High Pay and All, Cat Is a Global Leader
Four Japanese reporters all posed the same question in phone calls to management expert William Ouchi: “Do you believe the underlying manufacturing structure of the United States is now in the process of crumbling?”
Ouchi, a professor at the UCLA Graduate School of Management--and author of two highly praised books on industrial competition--answered No to each caller, but then wondered if he had missed something.
He hadn’t. At its best, the U.S. structure is sound and the workers are highly productive, although the process of adapting to a changed world is painful and often filled with strife.
That will be illustrated most clearly today in St. Louis as Caterpillar Inc. and the United Auto Workers resume negotiations toward averting a companywide strike.
Underlying those negotiations are surprising and useful truths:
* That U.S. workers can earn high wages and still be globally competitive--shipping goods even to Mexico--as long as the company makes the proper investments in plant and equipment.
* That a U.S. company can hold markets around the world against the best Japan or any other country has to offer.
* That success demands short-term sacrifices in jobs, job security, profits and stock prices, but that progress is measurable and the long run is rewarding.
Caterpillar, the world’s largest producer of heavy construction equipment, makes most of its tractors and excavators in and around Peoria, Ill., even though it depends on foreign markets for 55% of its $10 billion plus in sales. It exports more than a third of its equipment and has benefited lately from increased business in Mexico.
Donald Fites, chairman of Caterpillar, told a U.S. Senate committee that sales to Mexico have doubled in recent years to more than $131 million. Asked if Cat would now be setting up a plant in Mexico, Fites saw no reason. “We can produce in Peoria or Decatur and export to Mexico,” he told the Senators--despite average U.S. wages of $17 an hour or $32.35 including benefits, at least eight times as much as Mexican wages.
“Productivity is the issue,” Fites said, referring to the high output Caterpillar gets from its skilled employees after investing $62,740 per worker in plant and equipment the past four years. Such investment has cut the time needed to make a tractor part from 25 days to 10--and will reduce it to six days by next year.
Now Cat wants a change in union work rules so employees can shift around to take advantage of the new equipment. And the union is balking. Instead, the UAW is offering Cat the same wage and work standards contract it signed with Deere & Co., the farm and construction equipment maker. That follows a tradition of pattern bargaining--a single agreement covering all companies in the same industry--that prevents union or managements from whipsawing each other.
So far, the argument has idled half of Cat’s union work force, and guarantees tension in the negotiations. Cat wants flexibility and is offering a $5-an-hour raise--plus a six-year job guarantee for each worker--to get it. But the union, with an eye toward next year’s negotiations in the automobile industry, is reluctant to give up a 34-year tradition of pattern bargaining.
Trouble is, the tradition is out of date. Caterpillar’s competition is not Deere, but Komatsu Ltd. of Japan, the world’s second-largest maker of construction equipment, with $5.5 billion in sales. Komatsu doesn’t face pattern bargaining because there are no industrywide unions in Japan.
An attempt in 1953 by Nissan labor leader Tetsuo Masuda to establish a UAW-style union was crushed by the Japanese government and the managements of Nissan and other automobile makers, who saw the issue as important to global competitiveness.
Still, Caterpillar has more than withstood the worldwide challenge from Komatsu, blunting the company’s charge in the United States, competing with it in Japan through a joint venture with Mitsubishi and holding as much as 70% of the world market for the heavy equipment used to build highways and airports.
Triumph has a cost. Caterpillar today employs 54,000 people, one-third fewer than 10 years ago. Investing heavily right through recessions eliminates profit. Cat’s stock, at $51.25 a share Tuesday, is lower than 10 years ago, and its $1.20-a-share dividend is half what it was then.
But Caterpillar has paid its dues, and will get a payoff in rising profit starting next year, say analysts such as Steven Colbert of Prudential Bache Securities.
So to answer the question posed to Ouchi: No, the structure of U.S. manufacturing is not crumbling. It is adapting. Many analysts see Caterpillar as a company primed to benefit from the building that will go on around the world in this decade, from Asia through Eastern Europe to Latin America.
Meanwhile the UAW, like most labor unions, persists in a North American view of reality that is too narrow. But it too can change. “Unions will return to popularity when they discover a new, more flexible form,” Ouchi says. Good point: Change is painful, but flexibility keeps structures from crumbling.
