The United States Needs an Economic Offense: Remarks by Doug Oberhelman at the Indiana Economic Forum

Good afternoon everyone. Thanks for that kind introduction, Sherry. I’m familiar with the Economic Club’s forums and events, and it’s an honor to make my first appearance here, surrounded by great friends and terrific people.

I’ve certainly spent a lot of time in Indiana and Caterpillar feels very welcome here. That’s because of what you’ve done to make the state a good place for business, to improve your competitiveness.

Before I get into that, though, I want to recognize a few people and companies in the Hoosier state.

I want to start with Eli Lilly. I’ve served on the Lilly board since 2008 and it’s a company with a long, long tradition of great science, innovation and saving people’s lives. The board meets every other month and when I leave after a meeting I always leave with a great sense of respect for Lilly’s scientists, for the amazing things they’re achieving.

I’m also honored to be spending time in the shadow of Cummins, a great competitor of ours and a company I respect deeply.  Indiana is pretty lucky to have them based here. 

I want to recognize P.E. MacAllister. Please stand up, P.E. while I say some nice things about you.

P.E. is Chairman of the Board of MacAllister Machinery, which has been the Cat dealership for Indiana -- and a huge part of Indiana and Caterpillar history -- since 1945.  They have twenty locations and about a thousand employees in Indiana, and recently expanded their territory to include the state of Michigan. MacAllister is one of the strongest Cat dealers, and their performance helps us and I’m sure it helps the state of Indiana.

In July, P.E. was named the Sachem for 2014, Indiana’s highest honor.  Earlier this year he also earned an award from the Boy Scouts.  I don’t know anyone who is more generous and inspiring than P.E. He’s the citizen we all want to be.  He recently celebrated his 95th birthday, and I hope I look as good at 70 as P.E. looks at 95.

And P.E’s son, Chris, who is MacAllister’s President and Chief Operating Officer, the one running MacAllister day to day, is  here, too.

Getting back to Caterpillar, you may know us as the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives.

Our global headquarters are in Illinois and we’re proud to have about 3,000 employees and seven facilities in Indiana, too.  I will tell you that our facilities here are critical to our company.  Let me talk about them for a minute.

We have a remanufacturing facility in Franklin and Bill Roberts, who manages that facility, is here.  Franklin has recycled over 338 million pounds of iron by re-engineering, re-machining and re-cladding about 400,000 diesel engines and components—turning them back to good as new.

Our Muncie facility and three other locations are part of our rail business, and Jim Shirvinksi, senior vice president of engineering, is here today, too.  In Muncie, we design and build Electro-Motive Diesel locomotives used in the U.S. and all over the world. So every time you stop at a railroad crossing and a train goes by, that locomotive is likely made by Caterpillar.  If it’s a locomotive made recently, it was probably made in Muncie. In East Chicago we manufacture axles and wheels for EMD and other railroad customers.

Bruce Brineman, manager of our large engine operations in Lafayette, is here. We’ve been in Lafayette since 1982. Today, about 1,800 employees assemble and test our largest engines there, engines used in mining, oil and gas production and to power the world’s largest ships.  For example, the largest engine we build in Lafayette, the 3616, has 16 cylinders, weighs 66,000 pounds and has a maximum 6,600 horsepower. To give you a sense of the scope of that engine -- each cylinder is 11 inches in diameter.

We wanted you to get an idea of our machines, up close, and each table has a model of the 250-ton 793 mining truck.  There’s a whole lot of Indiana inside that mining truck, including a 2,650 horsepower, 16 cylinder engine that’s made in Lafayette and turbochargers that are made in Franklin.

Three Levels of Responsibility for Competitiveness

Obviously, we’ve got a big footprint here in Indiana and that sets the stage for what I want to talk about today -- competitiveness and why it matters. There are competitiveness indexes for states. Indiana ranks pretty high on those and that’s one of the reasons we enjoy doing business here. 

Every year, the World Economic Forum ranks every country’s relative competitiveness, based on variables like tax rates, trade and infrastructure.  But, in the end, competitiveness is all about productivity and ultimately, prosperity. 

That fits nicely for us, because at Caterpillar we believe that when more decisions are left to individuals and businesses, it’s more likely that the United States will be as productive as it possibly can be. 

Competitiveness describes the factors that make companies, states and countries productive.  That higher productivity leads to higher wages and higher returns on capital -- and prosperity is the welcome, final result.

The way I see it, there are three levels of responsibility to get that result:

✓ First, there’s the company level, which is my responsibility as a Chairman and CEO.  
✓ Second, there are state and local responsibilities – held by governors, state legislatures, mayors and city councils.
✓ And third, there’s the federal government’s role.

Company and CEO Responsibilities

CEO’s, and the companies we lead, are on the front line of competitiveness.  We either adapt and change – or we perish. For example, we may have only a few competitors here in the United States, but we have over a hundred in China.

