How successful has Caterpillar’s reorganization been – combining functions of engineering, manufacturing, marketing and finance into accountable profit centers? Given that Caterpillar is a large organization with well-defined corporate traditions and structures, how hard was this change to enact and how much resistance was met?
It has exceeded my expectations, in terms of our ability to move quickly and to change a corporate culture when we very much needed to do so. It’s always easier to change something when things are a little tough. When things are going well, it’s always more difficult to make changes. Everyone says, “Why change? Everything’s going fine.” Well, I certainly didn’t count on the recession being part of the change atmosphere around here, but it made it easier to accept the fact that we needed to change. We are a large company. When we talked to other companies about what we were going to do, they said it would take at least three years just to get the financial accounting systems in place. This was in March or April of 1990. I said, “We’ll have the systems in place by the end of the year.” Everyone said it would be impossible. Our people had them in place by the end of the year – and the whole organization deserves a lot of credit for making it happen.
This is a company that is very willing to put its shoulder to the wheel. People who work for this company like it, they’re loyal to it, they like the products, they know each other, and we can get things done in a hurry if we all decide to do it. In many respects, it’s like a Japanese company; once you get consensus, it happens around here. The restructuring made sense to everyone, although it was difficult to accept. We had these “functional silos” – the engineering silo, the manufacturing silo, the financial silo – and very little business communication between the silos over the years. But the problem was, as we got bigger and bigger, the people who were concerned about the profitability of the company were only those at the top. So essentially, you had only a handful of people who were worried about return on assets and profitability. The engineering guys were worried about their engineering budget for next year; the manufacturing guys were worried about their capital budget; and the marketing guys were worried about market share, and so on. In this new organization, people I had never heard utter the words “return on assets” in 30 years now have it as their by-word.
The other thing the restructuring has done is put the major decision-making players together in a team. Now we have 13 profit center divisions, and certainly each one of those has a ROA target. While some haven’t reached their’s yet, others are pretty far along. The question we ask is, “Are you making progress? When are you going to make a satisfactory return?” The effort is there to make it happen. I’m extremely pleased with the restructuring of the company.
How has your marketing background worked to your advantage in taking the helm of the company? How would you describe your management style?
I was in marketing for about my first twenty years with the company. You learn a lot in marketing. You learn it’s a give-and-take process. You learn the customer is right. The customer is king, because if you’re not producing something the customer wants, you’ve got a big problem. I was very sensitive to customer needs. I don’t think the company as a whole was as sensitive to customer needs over the years as it needed to be because of our functional organization. Because I was in marketing, essentially international marketing, I got to know the entire worldwide organization well. I got to know both the dealers and the customers well, but I also had a chance to visit all of our facilities around the world. Another thing marketing does is teach you how to make a sales pitch – to get up before a group and explain your point in effective fashion. I don’t care what walk of life you’re in, part of getting things done is getting it done with other people. International marketing also gave me a chance to learn several foreign languages and cultures. It gave me a broad outlook on what it takes to be globally competitive. And the company has always given me lots of opportunities. Although my background was in marketing, they sent me to MIT in 1970-71 to get a MS in management, giving me the background in finance and other things needed to run a company the size of Caterpillar.
It would appear that Caterpillar has been very successful in fortifying its position through product and service diversification and joint ventures. What more can we expect in the future?
Our diversity has essentially been into products where we can successfully contribute. If the venture has a strong engineering content, or a strong manufacturing content, or needs a strong distribution organization like ours, then it might be a good fit. One of the things we have successfully done is develop our product line, particularly in mining. We are now the world’s largest supplier of mining equipment. When I joined the company 36 years ago, we were minor league players. We were providing support equipment, but not production equipment. Now with our mining line, we are the main suppliers of production equipment. We’ve also moved our product line down very successfully to smaller products like backhoe loaders. And we have broadened our engine line; we now deal from 8,000 horsepower down to around 50. We have become involved in things like locomotive engines by leveraging our engineering and manufacturing. Then there’s our financial services corporation and our worldwide marketing organization. You should look, in the future, for more of that.
