Caterpillar Inc. Chairman and Chief Executive Officer Don Fites has been at the helm of the world’s largest manufacturer of earthmoving and construction equipment and major manufacturer of diesel and natural gas engines since 1990, continuing a tradition begun in 1925 when the company was formed by C.L. Best and Daniel Holt.
Today, Caterpillar is an $11.6 billion Fortune 50 company which, headquartered in Peoria, is one of only a handful of U.S companies that leads its industry while competing globally from a U.S. manufacturing base.
Inter-Business Issues Editor David Wright talked with Mr. Fites on the afternoon of February 16, 1994, in his office at Caterpillar Inc. headquarters in downtown Peoria. The following interview relates some of the chairman’s thoughts on Caterpillar’s 1993 performance, global markets, labor issues, future challenges, and other topics affecting the company’s future.
Caterpillar is coming off a great year. Sales and earning were up in 1993 and the company turned the corner after a loss in 1992. Market share has grown significantly on the strength of quality products and successful marketing strategies. The company closed last year with an announcement of the hiring of several hundred workers here in Illinois. Caterpillar stock is at record levels. What are the major factors in this turnaround?
First of all, I wouldn’t characterize it as a great year. I’d characterize it as a good year. As I keep telling all of our people, I’m pleased with the 1993 results, but I am not satisfied. We can do better.
The fact that our stock is trading at over $107 a share today confirms that people have higher expectations. They’re not paying $107 a share because of our 1993 results. They’re paying $107 a share because they believe we are well positioned for the future. And I believe they are right.
When you strip away all of the special items in our 1992 and 1993 results, our profit improvement – year over year – was about $550 million after tax. It went from a $200-million-lus loss to a $300-million-plus after-tax profit – which is very significant.
The key items that contributed to that improvement are some of the same things we discussed in the Inter-Business Issues interview last year. The company restructuring is working. The new organization – 17 business divisions which push accountability and authority down – has gained more and more confidence and strength. Our plant modernization program is essentially done. The capital has been spent and only a handful of the 77 projects which made up that huge worldwide program need to be completed. By 1995, modernization will be doing what we thought it would do. That’s a key factor.
There are things that we don’t have control over that also contributed to our 1993 results. The U.S. market was stronger, and was a key factor that contributed to our 14% increase in sales. But some of the increased sales were caused by factors we do have some control over. We reached a record worldwide market share for construction and mining equipment. We achieved a world-leading market share for our gas turbine engines made by our Solar division. And we moved into second place for heavy-duty truck engines.
So, we have a lot of good things going for us. I would be remiss if I didn’t say that in 1993 our productivity was higher than it’s ever been, our quality was at all-time record levels, and our warranty costs are continuing to go down as a percent of sales. So, the contributions from all of our employees around the world together made 1993 a better year. But the market is convinced that we will do better than we did in 1993, and that’s the challenge we have before us in 1994.
The company’s growth in 1993 was almost entirely domestic growth, with major foreign markets remaining recessed. In view of NAFTA and GATT, Caterpillar’s joint ventures in both domestic and foreign countries, and the impending rebound in Japan and Europe, how do you feel about Caterpillar’s prospects for the rest of the decade?
We may not see another year like 1993, in terms of relative weighting of U.S. versus non-U.S. sales, in the history of Caterpillar. For the first time in perhaps a decade, U.S. sales slightly exceeded sales outside the U.S. That is very out of the ordinary, and will turn the other way as the global economy continues to develop. You put your finger on something very important: We accomplished the things we did in 1993 with extremely weak markets in Europe and Japan – both of which are important marketplaces for us. So if we could just get back to an average year in Japan and in Europe, our results would be particularly enhanced. And, let’s face it, even though we had a better year in the U.S., we’re still not back to the sales levels of 1989 and 1990 – nor is the industry back to those levels in the U.S. So, the market was stronger, but we were coming out of a recession. It certainly wasn’t a boom year – even in the U.S.
However, I think we can be encouraged by the things that we did at Caterpillar in terms of restructuring the organization, plant modernization, and higher market share. We have never had as big a leap in market share in a single year as we did in 1993. So, while some good things happened to us that were external, which we didn’t control, most of our improvement in 1993 was the result of things that we did right internally – things that we made happen.
Do you have any fear of deteriorating relationships between the U.S. and Japan in trade, given the events of the last few days with the breakdown in trade talks?
