Cat Lands on Its Feet in Competitive Global Marketplace

The eyes of American business are focused these days on Caterpillar Inc. as it spends billions to automate its factories and tries to stay No. 1 in fiercely competitive world markets.

Most investment people nod approvingly--”They’re doing the right things,” say analysts. But they also have reservations, recalling that another giant, General Motors, spent $40 billion on automation in the early 1980s, with unimpressive results so far.

Right now, Caterpillar’s figures are not reassuring. Revenues are increasing for the Peoria-based maker of construction equipment, but profits are down--just as management told shareholders they would be--due partly to costs of the automation program. So the final verdict on how successful Cat’s reorganization will be must wait until next year, or even later in the ‘90s.

Why should you care? Because Cat is a very important company--$11 billion in sales, the second-largest U.S. exporter (after Boeing), an employer of 42,000 in the United States (and 18,000 overseas) with a ripple effect throughout the economy.

And because Cat’s $2-billion investment and reorganization could set a pattern, affirming that U.S. companies can compete successfully and encouraging others to do the same.

Also, in an often disturbing modern business world, Cat can teach you the real meaning of 50-cent words and concepts such as long-term investment, global trade and competitiveness.

In a recent speech, Cat Chairman George Schaefer explained succinctly how the world has changed. Business was a breeze from the end of World War II to 1980, he said, with something new always coming along to provide a market for Cat’s bulldozers and tractors--from the rebuilding of Europe to U.S. interstate highways to development in Asia.

Then it all ended. The recession of the early 1980s coupled with the high value of the U.S. dollar hurt Cat competitively. Sales fell from $9 billion in 1981 to $5.4 billion in 1983--a 40% decline in two years.

The market didn’t so much shrink as change. Big projects gave way to smaller, more diverse operations, often run by small owner-builders. So Cat expanded its product line. Today it has 300 models of construction machinery compared to 150 before, and a whole new line of light equipment for smaller jobs.

One thing leads to another. That variety in models and customers forced an end to the way Cat manufactured things. A typical plant at Cat’s complex in Peoria used to go for a week or more making thousands of copies of a single part, which would be set aside in inventory--millions of dollars in parts sitting around--until the rest of the product could be made and shipped.

That sounds wasteful but in the days when it took a full eight-hour shift to change machinery on a production line, it was more efficient to do things that way than to shut down frequently to change tools or models.

Now computer-guided machines do things differently. “You tell the machine to change tools and instantly it turns out a different model,” says a Cat veteran. So technology allows flexibility, and saves money on inventory. But it also demands other changes.

If you’re responding to diverse customers with instantly flexible manufacturing, it makes no sense to have people in the field waiting for decisions from headquarters on pricing or production. So Cat is reorganizing to give more people more responsibility. “If they succeed, they’ll have a very powerful organization,” says an industry expert.

The point is that corporate reorganization, rightly done, does not simply displace people. It increases their responsibility and productivity. Cat employs more people today than in 1983--and has increased wages and benefits 35% since then. At the same time, it has boosted total sales 105% and sales per employee 48% to $185,000. Productivity has risen, in other words.

But Cat hasn’t let up, hasn’t harvested those productivity gains to buy up its own stock or make acquisitions, as many companies did in the ‘80s. Instead, it has used its financial strength to support dealers and increase sales overseas--from $2.5 billion in 1983 to $6 billion last year.

As a result, Cat has held its leading share of the world’s markets against stiff competition from Komatsu Ltd., a $6-billion (revenue) Japanese company that has a joint venture in the United States with Dresser Industries. “Cat holds 35% of the world market in construction equipment overall, and 50% or more in larger machines,” says analyst Steven Colbert of Prudential Bache Securities. It even succeeds in Komatsu’s home market through a joint venture with Mitsubishi, called New Caterpillar Mitsubishi, which supplies 70% of the construction machines for Japan’s new Kansai Airport.

So what’s left to decide about the reorganization? Whether Cat can make enough profit to do something for its shareholders. Its stock price, at $66 a share recently, is only a few dollars higher than it was 10 years ago. And that may not improve in a hurry: U.S. construction markets are slow, and overseas markets are weakening; Eastern Europe’s great potential for new construction is still only a promise. “Cat’s earnings may fall to $4 a share this year,” --from $4.90 in 1989--says analyst Michael Braig of Cleveland’s Prescott, Ball & Turben investment firm.

But Cat, just because it keeps investing to reduce costs, will be able to operate profitably in bad times--and benefit tremendously in good. Sometime in the ‘90s, say analysts, Cat will earn $10 to $15 a share--indicating a stock price that could triple. “If you’re managing a large diversified portfolio, arguably Caterpillar should be at the top of the list,” says analyst Robert McCarthy of Chicago’s Duff & Phelps research firm.

Indeed, if American business is looking to Caterpillar for guidance, there’s reason to hope for us all.