Interview: Terex’s Ron DeFeo

Ron DeFeo, chairman, CEO and president of Terex, is known to have his share of opinions. Direct, blunt, sometimes feisty, he’s taken the company from a time when “we didn’t have two nickels to rub together” as he puts it, to a $3.5 billion player in the construction equipment business.

“I can remember during my first few years we would have daily cash calls to see what bills we would pay,” DeFeo says. “If you haven’t had the cash, you remember clearly what it’s like.” Those lean times still reverberate through the organization. Claiming bragging rights to the 18 months it took his engineers to develop the company’s new articulated truck line, DeFeo explains, “It’s simple: I don’t give them any money. They have to be crafty and come up with a solution.”

For more on DeFeo’s philosophy on how to run a construction equipment company, read on:

Q: During a recent investor’s meeting you made a comment that Terex has
lost its gorilla warfare stance. Could you go into that comment?

A: Terex is now a $3.5 billion company, the number three player in the global construction equipment business. I don’t think you can really be a gorilla warfare player in that position. Having said that, however, our product line isn’t the same product line you see in an industry-defined, full-line player. We don’t have large excavators or dozers, for example.

The Caterpillar model is a fabulous model, but I’m not trying to emulate it. I’m trying to bring to the marketplace products that will make money for the customer in ways that the customer is comfortable in buying.

Q: How would you describe your distribution strategy?

A: I have a fundamentally different perspective on distribution than many in our industry. That doesn’t mean that I’m right and they are wrong, but I think there is room for a difference of opinions.

Once you get past the largest distributors, access to capital is a real problem and the ability to keep the level of expense required to sell a full compliment of construction and mining equipment is pretty limited. So we have to find those distribution points that have intimacy with customer niches. It makes no sense to us to have the same distributor sell 100-ton rigid-frame trucks and compact excavators. These products go to two distinctive customers. We want to build our business around customer types and let the distribution follow, as opposed to building our company around distribution. Let the distributors do the hunting and gathering of customers.

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So we give our distributors a chance to grow their businesses, but we are not the policemen of our distribution network. Distributors have to deliver on the value they bring to the table and not expect the manufacturer to ensure their value. For this reason, we don’t have exclusive distributor arrangements.

The construction equipment industry is full of rules, but these rules only serve the people who are incumbents. I don’t plan to be controlled by the rules of the current incumbents – otherwise I don’t do my shareholders, customers or employees a service and that’s who I work for. I don’t work for the acceptance of my competitors.

Q: Terex has had such a strong acquisition diet over the past few years. Will that continue?

A: The reason we acquire businesses is not because we like to shop but because it’s the most logical way to build our franchise for the long term. There are a lot of ways of getting into new business. Inventing products would be one, but it’s unlikely that you could invent products that are so meaningful in their differentiation that you can dislodge a competitor. So if we’re going to grow, it’s going to be at least partially through acquisition. Right now, though, we’re going to concentrate on consolidating the companies we’ve already acquired.

Q: Because you have so many products in the marketplace, is there a possibility of confusion in the minds of contractors?

A: There’s always that possibility because contractors over the years have been trained to look for a common dealer network. This is especially true with some of the larger contractors. It’s up to us to offer these people a compelling enough reason to own our equipment, and we think a 20-percent value advantage can be compelling enough. If we get a sufficient value proposition, we can work through the confusion.

We’ve also segmented our company into five clear operating groups. [See sidebar on page 43.] If we stay focused on those five segments, we can have a meaningful and direct communication with the users of our equipment so we can avoid whatever confusion that may come up.

Q: What do you hope to accomplish with your new compact equipment division?

A: My view on compact equipment is to deliver to the customer the best value you can while making the product functional and effective with few bells and whistles. Over the years, too much has been spent on engineers seeking to put technology in the marketplace for their own legacy, not to add value to the customers.

We take a completely different approach, one that’s very straight-forward: the product needs to dig a hole. Our job is to provide a product that gets the hole dug as effectively as it can be done and charge a great price.

It makes no sense to me that people should pay $65,000 to $70,000 for a backhoe. In the long term, that’s a going-out-of-business strategy. This is an industry that needs to pay attention to pennies. If our backhoe can dig holes and move materials and sells for $40,000 instead of $70,000, we’re creating value.

Q: How would you characterize the level of parts support you offer to your customers?

A: We’re doing a good job but we can do better. Through Genie we have a company that does an excellent job in this area, and I think we can learn a lot from them. Part of the difficulty in providing terrific aftermarket support is finding the institutional mechanisms to accomplish that. We have a lot of work in front of us.

Life is about trade offs. Our mission is to deliver the best overall value proposition we can. I’d rather have 98 percent of my customers delighted with my value proposition than to put an institutionally expensive system in place for the remaining 2 percent. A mid-90 percent parts availability is working for us where others would say that’s unsatisfactory. I will let the customer decide.

Q: What is your product development strategy?

A: We want to reinvent our products every couple of years, but that doesn’t mean that we have to spend 5 percent of our revenue on research and development. Since we don’t create our own parts, we don’t have to spend all that research and development designing our own parts. Our view is not to design in extra costs for our customers, but rather design in simplicity so that our customers can get the best value proposition.

Other manufacturers have a high captive parts content. Do you really think they are doing that to serve customers better? I don’t think so. So at the very beginning of the design process, we look at what technology is available off the shelf, including hydraulics and engines.

We also have our engineers actually spend time with customers. It’s not a novel concept, but it gives our engineers direct feedback. We don’t want to go through the product development process that happens in our industry where everything is filtered through dealer councils, sales feedback and a complicated bureaucracy of product development meetings. The sales organization interprets what the dealer council says and by the time it gets to the engineers, who knows what the reality is? We cut through all that crap and have the engineer talk directly to the end user.

Q: How are you weathering the current downturn in construction equipment manufacturing?

A: You have to be flexible and adaptive, and keep low selling and administrative expenses. We have put together a model that is 180-degrees different than the traditional model. We are not vertically integrated. We outsource. We don’t have common distribution. And we’re still making money at this point. One of the jobs I have is to make money through the entire cycle, not just the peak of the cycle.

We just want people to look at Terex not through the eyes of our competitors but by the performance and value of our equipment. That is all I can ask.