I spent the last three days in Washington, D.C., at a meeting of the U.S.-Japan Business Council, which consists of top leaders in U.S. and Japanese business. We were meeting right in the midst of this whole thing as it was developing. I can assure you there is significant concern on both our side and the Japanese side. Whenever the number one and number two economies in the world start saber rattling, there should be concern by all involved, because the stakes are very high.
On the other hand, let me quickly add that Caterpillar just celebrated the 30th anniversary of our joint venture with Mitsubishi in Japan. We export equipment from East Peoria, Decatur, and Aurora. But, we are fortunate because many U.S. business sectors do have problems. The insurance, automotive parts, telephone equipment and other industries have legitimate concerns. As vice-chairman of the U.S.-Japan Business Council (I’ll become chairman in July), I need to represent their concerns, even though Caterpillar doesn’t have a problem.
Both sides – Japan and the U.S. – are saying they recognize that markets are not fully open in Japan. The difference of opinion is how to go about opening those markets, and how to measure progress. This is where the whole “framework negotiations” came apart, and that’s unfortunate.
At this stage, we need to be supportive of the Clinton administration, because for those industries that do not have access, the $60 billion U.S. trade deficit with Japan is intolerable. There are U.S. industries that do not sell in Japan because they don’t deserve to; they don’t have the quality product or they haven’ put forth the effort. But there are many industries in the U.S. that do deserve access to the Japanese marketplace that aren’t getting it. I think we have to support these industries.
The continued labor problem with the United Auto Workers is obviously the wild car in Caterpillar’s immediate future. Given the current strong demand for Caterpillar products, given the fact the UAW will negotiation with Deere again this fall, and the general frustration of UAW leaders concerning Caterpillar, is it a strong possibility that the union leaders will call a strike this spring as has been rumored? If a strike were to occur, how badly would it hurt the company?
I hope that the international union leaders in Detroit will not try to inflict that upon our employees, who have already suffered through a five-and-a-half month strike in 1991 and 1992. There is no reason for employees to be asked to strike, when the company’s offer provided an average wage last year of $49,000; as well as up to five weeks vacation, improved pensions, eleven paid holidays, six-year by-name job security, and full medical coverage with no co-payments or deductibles. And there’s no reason for our employees to have a strike inflicting on them to better position the UAW for bargaining with anyone else or to better position the UAW in their negotiations with the Big Three auto makers.
I’m convinced the vast majority of our employees do not want a strike. The question I would ask is, Why doesn’t the International UAW – under the auspices of the mediation service or the NLRB – hold an in-plant secret ballot, audited vote, to see whether our employees would like to accept the offer that we implemented? It’s interesting, I just read in the paper yesterday that a rubber worker’s union just had such a ballot in a plant of a couple of thousand workers in Indiana. Even though the union recommended against accepting the company’s offer, the offer was overwhelmingly accepted by vote of the workers.
Our employees do not want a strike, and I don’t believe that the vast majority feel there is any reason for the International UAW to ask that of them.
In the event of a walkout, what level of support for a sustained strike do you feel exists among union workers? Would you expect a significant number to cross picket lines? Would Caterpillar take steps to permanently replace striking workers in the event of such a strike?
If there would be a strike, we would invite our employees to return to work, and I believe they would return in large numbers. Remember, we have to be concerned about all Caterpillar employees, the roughly 75 percent who are no affiliated with the UAW, as well as those who are affiliated with the UAW. So, we would do whatever it takes to keep production going and not lose business. I would hope that would not include the necessity of hiring other people, but if it did, we would hire. And just as occurred in 1992, we would be overwhelmed with people wanting those jobs. These are among the best manufacturing jobs in the country.
If a strike scenario were played out, and the decision made to replace striking workers, would the company be in a position to act much faster in doing so this time than last time?
I would expect that we would immediately invite our people back. They would have every legal right to return to work. We also would immediately get management and salaried people to fill the gap. If we did not have enough hourly people return to sustain production, we would hire people to make sure we could keep our business going. That’s the responsibility we have to the 75 percent of our employees who are not UAW members, and to those who would not support a strike – as well as to our shareholders, dealers, and customers.
A move to permanently replace striking workers would obviously be legal now. The Clinton administration supports legislation that would make such replacement illegal. The House passed the legislation, but the Senate has balked at passage. Are you confident that Senate support exists to defeat the measure if a vote is held this spring?
