Interview with Douglas Oberhelman, CEO of Caterpillar
As CEO of Peoria-based Caterpillar, Douglas Oberhelman is the most outspoken business leader in Illinois. On Friday, the company broke ground on a new plant in Athens, Ga., after a continent-wide competition for the facility. Oberhelman reveals in this interview that Illinois didn't even make the first cut and explains why he will not build any new factories here in the near future.
Doug Oberhelman, chairman and chief executive officer of Caterpillar Inc., talks during an interview at the East Peoria plant earlier this week. (Zbigniew Bzdak/Chicago Tribune)
As CEO of Peoria-based Caterpillar, he has placed himself — and the issue of Illinois' fiscal crisis — centerstage through a series of sharp-tongued op-eds bemoaning the impact of last year's income tax increases on businesses.
Pat Quinn suggesting that Springfield politicians were making it harder for Caterpillar, Illinois' biggest manufacturing employer, to remain in the state. He attached letters from three other governors trying to woo his company's operations. The letter was leaked and provoked a firestorm.
By communicating through letter, Oberhelman has controlled the script.
His actions have added to the atmospherics.
On Friday, the company broke ground on a new plant in Athens, Ga., which will eventually employ 1,400 people, after a continent-wide competition for the facility. Oberhelman reveals in this interview that Illinois didn't even make the first cut and explains why he will not build any new factories here in the near future.
Below is the transcript of the interview. Edits were made for clarity, accuracy and to avoid repetition.
Q. Why have you chosen to spend any time on political issues?
A. I've got a feeling that my predecessors did not have to spend a lot of time on it. The environment has changed ... We have to have a voice in writing regulations that are fair to all sides. Sometimes there's a big push on, where things get so far along and it's too late. I think it's really the job of a CEO to get dealt in on those things.
Q. What regulations in particular do you see as unfair?
A. I come at it more in terms of the process of regulating. The momentum it seems is that governments around the world want to regulate more and more. We have shareholders, employees and customers to represent. In the debate over clean air for our diesel engines, we had been intimately involved with how those regulations were ultimately written. We were a player. We were listened to and ultimately heard.
Q. Do you think you've been heard in Illinois?
A. Yeah, I think I've been heard.
Q. What have the results been?
A. I hear constantly from our customers in Illinois. I was just speaking at the Illinois Asphalt Pavement Association in Springfield. A lot of our customers will thank me for voicing an opinion for business, for trying to create a business-friendly environment. It's just part of the territory as one of the largest employers in Illinois. We have more than 23,000 in the state ... I feel an obligation to all of our constituencies, when things aren't going the way we think they probably should be going, to speak up. That applies in Illinois or China. I'm going to China Saturday.
Q. It plays well with customers, but it can't play well with politicians.
A. I think in Illinois every single politician knows how bad it is. We have had leadership over a long period — bi-partisan leadership — that has failed its citizens. When you talk to politicians one-on-one, they don't disagree. Then they get into Springfield or Chicago, and things fall apart. For some reason, we haven't seen progress, starting with a balanced budget in this state.
Q. Do you think all CEOs should be as vocal as you are?
A. There are a lot of us who are speaking out on a lot of different things. Being the largest manufacturing employer in the state, that gives me a bit more of an obligation.
Q. Generally, what's wrong with Illinois, when you're trying to figure out where to grow your workforce?
A. Well there's a lot right, which is part of what's so frustrating: A central location; a great city, Chicago; a deep educational base; and, until recently, a relatively attractive tax rate. That's never really been a problem here. It has been all the other things that have gotten off track in the last decade.
And I'll start with workers' compensation, which is way out of whack. I think it's the (2nd or 3rd) most-costly in the country. We've had our tort and legal issues ... We're very plaintiff-friendly. We have a budget that is in California-like condition, and California is imploding in front of our very eyes, losing jobs by the day. It's almost a too-perfect comparison. Before we ever get to talking to the state about things we could do here, we can't get past the basics.
Take the tax increase. I am dead set against early repeal of that tax increase. But, in fact, it's temporary. It will end in 2014. And government spending has gone up after the tax increase, so we've absorbed (it). We have to replace that by 2014 with savings somewhere, and we're heading in the wrong direction. So what do I tell the employees we would bring here for investments? That our tax rate is going to go down? I question that.
