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December 01, 2005
Mixing manufacturing and services
In my paper on our new competitiveness challenges, I made the point that there is a fusion between manufacturing and services. Part of that fusion is new - as design takes a preeminent role. But part is old - the remanufacturing and repair of products. Caterpillar is a case in point, as Business Week points out in Cat Sinks Its Claws Into Services:
Services, however, are the key to Cat's strategic shift. The Peoria (Ill.) company has three service divisions today -- Financial Services, Logistics, and Remanufacturing -- which account for 15% of Caterpillar's revenues and perhaps 20% of its net income. Because of their fast growth, [CEO James W.] Owens says, they should generate 20% of sales by 2010, which would put the troika's combined revenues at $10 billion. Since these also are higher-margin businesses, their bottom-line contribution should increase even more, to as much as 30% by the end of the decade, calculates Ann Duignan, an analyst with Bear, Stearns & Co. (BSC ).
Cat Financial extends credit for three-quarters of all Caterpillar sales, so it has soared right alongside the equipment business. The division, which averages 95,000 customers a year, opened its first office in China earlier in 2005. No surprise, then, that it's having a record year, with expected revenues of $2.3 billion and a $350 million profit. Cat Logistics, meanwhile, is prized for its steady income stream. The unit warehouses and delivers replacement parts for 60 industrial customers, including Bombardier Inc. and Harley-Davidson Inc. (HDI ). In October it signed a $100 million contract with General Motors Europe (GM ) that will pay out over a decade.
The remanufacturing division is the newest of the service units. Caterpillar got into the business almost by accident: It dates back to a favor Cat reluctantly did for Ford Motor Co. (F ) in 1973. To lower its own costs, Ford's truckmaking subsidiary wanted a source of rebuilt engines, which generally sell for half the price of new ones. As Caterpillar executives tell it, management saw Ford's demand as a chore. But because supplying Ford with new engines would be such a money-maker, the company consented and opened a repair shop in Bettendorf, Iowa. By 1982 the business had grown enough that Caterpillar bought a vacant factory in Corinth, Miss., to reclaim used crankshafts. Still, even into the late 1990s, after Caterpillar built a second plant in Nuevo Laredo, Mexico, and a third in Prentiss, Miss., remanufacturing was considered a sideline. "It was something we had to do," recalls Steven L. Fisher, president of the division.
In 2000 management realized that this handful of ancillary factories represented a hidden opportunity. The business had become reliably profitable, and the marketplace was full of mom-and-pop outfits, making it easy for the company to pick up business through acquisitions. Caterpillar's own numbers argued for expansion, too. As new-equipment orders were falling amid a plunge in the industrial economy, revenues and profits from Caterpillar services continued to climb. Since then, as the company has built and acquired more facilities, Cat Remanufacturing's results have doubled.
Design-build-finance/sell-service/repair. Its all part of the value chain - and smart companies (and countries) realize there are opportunities at each stage.
Posted by Ken Jarboe at December 1, 2005 05:15 PM
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