Yes, I believe our position is very solid. While most of the support is from Republicans, I should point out that there is bipartisan support; there are Southern Democrats who are opposed to this bill. Passage would, in effect, change the labor laws that have served us for 50 years.
I think Caterpillar is an excellent example of why those rules should not be changed. Here’s a company that bargained in good faith for a year and a half, while the union refused to say anything but ‘pattern, pattern, pattern,’ and refused to do anything but throw the Deere agreement on the table. After a five-and-a-half month strike – in order to save the jobs of everyone involved and get on with life – we invited all employees to return to work and said that we were going to replace those employees who chose not to return to work.
As I told you a year ago, 1,000 workers crossed the picket lines, and there were thousands more who were going to cross within the next few days. I think most of them were very relieved that there was a new law on the books that, in effect, gave them a strong reason to return to work.
Recently out of a need to become more cost competitive, Caterpillar announced the relocation of its Advanced Compaction Technology Group to Tennessee. Much has been made of the fact that the company has opened several facilities in southeaster states in recent years. Will Caterpillar be able to maintain its main manufacturing base in Central Illinois and wait out a change in the current UAW labor mentality?
We fully intend to. I strongly believe the vast majority of our employees do not support the scorched earth policy of the UAW. I think that is demonstrated by the productivity and the quality that was produced in all our Midwestern facilities during 1993. It would be very wrong of us – morally, financially, and in every other way – to desert those employees who have put forth that effort. We don’t intend to do that.
As I mentioned a year ago, we’re fighting to stay in Peoria, not leave Peoria. It would be easier to leave; it’s more difficult to stay. But we intend to stay, and that’s why we’ve continued to invest here. The vast majority of our $1.85 billion total plant modernization dollars was spent in Illinois, and almost half of them were spent in the Peoria area – almost a $1 billion investment in the past seven years right here in the Peoria area. You can talk all you want, but if you follow the money trail, we’ve put our money here. That says a lot about our confidence in our employees in this area.
It would be easy for Caterpillar to take the path many U.S. corporations have taken – that is, “If you are going to sell outside the U.S., then manufacture outside the U.S.” We have intentionally put a strategy in place to be globally competitive from a U.S. manufacturing base. And that base is essentially a Midwestern manufacturing base. We’ve done that for many reasons: the political climate in the U.S. is better than in other areas of the word; we live the productivity of the employees; and we have an experienced work force. We believe our strategy will work, and we’re not going to be easily deterred fro it. We’re going to make it work.
Could we be driven outside the U.S.? I suppose, if there were enough onerous legislation passed or if there were enough obstacles put in our way, making it impossible to continue to be globally competitive. But I think we will be successful implementing the strategy that we have put in place.
To get more to the point of your question, to or three of the new operations we have opened are very small operations. The one in Clayton, North Carolina, is somewhat larger, but not anywhere near as large as our Peoria area facilities. And Clayton was opened to bring a product in from overseas. We opened the facility to supply products to the Southeast corridor where most of those products are sold. No work was transferred to Clayton from any Midwestern facility.
The other very small operations that we’ve opened have just a handful of employees, and involved decisions concerning whether we would continue in the business for those particular components. The decisions were made by our profit center, who have been given that latitude.
It’s important to keep in mind that 35 percent of our employees were in the Peoria are when we had 900,000 employees throughout the corporation, and that percentage is the same today when we have 51,500 employees worldwide. There is no strategy to drive that percentage higher or lower. Our strategy is to remain globally competitive from our U.S. manufacturing base.
You are a member of the Business Roundtable, an association of top U.S. chief executives which – despite heavy White House lobbying – recently turned thumbs down on the Clinton healthcare reform, opting instead to recommend the Cooper/Grandy Bill as a starting point for healthcare reform debate. What kind of reform legislation do you feel will ultimately be passed by Congress this year?
Well, first of all, I compliment you on getting it right because most major publications are saying that the Business Roundtable Policy Committee, of which I am a member, endorsed the Cooper bill. They did not endorse it; they endorsed it as a “starting point,” and there’s a big difference. I did not vote with the majority, in favor of that endorsement. I was opposed to the position the Business Roundtable Policy Committee took. I am also a director of the National Association of Manufacturers, and opposed a similar position that the NAM took two or three days later.
Does that mean that Caterpillar is endorsing the Clinton plan? No, it doesn’t. Our position has been that there are some elements of Cooper, Clinton, and some other plans that we like, but we think it’s premature to endorse a single plan. The healthcare debate is in a state of flux. Every day recently has seen something changing. We would like to take the best of all the proposals and try to come up with a health plan.
