Caterpillar is relying on an old manual to deal with Trump tariffs

CLAYTON, N.C. (Reuters) – Six months on US tariffs on imported aluminum and steel, Caterpillar Inc. (CAT.N) finds that one of the best ways to protect profits is a cost reduction strategy that is more than two years old.

In this sprawling plant in central North Carolina where it manufactures small front-end loaders, the company fired workers in 2016 in response to falling sales, consolidating two teams into a single program called Model D & # 39; operation and execution.

Although demand has recovered since then, its Clayton plant still operates a quarter shift and only operates four days a week. One-third of the company's 550 employees are under flexible contracts.

The result: CAT produces more chargers here with 30% fewer people in the factory than in the past, the company told Reuters.

Tony Fassino, Caterpillar vice president of construction products, said after a factory tour to Clayton that he has redesigned all the new machines he manufactures with over 20% fewer parts, reducing fuel consumption steel.

"Fewer coin numbers are a huge win," Fassino told Reuters. "It improves safety, improves quality, improves costs."

Now, these cost-cutting approaches are helping to counter the financial impact of US President Donald Trump's trade wars.

The heavy equipment manufacturer estimates that import tariffs will swell its raw material costs by $ 200 million between July and December, even though it does not anticipate manufacturing costs in 2018. Caterpillar reported increases that came into effect July 1 and general cost – cutting measures, which helped to post a record profit for the full year of 2018.

Caterpillar's growing focus on operational efficiencies has proven timely, helping to reduce the cost of production at a time when material expenditures are increasing on Trump's import restrictions, and capacity constraints are driving up costs. freight costs.

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An internal calculation provided to Reuters, previously undeclared, shows that the measures have accounted for half of the improvement in profit margins since 2015 in the division of the construction industries of the company. Since January 2017, the model of efficiency has been deployed throughout the company, but CAT has not disclosed more details.

CAT, Deere & Co (LAIR) and Harley-Davidson Inc (HOG.N) are among the many manufacturers trying to limit spending to cope with a 30% increase in US steel prices since the beginning of 2018.

This rise in costs, combined with a tariff war with China, has clouded the profit outlook of industrial companies, leading to a fall in their shares.

Despite a recent rally this month, Caterpillar shares fell about 9% from the end of January, compared to 0.4% for the S & P 500 .SPLRCI industrial index, showing that investors have not yet rewarded for operating margins and return on net operating assets.

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Steve Volkmann, an analyst at Jefferies, attributes the underperformance of the stock to concerns that the company's greater exposure to foreign markets and a significant presence in China make it more vulnerable to growing trade wars.

"It is disappointing that they can not be paid for the good quarters of these days," he said, referring to the company's strong performance in the last quarter.

Although overseas markets account for over half of Caterpillar's sales, the company has a balanced global presence, which Volkmann and other analysts say makes it better positioned to manage rates.

The company also tried to calm its concerns over its operations in China, saying the trade tensions had not impacted its operations in China.

COST CONTROL

As part of its cost-cutting efforts, CAT officials have been mandated to reduce the overall manufacturing cost of each new product by at least 5 percent, an executive at Caterpillar said. This also implies cost reductions by the suppliers.

Donaldson Company Inc (DCI.N) – which manufactures filters for CAT machines – told Reuters it was trying every year to reduce the cost of production through material substitution, automation or efficiency gains. The cuts in travel and entertainment budgets allowed the company to improve its operating income by 40 basis points in the last quarter.

CAT's operational and execution effort affects both production strategy decisions and the small details of each operation.

For example, it does not manufacture small wheel loaders in the United States even though its sales in North America are increasing. Instead, the semi-finished machines are shipped from overseas plants to the Clayton facility where the tires and buckets are installed, Fassino said.

This not only allows for better use of the company's factories, but also offers the flexibility to adapt the machines to the requirements of local customers.

Similarly, CAT has been managing transportation contracts for North American deliveries since 2016. In addition to improving predictability of deliveries and reducing claims for insurance and damage, the contracts allow Caterpillar To exploit its volume and volume to moderate transport costs.

OPERATIONAL EFFICIENCY

At the Clayton plant, the company's focus on lean manufacturing, efficiency and cost flexibility is on the agenda.

The parts are placed in sequential order in bag trolleys next to the assembly line so that assemblers do not have to spend time looking for them.

Suppliers were asked to pack the parts in the same way. If the parts do not arrive in the required order, the warehouse workers must unpack and rearrange the parts before they reach the factory.

Automation is increasingly used to test machines. Components and parts are moved on tug trains rather than forklifts to save time and money.

"Save a minute here and save five minutes. In addition to all that, you have two changes to make, "said Fassino of Caterpillar.