The hungry Caterpillar

By PETER MARSH

and STEFAN WAGSTYLE

The Financial Times

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 stock price, chairman Donald Fites 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's 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's 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 $16.5 billion last year to $30 billion before the end of the next decade and to raise the proportion of revenues from the developing world from 23 percent to about half.

Caterpillar's shares have slid about 20 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 percent 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 reorganization Caterpillar has shown the U.S. 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 U.S. and overseas.

After losing money in 1991 and 1992, it has since boosted profits steadily, turning in net earnings of $1.36 billion last year. Recently it reported a 24 percent increase in third-quarter profits to $385 million, and Wall Street is forecasting a further rise in earnings for the full year to about $1.6 billion.

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 penciling in virtually flat earnings growth for next year as the "yellow lights start flashing" over growth in the company's main markets.

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 U.S., 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 percent beyond what we thought was possible," says Fites. "We're still exploring how far we can go."

The company is investing about $100 million in compact equipment it plans to launch early next year. The mini-excavators' field is dominated by Komatsu, Yanmar and Kubota of Japan, "skid steer" loaders by Ingersoll-Rand, a U.S. company, with its Bobcat range.

The new machines will be produced in the U.S., Britain and Japan, and the company is aiming to gain a fifth of the $3.5 billion 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 U.S. making combines based on Claas designs.

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 globalization will leave the proportion of its manufacturing in the U.S. 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 U.S. Fites envisages domestic sales will fall from roughly half total revenues this year to 25 percent within the next two decades.

The company is expecting particularly large returns from China, where it's half way through a $90 million investment program and where annual sales are projected to climb from about $200 million to up to $1 billion by early next century.

(Distributed by Scripps Howard News Service.)