We think there should be health reform. I should quickly point out that Caterpillar employees already have better medical coverage than any of these proposed plans. I mean, nobody has proposed first dollar, no co-pay, no deductible medical coverage, as Caterpillar already provides. So this is not a question of Caterpillar trying to improve the medical coverage we already have. For us it’s more a question of how we stop the cost-shifting which is affecting companies like our own. Do we believe in universal coverage? Those are critical decisions. So is the portion of the Clinton plan that says it will totally cover early retirees and take that cost away from companies. Those are the issues we’re trying to wrestle with. We’re not to a point yet where we are prepared to come out with a public statement and say, “Okay, here’s what we want. Here’s what we would support.”
I believe it makes sense – and there are other companies that feel the same way – to wait and learn a little bit more. There is going to be so much change. You’re probably not going to be able to recognize any of these plans 90 days from now; that’s all we’re saying. I think it was a tactical mistake, as I told my colleagues on the Business Roundtable Policy Committee, to take the position they did. There were about 20 of us who felt that way. We lost. You can’t win them all.
I can’t give you a formula right now as to what we are going to support. We will have a position, and it’s going to be a well-thought-out position. I can assure you we are going to be a major player in the process when it comes time.
Recently there was a move, initiated by salaried Caterpillar workers in the United Kingdom, to de-recognize their union. The UAW has suggested that is an example of Caterpillar operating as a union buster. What comments do you have on the scenario that took place in the U.K.?
These were salaried and management people – first management people, then salaried people, who essentially had they own union bargaining unit. I think what really happened is that they saw the rest of the Caterpillar world and many of their own higher management level people getting involved in our incentive compensation program. They felt they would rather be a member of the management and salaried team and be compensated or rewarded that way.
It was an act of confidence and faith in the company by these people. And we insisted – although it is not required by U.K. law – on an audited vote on this issue. They voted overwhelmingly to work directly with the facility’s management rather than through a third party.
But there seems to be some aversion in union circles to letting people vote. And in this case, it was overwhelming; there was nothing untoward about it. The UAW just seized upon it to try to label us as union busters. We’re not interested in busting unions. We wish we could get the UAW International to sit down and talk to us. As we’ve said all along, everything’s on the table. I think we’d all be better off if there were a little more democracy exercised in this whole activity.
What are the biggest challenges Caterpillar faces into the year 2000? What is your vision for the company?
The biggest challenge, by far, faced by this company and U.S. industry in general is that of a whole new economy developing. We are seeing a watershed event that in my lifetime could only be compared to the late ‘40s and early ‘50s; a whole new economy is evolving and now it’s a global economy.
President Clinton has said many time, “Compete, don’t retreat.” We have to compete; we can’t retreat. American industry can’t retreat. We have to compete on a global economic basis.
The greatest challenge this company faces is to make sure the strategy we have put in place works – a strategy which says, “Hey, we’re not only going to compete; we’re going to stay right here in the U.S. and compete on a global basis.” It’s a strategy that believes we have the assets and the people in place to make it happen.
There’s going to be a handful of U.S. companies that are going to remain preeminent in the global economy. Many U.S. companies are not going to be able to compete on that basis because either they haven ‘planned for it, or there are other elements of their business that just don’t allow them to compete – natural resources, labor costs, or something else. But we have to recognize, just like the people who were running Caterpillar in 1945 recognized, that this is a whole different ball game.
After World War II, Caterpillar’s leaders put this company in a position to be the best in the world. We have been able to do that now for 50 years; but they next five or ten years will dictate whether or not we are going to be dominant in business 50 years from now. I think we will succeed. Evidently that’s what the stock market thinks, too. Caterpillar and Boeing and a few other companies are going to be very good and very competitive.
We’ve got some things coming in terms of new products and services that I know our competition can’t match. We’ve got a lot going for us. If we do our job right – providing the assets, training, and putting the right people in place around the world – we will have a very good position for several decades to come.
In closing, I’d like to say what I said the last time we talked with Inter-Business Issues, because I think we need to keep saying it over and over: This company is going to remain headquartered in Peoria, Illinois. We’re going to continue to have major manufacturing resources in Central Illinois. We think we’re on the path to making that successful. Don’t let anyone convince you of anything different. It is our strategy; we’re going to make it happen. IBI