Heavy metal - interview with Caterpillar CEO Donald Fites - Cover Story

Chief Executive, The, Sept, 1995 by J.P. Donlon

Being unpopular doesn't trouble Donald Fites; becoming uncompetitive does - particularly in global markets where Caterpillar is redoubling its efforts.

During the 1980s, prevailing management wisdom had written off Caterpillar as another arrogant rust-belt producer that might go the way of International Harvester, Allis-Chalmers, and Euclid. With the demise of these once-prime competitors, Caterpillar, the $14 billion Peoria, IL-based producer of earth-moving equipment and engines founded in 1925, realized the danger of being knocked from its perch as the world leader. Like many U.S. companies, it operated for decades in an ideal environment in which demand exceeded capacity. But by the 1980s, higher interest rates and a pummeled dollar combined with closing mines and fewer highway construction projects to expose weaknesses. Costs were too high. Non-U.S. competitors, such as Japan's Komatsu Ltd. and Hitachi, had as much as a 40 percent cost advantage in some product categories. Komatsu's ambition was summed up in "maru-C" - to encircle Caterpillar by picking off product and market segments where it was said to be weak.

The company depends largely on its reputation for quality and the service provided by its 187 dealers worldwide. The stuff ain't cheap either. A heavy truck runs between $1.3 million and $1.7 million, and even a modest wheel loader can cost $73,000.

When Don Fites, 61, succeeded George Schaefer as chairman and chief executive in 1990, years of cost cutting had been underway. A seven-year, $1.8 billion factory modernization program started in 1987. It reduced throughput - the time it takes to process a part from start to finish - from 25 days to six. A year into the job, Fites faced a collapsed world market resulting in a $404 million loss on an 11 percent decline in sales.

Born in Tippecanoe, IN, the son of a subsistence farmer, Fires had worked 39 years with the company, 16 of them in Europe, Africa, South America, and Asia. As a Sloan Fellow at MIT in 1971, he wrote his thesis on whether U.S. manufacturers could compete globally with Japan. (He met his wife, Sylvia, while stationed in South Africa.) Aside from giving him a working knowledge of German, Portuguese, and some Japanese, the overseas experience left its mark. More than anything, Fires is driven to ensure that Caterpillar is globally competitive.

To this end, he set about a complete reorganization of the company from a centralized hierarchy into 13 profit centers, despite the misgivings of some who thought Cat's corporate culture too ingrained to change much.

As if Fites hadn't enough on his plate, in June 1994, 11,000 UAW workers, mostly in Peoria and Decatur, walked off their jobs over job security and work-rule changes. (An earlier five-and-a-half-month strike in 1991 and 1992 was settled.) The company countered by hiring temporary workers and reassigning 6,000 white-collar staff Lawyers welded. Secretaries operated assembly-line process controllers. Today, the number of reassigned employees is down to 500 as more union workers have crossed picket lines. The company asserts that the dispute has had no material impact on manufacturinG quality or financial results. (With an average hourly wage rate of $18.70, a typical Caterpillar employee earns $55,000. When first-dollar health and dental coverage are added, the hourly rate comes to $39.)

Money is less an issue than the UAW's insistence that the company accept "pattern contracts" modeled on those of GM, Ford, and Deere. As these are not Caterpillar's primary competitors and such a move would severely inhibit its global competitiveness, Fites steadfastly resists, maintaining that nothing less than control of the company's destiny is at stake. The largest current labor dispute in the U.S. may yet be resolved as the newly elected UAW leader, Steve Yokich, a pragmatist, has resumed talks.

Fites, who is said to resemble actor Gene Hackman, can point to some promising results. Total five-year annual average return to shareholders is 15.48 percent. Recently, the company reported its sixth consecutive quarter of record earnings. It holds the No. 1 market-share position in every market it serves except Japan, where it is second. (Caterpillar's joint venture with Mitsubishi is first in Japan's heavy truck market.) It has moved up to the No. 2 position behind Cummins as supplier of diesel engines in North America. The company has four joint ventures in Russia and the CIS and two in China and is positioned to capitalize on future mining, natural gas production, and infrastructure projects.

To date, Fites has earned laurels from competitors and customers alike. Varity Corp. CEO Victor Rice thinks Fites is one of America's best managers. Magma Copper Chief Burgess Winter reckons the efficiency of use balances Caterpillar's higher prices for equipment the mining company uses. "Caterpillar does great development work. It's very innovative," he says. Unmanned, satellite-controlled mining equipment is one innovation in the offing. Fites still has his work cut out, though. Wall Street, although generally appreciative, tends to discourage easily. The trade dispute with Japan alarms Fites, a diligent free trader who chairs the U.S.-Japan Business Council. CE Editor J.P. Donlon recently talked with the plain-spoken Caterpillar chief at his Peoria headquarters.