While a number of construction equipment companies staggered through 2002, Caterpillar posted profits of $798 million. “But don’t forget,” Glen Barton, chairman, is quick to point out, “that we also made a profit in 2000 and 2001,” in spite of overall dismal returns from the market.
“We’re determined we’ll adjust our business plan to whatever are the realities of the marketplace,” says Barton, who joined the company as a college graduate trainee in 1961. “We’ll continue to be profitable in business downturns just as we would expect to be if business was better.” Here’s how Barton, chairman since 1999, expects Caterpillar to accomplish this:
Q: You’ve said Caterpillar has every intention of becoming a $30 billion company before the end of this decade. In light of today’s economic realities, is that still your goal?
A: We definitely see it as something that is achievable for us. When we announced that goal, we did not plan on a couple of years of continued economic malaise like we’ve had, so we’re a little slow in getting off the mark. But when we look at the businesses in which we compete we still believe that $30 billion is within our sights and we have the plans and strategies in place to take us there.
Q: Caterpillar has made quite a splash with its new ACERT on-highway engines. What impact do you think these engines will have on your market share?
A: We’ve already seen a good improvement in our position within the on-highway truck industry over the past four years. Winning J.D. Power and Associates’ awards for three years running with our engines has certainly given us confidence that we are giving the customers what they expect. ACERT is really a continuation of that. I believe we’ll continue to grow our penetration of the on-highway truck business because we have a better answer with ACERT. We’re confident that with our engines’ reliability and durability, plus fuel economy that’s the same or better than what we’ve been offering, these engines will be attractive to our customers and our industry shipments will continue to grow.
Q: If there’s one thing your competitors admit to envying, it’s your dealer network. To what do you credit your dealers’ ability to maintain and even gain market share in a flat market?
A: Our dealers are well-established business people within their communities so they know a lot about what’s going on within their local economies. And they have a long-standing relationship with almost all the customers within their territories. I was just at a dealer’s 75th anniversary and met people from many companies that had been customers with that dealer for the entire 75 years. It’s amazing to hear the customers talk about the support our dealer gave them throughout that time.
We’ve also been helped in recent years by the expansion of our product line to include compact equipment and rental services, offered entirely through our dealer organization. This has helped us grow our industry share at a time when others have seen flat or decreasing sales.
Our dealers are continuing to add to their rental fleets in anticipation that market recovery will occur and they want to be better prepared or better equipped to service that opportunity as it comes along.
Q: To what do you attribute your ability to stay profitable?
A: Part of this comes about as a result of our diversification. We’re certainly a more diversified company than we were 10 years ago. The addition of our financial services company, for example, is a major contributor to our bottom line and is less cyclical than the machinery business. In times of economic slow down, it actually contributes more to our bottom line than it would otherwise. We finance some 50 percent of our total sales today through Cat Financial Services.
We also now have some 40 clients of our logistic services on a worldwide basis, including Ford Motor. We’ll probably double the size of our logistics business.
We believe that the principles we’ve learned through these difficult times will serve us extremely well as markets recover to a more normal level.
Q: Describe what you would like to see your Cat Certified Used Equipment initiative accomplish.
A: We’re really trying to make sure that the Caterpillar value chain is involved in the second, third and even fourth lives of equipment that we manufacture. We know that one of our distinct advantages is our resale value. Often times, however, the Cat dealer has not been totally involved in subsequent owner transfers of that equipment.
We want more of our used equipment to go through a Cat channel so that we can be more involved in making sure that second and third customer has the kind of service and support he would get if it was a new product. We think that will help us form a more long-term relationship with customers and make them even stronger customers in the future.
Q: Caterpillar’s been the industry market share leader for quite some time. How do you fight inertia and complacency?
A: We get up every morning with the thought there’s someone out there who would love to displace us and that we’re going to do our ultimate to keep that from happening. We’re going to continue to make sure we have the best products, we’re the most efficient corporation, we have the best distribution organization and we understand what the customer wants. If we do all those things, I think our future is secure.
It’s when we wake up in the morning and say we no longer have to listen to the customer, or we no longer really have to worry about this or that threat, that’s the day we’re in trouble. So our job as the leader in the business is to make sure we don’t become complacent and we have strategic plans in place that really address the threats, strengths and weaknesses we have.
