Transcript: Caterpillar’s Doug Oberhelman

Below is an unedited transcript.

MODERATOR:  This morning we have a great lineup, and we will kick things off with Doug Oberhelman, Chairman and CEO of Caterpillar, and he will be talking with my colleague, Geoff Colvin.  Please welcome them now.

MR. COLVIN:  Have a seat there, Doug.  Thanks Adam, thanks everyone.  Lots to talk about here, and I should mention first off, by the way, Doug made superhuman efforts to get here this morning, encountering all kinds of problems last night.  I almost said he moved heaven and earth to be here, but they actually move earth, and so I’ve got to be careful.

MR. OBERHELMAN:  We enjoy doing that.

MR. COLVIN:  Right, exactly.  So true story, Doug.  Last night at the dinner, I was talking with one of the attendees, and I mentioned that I would be interviewing you here this morning, and this guy said to me “oh, well what’s he doing here?”  Now I thought well, okay.  That’s a legitimate question.  We invited you, but what are you doing here?

MR. OBERHELMAN:  Yes, that’s a fair question.  We do a lot of things.  We push dirt.  That gas stove in your kitchen when you turn it on in the morning to do your cooking, whatever it is, chances are we compressed the gas behind that to get it to you.  We make locomotives.  We make diesel engines, very clean diesel engines.

MORE: Why the engine is here to stay

Here’s one of the things that I think is such a connection to what you’re all talking about here.  A diesel engine today is perfectly clean, and the diesel engine that we all grew up with or many of us are familiar with in New York City or the transit buses, black, belching, smelly smoke.  That’s gone today.

We couldn’t do that without deep software technology and integration.  For instance, the combustion chamber in a diesel engine where the explosion occurs is a more complicated process that we monitor than a space shuttle launch.

We couldn’t do that without absolutely loads of technology simulating that, without having to make a new diesel engine every time we want to make a tiny change in the combustion chamber.  We issue 500 patents a year at Caterpillar (CAT).  Many of those are around software.

A bulldozer we make will last 10,000 hours.  What does that mean?  500,000 miles on a car before overhaul, and we couldn’t do any of that without technology.  We’re finding today a lot more application in linking our customers with our machines.  Where’s my machine, what’s it doing and how is it operating?  Just like our cars and just like our iPads.

So there’s just tremendous opportunity for us around technology, and I think there’s no way we can do our industry and our business, what we’re doing today, without this kind of a connection with technology.

MR. COLVIN:  So you do a lot of fuel technology for one thing, which involves a lot of software and computing power and so forth, cutting edge?

MR. OBERHELMAN:  Yep.

MR. COLVIN:  You also do a lot of straight information technology, not only in the sense of monitoring how all those giant machine, multi-million dollar machines are performing, but also how they operate.  I gather that, you know, one of those big old graders we see out there making a highway is now guided by InfoTech; is that right?

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MR. OBERHELMAN:  Yeah absolutely, and there was a construction project right out here coming in this morning, and I just smile on construction projects, unlike everybody who kind of bad-mouths them because of the delay in the process.

But if you look at a machine today and take a motor grader, the one you’re talking about with the big 16-foot blade on it, that’s controlled from the satellite today.  The operator won’t touch the blade, and he’ll merely shift forward and back when his pass is done.  Now imagine the impact on the environment, using less fuel, emitting less CO₂, if he can do that in one pass or five fewer passes or whatever.

MR. COLVIN:  Right.

MR. OBERHELMAN:  And that — we can design — we design machines all the time, but we try, we strive as hard as we can to get three to five percent cost reduction.  If we link the machine to technology and cost reduction, we can see a 20 to 25 percent improvement in the cost of operation to our customer, and our customers love that.

So that’s really where the connection with technology has to happen and is happening today.

MR. COLVIN:  We heard, strangely enough, a lot of things Cat does tie into the discussion that we heard at dinner last night, one having to do with — there was a comment that Peter Thiel made  about fuel technology, and the fact that we haven’t had a lot of progress, in his view, on fuel technology over the past 40 years.  Do you think that’s basically right, and what’s happening there?

MR. OBERHELMAN:  Well, fuel technology is so related to fuel and energy prices.  We see fuel prices and energy prices go up.  A slew of alternative energy ideas come out.  The energy price goes down; they disappear again.  Take hybrid technology, for example.  Three years ago, hybrid technology was everywhere.  It’s lost its luster.  It’s over-rated today, because basic carbon prices are lower again.

