Interview with Komatsu America’s Dave Grzelak

It’s been a busy two years for Dave Grzelak, chairman and CEO of Komatsu America, the second-largest supplier of construction equipment in North America.

With his position came a daunting assignment: oversee the restructuring of North American operations, a move that combined five companies into one, part of a company-wide effort to reduce fixed costs. And Grzelak’s team had to accomplish this while the U.S. construction equipment market took a dip. “Even though our five companies were restructured for growth,” Grzelak says, “unfortunately there hasn’t been a lot of growth in this industry in the past few years; therefore, a consolidation was required.”

Yet in the midst of this realignment and industry sluggishness, in the past two years Komatsu introduced 35 new construction equipment models to the North American market. And Komatsu is accelerating the development and introduction of what it calls “unrivaled products.”

“These products are designed to leave a deep impression with the customer,” Grzelak says, “offering significant cost-of-operation savings and improved productivity.”
In an interview earlier this year, Grzelak discussed Komatsu’s plans for the North American market.

Q: How would you sum up your 2003 sales and market share in North America? What is your forecast for 2004?

A: In 2003, the market and our share of it was stronger than we anticipated. This year, our market share will be up further compared to 2002.

Since we have all these new products coming, we plan to continue to grow our market share. We could even see double-digit market growth in 2004 in both our construction and utility markets. Housing continues to be a major driver and it’s doing so well right now. In fact, we doubled our volume in utility equipment in 2003 over the previous year.

We’re ramping up in Chattanooga. We anticipated the upswing ahead of our own marketing people.

We ordered more machines than our distribution, which tended to be a little more pessimistic in a down market.

There may be some models this year where we might be on allocation depending on market demand. We’re trying to anticipate it, however. To minimize shortages, we need to have a good forecasting process with our distribution.

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Q: What do you hope your customers will see as the result of your restructuring?

A: We can provide better customer support because we have different sales and service organizations to focus on each of our main divisions – utility, construction and mining.
At the same time, through our matrix organization, we will be providing best practices and procedures across all of our plants, including our remanufacturing facility.

Our customers and our distributors should feel more personal support because they will have each division – utility, mining and construction – focusing on their individual needs.

Q: Maintaining a strong, healthy distributor network has become a test for most manufacturers. What are your challenges in this area and how are you addressing them?

A: Part of why we are so successful is the quality of our distribution. Loyalty is a big factor in the distributors business. The industry margins have shrunk for both distributors and manufacturers, so we need to make sure both the teamwork and the close cooperation is strengthened over time and the customer base feels comfortable that there’s going to be stability.

Part of why national and large multi-state customers may not want to buy your equipment is that they may like their local dealer but not have the same experience with dealers in the other states where they’re working. So we’re continuously upgrading the overall quality of our distribution network.

Additionally, consolidation is occurring among dealers. For example, our Florida dealer, Linder Industrial Machinery, acquired Mitchell Distributing in the huge market of North Carolina and South Carolina. Tractor & Equipment in Alabama bought Stith in Georgia, Roland Machinery in Illinois took on Bark River in Wisconsin and Modern Machinery in Montana acquired PNE in Washington and Oregon.

Consolidation is a natural process. If you think about it, it’s no different than what we did with putting five companies into one. Other manufacturers’ dealers are doing the same thing. In the future, with such slim margins, you’re going to have to have a bigger base on which to spread your costs.

Q: Komatsu has always prided itself on its technology. Any predictions on where this technological push will take you in the future?

A: We have to make sure we’re providing quality products at the right competitive price and with the right competitive features. To do that, we continue to spend $350 million to $400 million a year in research and development even in down markets.

The product lifecycle is in constant movement. We might be at the top in a certain product and then our competitors develop a new model and our product declines while their’s goes up and the cycle starts all over again. So if we’re constantly spending that kind of research and development money, our distributors and customers should feel good about the fact that we’ve always got new and competitive products coming.

