Corporate Restructuring in CAT

Corporate Restructuring in CAT

Caterpillar, popularly referred to as CAT, is a global manufacturer of technologies that are designed for mining earth and construction of buildings in addition to manufacturing of heavy-duty vehicles and engines (Caterpillar 2010). It is the leading manufacturer, by revenue, of highway and non-highway trucks, turbines and engines used in machinery, sea vessels and electric generators (Haddock & Orlemann 2001). The company relies primarily on the provision of infrastructural equipments to compound its market share and increase revenues. There is increased CAT presence in countries like China which has an unprecedented demand for energy and has grown in leaps and bounds creating numerous wealth. The company had for many years depended on the US housing industry but has since diversified it product base and entered into the global market, which is largely driven by the boom in infrastructure development in key markets. Majority of CAT products are distributed by Finning International (FTT), a Canadian company.

CAT employees over 95,000 people worldwide and it’s global footprint spans six continents making it the leading distributor of its specific range of products, which is evidenced by its high sales that are unmatched by any competitor (Yang 2009). The company has ventured into provision of financial products to its customers in addition to manufacturing and sale of engines and machinery. In 2010, the company’s three business segments; engines, machines and financial products generated revenues in excess of $7.5 billion but has since then experienced some upheavals due to the collapse of commodity prices. Financial products account for a little over 10% of the company’s profit with the rest coming from machines and engines.

CAT has undergone steady restructuring with the aim of increasing productivity and in turn market capitalization by diversifying its products. There are numerous opportunities for growth existent in the global market. For example, as the quest for using cleaner energy sources persists, a company that positions itself as the major supplier of tractors for large scale farming of soybeans and corn for the production of ethanol will benefit. Furthermore, the ethanol will be used to create other forms of energy which will require conversion by heavy-duty machines and turbines. In this regard smart decision-making coupled by smart investments based on extensive research can be the difference between success and stagnation.

CAT has witnessed an unprecedented rise in its financial product capitalization. This is due to favorable legislation that insists on insurance for all investments. Additionally, investors in the kind of products that CAT deals with need specialized care compared to manufacturers and distributors of smaller machines and engines. There are four fundamental areas that management must focus on in order to achieve the best results. These are: the rules that govern who make what decisions, the methods of performance measurement and knowledge transference, the incentives that motivate people to perform better and the organization structure (Coyne & Subramaniam 1996). Mastering these four will not only lead to more capitalization of financial products but will improve the company all round.

The US subprime lending crisis was a lag phase for CAT. Home values went down to all time lows which did not augur well with the company’s bottomline. Investors were much more preoccupied with their tanking investments than they were with new opportunities for growth. This decline meant that CAT had to look to other markets to diversify its market base which would cushion it from future market crises.CAT had for a long time concentrated its efforts in the American housing industry (Orleman 2006). However, the company has restructured its operations to put more emphasis on the provision of products and services to emerging markets around the world. India and China are touted as the next big frontiers in investment due to large populations which has increased demand for housing creating a ready market for CAT products. Mexico is also an important market for the company CAT relies on its global distribution networks to avail products to industrialization projects in different markets. It is estimated that over half of CAT’s revenues are sourced from markets outside of the US with that proportion set to rise in the near future.

Economically speaking, there is a higher marginal utility for machinery in areas where it is underutilized (Slack et al 1998). For example, in a developing country where there are only a handful of companies or government departments with CAT’s heavy-duty products, additional machinery would be more significant to that country compared to a different country where there is product saturation, say the US. It is thus the company’s business strategy to identify those countries and markets where industrialization is taking root meaning that there are opportunities for growth and in turn investment. CAT products have been viewed as drivers of value in markets that have a positive developmental outlook. The major point of concern for the company is the stability of these emerging markets and if adequately addressed, then it will soar to even greater heights. Other factors that have to be considered as they pose substantial threat to the company’s increased growth into new markets are political forces, corruption and terrorism (Kotler 1997). These factors are not only important in avoiding physical loses for the company but also in fiscal loses. Some of these vices, like corruption and terrorism, have the capacity to drive down the worth of company products if not controlled especially in developing countries thus affecting company bottomlines.

CAT has interest in agriculture, construction and machinery industries where there are numerous other players. Some of the most notable competitors include Kubota (KUB), AGCO (AG), CNH Global N.V. (CNH), FIAT S.p.A. (F-MI), Deere & Company (DE), Terex (TEX), Joy Global (JOYG), and Fastenal Company (FAST). The company’s net annual income far exceeds those of the next largest companies by a large margin (Olive 2012). Despite this supremacy in the market, the returns of the company are still below the desired levels meaning that it has largely underperformed and depended on its history of quality to ride through this phase.