And certainly there’s some blame to go around in terms of how we make our investment, what we are encouraging to do and where should we be put our energy investments.  I would argue a little bit with natural gas, and the fact that natural gas in this country, I think, peaked at $12.  Five years or ago or so we thought natural gas was done.  There was no way we’d ever have natural gas again.

The plastics business left, the chemicals business left.  Suddenly we’re at $2 and some days giving it away.  This will attract technology and manufacturing, but it was technology that brought us fracturing and the ability to get that gas out of the ground, where we didn’t have that before.

That likely will lead to a long period here of fairly reasonable energy prices around natural gas, which I think is great, because it’s easier on the environment and it makes us a lot more competitive because we have that resource.

MR. COLVIN:  And what is Cat’s strategy on fuel technology, because you mentioned that these big machines operate on diesel.  But you are, I gather, looking much further into the future and looking at other ways to power these things completely.

MR. OBERHELMAN:  We’ve got kind of an all-in scenario, at least I hope it is.  Right now, a strong pull and demand for natural gas, and to either retrofit a diesel engine or in our case, we make locomotives, big locomotives, Class 1 freight locomotives, and we’re talking about gasifying those.

So an hundred-car coal train or a hundred-car freight train, whatever it is, the first car back would be a propane tank or LP tank, some kind of liquefied natural gas tank, powering the locomotive.  You can imagine when some of these locomotive companies or these rail companies are spending one and a half to two million dollars a day on diesel, what the attraction is, with the spark spread so far down.

But again, all of that comes to us with software technology and how we apply that.  There’s a tremendous opportunity coming for us, and we’re looking at lots of hybrid technologies.  We’ve had, and our industry has been somewhat slow to get to this, because it’s hard for our industry to store either battery, because it’s heavy, or store kinetic energy as we move back and forth with these machines, to lift dirt and empty dirt, whatever it is.

But we’ve got a deep, deep tow in that water that we’re about to, I think, come through with a breakthrough, which will really be applicable and our customers will love it.

That’s really where we have to be careful.  We’ve got a lot of competitors around the world.  Most of our competitors, all of our competitors except one are outside the United States.  Lots of Chinese competition coming, entrenched European competition, and every dollar we spend, we have to get a return on.

Everybody would say, but we really have to be careful in a capital-intensive business that we do that, and there’s no way we can do what we do today or where I think we have to go without deep software technology.

MR. COLVIN:  Yeah.  A couple of years ago you also bought a big company in Germany that has technology, that will burn, it seems to me, just about anything that burns, right?

MR. OBERHELMAN:  Yeah.

MR. COLVIN:  And figure out how to power an engine with that?

MR. OBERHELMAN:  Yeah.  This is a company that we really have been after for a few years, and it’s based in Germany, as Geoff said.  It will burn any kind of gas, biogas, landfill gas, natural gas, you name it.

Again, the reason it can do that is a very sophisticated engine control module on the engine, that knows how to affect the spark inside the combustion chamber, make it run.

So again, we have a tremendous overlap with the demand for our technology, and in this case a very sustainable way to produce energy through gases of all kinds.  I’m really excited about that one, but again, we couldn’t do that without a deep knowledge of software.  We’re kind of a software user.  I think many in the audience are probably software producers.

We’re a big user of it.  We have a lot of software engineers that are new in the last 20 years to our business.  It’s not maybe as flashy as Palo Alto certainly.  We’re in Peoria, Illinois.

But at the same time, it’s a tremendous opportunity to really use technology in something you can see move, and either push dirt, like I said, or pull a freight train or sexy stuff like that.

But in fact — or at least, you know, gets people a little anxious — you guys are developing autonomous giant multi-ton earth moving machines that will drive themselves.

MR. OBERHELMAN:  Yes.

MR. COLVIN:  How is that going?

MR. COLVIN:  Yes.

MR. OBERHELMAN:  These are big 350-ton payload trucks, so imagine a pickup truck from Ford is a half a ton, a pickup truck.  This is 350 tons.  Our biggest is 400 tons.

We have our first commercial order today for 50 of those in Australia that are completely autonomous.  So it’s a big iron ore mine site out in western Australia in Pilborough.  And the mine is new and it’s being set up and programmed inside the office, to run all these trucks autonomously.

So they’ll pull up to a shovel or they’ll pull up to a drag line.  They’ll fill, they’ll take off, they’ll dump, they’ll do whatever they’re supposed to do 23-1/2 hours a day.  The first thing we found out was an operator in western Australia is $160,000 a year, and there’s four a day that you need.

So the demand for that is huge.  This is all about software technology.  I’ve a D-11, one of our big bulldozers again, nearly as big as this room, with joysticks remote control from almost a half a mile away.