Q. But there are a few things I have to square that against. Caterpillar, for instance, takes taxpayer money to help pay for job training and new factories, and your overall effective tax rate from 2000 through 2009 was about 26 percent. (The top U.S. corporate income tax rate is 35 percent, meaning foreign subsidiaries helped shave Caterpillar's tax bill substantially.)
A. We end up filing a piece of paper waist-high every year (with the Internal Revenue Service), given all of the complexities in the tax code. We take full advantage of every deduction we possibly can, like I would encourage every single American to do.
Q. You have a whole department dedicated to lowering your taxes.
A. We have a whole department. We try to take advantage of every single deduction we can possibly find, which is in, my mind, an American way to do it. It's the law. We do nothing illegal. Everything we do is absolutely according to code. We're audited. I'm proud of our tax department.
However, what I would like to see is, let's recognize an average (federal) rate of 25 to 26 percent. Get rid of the deductions and watch tax revenue go up. I would gladly pay more in (federal) taxes. Because I think a simplified (federal) tax code would make it a lot easier to invest in this country. Same as I would say on the personal tax code ... Clean all that out. Simplify it. Lower the tax rates to what is reflected anyway, and watch tax revenue go up.
Q. As you know, Illinois changed its tax code, so that large manufacturers, like Caterpillar, pay income taxes only on income from in-state sales. That was done to appease manufacturers. Your Illinois tax rate would skyrocket if Illinois simplified its tax code.
A. We have always had for a long time in Illinois a relatively attractive business tax rate. That was put in (in 1998) to make Illinois relatively tax friendly. What's happened is all these other things have gotten in the way of being friendly to business ...
Q. You had a backlog of orders at the end of 2010 of $18 billion. At the end of 2011, it was a record $30 billion. How much of Caterpillar's recent success and its predicted success comes from the company just catching up or from the stabilization of the economy?
A. Our sales increase is due to several things. A better worldwide economy would be at the top of the list. We've also worked hard on our investments to increase the amount of products we can get through our factories. We'll spend $4 billion on capital investments in 2012, most of them on expansions, in order to be able to build more. I think the backlog is a result of increasing business demand.
Q. What do you attribute the demand to?
A. Believe it or not, we're almost to the fourth year after the recession. We have seen the Asian economies booming in the last three years. We've seen South America booming. We've seen Africa and the Middle East booming. And that's more than offset the slower growth in the U.S. and all the problems in Europe. Our footprint is so broad and so wide; we can take advantage of all those economies.
Q. Have you met privately with the president?
A. Oh yeah. Yeah. Yeah.
Q. Are you a fan of the President's?
A. ... The respect I have for that office and him is unparalleled. He and I wouldn't agree on everything, but we'd probably agree on a lot of things.
Q. Are you going to vote for him?
A. I don't know if I'm going to vote for him. I really don't know who I'm going to vote for.
Q. You're a rare one then. Because you are a Republican?
A. I am a Republican.
Q. Well, either that bodes well for the President or you're not being honest with me.
A. I really don't know who I'm going to vote for. I voted absentee this week in the Republican primary because I'm going to be in China next week, but I don't know how that's going to finish up. I think the jury's out. Look, we have today the most divided government I've seen in my lifetime. And politicians are just the reflection of the rest of us. Until we get closer to fall, who knows what's going to happen. Right now, the No. 1 worry I have is energy prices. Oil at $100 to $110 is high.
Q. Because you make engines?
A. No, I mean for the economy in general. Well, I am worried about our customers because they buy diesel fuel to put in our engines. I'm more worried about the impact on our global economy due to very high energy prices.
Q. Have you said that to the President?
A. I have not.
Q. Which politicians do you speak with the most?
A. A number of congressmen and senators, mostly from Illinois.
Q. So (Illinois) Sen. (Dick) Durbin?
A. I just talked to him yesterday, actually.
Q. Which members of Congress?
A. Usually those around our factories. It's important they know what's important to Caterpillar.
Q. This is the first time The Tribune has had a chance to interview you since you wrote the letter to the governor. In it, you said you weren't sending the letters as a "threat," but people interpreted it that way. Do you wish you had reworded the letter?