We are not going to diversify in the classic sense. The diversification by way of the big conglomerates that went on this country last decade involved a lot of big egos. Just because you know how to manufacture and sell tractors (and I’m using this as a hypothetical example), doesn’t necessarily mean you can transfer those skills to consumer products. You’ve got to ask yourself, “What more do I know than these people who have been in it for 20 or 30 years? What do I bring to the party?” The truth of the matter is that a lot of those conglomerates really didn’t bring anything to the party in terms of skills in marketing, engineering, and manufacturing. I think U.S. industry is off that kick. Caterpillar never got on it. We are going to stick to things that we know how to do well – basically the fields in which we now work – construction and mining equipment, diesel engines and gas turbine engines. We are number one, essentially, in industrial gas turbine engines. In diesel engines, we are right there among the leaders. Certainly we are number on in construction equipment and mining equipment. We need to continue to strengthen our position in those areas. I tell our people that even though we are number one, there’s a lot of market share that we aren’t getting. Rather than worrying about getting into some other business, we need to worry about doing even better in the businesses we’re in.
Are there any particular changes in federal law which would improve the competitive position of exporting manufacturers like Caterpillar?
Anything we can do to eliminate trade barriers and tariffs is essential. The faster this country can move toward free trade, the better off Caterpillar and most industries will be. We are paying $100 million annually in duties on products we distribute around the world. That’s a barrier to exporting. Anything that we can do regionally or globally to reach trade agreements – like the Uruguay round of GATT – is very important to Caterpillar. NAFTA is very important for us to export more product. The truth of the matter is that we already have a trade agreement with Mexico – but it’s just one way. Everything from Mexico comes into this country essentially duty-free, and everything in this country that goes to Mexico is charged 10-20 percent duty, including much of our equipment. We’ve always said around here, “Take down the barriers, but we don’t want government help.” An industry that is surviving on government support or protectionism is an industry that is in trouble; because it’s going to get weaker, rather than stronger, behind that government protectionism. I don’t think we need managed trade in this country. I don’t think we need subsidized industries. Essentially, we need less government.
Another area that would be very helpful to us would be some kind of tort reform. It’s really getting incredible, not only the money, but the number of people whose time it takes to continuously be involved in all these lawsuits. I’ll give you an example: We have over 500 ongoing lawsuits at Caterpillar at all times. If you resolve ten, ten more take their place. Most of these lawsuits center around product liability. We have a joint venture in Japan, Caterpillar Mitsubishi (which doesn’t appear on our books because we only own 50 percent of it), a $2.5 billion operation, one-fourth the size of Caterpillar Inc. They do exactly what we do; they design, manufacture, and sell construction and mining equipment. Do you know how many lawsuits they have going on? Zero. Sometimes they get one a year. Think of the great advantage that gives our Japanese competitors, who can spend all of their creative juices working on their products and marketing plans. More and more of our creative juices around here are spent trying to defend ourselves in trials. Litigation is the fastest growing industry in the U.S.
Recent indications are that GATT negotiations could be in trouble. There have been some questions about Bill Clinton’s commitment to NAFTA. Do you have any concerns about trade talks being interrupted between the Bush and Clinton administrations?
We will have to wait and see. Candidate Bill Clinton made a lukewarm endorsement of NAFTA. I hope he carries through on NAFTA. It’s a win-win situation for the U.S. It will depend on who Clinton surrounds himself with in terms of cabinet and staff. Hopefully he will get someone in USTR of the same caliber as Carla Hills, who is just outstanding. I think the Clinton administration essentially will embrace free trade – and will probably try to get the new GATT agreement in place – but that’s just an opinion. When Clinton was here earlier in the year talking with Caterpillar about the labor situation, he did say that he admired our stance on trade, so I think his instincts are with free trade.
Caterpillar has stated its desire and intent to both administrate and manufacture from a Peoria base. Yet, there is a widespread belief and fear that, because of labor problems, the company will gradually close manufacturing operations in the Peoria area. How likely is it that Peoria area manufacturing operations will be phased out slowly over the next few years?
Extremely unlikely. Our corporate strategy is to be globally competitive from a U.S. manufacturing base. I know of only one other company in the U.S. that has a strategy like that, and that is Boeing. Seventy-five percent of our assets are in this country. Seventy-five percent of our workforce is in this country. Yet, we do 60 percent of business outside of this country. We think we can do what it takes to be globally competitive. We think we can continue to provide high-paying manufacturing jobs in this country. We’ve just invested a billion and a half dollars in our Illinois facilities – a billion dollars right here in central Illinois. That’s equivalent to 30 or 40 Peoria Civic Centers or several Diamond-Star Motors, to put it into perspective. The last thing we want to do is leave Peoria, Illinois. We think this is a good place to operate. We want to keep our headquarters here and we want to keep our plants here.
