Interview - Caterpillar's Doug Oberhelman and Ed Rapp - KHL Group


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Interview - Caterpillar's Doug Oberhelman and Ed Rapp

Written by Helen Wright - 24 Apr 2014

Caterpillar chairman & CEO, Doug Oberhelman.

Caterpillar chairman & CEO, Doug Oberhelman.

This year’s ConExpo-Con/Agg was dominated by launches of Tier 4 Final machines – equipment that complies with strict new diesel engine exhaust emission laws in North America, and the equivalent Stage IV laws in Europe.

As the name implies, Tier 4 Final is expected to be the final major step in the emissions reduction for manufacturers in the near future – a journey that has taken almost two decades to complete, with huge R&D costs attached.

Not surprisingly, Caterpillar chairman and CEO Doug Oberhelman and group president responsible for construction industries and growth markets Ed Rapp, both said the company was looking forward to life after Tier 4 Final.

“We’ve had this tremendous weight on our shoulders of emissions,” Mr Oberhelman said. “And this goes back to the mid-nineties – Tier 2, Tier 3, Tier 4, all the way through to the end of 2014, when we will essentially be 80 to 90% through Tier 4.

“This will free up tens of billions of dollars in the industry, and certainly billions of dollars over the next five years here, to invest in other things.”

Major focusses for the company’s future research and development dollars will include fuel economy and technology, according to Mr Oberhelman.

Technology

“I see technology as drawing a tremendous amount of our investment in the next few years,” he said. “How do you cross the ground in one less pass? When a government or an owner gets a bid, they get it digitally – how to we make sure that goes right through to the blade of that machine?

“To know how many cubic yards or metres need to be moved, with a machine running eight hours a day with no downtime. How do we prevent repairs, so that we anticipate when a failure occurs? There is a tremendous opportunity with that.”

Dealer strategy

The executives also discussed Caterpillar’s wider strategic focus for its dealers over the coming years. The company had been pushing to raise the standard of its dealerships around the world, and Mr Rapp said the key was having credibility.

“We had the debate back in 2010 about pushing this issue of raising the bar with the dealer organisation, and what we decided was that we needed to raise our own bar first. 

“We needed to improve product quality and availability, management of the cost structure – we just felt there was a lot more credibility talking to the dealer organisation about raising performance after we’d demonstrated that capability ourselves.”

Rental equipment has also become increasingly important to Caterpillar’s operations – a dynamic that Mr Rapp said had been fuelled by recent global economic volatility.

“As we’ve gone through the cycles, and we’ve had some uncertainty relative to economic growth, it’s very normal for our customer base to turn to a more flexible asset, and rental is one of them. So our dealers have got to be in a position to serve them. The question is how to we drive common best practice across our global dealer network to raise that level of performance, because rental is here to stay.”

Mr Oberhelman agreed, and highlighted the fact that every single one of the company’s 180 dealers has a rental fleet.

“What we need to do and work on is how we go to the rental market with our dealers, particularly for customers that cross territories, so they get the same look and feel.

“We are the biggest rental equipment supplier in the world today when we aggregate all of our dealers, so we should be the ones that really get the benefit of that. But it is both good and bad for us – the pressure that [rental] puts on the collective dealers and us financially is why I say that.

“As our contractors/customers push the asset up to us, it moves the financial pressure from the customer to the dealer, and then ultimately to us. We’ve had good luck with that so far, but we ought to be in a position to take advantage of that because we’re the biggest player in the industry.”

China

Caterpillar has also become one of the biggest construction equipment players in China in recent years, and in fact claims to hold the largest market share in the country for mid-to-large-sized excavators. Mr Rapp and Mr Oberhelman said the manufacturer had seen rapid changes in demand in this market in the last
few years.

“I can remember 10 years ago, 12 years ago when we started on this fairly aggressive expansion of our footprint in China, one of the great debates was always one between low-end, low-cost equipment or value equipment like Caterpillar that drives lower owning and operating costs,” Mr Oberhelman said.

“I think the slowdown in the last two years has really hastened the time in which that customer need for productivity has come to our business model. I don’t think any of us would have guessed 10 years ago that in 2013/2014 that we would have seen the same kind of productivity needs calling on us. But the Chinese customers need productivity too, and that’s where our business model is going.”

Mr Rapp said other crucial aspects to Caterpillar’s success in China have been its supplier integration and use of locally-sourced parts.

“That puts us in a very competitive cost position,” he said. “We’ve continued to launch products targeted at customer economics and how they make money. The GC line up of product is an example – the 950GC wheeled loader and 312GC, 320GC excavators are hitting high volume market segments in China that we weren’t addressing.

“As the industry in late 2012 and 2013 declined in China, an area where our business model just excelled has been an ability to understand how you finance equipment. A lot of our local China competitors put stuff out on financing, or perhaps didn’t have the same discipline about down payments and management of receivables,” he added.

Dual-brand strategy

However, a complicating factor is Caterpillar’s wholly-owned subsidiary SEM, a Chinese construction equipment manufacturer which also sells its products in China. But both executives denied that there was any conflict within this dual-brand strategy.

Mr Rapp said SEM produced equipment for customers where the initial purchase cost was key – what he called the utility segment. “If you look at SEM, the utility customer in China would like productivity, uptime dealer support and all the other things, but he just doesn’t want to pay for it.

“And that pure price play, that’s where we go to market with the SEM brand. Our hypothesis all along has been that, as the economy continues to develop and grow, more of that customer base will migrate up to machines focussed on lifecycle value and performance. It’s one of the things we’re starting to see.”

Mr Rapp said Caterpillar hadn’t yet seen consolidation of manufacturers in China, but it had started to see consolidation within the customer base.

“As they went through the significant downturn, it’s just a natural that you’d start to see certain smaller customers go out of business, consolidated into large customers. And as those customers grow, they become more sophisticated in terms of how they make money. And in our business, you make money when the machine is up and running.”

Future growth

Looking ahead to the rest of 2014 and beyond, Mr Oberhelman seemed confident in growth prospects for Caterpillar. He said the manufacturer was constantly eyeing new acquisition opportunities, but was also self-assured about its ability to expand from within. 

“Any M&A activity we have will be around the edges – every day we have 10 or 20 things that we’re looking at, but all very small. We don’t have anything big out there right now that we could go after.

“I see great organic growth opportunities in the structure of the business as we have it – that’s going to drive a lot of volume. And then we may find some small bolt-on acquisitions that we would do from time to time, as we have done in the past.”

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