Caterpillar: Sights set on rivals'
markets
TUESDAY DECEMBER 2 1997
By Peter Marsh and Stefan Wagstyl
Caterpillar, the world's largest construction equipment
manufacturer, may have slipped a gear on the stock market
in the past few weeks, but compared with the 1980s, when
it came under strong pressure from Japanese rivals, it is in
overdrive.
Unruffled by the recent fall in its share price, Donald Fites,
chairman, says that in his 41 years with the company he has
"never felt better" about its immediate prospects.
Having beaten off the challenge to its dominant position in
the large-scale equipment market, Caterpillar is taking the
fight into its competitors' territory.
It is launching a family of "compact" building equipment,
entering a market in which Japanese makers have
traditionally been strong, and returning to combine
harvesters, a market it left in the 1930s.
It is also renewing its push into China and other developing
countries where rapid growth in demand for construction
equipment is expected.
It intends to increase annual sales from $16.5bn last year to
$30bn before the end of the next decade and to raise the
proportion of revenues from the developing world from 23
per cent to about half.
Caterpillar's shares have slid about 20 per cent, from just
under $60 in mid October to $48 at the end of last week,
following concerns about its exposure to likely cuts in
infrastructure spending in developing countries.
Even so, since late 1995 the shares have marginally
outperformed the whole of Wall Street, while over the past
five years they have risen 80 per cent compared with the
rest of the market.
The stock movement has been a response to the change in
Caterpillar's position. A decade ago, it was losing market
share to Komatsu and Hitachi, struggling with high costs
and low profits and seemingly unable to respond to the
challenge of Japanese competition.
But like many American companies in the 1990s, through a
combination of cost-cutting, investment and reorganisation
Caterpillar has shown the US remains a highly competitive
manufacturing base.
The payroll was cut from a peak of 90,000 in 1979 to
59,000, with further savings coming from replacing retired
staff with new workers on lower pay, both in the US and
overseas.
After losing money in 1991 and 1992, it has since boosted
profits steadily, turning in net earnings of $1.36bn last year.
Last month it reported a 24 per cent increase in
third-quarter profits to $385m, and Wall Street is
forecasting a further rise in earnings for the full year to
about $1.6bn.
Analysts are generally upbeat about medium-term
prospects. One fund manager says: "In the past decade they
have got stronger while most of their rivals have got
weaker."
However, Mark Koznarek, of Cleveland-based Midwest
Research, is pencilling in virtually flat earnings growth for
next year as the "yellow lights start flashing" over growth
in the company's main markets.
Mr Fites expects a continuation of the big productivity
gains obtained in the past 20 years. Output per person has
doubled since 1979, with most of the advances coming
from the US, which accounts for three-quarters of
Caterpillar's manufacturing and nearly two-thirds of its
employees.
"Because of changes in areas such as computer aided
design and logistics capabilities, we find it's possible to
lift the output of individual plants by as much as 40 per cent
beyond what we thought was possible. We're still
exploring how far we can go," says Mr Fites.
The company is investing about $100m in the compact
equipment for launch early next year. The mini-excavators'
field is dominated by Komatsu, Yanmar and Kubota of
Japan, "skid steer" loaders by Ingersoll-Rand, a US
company, with its Bobcat range.
The new machines will be produced in the UK, Japan and
the US and the company is aiming to gain a fifth of the
$3.5bn a year market for compact equipment by early next
century.
"The mass market for construction machinery will require a
very different sales approach," says David Phillips, of
Off-Highway Research, a London consultancy.
Caterpillar is also building its alliance with Claas, the
German company and Europe's biggest maker of combine
harvesters. Caterpillar expects by 2000 to be operating a
plant in the US making combines based on Claas designs.
Mr Fites, who has run Caterpillar since 1990, says his
"single largest" strategic weapon is the worldwide dealer
network covering 197 countries. He says Caterpillar is
putting a huge effort into cementing the links with its 190 or
so dealers, for instance through a worldwide computer
network providing instant information about parts
availability and new machines.
He thinks that globalisation will leave the proportion of its
manufacturing in the US fairly constant, out of a need to
avoid plant duplication, especially at the heavier end of
Caterpillar's range where machines can sell for $500,000
or more.
However, in marketing and sales operations, Caterpillar
will become less focused on the US - Mr Fites envisages
domestic sales will fall from roughly half total revenues |