Q. Did you consider leaving Illinois?
A. I never said we were leaving or considered leaving. I wrote that letter very carefully.
Q. So you personally wrote it?
A. Yes, I did.
Q. Other CEOs, namely Sears Holdings and CME Group, have bluntly threatened to leave. What do you think of that?
A. I think it's up to them.
Q. What do you think about the deals they've struck?
A. Again, I think it's up to them and the state. I like to think Caterpillar has taken a different road. One of the reasons I've tried to be vocal, firm, and, I hope, represent a fair shake is to improve the environment overall, so that we don't have to get in a situation where I am forced to do something I don't want to do, like Sears, or like others.
Q. The most important thing I wanted to come out of this interview with is an honest narrative about how you decide where to open new factories. How did you make the decision to move 1,400 jobs from Japan to the new plant in Georgia? Do you use outside consultants?
A. We do. The outside consultants start with a very broad sheet of paper. In this case, we hired (Harvest Group LLC in Germantown, Tenn.) for this particular plant. This is the first time we've used that group. I was very happy with them.
We lay out what we want, and where we're coming from. That is, we're bringing jobs in from Japan. The types of supply chain we need. The types of employees we need. In this case, (it was) 1,400. We think that will generate another 2,000, 3,000 or 4,000 supplier jobs. (They look at) the workforce that's available, and the training that's available to further develop the workforce that's there. What's the business climate? (They look at) everything from the tax rate, to the workers' comp rate, the unemployment comp rate, (and) the situation around tort.
Q. Do they come back to you with a ranking?
A. You'll get a couple of cuts. I think we started with 20-plus states, and Illinois was not one of them, right out of the get-go, and hasn't been for several years. And I'll come back to that.
First, I want to make this point. We started with 20-plus states. The consultants got to know us, our criteria, what we are going to do there. They have a lot of experience ... They made a cut, a second cut, of about a dozen and half states. At that point they came to us and made a recommendation: Look at these six states.
In this case, the division that was in charge of the particular products (we're going to make in Georgia) then got into what I would call deep due diligence in those handful of states.
Q. So Illinois was not in the initial 20 you gave to the consultants?
A. No. No. They were not in the original 20-plus that the consultants screened for the criteria they thought we needed.
Q. Wow. And you said they haven't screened Illinois for several years. These consultants haven't?
A. No, no consultant has, for any (new) site selection in the last three or four years for Caterpillar. When we've worked with other consultants in the past, Illinois didn't make it through the first cut. We've announced probably a half dozen new factories in the last couple years. (Editors' note: In the last two years, Caterpillar says it has announced new factories or expansions to existing factories at 33 locations, half of those in the United States. This includes expansions in East Peoria and Decatur announced in late 2011 that will add 300 jobs.)
We've had several different consultants, and their process is more or less all the same. We sit with them. We hire them. We tell them what we want, what we're doing, how many people, the types of skills we need. Those consultants will bring a short list back to us, and we go into deep due diligence.
Q. So the consultants initially screen all 50 states?
A. In the Georgia case, we also considered a couple of provinces in Canada and Mexico.
Q. What states were in the final six?
A. I don't remember.
Q. You were happy with the list they brought you?
A. The people in charge of that business sit with the consultants, go through the recommendations and do the due diligence. And then the consultants come back and recommend three. And then we get into a deeper set of investigation at the site. Our people go to the site. They'll go to the local college. They'll go to the economic development officials. They'll talk to the mayor, and really get into what do we have here. And then the discussion on incentives begins. Only then does the discussion on incentives from the state begin.
Q. What you're telling me ...
A. You may remember two years ago. We acquired a (locomotive) company called EMD, Electro-Motive Diesel. Their headquarters are in La Grange, near Midway airport. EMD is a company that was owned for years by General Motors. They were sold to private equity in 2005. And in 2010, we bought them. In La Grange, the diesel engine is made for every locomotive that company makes. The final assembly was made in London, Ontario. The engine ships up to Ontario. They assemble a full diesel locomotive, and it is driven right out the door and goes to work for the railroad.
We knew we were going to need additional capacity in 2010. And we wanted to look at Illinois for the obvious reasons: Because La Grange was the headquarters (for EMD) and Caterpillar was here. You can imagine it would have been very nice. We couldn't get past the first screen.
