A Dream Marriage Turns Nightmarish

It seemed like such a smart pairing. In early 1988, Komatsu Ltd. of Japan and Dallas-based Dresser Industries Inc. merged their construction equipment manufacturing and engineering facilities in the U. S., Latin America, and Canada. The joint venture certainly had a compelling logic to it: A struggling Dresser needed a rich partner to help overhaul its aging factories. Komatsu, meanwhile, wanted to make a foray into the home turf of market leader Caterpillar Inc. The merger vaulted Komatsu Dresser Co. into the No. 2 slot in the $10 billion U. S. market for big bulldozers, tractors, and excavators.

Well, three years later, this power couple is showing signs of marital discord. Although Komatsu Dresser Co. has invested a princely sum--$200 million in all--to upgrade its network of seven factories, there's little to show for it so far. The original plan was for Komatsu to shift 60% of its production for the U. S. market to the joint-venture plants. The two companies were to merge their manufacturing, engineering, and finance operations. But the Komatsu and Dresser product lines would remain distinct, and they would be sold through existing, separate dealership networks. Unfortunately, that created something of a marketing nightmare: The two halves of the venture wound up competing against each other for sales, creating deep animosity among Komatsu and Dresser dealers.

Complicating matters have been numerous cultural clashes between Japanese and American executives at Komatsu Dresser. Now, there's even talk among dealers and industry analysts that Dresser might cash out its 50% stake and bolt. Such speculation is quickly dismissed by officials at Dresser, a $4.5 billion company whose core business is making equipment for energy and mining industries. All the same, some buyers have clearly shied away from Dresser construction equipment, fearing that the entire product line may eventually be phased out.

The upshot: Last year, Komatsu Dresser watched its U. S market share slip to 18%, from 20% in 1988. Worse, the company posted an operating loss of $14.4 million on flat sales of $1.3 billion in 1990 (chart). And the outlook for 1991 isn't exactly heartening. With the recession slashing orders for Komatsu Dresser's bulldozers and tractors by up to 30% so far this year, losses are mounting. During the first quarter, the company posted an operating loss of $29 million, and it's expected to lose about $80 million for the year. Says Komatsu Dresser Chairman Ralph W. Ytterberg: "The market deterioration isn't making life any easier."

SNAFUS. Komatsu Dresser's timing hasn't helped matters. While the company's plant modernization program has introduced state-of-the-art robotics and flexible machining centers into Dresser's dilapidated factories--making the joint venture largely cost-competitive with Cat--there have been some embarrassing snafus.

One example: Last fall, the company spent $35 million to retrofit a Dresser plant in Galion, Ohio, with whizbang automation. Komatsu executives had hoped to shift production of small hydraulic excavators from Japan to the factory in Galion. But the recession killed the U. S. market for these excavators. Galion was producing so few of them that it made more economic sense to import in bulk from Japan. So last month, Komatsu Dresser began mothballing part of the factory.

Such flip-flops haven't been unusual. Earlier this year, the joint-venture company began providing Dresser dealers with Komatsu excavators and wheel loaders. The move has infuriated Komatsu distributors, who believe the Dresser-labeled machines will cut mightily into their already depressed sales because of the ongoing recession in the U. S. "The only thing that's different is the paint and decals," says a Midwest-based Komatsu dealer.

For their part, Dresser executives felt excluded from Komatsu decision-making. One former executive says top Japanese managers often made crucial decisions during Friday evening bull sessions--held in Japanese, of course. "I was learning about decisions affecting my department from Japanese subordinates on Monday morning," he says.

The infighting between Dresser and Komatsu executives at the company's suburban Chicago corporate headquarters grew especially bitter during 1989. By then, the company was trying to solve its marketing woes by encouraging some Komatsu and Dresser dealers to merge.

But the dealers found it difficult to get reliable information on everything from parts availability to warranty coverage. "Dresser executives wouldn't give product information to their Komatsu counterparts," says one dealer, "because they were afraid of losing sales." Adds another East Coast dealer: "I lost one order for three tractors because after 10 calls I still couldn't get information on parts." Even Ytterberg admits that competition between divisions "made the task of bringing the organization together more difficult."

DEMYSTIFIED. Eventually, things grew so rancorous inside the company that it hired an industrial consultant to teach a class entitled Taking the Mystery out of Dealing with the Japanese. And more than 150 Dresser employees, including assembly line workers, were sent to Japan to learn more about Japanese culture and work habits. Progress has been swift, insists Ytterberg: "We're very pleased with the relations between our American and Japanese work forces."

Still, dealers are outraged by what they see as unreasonable prices for major components used to assemble the machines and for support services. One former executive says Komatsu charges the joint venture up to 15% above market. And last fall, as its markets dried up, Komatsu raised equipment prices up to 5% on its various machine lines. "That really hurt us," says one dealer. For his part, Ytterberg says, Komatsu's prices are competitive.

Now, dealers are receiving some relief. To make sure they aren't working at cross purposes, the company early last year combined its marketing and parts support organizations for both brands. With the company's encouragement, some 50% of Komatsu and Dresser dealers have merged.

Nor have the compelling reasons for a Komatsu Dresser joint venture faded. Komatsu needs an American manufacturing presence as a hedge against currency fluctuations and protectionist pressure. When the dollar decline handed a huge cost advantage to Caterpillar in the late 1980s, Komatsu lost a quarter of its market share.

Consider, too, that compared with the huge cost of building a new plant, Komatsu's $75 million investment in new equipment is cheap. And Komatsu executives remain upbeat. Vows Masahiro Sakane, president and chief operating officer at Komatsu Dresser: "This company will do well."

'NO DEAL.' Whether Dresser executives are of the same opinion is another matter. Some wonder whether Dresser will sell off its 50% stake to Komatsu. Dresser has invested $75 million in the joint venture for capital improvements. As part of the financing of the deal, Dresser took $175 million, largely in compensation for accounts receivable, out of its construction equipment division immediately after the joint venture agreement was signed in late 1988. Merrill Lynch & Co. analyst Suzanne Cook estimates that Dresser could sell its share of the joint venture for more than $400 million, booking a $200 million gain after deducting the book value of the assets it contributed to the joint venture. But for now, Dresser plans to sit tight. Says Dresser Chief Financial Officer David P. McElvain: "There's no deal with anybody to sell our interest."

Industry rivals still believe Komatsu Dresser could well prove a formidable competitor once its current marketing problems are behind it. "They've done a good job with the factories, and the product is fine," says a rival senior executive. "They just have to work out the marketing." Indeed, Ytterberg predicts that once the U. S. economy bounces back, probably in 1992, the joint venture will start turning out profits again. True, it takes more than money to hold a relationship together--but it sure helps.

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