2005 was very good to CNH Global, Case Construction Equipment’s parent company. In North America, sales were up 15 percent, led by strong backhoe sales. First quarter results for this year show these returns continuing, with sales in North America up 13 percent compared to first quarter 2005.
Earlier this year, CNH reorganized with an emphasis on brand focus and named Jim McCullough president of Case Construction Equipment. In one way this position has narrowed McCullough’s focus since he no longer has responsibility for CNH’s New Holland and Kobelco brands; in another way it has broadened it, as he now oversees the Case brand globally. While McCullough has worldwide responsibilities, we focused our conversation on Case in North America.
CNH Global reported in January its 2005 income was up 30 percent over 2004 income. How did the Case brand contribute to this increase?
Case in North America did well last year, especially when you see the lighter side of the equipment equation – compact excavators, etc. – getting more competitive each year.
While many of our competitors have gone into lighter equipment, our offensive strategy has been to produce more products on the heavy side of the business. It would appear everybody’s had some success in their strategies. But we were able to hold steady in the light side while we effectively grew the heavy side.
Everything changes – from the number of competitors on certain products to what customers are looking for in premier product providers. Because of this, we’re launching this year a professional care program for customers that require higher-than-usual service levels.
What would you consider the most significant changes Case products have gone through in the past 10 years?
Our product portfolio is now quite large – we’ve added articulated trucks, compactors, large dozers, motor graders and compact wheel loaders. The only subtractions to our product line have been our trenchers and directional drill lines, which we sold about five years ago.
There also have been several internal product changes, each with a significant value proposition to the customer. For example, we now say excavators are “thinking” machines because with a switch you can put the electronically controlled engine into Auto Mode, and the on-board computer and software will sense what you’re trying to get done. This has been well received. And instead of having mechanical transmissions, our dozers are now all hydrostatic, allowing them to do much more production with less operator fatigue.
If you don’t have rapid parts deployment you’ve got a real problem in this industry. Case has 11 parts depots throughout North America. We soon will have a new footprint that allows us closer access to all express points.
Back in the ’70s, the critical thing was to make sure any parts depot had access to key highways. Now it’s much more about airport access for next-day delivery service. We’ve altered our strategy to execute parts delivery to both dealers and customers and we’re putting lower volume parts in a master depot that has easy access to the Chicago airport.
Do you think there’s been a change in your customers’ perception of the Case brand?
We’ve learned some lessons along the way. I’m not going to tell you the road we went down was the wrong one because in many markets it was actually advantageous. We thought we could control a lot of costs by our initial approach.
We got feedback Case customers were concerned about where Case was going. And you really don’t want customers to question that.
Since the Case/New Holland merger in 1999, we’ve done a lot of research, exploring the customers for each of our brands. For example, what are the drivers for a Case customer? Is there a difference between those drivers and those for other brands? All this research has basically sent some resounding messages about what’s working and what’s not.
But the biggest change has taken place this year, when we set up the business structure to get customer input up front in product development. We now have lead marketing people whose job is to understand the customers and what they need and feed that to engineering. While this approach is not new for perhaps the car business it’s a fairly significant turn for a capital goods manufacturer.
A lot of our Case customers want security, stability, no concern and no risk. These are the customers who’ve come to rely on us. We’ve become a professional partner. They want to know clearly who we are, where we’re going, what products are in the portfolio and how fast we can meet their needs.
We’ve met with customer groups that have spelled out what we have to do to continue to do business with them. Our large national customers tell us they want to be part of product development and see the prototype machines. They want to know about coming technological changes and their expected benefits. They want our engineers to track anticipated owning and operating costs. And they expect us to listen to any feedback and act on it.
They let us know if they have to live with something in a product that doesn’t meet their expectations, it can have a big influence on the quality and productivity of their jobs. This group is one of our important sounding boards.
We need to know if we’re making any assumptions with our customers. With skid steers, we know there’s really two sets of customers. There are the guys who use the machine as a material handler – they’re usually more concerned about reliability and speed or how fast they can move product from this point to that truck. Case-type customers typically are more interested in how many applications they can do. They’re using forks one minute, grapples the next. Because their emphasis is on attachments, we need to make sure the machines we build for this segment have a certain hydraulic flow.
When I interviewed you in 2002, you compared what you were doing in CNH with what Ford’s doing with its brands: Ford, Volvo and Jaguar. Is that still a good analogy?
When companies have a unique, specific customer for each brand, they have a much better chance to go forward.