By 2006, we expect our unique and unrivaled products will represent 25 percent of our construction products and 55 percent of our sales worldwide. These unrivaled products will offer huge advantages to our customers. They will really give you an advantage over our previous models, and the competitions.

The first of these products is the PC400LC-7 excavator, which started shipping this past December. This model will offer a 23-percent increase in bucket capacity and a 17-percent increase in fuel efficiency.

In our mining division, we’re also continuing development of autonomous dump trucks. We have a proving grounds in Tucson, Arizona, to test our mining equipment in various applications.

And we’ve established a dozer research and development center in America, an activity that used to be done totally in Japan. We recognized, however, the American dozer market is the largest in the world and the growth in dozers will come from the Americas and Europe. So from a customer point of view, we needed to move the research and development closer to the customer base and their needs.

Q: Komatsu has expanded its North American product offering in the past five years, most notably with backhoes and skid steers. Are there any plans to further expand your product lineup, either through internal growth or external acquisition?

A: One of the product gaps we had was forestry. With our acquisition of the Swedish company Partek Forest in December we’ve taken care of that gap. Do we see many other acquisitions? I would say not at this point.

We’ll be working closely with them to meet the forestry needs in North America. Some of our distributors are already Partek Forest dealers.
We’ll also introduce a rubber-tracked skid steer this year in North America that’s already been introduced in Europe.

Q: Please detail Komatsu’s approach to the rental market.

A: Rental is of course a requirement in the construction and utility markets. We work with our distributors to advance our participation in the rental business. The tough part is demonstrating to our distribution there is profitability in the rental business.
Going forward, rental definitely will be a piece of the equation, but it’s certainly not the whole equation.

We will continue to develop our network through our distribution channel and work with other rental companies when it makes business sense.

We’ve established a rental model at Midlantic Machinery that demonstrates how our dealers can be successful without a huge infrastructure cost. We need to expand this model with our distributors.

We prefer to use our distribution channel for selling and renting equipment. All of them know how to sell; not all of them know how to rent. Some of our distributors have a long history of rental, while others want to walk very slowly with rental before they even think of running. You’ve got to get a buy-in from distribution that they can make money and will grow their overall business.

Q: How is your used equipment initiative working?

A: In the past, while some of our distribution understood the value of remarketing, the majority didn’t. When they got a trade-in machine, they’d send it to auction. That’s a negative for our dealers. They don’t get a good price for it in auctions and the machine leaves their territory, eliminating the possibility of any parts and service business.

So remarketing is part of our strategy for distributors to improve their overall performance and to keep more of their machines in their territory. Komatsu dealers now have established used equipment standards. Our customers know they’re getting a certified machine that meets these minimum criteria established by Komatsu.

I think most of our distributors will tell you it’s a good thing and this remarketing strategy has benefited them financially. It also leads to new customers. Let’s say one of our dealers works with a small contractor to get him into a used machine. Now that customer knows that dealer and he knows the quality of the machines. Remarketing has been a big plus for our dealers.

Q: What is the future of your manufacturing presence in North America?

A: We will always manufacture in North America. In North America, we now manufacture about 60 to 70 percent of the products we sell here.

And we just built a backhoe and skid steer manufacturing plant in Newberry, South Carolina. We certainly wouldn’t have spent the money or made that commitment if we weren’t serious about manufacturing here. And, even though we’re not going to build wheel loaders in our Peoria plant anymore, we didn’t close it when the mining market got tough. We’re keeping our presence in Peoria, which provides electric trucks for the world market. By Komatsu’s definition, the Peoria plant is a “mother plant,” providing products worldwide along with research and development responsibilities.

Q: What else should we look for from Komatsu in the future?

A: Corporate wide, Komatsu has an initiative called “Move the World: Komatsu 5-800.” This reflects our goal to make an $800 million operating profit by 2005. If you go back to 1990, when the Japanese market was the highest it has ever been, Komatsu made about $780 million operating profit. So the idea is – with the Japanese market now about one-third of what it was in 1990 and with the growth now being in North America, Europe and China – we plan to exceed the best we’ve done to date.