A Publication of WTVP

In 2000, with revenues stalled at about $20 billion, Caterpillar leaders set a goal to reach $30 billion by 2006. Caterpillar achieved this bold goal two years ahead of schedule. Now, under the leadership of Chairman and CEO Jim Owens, Team Caterpillar has set its sights on a new enterprise strategy that establishes aggressive goals for revenue growth, improved profitability and best-in-class performance in safety, quality and product availability. Building on Caterpillar’s uncompromisingly high ethical standards, Owens also chartered an update of the company’s Worldwide Code of Conduct. “The Code of Conduct is the most important document we produce at Caterpillar, serving as a daily guide for putting our values in action,” he said. “This updated code emphasizes the values-based culture that will guide our company to fully realizing our global leadership goals.”

The 59-year-old Owens is a North Carolina native and holds a Ph.D. in economics from North Carolina State University. He joined Caterpillar in 1972 as a corporate economist and was named chief economist of Caterpillar Overseas S.A. in Geneva, Switzerland, in 1975. From 1980 until 1987, he held managerial positions in Peoria in the Accounting and Product Source Planning Departments. In 1987, he became managing director of P.T. Natra Raya, Caterpillar's joint venture in Indonesia. He held that position until 1990, when he was elected a corporate vice president and named president of Solar Turbines Incorporated, a Caterpillar subsidiary in San Diego. In 1993, he came to Peoria as vice president and chief financial officer with administrative responsibility for the Corporate Services Division. In 1995, Owens was named a group president and member of Caterpillar’s Executive Office. Over the next eight years as a group president, Owens was at various times responsible for 13 of the company’s 25 divisions. In February of 2004, he became Chairman and CEO.

Owens is a director of the Institute for International Economics in Washington, D.C., a director of FM Global Insurance Company in Rhode Island; a director of Alcoa Inc. in Pittsburgh, Pennsylvania; and a member of the Council on Foreign Relations in New York. He is a member of The Business Council, Business Roundtable and the Manufacturing Council in Washington, DC; and the Global Advisory Council to The Conference Board in New York. He is also a member of the Community Advisory Board of Saint Francis Medical Center and the Civic Federation Board in Peoria.

In 2002 and 2004, Owens and his wife Katie were co-chairs for the Heart of Illinois United Way de Tocqueville Society. The de Tocqueville Society is made up of individuals and couples who annually donate more than $10,000 to the Heart of Illinois United Way Campaign.

Katie Owens also serves as a member of the Children’s Home Foundation Board of Directors and the Easter Seals Auxiliary.

(IBI interviewed Owens on November 1, 2005 the day after he presented Caterpillar’s new strategy to an analyst conference in New York.)

Before we jump into your plans for Caterpillar’s future, tell us about your background and the influences your childhood had on your success.

I grew up in Elizabeth City, North Carolina, a small town not too far from the Atlantic Ocean. I feel the foundation of family and friends and the small-town values I got growing up in Elizabeth City have served me very well my whole life. As a child, I spent time on the family farm hunting with my grandfather, and to this day a handful of best friends from my childhood are still among my best friends.

How did you end up becoming an economist?

When I decided to study economics, I knew I wanted to work in industry because I enjoyed applied economics much more than the theoretical side of the field. Caterpillar recruiters came to the NC State campus in the early 1970s and were looking for economists to join the company. I was interested in Caterpillar because it was a good company where I would have a chance to apply my education and possibly work overseas. I joined Caterpillar as a 26-year-old corporate economist and have worked with outstanding Caterpillar people all around the world.

Tell us about your international experience.

I should note that the opportunity to live around the world, in my case, Geneva, Switzerland, and Jakarta, Indonesia, provided me – and provides many Cat leaders– with unique business experiences that play a critical role in our success as a global company. At the same time, we place a great deal of importance on making sure our employees are able to maintain work-life balance.

When moving to a new community, it’s challenging to establish a new home and get children enrolled in school and involved in activities. I was very blessed to have had Katie as a true partner and children who readily adapted to new cultural environments. My international work assignments strengthened our immediate family bonds and gave us all a chance to see the world.