Porter’s five forces of competition are key in CAT’s management strategy. They are the existing suppliers, threat of new market entrants, bargaining power of buyers, power of suppliers and threat of substitute products including changes in technology (Porter 2008). Already, the threat of suppliers is apparent as Komatsu now commands a larger part of the Japanese market. Other manufacturers of heavy-duty machinery and engines are also being empowered by the favorable market conditions in their home countries. There is a distinct difference between manufacturers of heavy-duty machinery and that of normal machinery. This lies in the role that geography plays. While it may be a negligible matter in the production of small and conventional machines, geography plays a substantial part in the heavy-duty market. One way that the company experiences heavy competition is in the costs associated with shipping. Transportation of large machinery and engines requires specialized equipment and lots of space which drives the cost of CAT products up. This has reduced the competitiveness of these products in markets like Japan where local manufacturers like Komatsu have an advantage as they do not incur hefty shipping costs. Another area where competition is stiff is in emerging markets where there is cheap labor (Parkin 2006). CAT’s operations in the US are labor intensive with this labor being very expensive. International competitors thus have the advantage as they do not have to transport their products to far off places nor do they have to incur the high labor costs common in the US. Buyers are willing to buy the new entrants’ products as they are cheaper and add the same relative value to their respective industries (Gereffi 1994).

In order for CAT to transform the market, its productivity and financial performance, there must be an understanding of the competition and the nature of the market. The previous section has detailed the competition faced by the company. In this section, a clear understanding of the market and market forces will be discussed. The sector matrix is one of the most commonly used methods of analyzing the dynamics of demand and supply (Argyrous et al 2004). This method incorporates the concepts contained in the commodity chain and those of Potter’s value chain (Gibbon 2000). It is preferred for companies that have complex products and processes. The sector matrix deals with a set of complex variables. In the automobile industry for example, it is important to note that the different components that eventually form a finished product come from different manufacturers (Doner 1991). In some cases, these manufacturers are in different countries and thus subject to different economic conditions. CAT management has adopted a strategy that is aimed at expanding its market. However, capitalizing more markets requires an understanding of the sector matrix (Julie et al 1998). The global recession in the latter part of the last decade affected different manufacturers in a variety of ways. Multinationals like General Motors in the US required government bailout for them to stay afloat. In Japan, the leading global manufacturer of motor vehicles, Toyota, continued to perform at levels above the competition. This is because the US was largely the genesis of the crisis due to its subprime lending crisis. In this regard, the manufacturers in the US were left exposed due to the dollar performing dismally against other major global currencies. Manufacturers made huge losses due to the economic crisis and unfavorable exchange rates (Raikes et al 2000). Since the crisis affected the housing sector in the US that formed the bulk of the company’s market, there was an inevitable decrease in sales. CAT was not cushioned from the crisis as a decrease in demand translated to a reduction in supply and thus losses for the company that had to pay workers and suppliers. These dynamics are what the sector matrix considers in determining both the demand and supply of products.

The sector matrix analyses the amount of money in circulation in the economy and determines the demand for products (Sheffrin 2003). Therefore, where the related industries to CAT products are booming, demand is high. Conversely, a decline in related industries like housing, mining and agriculture where the capacity to buy products is diminished will lead to a low demand. The sector matrix determines the supply of a company depending on the level of demand. A high demand for housing translates to a high demand in CAT machinery hence increased supply and vice versa.

Infrastructure investment is cyclical in nature. In the last couple of years, there has been a lot of money spent on infrastructure projects. The reports generated indicate the amount spent but do not indicate how or how well it was spent. Therefore, circulation of money in infrastructure investment does not always translate to increased demand of machinery. This cyclic nature has made investors skeptical over the long run such that there has been a steady shift from fixed to variable resources (Geithner 2010). This means that more investors are open to subcontracting as an alternative to direct investment in construction projects. Economists assert that the resultant “low capitalization and the higher levels of subcontracting increase the internal transaction costs through the premium cost of risk transfer down the supply chain to second and third tier supply chain providers” (Underhill 2010). This means that there are more costs associated with decreased capitalization but points to growth in infrastructure.

Getting value from expended resources should be through ensuring that the growth of infrastructure catalyses growth in other sectors stimulating investment both within and without the supply chain (Ison & Stuart 2007). This simply means that there are times when a company like CAT can gain from the economy through infrastructure investment while at other times, the company is on the receiving end. Understanding this helps managers plan more realistically during corporate restructuring. It is prudent that all variables are considered especially those that the company cannot internally control.

 

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