that, to help the farmer see how he’s doing, how his practices are working, and what needs attention.

So, they all have value, they’re all important at their own point in time, and to the right person.

Well, this has been great. Maybe just to wrap it up you could talk a little bit about where we go from here, how the different scenarios are playing out, so taking out your crystal ball again. And maybe even some of the characteristics of potential or hypothetical winners and losers, where are some of the scenarios going forward?

There’s a couple of different dimensions here that I like to think about. One, I think there’s an ongoing debate in the industry being played out, not necessarily discussed but played out, between open and closed platform models. You can think Apple versus Android, more or less.

Certain players in the industry are trying to be more open, which means they would allow customers more choice, maybe more third parties to connect into the system, and provide value in their own way, maybe bring in data, maybe just doing processing of the data that’s in the system; versus more closed solutions where the OEM controls exactly how that happens, and basically is the main interface and won’t allow a third-party to have its own interface, its own image and direct connection to the customer. So, I think that needs to play out.

I would tend to say open more likely to win here, but we’ll see. You certainly couldn’t count Apple out when you talk about that, but there’s different characteristics here than there is just in the cell phone world.

Yes, there’s certainly less of the consumer privacy issues, which Apple plays for sure. Finally, Alan, we love to end with getting your thoughts on good books to read, or other resources for our audience. So, anything that you’re reading now, and think is value in the context of business and digital technology?

Here I go down a different path, and not so specifically digital, but I found a really fascinating book called The Future is Asian, by Parag Khanna. This book I think for those of us in the West helps reset your thinking about the role of Asia in a long-term history of the world, where it’s largely been dominated for most of time, and how Asia’s really positioned to restore that relative positioning in the world. And I think for any business leader it’s an important perspective, like if you sit in the West too long you lose that perspective.

Yes, it’s a very different world isn’t it.

Exactly.

Well great, thank you for that, and thank you for sharing your thoughts today, much appreciated Alan.

You’re very welcome, I enjoyed it.

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