The economic recovery hasn't gone well for Caterpillar Tractor Co., and the chances now seem good that the recovery might be gone before Cat gets much out of it.
In fact, the 1980s so far have been a bad decade for America's premiere construction equipment maker, which has just completed its third straight year of massive losses.
Like other big American corporations that make up the nation's industrial base, Caterpillar has been devastated by international competition and the long slump in the worldwide economy. Although sales began to recover last year from the disastrously low level of 1983, when they were 41% below 1981's levels, Caterpillar still lost $177 million in the first nine months of 1984, following losses of $345 million in 1983 and $180 million in 1982.
Analysts are expecting Cat's loss for all of last year, which is likely to be reported later this month, to top $200 million, and they add that Cat's outlook for 1985 is shaky at best. Even Caterpillar's management expects only "modest improvement" this year.
What is particularly embarrassing for Caterpillar about all this bad news is that the company hasn't made any money since it was showcased three years ago as one of America's best-managed companies in the book, "In Search of Excellence."
(Ironically, soon after the book was published in 1982, Caterpillar endured a seven-month strike by its unionized U.S. work force that helped push the company into the slump from which it has yet to recover.)
But unlike other companies in the auto, steel and machine tool industries, Caterpillar, headquartered in this central Illinois town, isn't crying about imports. Instead, it's worried about exports, and about maintaining its historical position as one of the nation's leading exporters of manufactured goods in the face of increasing Japanese and European competition in overseas markets.
While Caterpillar is still a dominant No. 1 in the earth-moving equipment business both in the United States and overseas, foreign firms--especially Japan's Komatsu Ltd.--are rapidly chipping away at Cat's worldwide market share, at least in part because of the strength of the U.S. dollar, which has made Cat's products more costly relative to equipment made overseas.
"We are still a net exporter, and we anticipate that we will continue to be one for some time," says Caterpillar Chairman Lee L. Morgan, who is retiring at the end of January. "But our numbers are significantly down."
Because of the company's higher costs of production in the United States, Morgan adds, the trend at Caterpillar is now toward using Cat's European operations and its Japanese joint venture with Mitsubishi Heavy Industries to produce equipment for the Third World and other overseas markets, while U.S.-built products are targeted primarily for sale in North America. (South Korea's Daewoo Heavy Industries is also about to begin building lift trucks for Caterpillar for sale around the world.)
"Eventually, we may cut back on the parts of the world we serve out of the United States," Morgan says. "Ultimately, we may reduce the size of our U.S. operations to the point where they are just large enough to serve the U.S. market. So rather than importing more goods, we might just export less."
But as foreign competition has increased, many of Cat's key overseas markets (especially in the Third World, which has traditionally accounted for about 20% of Caterpillar's U.S. exports, and 30% to 40% of sales of all Cat products made worldwide) have virtually dried up.
Falling oil prices and lower production levels have made it more difficult for Middle Eastern oil-producing nations to buy new equipment for their big construction projects, while the growing debt crisis plaguing other, non-oil-producing underdeveloped countries has also reduced their ability to pay for Cat's huge bulldozers and other earth-moving products.
The increasing weakness of its export markets represents a serious reversal for Cat, and is at the heart of the company's continuing financial woes even though domestic sales are strengthening. For although exports may be little more than frosting on the cake to many big American manufacturers, Caterpillar's fortunes are directly linked to overseas sales.
Caterpillar's exports fell from $2.6 billion in 1982 to less than $1.6 billion in 1983, and during the same period, the company fell from fifth to eleventh place on Fortune magazine's annual survey of the largest U.S. exporters.
Exports as a percentage of Caterpillar's sales fell from 40.5% in 1982 to 29.2% in 1983, according to the Fortune survey, and Morgan says that of the 20,000 U.S. jobs eliminated at Caterpillar since the company's slide began in 1981, about 15,000 have been lost because of reduced foreign orders.