We have to be realistic, though. The strategy of being globally competitive from a U.S. manufacturing base means that there must be some understanding among all parties involved that, “Yes, this is a unique company.” This is not a company like Ford, General Motors, or Chrysler whose strategy is really to build only in the U.S. what they sell in the U.S. It’s not a company like Deere or Case who essentially manufacture for the agricultural market. This is a company that exports over half of everything it makes in the U.S. The East Peoria plant exports far more than 50 percent of track type manufactured there. We have to have some recognition that we are not a “pattern” company. If we can get that recognition, we will be here for a long, long time. This is why we have spent the last two years trying to communicate with the UAW, with our employees, with the press, and with the community.
We want to stay in the U.S. This dispute with the UAW is our effort to keep high-paying manufacturing jobs at home. We are trying to keep jobs in central Illinois. We think we can do that, and we think we can do that and still pay our people very well. Our hourly employees now make an average of $44,000. In two years that would be up to $47,000 and in five years it would be up to $52,000, plus benefits. In benefits we are talking about first-dollar medical coverage, a wonderful pension program, and six-year job security. I keep saying that the only other people I know who have six-year job security are newly elected senators. I don’t have it. You don’t have it. Nobody else has it. The idea, which UAW is trying now to sell our employees, that Caterpillar has offered them six-year job security because in six years Caterpillar is going to close the facility – that’s absolute hogwash. We have no intention of doing that. This is a fight on our part to keep these facilities open, and at the same time pay people very well and be globally competitive.
GM signed a labor agreement with the UAW two years ago that, by most estimates, it could not afford. Deere & Co. signed an agreement with the UAW before Caterpillar negotiations started, but has been losing money. At any point, did you ever feel “betrayed” by the fact that Caterpillar was left alone to take a stand against the pattern bargaining concept?
No, I didn’t feel betrayed. I felt that as CEO of Caterpillar, I had to do what was right for Caterpillar. I don’t know what’s precisely right for General Motors. I’ve never been critical of Deere for signing the contract they signed with the UAW. I know their management very well; I have great respect for them, and I’m sure they did what they thought was right for Deere. I’m sure that Bob Stempel did what he thought was good for General Motors. But I have to do what I think is right for Caterpillar, and Caterpillar is fundamentally different from GM and Deere. Philosophically, do I think that some companies have given in too easily to some of these labor demands? Perhaps. But I wasn’t in their shoes. It’s easy to be critical when you aren’t in someone else’s shoes, and you don’t know what the heat of the battle is like. I’m charged by our shareholders with the responsibility of doing what I have to do to keep Caterpillar competitive.
Did you have contact about labor issues with executives of other UAW-represented companies during labor negotiations? Do CEOs of Fortune 500 companies “talk shop?”
Sure, CEO’s of Fortune 500 companies “talk shop.” That’s what we have in common. I received calls and letter from literally hundreds of companies around the U.S. – not so much calls of advice, but calls of encouragement and support. Shareholders, employees, customers and dealers from around the world called and wrote to support us. Of course there were some negative communications as well, but I swear, 99 percent of the communications we have received have been very positive. People are saying, “Hang in there, because if you are not cost-competitive, we aren’t going to be cost-competitive.” Our dealers understand that. I have visited with probably 80-90 percent of our largest shareholders in the past twelve months. Every one of them has encouraged me and the company to stay in there and do what it takes to be globally competitive.
Without singling out any particular companies, just look around this country and see what is happening to other companies who have not taken a firm stand and said, “We’ve got to be globally competitive or at least nationally competitive.” There are companies that should have been thinking about how they were going to compete with the Japanese transplants years ago, that are just now starting to face it. We started facing this years ago in the restructuring of the company. Our product line has been strengthened; our dealer organization is stronger that it has ever been; and our market share around the world is as high as it’s ever been. We’ve been worrying about these things for a long time. The last thing which we must do is make sure we have an understanding with our labor unions that we are unique, and that we have to be globally competitive from a U.S. manufacturing base. If we can get that, we will be in wonderful shape to provide high-paying jobs in places like Peoria, Decatur and Aurora as far as we can see into the future.
How do you think Caterpillar’s confrontation with the UAW will affect the union’s contract talks with the automakers?