The first level of responsibility for whether or not Caterpillar remains competitive is mine. I stand on the shoulders of those who were Caterpillar CEO’s before me. Every day I think about that.  I know the past doesn’t guarantee the future and I feel the heavy obligation to ensure that this company is successful.

Today, Caterpillar is one of the world’s most recognizable brands. We have been in business 89 years.  Think about this – our IPO was in December 1929.  We design, develop and build everything from big mining trucks to very small engines, to the big yellow construction machines that you may not like very much because they’re causing traffic delays.  Not me!  I love to see our yellow machines at work and I don’t mind those delays at all.  We also have a finance company with almost $40 billion in assets.  

Caterpillar has paid a cash dividend to our stockholders every year since the company was formed in 1925; and we have paid higher dividends for the past 20 consecutive years.

Our company hasn’t been this successful by accident. 

Like the CEO’s who came before me, I have to fortify Caterpillar’s four walls to keep us as strong as possible.  We don’t know what our competitors will do -- or what unexpected world event will come at us -- but by managing the fundamentals, we can put forward our very best products and services in order to win business and beat our competitors.

We constantly pull multiple levers to stay competitive, to become or remain the market leader in every segment where we operate. We are constantly innovating, designing and producing new and better products. We invest in sustainability – both in what we manufacture and how we manufacture it. We make sure our products are reliable and durable, and that when customers need parts or service they get it quickly– whether they are in Indiana, India or Indonesia. 

We’ve been a global company from the beginning, and today two-thirds of our $55 billion in sales and revenues are outside the United States.  This year, we’re celebrating 60 years of Caterpillar in Brazil, and next year we’ll celebrate 40 years in China. 

China is -- and will be -- the largest equipment market in the world, so we continue to invest in our business in China.  We’re also investing in China because we know the best defense is a good offense. Our Chinese competitors are spreading around the globe; and when we win market share in China, we not only strengthen our position there we also force those Chinese competitors to defend their home territory.

This is the same strategy Caterpillar used in Japan in the early 1960s, when we established a strong presence there as a way to take on Komatsu – our number one competitor in construction equipment – on their home turf.  Today we are among the leaders in Japan, along with Komatsu. We’re really proud of that. And our aggressive strategy in Japan in the 1960s and ‘70s meant we were in a better position when Komatsu came after us hard in the United States in the 1980s and ‘90s. 

We are constantly pulling whatever levers we need to pull – strategy, productivity, where we locate facilities or expand capacity. When we get it right, we employ more people, buy more supplies from more suppliers, and create prosperity for families and communities.

State and Local Responsibilities

So, where we operate matters. We pick locations based on many variables: Proximity to our customers and suppliers, taxes, regulations and, most importantly, whether there is a reliable and skilled workforce.

We can debate the elements of competitiveness year after year, and election after election, but none of those policies or programs will matter if we don’t fix our schools. 

Caterpillar partners with over 30 technical schools around the world. We work with community colleges for skills training and we have apprenticeship programs. 

But in reality, we are just managing around a broken U.S. educational system. 

We see it first hand, and it’s so frustrating.  Nationally, more than 5 out of 10 applicants for our entry level jobs don't make the cut for a range of reasons. 

We can operate specific programs to fill the skills gap, which we do. We can cajole and complain to officials, which we do; but we alone can’t fix this problem. Yet it affects our productivity, and U.S. prosperity, in every way possible.

Clearly, high quality education is essential, and state and local governments must take the lead. This is the most important part of their responsibility for competitiveness. 

In fact, I think the very core of productivity and prosperity, above and beyond anything else, is education. American public schools used to provide a great education.

Think about it – the one room schoolhouse educated the greatest generation and put a man on the moon.

And when you think about it even more, we need to be very concerned about our education system – because, after all, the only real competitive advantage a company or a country has comes down to their people.

When we consider where to locate or expand, we also look at a state’s overall attitude toward business. Does it encourage or discourage business?  Is there reliable energy, and reasonable regulations? Is the state fiscally solvent?

It’s no secret that I’ve urged our home state of Illinois to get its fiscal house in order, and that I think they can do a much better job creating the conditions for competitiveness. I think Illinois could learn an awful lot from Indiana. 

Just as I talk about the things out of Caterpillar’s control that affect our competitiveness, I bet you have a long list of how the federal government hinders, or at least affects, Indiana’s productivity and prosperity. 

If we compare lists, I bet we’ll find a lot of agreement. 

Federal Responsibilities

This brings us to the third level of responsibility for competitiveness, which rests in that foreign land called Washington, DC. 

Does the federal government –and that means both the Congress and the Executive Branch -- make it easier for companies to grow and hire more people? Or do they make it harder?
I’m not going to ask for a show of hands.

Caterpillar has a significant manufacturing footprint throughout the United States. And because the majority of our business is global, we operate on every continent and manufacture in many, many, many countries – Thailand, Indonesia, Brazil, Mexico, China and England, just to name a few.

We’re seeing that many countries have figured out how the U.S. built our amazing economic engine during the 20th Century, and they’re replicating our success as fast as they can.