Where does Caterpillar stand today compared to the 1970s?

When I started with the company in 1972, our sales were $2.6 billion with profit of $206.4 million. Based on our current outlook, sales and revenue for 2005 should be about $36 billion with a midpoint in the range of profits at about $3.75 billion. In 1972, Caterpillar spent about $100 million on research and development; we will spend about $1 billion for R&D in 2005. Today, we have more than 300 products, representing the broadest and strongest lineup in our company’s history. In 1972, the product line was just over 100 models. For example, 1972 was the first year Caterpillar offered a single hydraulic excavator model. Today we have 30 different hydraulic excavators.

In terms of similarities, our 1972 annual report discussed how Caterpillar products help mankind improve the world and make progress possible. Those words still ring true today. Back then, about half of our sales were outside the United States, today, international sales still make up about half of our business.

When I joined Caterpillar, our price/earnings ratio was slightly better than that of the average S&P 500 company. That’s a high standard, and I think Caterpillar is still a better company than the average S&P 500 company. Today’s average S&P 500 company has a P/E ratio of 16, we are trading at 13.

I believe Caterpillar is undervalued by investors because they don’t fully understand the strengths of this company including:

(1) The relative competitive strength of our comprehensive product line.
(2) Our global manufacturing footprint and its regional cost competitiveness.
(3) Caterpillar’s overwhelming advantage with distribution and product support infrastructure that our competitors can’t match.
(4) Our holistic business model, which includes selling new equipment, renting equipment, financing and insuring customers, and product support agreements keeping us involved with many customers over the life cycle of their equipment.
(5) The strength of Caterpillar’s balance sheet and the flexibility this gives us.

These factors, in addition to a highly committed global team and a long-standing history of high integrity and good governance, make Caterpillar an outstanding investment. I don’t think our current P/E ratio reflects these facts, but we are working hard to change that perception.

How will Caterpillar’s new enterprise strategy and the updated Code of Conduct, “Our Values In Action,” play into efforts to change Caterpillar?

Our Values in Action and the new enterprise strategy aren’t about moving Caterpillar in a significantly different direction—they are about growing in our “space” (areas where we already do business), exploring growth beyond our core (areas adjacent to our current businesses), and continuing to make 6 Sigma the way we work. What’s different is the focus, clarity and emphasis on executing. There are three key areas where breakthrough improvements need to occur: safety, product quality and product availability. The new strategy takes the form of an integrated pyramid, with our Vision 2020 at the top supported by strategic goals, critical success factors and strategic areas of improvement. The foundation is Our Values in Action—integrity, excellence, teamwork and commitment—which are expressed and defined in our updated Worldwide Code of Conduct.

Are you excited to lead the company during this period of growth?

It’s a very exciting time for all of Team Caterpillar, and I’m honored to be Chairman and CEO. Meeting these goals will involve every employee, and in fact, each member of the executive office (pictured on the cover of IBI) has responsibility for driving specific critical success factors (CSFs). The five group presidents I work with on a daily basis are a highly seasoned team. It’s truly a pleasure to work with them. Out of our entire executive leadership team of 36, including myself, 30 individual Cat officers have worked outside of their home countries, giving them tremendous business experience. With this great leadership team focused on our strategy, I’m confident we’ll succeed. There are seven critical success factors that are key for Caterpillar to achieve our new strategy.

• People— Focuses on creating an inclusive culture that fully engages current and new Caterpillar employees in a safe environment so that we all embrace Team Caterpillar.
• Quality— Focuses on accelerating the pace of quality improvement for current and new products. Caterpillar is already known around the world for the quality of its products, but we must and will make continuous quality improvements.
• Product— Focuses on implementing a disciplined and effective new product introduction process to drive platform commonality, supportability, systems integration and key technologies across product families. We will leverage this process to become the highest quality, lowest cost producer of our high-volume products in each hemispheric currency zone.
• Velocity— Focuses on radically changing our business model to reduce our order-to-delivery time significantly compared to any competitor. We will do this by integrating our supply chain and building quality products to end-user order through the Cat Production System.
• Distribution— Focuses on giving Caterpillar differentiated, cost-effective and profitable distribution channels for the retail end of our product line in each of our brands. Our distribution system will be the global benchmark for delivering integrated business solutions to our customers.
• China— Focuses on Caterpillar establishing a market leadership position in China, served profitably from largely in-country manufacturing operations with a supporting holistic Caterpillar business model.
• Trough— Focuses on the establishment of a flexible cost structure that allows Caterpillar to improve earnings performance significantly in any cyclical downturn.

