This Brawl Could Cost Cat A Couple Of Its Lives

Even if the UAW ends its strike soon, Caterpillar may be the loser

Last year, before the United Auto Workers began negotiating what it thought would be identical labor agreements with Deere & Co. and Caterpillar Inc., the union anticipated smooth sailing at Cat and choppy seas at Deere. The cooperative relations forged with Cat after a near-ruinous 205-day strike that began in 1982 would make all the difference, union leaders thought.

What they overlooked was Donald V. Fites, Cat's new chief executive, who after a long career in marketing was negotiating his first union deal. Fites had taken over the construction-equipment maker in mid-1990 determined to whip it into shape. First, he sliced its bloated $2.4 billion in overhead. Then, despite improved factory relations, he went after labor costs. Fites rejected the terms of a new pact that Deere accepted last fall and has continued to do so throughout a five-month selective strike involving some 11,000 of Cat's 16,500 unionized workers.

Now, it looks as if Cat could lose its gamble. Its strike losses--nearing $100 million so far--could take years to recoup. And though there's always a chance that Cat could salvage the situation, Fites is showing signs of distress. On Feb. 19, with negotiations going nowhere, the company withdrew its central demand for the right to negotiate separate agreements at its 17 profit centers. But that failed to jump-start talks. UAW officials are determined to maintain the principle of "pattern" bargaining and still insist on a Deere-like deal.

If this goes on for much longer, Cat could emerge from the battle with little to show except disgruntled workers. Already, the showdown has damaged the cooperative relations that have helped Cat raise its productivity by 30% since 1986. Says Jay Roberts, president of UAW Local 786 in York, Pa.: "The animosity they've created will have long-term repercussions." On Mar. 6, Cat raised the ante even more by declaring a formal impasse--typically a sign that a company plans to impose its latest contract offer. This could be a bluff to get the union to budge. But if Fites follows through, the UAW would likely respond by striking the 50% of Cat's capacity that remains open. And that could drain the company's two-month inventory in the midst of its best selling season.

Fites has taken his hard stance out of a desire to avoid the type of battering Cat suffered during his first year in the driver's seat. The company's chief negotiator, Jerry L. Brust, points out that 60% of Cat's $10 billion in sales are made overseas--and 37% of those sales are exports from the U.S. So when the dollar climbed 21% against the yen in 1989, it helped knock Cat's 1990 profits down 58%, to $210 million.

CURRENCY HEDGE. Brust says Fites has worried that another swing in the dollar could leave Cat's profit margins vulnerable to price competition from Japanese rival Komatsu Ltd. Fites, who declined to be interviewed, wants to hedge against this eventuality by limiting any increase in the $32.35 his average worker earns in hourly compensation. His latest set of proposals includes smaller pay hikes than Deere granted last fall, plus other wage concessions for specific groups of workers (table). He also wants smaller increases than Deere accepted in pension and health benefits. This, says Brust, is "what it will take to be globally competitive."

UAW officials don't buy that. Even Brust estimates Cat's own proposal would push its labor costs up by $150 million over three years. And the difference between that and what it would have cost to accept the Deere deal may have already been eaten up by strike losses. Analyst Tobias M. Levkovich, who follows the construction-equipment industry for Smith Barney, Harris Upham & Co., says Cat could lose more than $100 million in the first quarter of 1992, mainly because of the strike. He also figures that at least part of Cat's 1991 loss of $404 million reflected the walkout.

If that's the case, what is Fites after? The answer could be a much bigger prize. Initially, Fites gave the UAW two examples of the type of concessions he wanted. He proposed only cost-of-living increases for 3,700 lower-skilled workers throughout the company, arguing that they earn more than similar employees at other companies in the area. He also proposed lower wage scales for new hires in Cat's four parts-distribution facilities. In his latest proposal, Fites kept these demands and added a third for workers at another location. But he dropped his insistence that management be allowed to continually negotiate cut-rate deals over the next three years at other profit centers.

That sudden softening in what the UAW had viewed as Cat's central demand has now focused attention on the other major issue: job security. Cat has cut its work force by 24,000 since 1979. So the union wants it to maintain its current number of jobs during a new pact, as Deere will. Instead, Fites is insisting on a plan that only guarantees individual workers their jobs, which would let Cat cut its work force by attrition. Brust argues that the UAW "should stand the test of the marketplace just like us."

UNITED FRONT. But UAW officials see a hidden agenda. The average Cat worker is 46 years old, and more than 60% of Cat employees will be eligible to retire within six years. When that happens, union leaders say, Fites's proposal would let Cat shrink its work force--and perhaps even shift some vacant jobs to nonunion suppliers. The UAW wants no part of that.

If UAW leaders hold firm, as seems likely, Fites has some big decisions to make. His bottom line may be to match Deere on pay if he gets some give on job security. But there are no signs of cracks in the UAW's rank and file. And a total shutdown would almost certainly hurt the company's market share, which has remained at 30% of worldwide construction-equipment sales even during the walkout. Indeed, several Cat dealers say they're worried about running out of some equipment by May. If that happened, Cat might be tempted to hire replacement workers. But the consequences would be huge. Many Cat employees are highly skilled and not easily replaced, particularly since several plants are in semirural areas that lack large work forces.

Even if none of that happens, the damage is going to be bad enough. It took years of painstaking work by Cat managers to offset the ill will caused by the 1982 strike. Now, that achievement has been undermined. Fites isn't yet playing an all-or-nothing hand. But unless he performs a miracle at the bargaining table, his company could emerge even less competitive than it was before it decided to fight.