Cat is back: an icon that once seemed headed for the dustbin, Caterpillar has made an impressive turnaround. Here's how

Chief Executive, The, July, 2005 by Dale Buss

Every time he glances out the windows of his seventh-floor office atop Caterpillar headquarters in Peoria, Ill., CEO Jim Owens takes in a very satisfying panorama: Hundreds of yellow bulldozers and other humongous Cat pieces are rebuilding Interstate 74 through town and across the Illinois River, in the largest highway reconstruction in downstate history. They spend all day crawling back and forth across his view.

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Hundreds of sites like it around the world are teeming with more Cat equipment than ever before. "We're sitting on the sweet spot as a company right now," Owens says. "We're well positioned with our products and in our markets. The competition is good--but a lot more fragmented than we are."

Caterpillar once seemed destined to join the Midwestern industrial scrap heap, succumbing to Japanese competition the same way the U.S. automobile industry is in the process of doing. But Caterpillar has bootstrapped its way to an impressive recovery from its early-1980s nadir. It still leads the heavy-equipment business worldwide, and is putting on one of the most impressive runs in recent manufacturing history.

The global infrastructure boom has surely helped, but credit also goes to the company's long-term recovery strategy that was hatched by Owens' predecessors and is currently being executed by the 59-year-old Owens. The plan has included decentralizing the company, playing tough with the United Auto Workers, making bold investments in technology, streamlining manufacturing, emphasizing leadership development, and being able to catch up with a burst in demand that materialized two years ago.

Cat's sales were up 33 percent last year, to more than $30 billion, and Owens is trumpeting projections of a further sales increase to more than $35 billion this year. (See charts, right.) Profits for 2004 were a record $2 billion, and Cat forecasts another 35 to 40 percent increase this year (bolstering the reasoning behind the company's 22 percent dividend bump and two-for-one stock split as of July 13). Amid national hand-wringing over manufacturing employment, Cat has added a stunning 5,500 full-time hourly jobs in the U.S. compared with a year ago. Worldwide employment rose to 80,000 at the end of the first quarter compared with fewer than 71,000 a year earlier.

Nearly every major industry served by Cat--construction, mining, energy and marine--is solidly on the upswing. Caterpillar is ideally suited to exploit that with a product line that ranges from a small skid loader to the $2.5-million, 797B mining truck, with a hydraulically controlled operator's seat, a 3,550-hp, engine, a payload of up to 400 tons and 12-foot-diameter tires. "We sure didn't do it with flim-flam," says Owens, with a deliberate manner that bespeaks his background as an economist. "Big iron is really moving, and production at most of our manufacturing facilities is up 35 to 50 percent for the year." Owens is quick to admit that even he, with his economics background, didn't foresee the speed and size of the upturn. "The stars have shone on us," he says.

It's taken awhile. Founded in 1925, Caterpillar Tractor Co. eventually became synonymous with big construction projects around the world. But global markets fell off by 40 percent during the economic downturn of the early 1980s, just as Japan's Komatsu was leveraging a cheap yen to target Cat's dominance. CEO George Schaefer slashed U.S. capacity, pursued low-cost overseas suppliers and streamlined manufacturing.

Successor Donald Fites reorganized the company into many business units, each accountable for its own P & L, and outlasted the UAW's 18-month strike in the mid-1990s. The next CEO, Glen Barton, made Cat a trailblazer by adopting Six Sigma practices companywide and investing hundreds of millions of dollars in new engine technology, called ACERT, that brought Cat in line with the Kyoto clean-air accords without compromising performance.

Consequently, Komatsu has been thwarted. Since the mid-1980s, Cat has built nicely on its market-share lead over the Japanese company, "and so they're now a fairly distant No. 2," notes Owens. Tweaking Cat nevertheless, Komatsu maintains a big billboard inside Peoria International Airport.

Peoria is the proverbial center of Middle America, but Cat is far from provincial. It manufactures in 22 countries, and its independently owned dealers sell and service equipment virtually everywhere such equipment is needed. The territory for Denver-based Wagner Equipment, for example, includes Colorado, New Mexico, Mongolia "and a piece of Siberia that is larger than the United States," as dealership president Bruce Wagner puts it.

Owens is a product of both the Cat culture and his upbringing in Elizabeth City, N.C. His hopes for a college sports scholarship ended after he was injured running the football. And his future as a textiles engineer took a blow at North Carolina State when Owens discovered he was colorblind. But he did excel at economics, and after he received his M.B.A., Owens moved to Peoria in 1972 to join a manufacturer that understood the importance of currency-exchange rates.