What do you hope this will translate to in terms of growth for Caterpillar?

Our 2010 strategic goals—grouped under the “3Ps” of people, performance and profitable growth—are the first set of hills to conquer as we move toward our Vision 2020 and take Caterpillar from good to great. We have set challenging but realistic goals for 2010 and beyond and are committed to achieving success that will reward customers, stockholders and employees. It’s about being number one in every endeavor we pursue, affirming our leadership in technology and innovation and creating a great place to work. These are the things that will take Caterpillar to the next level.

Specifically, we have established several key goals for 2010:

• Achieve breakthroughs in factory-delivered product quality
• Be number 1 for every major product group on every continent in the markets Caterpillar serves
• Achieve $50 billion in sales and revenues by 2010
• Deliver earnings per share growth, averaging 15 to 20 percent annually through 2010
• Dramatically improve earnings performance in any future economic downturn

How can Caterpillar make these goals happen?

Worldwide, good economic growth is forecasted between now and 2010. A low inflation/interest rate environment coupled with strong corporate profits for companies around the world and recent underinvestment have resulted in a favorable investment climate.

The near-term outlook is particularly strong in many of the key markets Caterpillar serves, including global mining, global oil and gas production, large infrastructure projects, marine engines for cargo ships, distributed power, building construction and housing and North American on-highway trucks. This year represents the third year of the current economic recovery, and the last two cycles have each lasted about seven years.

Given this strong market environment and our focus on executing three key-strategies that we control–safety, product quality, and order-to-delivery– I have no doubt that Team Caterpillar will deliver on these goals.

Caterpillar’s strategic goal is $50 billion in sales and revenue by 2010. What about the goals for 2020?

Vision 2020 is our beacon. It’s what we aspire to be. It’s about pride and leadership. It’s about being number one in every endeavor we pursue, a leader in technology and innovation and a great place to work.

When we achieve our Vision 2020, we could reach over $100 billion in sales. Think about that. Just a few years ago, many thought $30 billion was an impossible goal. But now we can realistically see ourselves reaching the $100 billion milestone—and very few companies have that kind of organic growth potential in their areas of core competence. We do, and that’s genuinely exciting.

Caterpillar has always been known as a cyclical company. What happens if there is a downturn in the historic businesses you serve?

Cyclical earnings are a key reason Caterpillar stock’s P/E ratio has been relatively low over the years, thus reducing our ability to attract more funds required to accelerate growth and reward employees—both critical to our long-term health. To improve our P/E ratio, we are committed to generating attractive earnings during the “trough,” or downturn, and improving them at every cycle. We delivered $1.15 EPS in the last trough in 2002 and plan to at least double our EPS in the next downturn.

Caterpillar is uniquely positioned to improve earnings performance in the trough. We’re leveraging our substantial expertise in less-cyclical areas of business such as financing, remanufacturing and logistics and offering these services to outside companies. Cat Financial, Cat Reman and Cat Logistics are proven strong contributors to countering a downturn in machine and engine sales.

What sets Caterpillar apart from its competitors?

I’d like to tackle this question in two ways, looking at the people of Caterpillar and its dealer network and the products, product support and services that set Team Caterpillar apart from our competitors.

First, people have made Caterpillar a global leader for the past 80 years, and as we grow around the world, it is people who will take our company from good to great. Only through the individual and combined actions of Caterpillar people will we achieve our strategic goals, reach our Vision 2020, and live Our Values in Action as expressed in our updated Worldwide Code of Conduct.

