washingtonpost.com
After Caterpillar's Turnaround, A Chance to Reinvent Globalization

By Steven Pearlstein
Wednesday, April 19, 2006

If you want to know how the General Motors and Delphi stories are going to turn out, you can find the answer in Peoria.

For it is there that Caterpillar has come up with the model for how a big American manufacturing company can not only survive, but prosper, in a highly competitive global economy.

As part of that process, Caterpillar has led the way in shredding the old social contract that once existed between big corporations and their workers -- the unwritten code that included lifetime employment, company-paid life insurance, rock-solid retirement benefits and above-market wages. There's no question that had it stuck with that model, Caterpillar would have gone the way of the auto and steel companies and the traditional airlines.

But now, having pulled off one of the most impressive corporate turnarounds in recent memory, Caterpillar -- like the rest of corporate America -- must confront a new question: What is the new social contract it has to offer around which a stable political business model can be built?

But first, a little history. By the early 1990s, Caterpillar's products were tired, its cost structure bloated, its market share declining in the face of stiff foreign competition. Management was determined to do something about it. The company was decentralized and restructured, and big investments were made to modernize factories and transform trucks and earth-moving equipment into high-tech machines. Work was shifted or outsourced to lower-cost regions and countries. The Six Sigma quality improvement program became a corporate obsession.

Perhaps most significantly, the back of the once-mighty United Auto Workers, which represented most of Caterpillar's unionized workers, was broken. Over a period of nearly seven years, the company took two strikes, operating its plants with management and replacement workers, rather than renew a contract whose cost structure would have either driven it out of the country or into bankruptcy. When it was over, the union was forced to accept a new two-tiered pay structure that called for wages for the lowest-skilled workers to start as low as $13 an hour, with more limited pension benefits, no job security for at least a decade, and a pay scale based more on skills than seniority. Existing workers agreed to minuscule annual pay increases and a first-time-ever 20 percent contribution to the cost of health insurance, along with a cap on retiree health benefits.

Today, Caterpillar is going like gangbusters. Its workforce has grown about 25 percent in the past two years, including thousands of new jobs in the United States. Its share price has more than tripled. Last year alone, its profit increased 40 percent, to $2.85 billion, on a 20 percent increase in sales. With more than half of its sales now outside the United States, it has become one of the country's largest exporters.

Much of the credit for this success goes to chief executive Jim Owens, who likes to use his experience to make a pitch to anyone who will listen for why American businesses and workers should embrace globalization. But reading through Owens's recent speeches, op-ed columns and letters to shareholders, what is most striking is how little appreciation he seems to show for the middle-class dreams that have been shattered to make Caterpillar's success possible -- or how those shattered dreams now translate into political opposition to globalization.

Imagine, for example, what the public reaction would have been if Owens had announced that, in recognition of the year's spectacular results, each of Caterpillar's 22,000 unionized employees would get a special bonus of, say, $3,000. I can assure you it would have been widely noted in the press and praised as a significant first step toward a new social contract. And who knows how much extra loyalty and commitment it would have engendered from Caterpillar's blue-collar employees.

But, instead, what those employees know is that Owens took home a performance-based pay package with an estimated value between $18 million and $38 million. They know that 50,000 nonunion employees split a bonus pool of $445 million. They know that the top executives were awarded options with an estimated value of between $80 million and $206 million. They know that shareholders earned spectacular returns.

Oh, yes, I can just hear the dismissive response from corporate types now. They'd point out that Caterpillar investors who earned a record $4.21 a share would hammer the company stock if that figure were reduced by even a penny. They'd point out that unions like the UAW have traditionally opposed performance pay, or traded it away for higher guaranteed pay or benefits. And they warn ominously that this kind of "excess" compensation would quickly render the company uncompetitive again.

But none of that really matters. Because the real world choice for the corporate elite is now quite clear -- not just here in the United States, but in Europe, Latin America and Japan, as well. Either the members of the business community will have to come up with an improved social contract that allows them to run competitive companies while ensuring that the gains of globalization are spread more equitably, or they will have to face the almost certain prospect that angry and anxious voters will roll back globalization in ways that will hurt the global economy and their newly globalized companies.

Or to put it another way: It's time for the Jim Owenses of the world to show the same backbone and ingenuity in dealing with the excessive and unreasonable demands of Wall Street that they previously showed in dealing with workers and labor unions.

Steven Pearlstein will host an online discussion tomorrow at 11 a.m. at washingtonpost.com. He can be reached atpearlsteins@washpost.com.

View all comments that have been posted about this article.

© 2006 The Washington Post Company