However, while they’re moving forward -- we are stuck.  Washington’s failure to act on key economic issues is significantly threatening future productivity and prosperity.  While I do my job to keep Caterpillar competitive, and many states do their job to support business – we’re still waiting for the feds to do theirs. 

We all know that the financial crisis significantly changed the economic landscape. That crisis began six years ago, yesterday: Lehman Brothers filed for bankruptcy on September 15, 2008.  We all remember that day.  The financial crisis was a horrible shock, but we’ve rebounded from crises before. The difference this time is how we’ve responded, and how fragile our recovery really is.  

It’s good that our economy is creating jobs again, but we’re still not firing on all cylinders.  The real unemployment rate is over 10 percent, and workforce participation is way down.  In August alone almost 800,000 Americans were so discouraged they left the workforce altogether.

To put that in perspective -- imagine every Indianapolis resident over the age of 18 giving up hope that they will be able to find a job.

I think a lot about how different the U.S. outlook would be if Washington was focused on pulling the right productivity levers.

The need to fix the current, incoherent approach to infrastructure funding is near the top of my list – and probably yours, too.  It’s incredible to expect sustained growth when multi-million dollar, multi-year projects are funded for only six to twelve months at a time.

Who would build a house if the bank only assured funding for part of it – say, for the foundation and the framing – and then asked you to trust that the rest of the money would come next spring?

Meanwhile, other countries are investing for growth -- like China and Mexico, who are planning major new airports in Beijing and Mexico City.

In 1956, President Eisenhower and a Democratic Congress agreed to fund and build the interstate highway system – truly the backbone of much of our economic growth. But that was last century. Now, we don’t have the funding, let alone the strategy or vision, to meet the demands of this century.

Second on my list is the failure to enact immigration reform.  A modern immigration system is absolutely necessary for U.S. companies like Caterpillar to remain globally competitive.

Some of the smartest people in the world get the greatest education in the world here.  Then, because of our immigration policies they take that great education back home and work for our competitors.

We want them on our side, not competing against us.  Isn’t it fair to expect the U.S. to attract the best and brightest – no matter where they come from? 

Not everyone is going to agree on every point surrounding immigration reform, but we have to take practical steps and move forward.  This is not a red state -- or a blue state -- issue.  It’s a red, white and blue problem we must solve. 

Of course, to unleash our full economic potential, we need to overhaul the tax code – for individuals and businesses. It’s currently four million words long and taxpayers waste hours and hours every year figuring out how to comply.  As Paul Ryan has said, the current code “punishes free enterprise and rewards political influence.”

In 1966, Peter Drucker talked about how outdated regulations and programs create barriers to new enterprise. Almost fifty years later, the problem has only gotten worse.  Last week, the National Association of Manufacturers issued an economic report that put the total cost of regulations in the United States at just over $2 trillion, and showed that the burden of those regulations hits small and medium sized companies, and manufacturers, the hardest. 

I understand and agree that business needs to be regulated. Those who say there’s no room for government in our economy are plain wrong. 

But we’ve invented smart phones and smart cars – why can’t government invent smart regulations? Why can’t our government agencies be as efficient as our best companies?  Indiana has shown how to do that.

And last but certainly not least is ensuring U.S. companies can reach the 95 percent of the world’s consumers who don’t live here.  That means supporting trade -- by passing Trade Promotion Authority so trade agreements with the Asia Pacific region and Europe can be completed on favorable terms.   More than 30 percent of U.S. economy is tied to trade and investment. Over the past five years Caterpillar has exported over $82 billion of U.S.-made products, and that has supported tens of thousands of U.S. jobs.

Congress also needs to pass long-term reauthorization of the Export-Import Bank, so American exporters can better compete with companies from the 59 other nations that provide government-sponsored credit assistance.  Caterpillar competes with companies that have that advantage, every day.

Put another way, it’s hard to find a time when trade has been more important -- to companies, to countries and to the world.

Conclusion

The world economy is not a zero-sum game.  Higher productivity increases the value of goods, and then incomes rise.  Higher incomes then bring greater global demand --– and it’s a positive cycle for countries that rise to the challenge. 

The United States government used to understand this. 

But as much as I can list all these frustrations, I also never forget that the United States remains the world’s greatest economy.  Through innovation and technology we drive growth and higher standards of living at home and overseas. We still have the greatest secondary educational system in the world. Our democracy may be dysfunctional right now, but it is also dynamic and resilient. The dollar is the world’s reserve currency and we have an established, enforced rule of law. 

No problem has ever been too big for us to solve!

We can fix all of this if we take responsibility and action, level by level.  For my part, I have to answer to our board and shareholders every quarter -- I can’t kick the can down the road.  Indiana understands this, too, and has taken bold steps in recent years, such as tough policy changes in education and economic development. 

It’s a bit like how I described our China strategy – the best defense is a good offense. 

And it’s far past time for the United States to go on economic offense again.

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