Cat Vs. Labor: Hardhats, Anyone?

Donald V. Fites may well wonder if there's some sort of global conspiracy to trip him up. Just as he settled in as Caterpillar Inc.'s new chief executive last July, Fites faced a cataclysmic economic downturn in Brazil that leveled a $500 million-a-year market for Cat. Then, the U. S. recession and economic slump in Europe conspired to drive down orders for Cat's array of construction and earth-digging equipment by about 10% this year. In Japan, Cat's joint venture with Mitsubishi Corp. was implicated this summer in an industrial-espionage scandal. And to really put a capper on all of this: Cat is expected to finish 1991 by posting a loss of around $90 million.

So much for beginner's luck. And if Fites is looking for a breather, he can forget it. Cat's contract with its 17,000 unionized workers, represented by the United Auto Workers, expires on Sept. 30. There's sure to be plenty of head-banging once negotiations start in late August. The sides are far apart on a host of issues, ranging from wages to health care benefits. And Cat's union hands, who have seen their ranks shrink from 40,500, or 58%, since 1979, aren't in a charitable mood. If there isn't a meeting of the minds, odds are union members will take a walk. Warns UAW Local 145 President J. P. Yarbrough: "We won't roll over and play dead."

Neither will Fites. Since the mid-1980s, Cat has been on a worldwide crusade to slash costs and improve productivity in order to stay competitive with archrival Komatsu Ltd. In 1987, Cat launched a $2.1 billion plant-modernization campaign, dubbed "Plant With a Future," to install more flexible manufacturing capacity. If successful, it could save $420 million in all by 1993. Last year, in a bid to push more decision-making toward the front lines, Cat eliminated layers of managers and reorganized itself into 17 profit centers. The aim: Slash the company's hefty $2.2 billion in overhead.

Now, labor is the last frontier in Cat's mission to ensure its survival as a manufacturing powerhouse in the decade ahead. Given the weak dollar against the yen, Cat's labor costs are roughly the same as Komatsu's. But that could change quickly enough. And says Caterpillar board member John W. Fondahl, a retired Stanford University engineering professor: "There hasn't been sufficent cost reductions there."

DOCTOR BILLS. It's hard not to admire Cat's cost-cutting zeal. Back in the early 1980s, a bloated Caterpillar ceded market share to Komatsu, which used the strong dollar to storm the U. S. market. Cat's three-year string of losses hit $428 million in 1984. Humbled, the company cut costs and vigorously pushed exports. Profits reached $818 million in 1988. Export sales, assisted by a weaker dollar, jumped to $3.4 billion in 1990 from $2 billion in 1988. More important, since 1986 Cat has regained U. S. market share, climbing to 37% from 35%, while Komatsu has lost about a point to 13%.

Cat veterans have no desire to relive the early 1980s. Cutting labor costs is essential for Cat's pricing competitiveness abroad. "They don't want to rely on the dollar being weak forever," says Tobias M. Levkovich, an analyst at Smith Barney, Harris Upham & Co. The UAW contract is an obvious target. Including wages and benefits, the average hourly worker represented by the UAW at Caterpillar earns $31.74 an hour.

So Fites, who declined to be interviewed for this story, is turning a gimlet eye toward an issue long considered sacrosanct by Cat workers: health care. Cat's strategy is to shift more of the burden of its health care costs to its hourly workers, whose current medical costs are paid in full. Cat's health care costs, including expenses for retirees, run about $9,000 per active employee. Overall, Cat's health costs rose 14% last year, to $271 million, and could jump 75% to $474 million by 1994. The UAW, which protected auto workers' health benefits last year, is expected to vigorously oppose Fites. "We fought 40 years for those benefits," says UAW Local 751 President Larry Soloman.

Other issues could prove just as contentious. Union officials say Cat wants fewer workers protected by job guarantees and hopes to avoid completely the costly income guarantees that auto makers agreed to last year. General Motors Corp. set aside $4 billion for three years' worth of income guarantees for laid-off workers. Moreover, some union officials suspect Cat wants to push for a two-tier wage system, in which new hires are locked into a lower pay scale.

Fites is playing hardball. During the spring, he launched an advertising campaign in central Illinois, where most of the company's workers live, lecturing locals about the company's need to remain competitive. "Auto industry patterns should not apply to our labor agreements," proclaimed one ad, which went on to tell how high wages and benefits could undermine Caterpillar's fragile recovery. The ads angered the UAW, which shot back with an advertising campaign of its own.

And Fites already has insured that Cat will keep purring if a strike breaks out. He has built up enough inventory to cover a six-month stretch. That could give Caterpillar the cushion to ride out a long shutdown. Indeed, Fites cleverly gave Cat dealers special incentives and easy payment terms this spring to help them stock up on parts and equipment. With inventory at such high levels, "Caterpillar figures it's a good time to get tough with the union," says industry consultant Frank E. Manfredi.

FIRE SALE. Even so, Cat could face plenty of pain in a strike. Analyst Levkovich believes losses could top $100 million in the fourth quarter if a strike lasts three months or so. A prolonged strike could bash sales overseas, where inventories are razor thin. Should construction equipment demand pick up in Europe, Cat may have to swallow the expense of shipping U. S. inventory abroad.

Worse, any extended downtime on the assembly line only pushes back the point at which the financial benefits from Caterpillar's $2.1 billion plant modernization begin to outweigh its costs. The company already has pushed back the crossover point to late 1992 from late this year.

Even if Fites manages to get concessions without a strike, he still won't be in the clear. Big inventories mean he will have to slash production by up to 20% in the fourth quarter to bring back balance, say analysts. And since worldwide demand isn't likely to rebound soon, Fites may have to start moving machines off the lot at fire-sale prices.

Fites' fans say he's up to the many challenges facing Cat. "He's more forceful than past chiefs," says Fondahl. "Maybe more combative, too." He had better be. His second year on the job promises to be every bit as much fun as his first.

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