MR. COLVIN:  They let you do that?

MR. OBERHELMAN:  Once.  I didn’t hurt it, or myself or anyone else for that matter.  But we’re on the edge of, not unlike Silicon Valley and where we’re going with what I’d say the iPadization, maybe a poor word, for Caterpillar and the world.  But we’re on really the verge of some very innovative breakthroughs in our industry that will save energy, save CO₂, and really allow value to our customers, which is really our — we have to be overriding with that.

MR. COLVIN:  Well, and that gets to a good, larger point, which is Caterpillar is the most, as you have pointed out, the most vertically integrated of any company in your business.  You are doing this pretty primary level research and taking it all the way through to the finished product.

MR. OBERHELMAN:  Yeah.  That’s a great question.  We spend every year about two — or this year, we’ll spend about 2.3 billion in R&D.  A big piece of that is around electronics and software, and the efficiencies that it brings in cost reduction to our customers.  It’s important to us.

If it has a little bit higher heat exhaust temperature, maybe the guy in the pickup truck that’s a supervisor for that job gets a vibration on his belt.  Wow, I’ve got a problem and we’ll come out and fix it, or it comes back to us directly and we’ll send somebody out to fix it.

MR. COLVIN:  And you can fix it —

MR. OBERHELMAN:  Opportunities are limitless out there.

MR. OBERHELMAN:  Before it breaks down.

MR. COLVIN:  Yeah, yeah.  By the way, there’s a little story about what you did basically as soon as the iPad came out and you got your hands on one.

MR. OBERHELMAN:  Yeah.

MR. OBERHELMAN:  Well, I am not a technology.  My degree was Finance.  I’m not an engineer, I don’t know anything about it, but much about it.  I got smarter with the iPad.  Really, I had just taken over at CEO of the company, and we do an annual leadership meeting for our top 350 people or so.

But anyway, so I required the top 350 people to buy their own iPad, come to the meeting.  There would be no pencils or paper, and we’re going to do it all on the iPad.

So we got to the meeting and everybody had their iPad and it worked pretty well, and now, everywhere I go, everybody’s taking notes or doing everything they can on their iPad.  I saw this engineer not long ago, and sure enough, he’s whacking away on his iPad just like everybody else.

But I think there’s a lesson there in terms of if we can get technology that the basics are usable by everyone — think about a mechanic out in the dirt fixing a tractor, and how we can help him with his job.

He’s under a machine, he’s inside a machine.  He’s trying to figure out what needs to be done.  The answers are right there on the iPad if we can get him that in an easy form, rather than a book or he has to go back and call the service supervisor to find out what’s going on.

MR. COLVIN:  One of the things Caterpillar has in common with pretty much every company represented in this room, including those that are web start-ups or anything else, is you need really good engineers.  You need most of them here in the United States, and this is a problem that you feel strongly about.  What needs to be done?

MR. OBERHELMAN:  Yeah, yeah.  I and many are on this, I think, campaign is probably as good a word as any.  But the latest statistic I saw is that the United States ranks 52nd in engineering and math and science in the world.

MR. COLVIN:  In what, test scores?

MR. COLVIN:  Yeah, yeah.

MR. COLVIN:  Unless they go home?

So we really need an all-out effort around STEM, in my opinion, and there’s a lot of work being done on this.  But we can’t seem to get traction in Washington, and I won’t blame everything on Washington, but certainly in our political leadership, to really recognize this and get us going.

Because we cannot be an innovative, manufacturing country like we were if we’re 52nd, and we don’t have the raw material coming in here.  We’re set up, though.  We’ve got great research universities; we’ve got some of the greatest R&D efforts here like Silicon Valley.  We’ve got a wonderful complex in the Midwest, lots of companies do.

We’ve got to — we cannot lose this, and we’re losing it in front of our very eyes.

MR. OBERHELMAN:  It’s a cultural thing.  I mean who emphasizes science and math any more in grade school and high school?  So it’s really a cultural movement, that I feel the government has a role in leading that to help us.  Instead, they’re playing second base.

MR. COLVIN:  Yeah.  Well, developing science technology engineers gets us to this thing.

MR. OBERHELMAN:  My little friend over here?

MR. OBERHELMAN:  This is a pretty rudimentary —

MR. OBERHELMAN:  –Caterpillar bulldozer.  But the story on this is that it’s a little robot that shoots baskets into a hoop, and it was designed in six weeks by one of our high school classes that we sponsor, and we have — there’s a program around the country.  There’s a couple of thousand of these different science projects going.