I want every employee to be engaged in his or her work, and that means ensuring everyone understands how his or her job fits in the bigger picture, has opportunities to learn and grow, and feels appreciated for making a contribution. In particular, we are also focusing on improving our safety performance. It’s a contradiction to say people are important and have poor safety performance. We’ve made improvements, but there’s more to do. Our ultimate goal is zero injuries, and our 2010 targets will help us get there.

We are committed to developing strong leaders, embracing diversity and providing continual learning opportunities—what our people have told us are the three main drivers of engagement. That commitment to developing leaders from within is one of the reasons Caterpillar has been so successful over the years. This company has incredible bench strength across the entire organization. These are people working in Peoria and all over the world who have had diverse careers within Caterpillar and who are leading us today and will continue to provide leadership as we reach our Vision 2020 goals.

From a product standpoint, I’ve already talked about the scope of our product line, but it truly is incredible when you consider the progress that is made possible all over the world because of the products we make. Our global market leadership is supported by the nearly 200 independent Caterpillar dealers who sell and provide support for our products. In addition, Caterpillar Financial Services Corporation is a key strength, offering customers financing options for Caterpillar equipment. And with 300 facilities in 40 countries, Caterpillar’s global manufacturing footprint also sets us apart from our competitors by helping us be cost-effective in every major hemispheric currency zone.

To meet your growth plans will you need to hire more people?

We expect to hire 80,000 new employees over the next 15 years to offset attrition and to support our growth—this is the equivalent of nearly our entire workforce today. Workforce development and integration into the Team Caterpillar culture are critical, as is building the diversity of our leadership team to reflect the markets we serve.

Will much of that growth for Caterpillar be in China?

China holds enormous potential for growth for machines and engines. Caterpillar is making significant investments there, and all of Team Caterpillar has the responsibility to ensure that these investments are successful. To do that we must:
• Establish a market leadership position in China through accelerated development of market-driven products and services
• Ensure that in-country manufacturing operations are profitable
• Develop a holistic Caterpillar business model that accelerates the market evolution toward our global business model, which combines the best distribution with product support tailored to customer requirements

Where do Peoria and central Illinois fit into Caterpillar’s new strategy?

While most of our employment growth will be outside the U.S. to support customers in areas where our business is growing rapidly, we remain committed to Peoria and central Illinois. We expect to maintain a strong manufacturing presence in North America for the long-term future, just as we will have a presence in Europe and Asia. We must manufacture and supply products in those areas where our customers are located. We also continue to invest in the local community, particularly through the development of our new worldwide visitors center in downtown Peoria.

With ACERT® Technology and other efforts, Caterpillar has made a name for itself in the area of sustainability and improving the environment. Is this also part of the new strategy?

Caterpillar has a history of providing leadership to industry and community initiatives that reflect our commitment to the environment, as reinforced in our Code of Conduct. We want to be recognized as the leading company that makes sustainable progress possible. It is not only the right thing to do but it also drives substantial stockholder value as we enable our customers to become more sustainable in their industries.

Additionally, our employees are proud of our progress on eco-efficiency in our operations and are proud to provide products and services that make sustainable progress possible. We will ensure that our business units are working together, leveraging each other’s learning, and contributing their best to elevate our performance in making sustainable progress possible.

This seems to be a very exciting time for everyone involved in Team Caterpillar.

Caterpillar’s story is an exciting one of growth and profitability. We are currently operating in an environment conducive to growth, introducing a highly integrated and comprehensive new strategy that is being cascaded throughout our organization and guiding all our actions through a values-based Code of Conduct. We have set challenging but realistic goals for 2010 and beyond and are committed to achieving the success that will reward our customers, stockholders and employees.

Do you have any final thoughts?

Team Caterpillar is ready for tomorrow and is as well positioned as any company, in any industry, to succeed in the global economy. We’re excited to take on the challenges ahead of us because we have the right strategy, products and services, technology, the right global footprint and most importantly, the right people to win. IBI