Q. Meaning the consulting firm, we weren't in the firm's first pool of 20?
A. Illinois didn't make the first cut. Look at the basics. The fiscal situation was a disaster, maybe worse than now. Workers' comp was really bad, and we had a tort situation still known for attracting plaintiffs from all over the world. It goes on and on.
What happened was that we found Muncie, Ind. We have two very similar Caterpillar plants: One in Illinois (in the Peoria area) and the other in Lafayette, Ind. It was in 2008 when we did this study, but just pick an injury, say a (torn) ACL. The (workers' compensation) expense to Caterpillar was seven-times higher at the Illinois plant than at the Indiana one. That and the uncertainty around taxation are the two big factors. Are taxes really going to be lower in Illinois? Therefore, the plant ended up in Indiana.
Q. That doesn't mean you can't build a new factory here. It just means you won't. What about the hometown pride factor? Why don't you sit there and say (who cares what the consultants think)? I look at Rockford; 19 percent unemployment at one point. It looks worse than Detroit. Why don't ...
A. I want to do something in Illinois so bad. But my first obligation is to the shareholders of this company. I have not been able to find, even with my bias toward Illinois, a way to do that because the cost in Illinois and the risks are so much greater than so many other states.
Q. But you are expanding here.
A. We are investing in Illinois, and our employment has been flat in Illinois for a decade. We haven't reduced it, but it hasn't grown. While we've grown U.S. employment vastly in the last decade, it has been flat here. We have three huge plants in Illinois ... And I'm on the export council for the governor.
Q. Have you told the governor this? Have you shown him your consultants' studies? That's the light bulb.
A. I haven't. I'm not going to get into the basics of the comparisons. But I will tell you, Melissa, if it was me and my company wasn't competitive, the first thing we'd do around here is to send our people to the best people to find out what they're doing. It's bench-marking. Part of the message I've had to the governor and his chief of staff, both of whom I respect, is just go benchmark. It's a great way to learn.
And I have a plug for the governor. In his budget speech last month, he put the things that needed to be fixed on the table for the first time ever. He got it out. He had the courage to do it. Now it's to the (Illinois) legislature. OK, legislature, let's go.
Q. If I'm a politician and you're trying to get me to change something, the first thing I'd want are those (consultants') studies. I'd want to read them for myself, analyze them myself, and have my staff look at them. And if they hold up, I'm going to say, ‘OK. Let's play ball.'
A. What happens is that most of the states will make you sign a thing that says you can't do that, for obvious reasons. Having said that ... I suspect (the economic development officials) all know this. They know exactly the competitive situation. This is no secret around here. I'll go back to my point. Every federal and state politician, they all know the problems. We just have to get it done.
Q. You're such a large exporter, though. Why would a large exporter build anything in the Midwest anymore, just because we're in the middle and not near a port?
A. That's a fair question. That's certainly a piece of it. No question port and logistics are a piece of it. Then you get into a bigger argument, which is your rail and interstate system, which are pretty darn good in the Midwest ... No other country is more efficient at moving goods inside the country than the United States. That's been a tremendous strength of ours, and it sort of off-sets the obvious advantage of setting up a factory right at a port.
We're setting up a factory in Athens, Ga., because a lot of those machines will stay on the East Coast. But there's a port in Savannah, from where we export a lot to China. And we have to transport (our bulldozers) all the way across the country. The Midwest is a pretty good location.
Q. Well if you're shipping to Asia, you could put a factory in Oregon. Or is that not cheap enough?
A. You can't chase wage rates. That's not going to work in a highly-skilled environment. We're not chasing wage rates at all in the United States. In our case, an investment like (the East Peoria plant we're in) has been 50 years. Just because wage rates go up and down, you can't base it on that. You have to base it on other things. And I would say that wage rates in the United States, with the way things are going today, are not all that greatly different (from state to state).
Q. OK. There was one other topic. Most of the high-tech engineering equipment on the floor of this factory was manufactured in Germany. Their economy is performing, yet they've preserved a social safety net.
A. I go back to bench-marking Germany. There are some big things to be learned in Germany. They value education. We spend a lot of money on education, but we don't value it. That's a big difference. Spending money and value are two different things. Somehow German society still values bettering themselves in STEM (science, technology, engineering and math). They're also great savers ... Society there is very different. There's little consumer debt. Charge cards aren't that popular. But education is the big one, and we've lost some of that.