Q: You’ve said that Cat is not the same company it was 10 years ago. What have been the most significant changes?
A: By far the most dramatic change this company has ever faced since it was organized in 1925 was going to the business unit concept in 1990. This reoganization took a company that had been functionally organized and changed it into business units with profit-and-loss responsibility.
We’ve been developing a management team since then that can lead a profit-and-loss enterprise and understand the interplay between different business units since we’re still a highly integrated company. One of the things that’s really helped us has been 6 Sigma, because it promotes activities across business units. It’s a fact-based, data-driven process so that you’re making a decision not just for your particular portion of the business, but you’re making a decision that’s going to affect two to three divisions. As long as it’s based on factual data, people won’t argue with you. It makes us a stronger, more responsive company than what we’ve previously been. Until we got into 6 Sigma we were not fully harvesting the potential of our reorganization.
We kicked 6 Sigma off in January 2001 and we did it on a worldwide basis. It’s been a program that’s been universally accepted. We haven’t had anyone who wanted to opt out of it. We haven’t had anyone who has fought to change the way we’re doing it. We’ve done it with consistency, clarity and with a commitment from our management team throughout the organization.
Q: Where do you see most of Cat’s growth in the next three years?
A: We’ll have three major areas of growth, especially if we get some economic growth. Some of our industries and geographical areas are down 30 to 35 percent from their peaks of just a few years ago. Whether they go back to those peaks remains to be seen but they certainly will recover from where they are today.
Major growth will come from economic recovery in Latin America and Europe. We are certainly seeing some of that recovery occur in the non-China portion of Asia Pacific today. On top of that we have the emerging country growth, particularly China, where we’ve seen a dramatic upsurge of activity in the past couple of years. We believe that’s going to continue for the next three to five years and probably beyond that. We also see a similar thing in India where we have our own manufacturing plant and where we are starting to put some locally designed product in production. We also believe that Russia is ready to break loose, particularly the oil and gas sector of the Russian economy, which is doing well.
The third area where we’ll see growth is on the engine side. Prior to the start of the recession, we were really consolidating a couple of acquisitions – including Perkins Engine and generator set manufacturer FG Wilson – and we have not seen the anticipated growth in those businesses because of the economic situation. We believe that economic growth will help us realize that potential. Engines, which represent more than a third of our total business today, will grow to 40 to 45 percent of our total business.
There’s also still plenty of room to grow in the area of dependable power. We believe the world is still critically short of power generation capability and all we need to do is have some economic growth and we’ll again uncover some of the tight spots that were prevalent a couple of years ago. Our distributed power business model is still a valid approach to satisfying some of that need in an expeditious manner and we’re prepared to take advantage of that.
Q: What is the Caterpillar recipe for future growth?
A: Our recipe is our basic business model: Try to understand the needs of the customers, build the best possible product you can, have a dealer organization that is the most efficient and the best in the world at delivering and caring for the product and then reinvest profits into things that will improve your business. We are not reinvesting in things that are far from our basic core because we understand the businesses we are in today. We continue to spend about $4 million a day in research and development just to make sure our products have the kind of features and capabilities customers want.
We also know that two to three years from now someone else is likely to have a product that equals or exceeds ours and we must always apply our best minds to new technologies to stay ahead of them.
We do technology application on a gradual basis, as opposed to doing it in big steps, so you’re always integrating new technology on top of proven technology as opposed to trying to take great leaps from one technology to another.
We’re determined that our products are going to be technology leaders. We’re going to have the best product for the customer and we’re going to continue to try to do everything we can to develop those and then convince the customer that these are the best products; that they’ll give him more production, lower operating costs, increase resale value, provide a better economic solution than any other alternative he has.
This industry has a bright future, especially when you consider that our economy has a natural tendency to want to grow and when you think of the desire of most people to have a better quality of life. We’re going to go through ups and downs and we’re going to have to manage through those periods. The basic thing I know after 40 years in this business and I think that Caterpillar knows after being in the business for 77 years that this is a good industry and it will provide good returns if you do your job well and manage your business correctly.