I think it will have little or no effect. The automakers are truly different. The impact is going to be the other way. If there is an impact, it will be that we won’t be able to reach an agreement with the UAW until they have negotiated their final agreements with the Big Three – Ford, General Motors, and Chrysler. Those negotiations will be taking place next fall. I think the UAW will be loath to make any changes with Caterpillar – which represents only two percent of its membership – that will have any impact at all on what they negotiate with the automakers. We are the tail being wagged by the dog – or the Big Three – on this one.
We would like for our settlement with the UAW to take place as soon as possible. We want a contract. Let’s face it – many of our hourly employees who have been with the company for 20 or 30 years are used to working under a contract. A contract would take some of the uncertainty out of the situation for them, and it would allow everyone to concentrate on the positive aspects of our business. But, I think there is a chance that we will work for a lot longer without a contract.
How would the scenario you just described affect labor management relations in regard to the so-called in-plant strategies attempted by the UAW?
I can look you right in the eye and say we have seen no impact of the in-plant strategies. We have been saying this repeatedly. I can show you chart after chart that reveals that our productivity and quality today, in our key UAW-represented facilities, are better than they were before the strike. It’s true that both UAW leadership and some Caterpillar managers could be more productively spending their time, rather than shooting arrows back and forth. But as far as in-plant strategies negatively affecting the more important things in our business, like the quality and productivity, it’s not happening.
Let’s assume Congress passes legislation that would make it illegal to permanently replace striking workers. President-elect Bill Clinton has said that he would sign such legislation. If Caterpillar and the UAW have not settled and the union goes out on strike again next year, what are Caterpillar’s alternatives?
We will have to wait and see: first of all, if the legislation is proposed; secondly, if it is passed; and thirdly, what it would actually say. I don’t think that our employees want to be forced out on strike again by the leaders in the International UAW. I think, as they work under this new contract that we have implemented, they are finding out that “Hey, this is a darn good deal!” They don’t want to spend another five or six months out on the picket line not getting paid. So I don’t think the scenario you describe is going to occur. Ultimately, we haven’t had to permanently replace anyone. We didn’t think we would ever have to. What we did was to provide out people, after five and a half months of being out on the picket line, an excuse for being able to come back to work. A thousand crossed the picket line and it was common knowledge that several thousand more were going to cross the picket line. Our workers were tired of being out there and not being paid – being pawns between the International UAW and pattern bargaining. They constitute only two percent of the UAW membership, and they were being used because the UAW didn’t want to reach any agreement with Caterpillar that deviated from the pattern. We gave them a reason to come back. The UAW leadership saw a stampede about to take place, so they got out in front of it and called it a parade. We knew that our employees wanted to come back to work. When we started the negotiation process in September 1991 we did not expect to get to the place that we did. Maybe we were naïve; but we honestly thought that we could, over a period of time, convince the UAW that Caterpillar is a unique company – that it is not like Ford, General Motors and Chrysler. As the dispute went on and on, particularly in the right to manage issues, which they refused to budge on, we knew that we were going to have to do something. So after many months of attempting to bargain with the UAW, we were faced with the fact that we have been bargaining with ourselves. This realization led us to the point where we notified the union that our third offer, which was made in February 1992, was our final offer. However, the UAW still refused to change their position. This in turn led to our declaration of impasse, implementation of the key provisions of our final offer, and the invitation to our employees to come back to work.
Much of the UAW’s campaign has centered around you personally. How have you handled the personal attacks?
It comes with the territory. If you are going to be in the kitchen, you are going to have to be prepared to take the heat. But I don’t let it bother me. I know that doesn’t represent the feelings of most of our employees or the community. I am certainly not going to retaliate. This is too important to let it degenerate into some personal mudslinging operation. If they want to continue the personal attacks, fine. I think it’s counter productive, quite frankly. I think it’s poor strategy on their part. I’m not going to get involved in that, because I am more concerned about the well-being of our employees. I have to be. This other thing we have to remember here is that 72 percent of our employees are not UAW members. Only 28 percent are UAW members. I have to worry about all of our employees, not just the 28 percent that belong to the UAW. That frequently gets lost, particularly here in the Peoria area where you see a lot of UAW activities.
I would like to say that the charge that Caterpillar is trying to get involved in union-busting us absolutely ridiculous. We have no desire to bust the union. While we would strongly prefer to stay non-union in those plants that are union free, we have good union relations around the world as well as in the U.S. We have a good relationship with IAM. In Joliet, where we have recently expanded our operations, we have a five-year contract with the IAM. We have good relations with other unions. We are not out to bust unions; we are out to do what it takes to be globally competitive from a U.S. manufacturing base. It seems to me that is precisely what big labor in this country needs – they need companies who have the strategy that we have – that still continue to pay excellent wages and benefits.