As the car companies do, we build Case machines that are targeted at a specific set of customers. At the same time, we can find ways to do it more efficiently and effectively, and make sure we still have a product the customer recognizes has the Case DNA.
How would you assess your Case dealer network? What are some of its strengths and what are some of the challenges it faces?
We see the changing nature of distribution as one of the major strategic issues we have. Another challenge is attracting young entrepreneurs into the distribution business. These young entrepreneurs can’t get in the business with the same capital as their fathers or grandfathers did; instead it’s a multimillion-dollar scenario. And the rental market has driven even higher capital requirements.
These entrepreneurs might not have what’s required to finance the floor plan and the products. We’d like to think about different ways to help those individuals if indeed there’s a mutual interest. But we don’t really want to be in the factory store business.
Some of our dealer consolidations have been successful and some have not. We need to expand the business to a higher level of sales per outlet. We’re focused on making sure that we stay competitive with the other tier one providers in North America.
We think the dynamics of the business is now driving the need for more dealer outlets than we have today in North America. The right number for us is somewhere in the range of 450 to 500 outlets.
As much as the business has changed, it’s still a human relationship business and has a high reliance on the dealer. While we’re trying to figure out how we compete in a market with too many competitors, how we find space for our brand, how we find loyal customers, at the end of the day it’s still the human factor that counts and that starts with good relationships.
Could you go into your rental strategy?
Essentially, the Case brand in North America handles rental two ways: direct through the national accounts such as Hertz, RSC and NationsRent and also through our distributors, who sell to local independent rental dealers. We also have dealers that are in the rental business. We’re satisfied where we’re at in rental. I think it’s now a case of seeing how the business will evolve.
There’s a desire for more consolidation, but other than Hertz going to a venture capitalist earlier this year, there hasn’t been a lot of it. It won’t be like the consolidation-heavy 1990s this time. Everybody’s kind of settled down. Traditional dealers also don’t look at rental as quite as threatening as they once did.
How would you describe the typical loyal Case customer?
We’ve got to answer that in two different ways. First of all, there’s the original customer of Case, the small, independent owner/operator. This company was founded on that customer and we learned early on how to best sell to that customer. Our credit corporation was actually known for putting people in business.
In the meantime, the customer who started back in the ’50s and ’60s sometimes grew to a medium sized or large customer. Their product portfolios have gotten larger and they have more appeal to a broader base of manufacturers.
Now we have customers of all sizes. We have skid steer and backhoe customers who are the small to medium sized. On the other end we have a customer with more than 600 Case backhoes in his fleet. He is now coast to coast and all the dealers touch him in some way because they’re either doing service or parts for him.
We’re selling to a lot more highway contractors. We used to be solely infrastructure and utility oriented and today we have products that will take us anywhere we want to go.
We moved more aggressively into heavy equipment a few years ago, and the numbers say it was a smart thing to do.
Where do you see most Case growth coming from in the next three years? Is it going to be in product, is it going to be in acquisition, where’s it going to be?
Growth really comes down to understanding the customers. Some growth will be through application intelligence, some of it will be through new conquest of customers and a lot of it will be through servicing the customers in a second-to-none fashion.
In some of our research, customers tell us we’re actually going too far, which is to say we are over engineering the product trying to add more features and benefits. There’s a certain customer who says, “I want simplicity and great parts back up.” They’re really focused on controlling their costs.
Customers are now asking us about biodegradable fuels, a concern that used to be just on the agricultural side. We may have the opportunity to use a biodiesel blend that has more than 20 percent ethanol or methanol. People will start asking us what we’re doing as a company on this issue. And so we want to make sure we’re leading and not playing catch-up.
All the industry numbers I see point to moderate growth, an average of three to four percentage points a year. We think we’ve got some pretty good strategies that should help us get a stronger foothold in some of our markets outside North America. It’s one of the reasons we’ve put Case back to global governance, because we’re trying to take the best practices from one market and bring them to another market.
While we were focused on internal synergistic opportunities during the initial years after the merger, now we’re looking at outward growth and bringing the Case brand to the forefront.
What’s ahead for the industry?
Our customers are smart: they’re planning well for equipment buys and they’re making wise decisions as end users. I don’t see a lot of impulse buying going on and there are sharp pencils for anything you have to offer.
If we go into any downturn, it will just be because the pace is so strong you can’t keep going at these growth rates. But there’s nothing out there that says in 2007 the bottom falls out of the business.
For Case in the United States we will continue to earn more of the large contractor business without giving up the customers we have loved and adored for all these years.