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Caterpillar Making Use Of Old Cost Cut Tactics To Counter Trump Tariffs


09/21/2018


Caterpillar Making Use Of Old Cost Cut Tactics To Counter Trump Tariffs
Caterpillar Inc is resorting to a cost cutting strategy which is almost two years old to avoid the U.S. tariffs on imported aluminum and steel impacting its profits. The company has found that it \to be the best way after in the six months since the tariffs were imposed.
 
A drop in sales resulted in the company laying off workers at its factory in central North Carolina where small front-end loaders are manufactured and combined two shifts into one to save costs. Operation & Execution Model was the name given to the program then. .
 
And despite the demand for its products increasing, the company has maintained the single shift in the factory and now functions for only four days in a week. The company also has about one third of the factory’s 550 employees now on flexible contracts.
 
This has resulted in the company manufacturing more products at a 30 per cent smaller workforce in the factory.
 
The company has also redesigned all of the new machines that it makes so that 20 per cent lesser parts are required which has helped the company reduce steel consumption and bringing down costs, according to a media report quoting Tony Fassino, vice president at Caterpillar’s building construction products.
 
“Fewer parts numbers are a huge win,” Fassino said. “It improves safety, it improves the quality, it improves the cost.”
 
These are the exact cost cutting tactics that the company is now using to reduce the impact of the Trump tariffs on steel and aluminum. .
 
While not issuing any forecasts on production costs for 2018m Caterpillar said that between July and December, the company would have to incur additional costs of up to $200 million because of the import tariffs of its raw materials. That increase would be offset by the company through a price increase which has come into effect from July 1 in addition to the cost cutting measures that have been mentioned earlier. In this manner it would be able to report record profit for all of 2018, the company hoped.
 
Time and again, the heavy machinery maker has shown that it can increase profits by laying emphasis on operating efficiency which helps to bring down costs of production. This would come in handy at a time when Trump’s import tariffs are increasing its material costs and freight costs are being pushed up because of capacity constraints.
 
There are other companies such as CAT, Deere & Co and Harley-Davidson Inc  that have also resorted to cost curtailment strategies to counter the 30 percent rise in U.S. steel prices since the beginning of the current year.
 
The earnings outlook have been diluted by those rising costs coupled with the tit-for-tat tariff war with China which has ultimately brought down their share prices.
 
For example, Caterpillar saw a drop of 9 per cent in its shares this month despite a rally in the market compared to its price in late-January against a 0.4 per cent in drop in S&P 500 industrials index. There are concerns among investors about the fate of the company because of its high exposure to foreign markets and a significant business in China, said Steve Volkmann, a machinery analyst at Jefferies, which led to the drop in the shares for caterpillar. 
 
“It is disappointing that they can’t get paid for good quarters these days,” he said, referring to the company’s strong earnings in the last quarter.
 
(Source:www.reuters.com)