We hear a lot of talk about the plants we have opened in North Carolina. I think it important to point out that the two plants we have opened in North Carolina involve work that has been brought back to the U.S. from other manufacturing plants outside the U.S. Quite frankly, we could not bring all that work back to UAW plants and keep it competitive, although we did bring back part of the Canadian work back to Aurora. The work being done at the Clayton, North Carolina facility is all work that came back from outside the U.S. The small transmission operation that we opened recently is work coming back from Japan. We’re paying $9-15 per hour in North Carolina, plus benefits. Trainees are paid less. The North Carolina employees also get profit incentives, something that has been introduced in our six-year proposal to the UAW, and it is something that can be very lucrative. We can bring work back to the U.S. and still create pretty darn good jobs. If we were subject to union pattern demands at those facilities, it would not have been economically viable to bring the work back in the first place. The idea that we are moving work from UAW facilities to non-union facilities in North Carolina just isn’t so.
The Illinois Legislature has proposed legislation that would penalize companies who hire permanent strike replacements, although it did not pass the General Assembly in the spring. What are the prospects in Illinois of future similar legislative attempts?
I don’t think Illinois, particularly now with the make-up of the new Senate, is going to pass any laws that are going to be anti-business, that might discourage further investment and employment growth. That would be counterproductive to the state. We already have high costs of operating in this state and we should try to hold that line. I think it is very possible, for a change, that the Illinois Legislature is going to be more pro-business that the Congress. That’s sort of a turnaround from what we seen in the past few years.
Caterpillar has modernized its manufacturing operations. It has adapted to a changing market by outsourcing. All of this has meant that Caterpillar jobs have steadily decreased in number, with hourly jobs cut in half since 1979. Do you expect this trend to continue? At what point might Caterpillar’s work force begin growing again?
First of all, we are as vertically integrated as we have ever been. We have not outsourced what we call core components of our overall product line. What we have done is become a heck of a lot more efficient in building what we build in our plants. But we are just as vertically integrated as we were 20 years ago. Our Peoria area employment ratio is almost precisely what it has been in the last 20-30 years – about 33 percent of our total worldwide employment. That percentage has remained remarkably constant over the years. If we had 90,000 employees like we had in 1979, we would be out of business – let’s face it. The fact that we can build as much iron today with 53,000 employees as we built in the late 1970s with 90,000 employees is what has enabled us to be globally competitive. We don’t intend to outsource in total more of our content. What we have to do, however, is make sure that what we build in-house is competitive; and that what we buy, we buy because we can buy better quality at a better price that we can make ourselves. That is the essence of how you go about running a manufacturing company. Ideally, you want to be 100 percent vertically integrated because then you control your own destiny, you get all of the after-market parts business, you control your quality and get all of the value added business. The fact of the matter is, in today’s world, there are some things we know we don’t have the volume or the expertise to do in-house – for example manufacturing tires. At one time, we thought we might get into the tire business; thank goodness we didn’t. The same is true of things like plastic parts and certain other fabrications. We want to make the “guts” of everything – the engine, the transmission, the hydraulics and those types of things. We have no long-term plans to outsource more product. We are about at the same vertical integration that we’ve always been.
Are there any misconceptions that Peoria area residents and/or businesses have about the area’s largest employer? Is there a message you would like to give our readers?
Caterpillar is a very transparent company. There aren’t many big misconceptions out there. I don’t think most people believe that we are going to leave Peoria. We have no intention of leaving Peoria. The fact that we are such a big fish in the Peoria pond means that these things get exaggerated when they occur. I didn’t see any big headlines in 1987-89 when we brought 600 new college graduates into the city. That didn’t make the news. When we moved 50-60 people down to Tennessee in our Caterpillar Financial Services operation, it was like the world was ending.
The fact of the matter is that our total employment in Peoria is going to remain at about the same percent of total employment as always. It wouldn’t be good for either Peoria or Caterpillar to have 50 percent of our people here. If there is that misconception out there, I want to correct it. We want to stay in Peoria; we intend to stay in Peoria; and we are going to fight to stay in Peoria – that’s the point. We are going to fight to stay here, and that’s what this is all about. IBI