"We think the No. 1 problem is the strong dollar," Morgan says. "We believe that there should be a 25% to 30% improvement in the exchange rate with the Japanese yen, because U.S. manufacturers are finding themselves disadvantaged by that amount," Morgan adds. (The yen-dollar exchange rate has moved from an average of 203 yen to the dollar in 1980 to nearly 255 yen per dollar last week.)
In an effort to get around the exchange-rate problem and to make it easier for Third World countries to buy Caterpillar products, in September the company set up a trading subsidiary that will sell Cat equipment overseas in exchange for locally produced bartered goods rather than cash. Cat's trading subsidiary will then resell the barter through international brokers, in what is expected to become a widespread practice in the heavy equipment industry.
"We in the industry are going to have to figure out how to sell things like Mexican oil in order to sell equipment down there," observes William Mulligan, president of the Construction Equipment Manufacturers Assn., an industry trade group.
But if anything, Cat's trade-related problems are beginning to hit home even harder now, as Komatsu, the second-largest construction equipment company worldwide and Cat's main competitor, has begun to work more aggressively to build its market share in the United States now that the overseas markets are weakening. Thanks to the weakness of the Japanese yen against the dollar, Komatsu has been able to price its equipment about 40% lower than Caterpillar's list prices, forcing Caterpillar to offer steep discounts to maintain market share.
"Cat doesn't want Komatsu to penetrate this market, so it is fighting back on prices even at the expense of short-term earnings," says Eli Lustgarten, heavy equipment analyst with Paine Webber Mitchell Hutchins in New York.
Because of Caterpillar's advantages in service, parts availability and in customer loyalty, as well as in its large network of about 85 U.S. dealerships, Lustgarten says Cat doesn't have to match Komatsu's prices, just remain close enough so that the higher price tags don't outweigh other factors in buying decisions. He estimates that Caterpillar is now offering customers discounts of about 22% off list price, which still leaves Komatsu with an 18% pricing edge.
It's easy to see why Komatsu, which is much smaller than Caterpillar, is targeting the Cat-dominated North American market. Industry shipments in 1984 in the United States and Canada rose about 30% over 1983's low levels, and sales are expected to rise another 11% this year, according to the Construction Industry Manufacturers Assn. By contrast, the trade group says overseas sales last year remained at 1983's low levels, and it expects only modest improvement in 1985.
Even if the powerful combination of slumping markets and greater competition that has staggered Caterpillar eases somewhat in 1985, Cat's sales aren't expected to return to anything like their pre-recessionary levels. Faced with such long-term structural problems, Caterpillar's management has been feverishly cutting costs in an effort to lower the company's break-even level so that it can make money even if the market never fully recovers.
Morgan says the company's costs have been reduced by 14% since 1981, and he predicts that costs will be 22% below 1981 levels by late 1985 or early 1986. But with little relief in sight in the marketplace, the firm's cost-cutting program has been accelerated over the last few months.
In October, Caterpillar slashed its quarterly dividend to 12.5 cents from 37.5 cents per share and said it was instituting a hiring freeze and accelerating its plans to lay off more workers in the United States. In November, Caterpillar said it was going to shift production from its Midwestern plants to Scotland over the next two years and would eliminate cost-of-living payments and other benefits for non-union salaried employees.
In December, Caterpillar said its layoffs planned for January and February were being expanded, and would eliminate the jobs of a total of more than 3,100 U.S. hourly workers. The company added that another 700 salaried workers would be laid off by the end of the first quarter.
Despite this Draconian cost-reduction program, Caterpillar's worldwide manufacturing capacity utilization rate is still relatively low--hovering between 60% and 65%--and analysts are worried that Caterpillar will continue to lose money as long as its overseas markets remain so depressed. But with little agreement among analysts about whether the company's Third World markets will improve this year, Wall Street estimates of Cat's 1985 financial results vary widely.
"It is one of those place-your-bet kind of things," Lustgarten says. "You tell me where the dollar is going and where overseas economies are going, and I'll tell you where Caterpillar's earnings are going. All Cat needs is volume, but at this point it is very vulnerable to . . . forces beyond its control."