http://www.truthabouttrade.org/article.asp?id=7112The Wall Street Journal
Since becoming chairman and chief executive of Caterpillar Inc. three years ago, Jim Owens has seen the Peoria, Ill., maker of heavy equipment nearly double in size -- to $41.5 billion in revenue last year -- as it rode a global boom in construction and mining.
The growth had its pains, as Caterpillar struggled with production bottlenecks, lengthy delivery times and capacity-expansion missteps that occasionally disappointed Wall Street. Now Mr. Owens, 61 years old, says he is more concerned with fattening the company's bottom line by making manufacturing more efficient, slimming dealer inventories and continuing to press for free trade.
The Ph.D. from North Carolina State University, who joined Caterpillar 30 years ago as an economist, oversees a global behemoth of 278 factories and 94,000 employees. In Naples, Fla., attending a recent meeting of the Business Council, Mr. Owens discussed world-class manufacturing, free trade, Sen. Barack Obama, Federal Reserve Chairman Ben Bernanke and the NCAA basketball tournament. Excerpts:
WSJ: Caterpillar just announced a $7.5 billion share buyback. Why?
Mr. Owens: Sitting on a big wad of cash doesn't make any sense whatsoever for shareholders. It also tends to promote bad practice among management. Almost all good companies make their worst mistakes in the best of times. That's when you get into overreaching. You've got more [cash] than you know what to do with, and you think you're so damned good you can buy anything and make it better.
WSJ: How is it that Cat added nearly $20 billion in revenue in the last three years?"
Mr. Owens: We've done it on the strength of the global economy. In 1998 through 2002, we experienced a prolonged recession in our key markets. In the 2004-through- 2006 period, the global economy experienced its best three years of growth since World War II. That drove strong commodity prices, and the combination of [those and] the strong economy led to a significant increase in investment for natural-resource development and global infrastructure. When this surge in demand started in 2004, we were well-positioned in terms of market leadership and some excess capacity to realize significant organic growth in a very short period of time.
WSJ: Looks like you're going to easily hit your goal of $50 billion-plus in annual revenue by 2010. Is it time to set the bar higher?
Mr. Owens: What we're really about in this near term is just a relentless focus on execution. We're very focused on introducing a Caterpillar production system that's universal across all of our manufacturing operations world-wide. We've had a propensity to do things at least slightly differently all over the world. We've benchmarked many different industries and then our own best-in-class facilities and created our own recipe book. Whether our top-line sales are $45 billion or $60 billion is going to be a lot less important than pulling off that operational excellence. The Holy Grail is not top-line sales growth; it's bottom-line [profit] growth.
WSJ: You've also said you want to get away from the automotive model of stuffing dealers' inventories with products.
Mr. Owens: We want to keep some dealer inventory out there so they can see it and buy it and try it, but we want to get away from having them carry significant amounts of inventory. If you look back ... dealer-inventory swings have in every case aggravated the business cycle for Caterpillar. We work overtime to build inventory in the up cycles, and then [in down cycles] help them get it moved by price discounting or other bad practices. We've got to convince them that they don't need to hold the inventory. This is a huge cultural change.
WSJ: Are you concerned about the new political climate for trade in Washington?
Mr. Owens: I have been very worried about a turn inward, a feeling that we can sustain our standard of living by building walls around the country and blocking trade. That would just be a grievous mistake, bad for the United States and bad for the global economy. I've been traveling in Asia for 26 years, and I've seen hundreds of millions of people lifted out of abject poverty from the benefit of exporting to the United States.
I would say the Republicans made a terrible mistake in partisanizing trade. It needs to be a bipartisan, national policy to be a free-trading country. It's easy to bash [free trade], because if somebody loses a job, you can personalize it. The fact that tens of thousands are benefiting by buying very high-quality, very low-price goods imported from China is one of the great realities of the American standard of living.
WSJ: What about the Democrats?
Mr. Owens: I'm encouraged that Democrats who as a party were bashing trade now have more thoughtful people stepping forward to say this shouldn't be about partisanship. Barack Obama is a senator from our state, and I've had the chance to talk to him about it. I quite frankly was very disappointed he voted against [the Central America Free Trade Agreement]. How can you not want free trade with countries that have done most of the things we'd like them to do in terms of democratizing their countries? [But] he seems to be a guy who can move off of extreme partisan positions and try to find win-win positions. We need to win him over.
WSJ: How do you make the argument that free trade is a win-win situation to someone who fears his $75,000-a-year job will be outsourced to China?
Mr. Owens: It's a very difficult sell. It's like the guy who's making horse carriages when the car comes along. How do you make the case to him that the car's going to make the world a better place? We try to educate our employees on the importance of exports to us. We exported $10 billion worth of product last year, and many jobs in our U.S. facilities are very much geared to export markets. Many small manufacturing companies that supply materials to us probably don't consider themselves as exporters, but they are. If we don't export, we don't buy from them. So they lose jobs.
WSJ: Will Caterpillar's U.S. work force shrink as it expands abroad?
Mr. Owens: We're going to have a lot more employment growth outside than inside the US. We [Americans] are 5% of the world's population. And today, we're more than 20% of global gross domestic product. So it shouldn't shock Americans or even worry us too much that 10 or 15 years from now we're going to have a smaller percentage of GDP because our country's not growing as fast as emerging countries. It doesn't mean that our standard of living's going to go down. It just means that theirs is going to grow much faster.
WSJ: What's the best country to do business in?
Mr. Owens: Brazil in some respects is challenging, but we've got one of the best operations we have in the world due to the leadership we have in that facility and the espirit de corps. I was in China recently, and I heard people there say they wanted to be the Brazil of Asia.
Some of our large Midwestern facilities have kind of a challenge of mixed allegiance to the company or the union, a we/they-ism that we haven't successfully purged. We're trying to have people understand that if we pay you, you're on our team and we want your heart and soul, we want you to help us be cost-effective, we want you to help us improve quality.
WSJ: What was the buzz at Business Council?
Mr. Owens: The buzz is always about the economy. The key issue right now is, do we see some easing of interest rates over maybe the latter half of the year and reacceleration of the U.S. economy and a soft landing here that creates a soft landing in the global economy? Or do we end up tightening again and having slow growth become slower growth or recession in 2008? We've got to drive some liquidity. I'm certainly feeling that inflation is a minimal risk, and I worry that we may overcorrect.
WSJ: What does Ben Bernanke do?
Mr. Owens: I think he's going to sit on a pat hand for a while. I think we're going to see inflation be very well-behaved, and I expect he'll be in a position to be comfortable easing interest rates in the latter half of the year.
WSJ: Did executive compensation come up at the Business Council?
Mr. Owens: It's amazing how much more time boards are spending looking at proxy statements and compensation write-ups and dotting i's and crossing t's. How does this help us compete in the global marketplace? For CEOs, if you make over $1 million, that's "excessive pay." If you participate in financial services or in sports, that's OK.
WSJ: You're a big college-hoops fan. Who's going to win the NCAA basketball tournament?
Mr. Owens: If I had to pick one team and put money on the table right now, I'd pick Florida.