There’s undercarriage in there.  There’s lots of electronic programming in there, and these kids kick it off the 1st of January when they get back after Christmas break, and they have to have it done, whatever the project is, in six weeks.

This is one that’s actually done by a group of students around the Peoria, Illinois area where I live, and I’m going to ask our two accomplished engineers here to demonstrate.  We’re going to hand out some souvenirs that will come out to you in the audience.  They won’t hurt.  You can catch them and take them home.

(Machine sound.)

(Pause.)

MR. OBERHELMAN:  Now think about this.  This is making science fun.

MR. COLVIN:  Right.

MR. COLVIN:  I don’t blame you.  It is quite amazing that high school kids did this.

MR. COLVIN:  Yes.  See look.  It’s empathic to me, right.  I’m open.

MR. COLVIN:  Well see this is the thing.  David Stern, Commissioner of the NBA was here yesterday, and he didn’t get to see this.

MR. OBERHELMAN:  Yeah, yeah.  Well, I would advise him that he could probably use this with a lot less salary schedule than he’s got in the NBA.  I don’t think it would be as much fun or as colorful, but it would certainly be interesting.

But anyway, this is just something that we’re doing.  There’s a lot of these programs around the United States, to make science and engineering and math alive for young students.  We’ve now, this is a class that came through about five or six years ago, I’m told.  We’re just getting now those kids through college, and they’re coming to work for us.

MR. OBERHELMAN:  So that investment is paying off, and in fact Brian and Mitch, two of our engineers, are leading the way.

(Applause.)

MR. OBERHELMAN:  But this is what we have to do in this country, not the robot.  But we have to emphasize that we need this resource, we can’t do without it.  It’s one of the things that made our country what it is, and we’ve got to get back to it.

MR. COLVIN:  Yeah.

MR. COLVIN:  Yeah, as opposed to one of those bulldozers that’s, as you say, the size of this tent.

MR. COLVIN:  Which is dramatic, I have to say.  Having seen them up close, it’s pretty cool.  But all right.  There’s lots to talk about, but I want to invite comments, questions, on anything we’ve talked about.  Yes, (name), right off the bat.  There’s Michael.  Yeah, a microphone is on the way.

QUESTION:  Quick question.  Michael Strick at MIT.  You talk, you have these enormous capital-intensive things, and you’re talking about now hanging sensors, etcetera, or more software engineering.  Like the Defense Department, you’re moving to be a netcentric organization.

MR. OBERHELMAN:  Yeah, yeah.

MR. OBERHELMAN:  Yeah, a great question, and one of the things that’s happening as a result of the networking of the machine to our distributor, to our customer all the way through is if we get that right, and that customer has a very user-friendly bulldozer or whatever it is, the barriers of anybody else penetrating them our competitor are a lot tougher.

So it’s a different mentality completely for our engineering and design teams from one of make the highest quality, low cost product that our customer has the lowest owning and operating costs around, to make sure he gets his oil changed on time, make sure if it’s a bucket the teeth are changed when they need to be changed, we’re talking about that.

All of that can come back through the customer’s application at his end.  If we network that together, we win every time.

MR. OBERHELMAN:  Yeah, we definitely are, and it’s a big challenge in a big company when we have multiple product groups all over the world.  We need a silver bullet on that one, I can tell you, and that’s a message to MIT and the Silicon Valley.

MR. COLVIN:  Yeah.  Who would have thought that these concepts of stickiness that were developed so heavily through web businesses would apply to Caterpillar, but they do?

But we’ve got every piece available to us, and in some of our products we’re past that.  In a mine site, for example to your point, every machine in a big mine site today, we know exactly what’s going on with it.  But it’s easy, because it stays in that four walls of that mine.

Out here on the road, it moves from this road up to Aspen, over to Beaver Creek to wherever it is in three weeks’ time.  It’s a very different application.  Then some are very small in terms of pricing and value.  We make a small skid loader for $30,000.  A big mining truck’s $4 million.

So you have to have, then, something very scalable, down to where again that customer gets value out of it.  What does he win with, and tying all that together is really challenging.

QUESTION:  Hi.  I’m Matt with Fortune.  You mentioned hybrids, and a couple of years was a vote, that asked the question what’s going to happen after the internal combustion engine goes away?

MR. OBERHELMAN:  Yeah.

QUESTION:  And in the last few years, we’ve seen that conversation die down, and the engines have really changed.  You’ve got direct injection, people are using lighter weight materials, smaller at least in consumer vehicles.

MR. OBERHELMAN:  Yeah, you bet, you bet.  It’s amazing to me that the guy that invented the diesel engine, Rudolph Diesel in the 1850’s, and we are still today basically using that pressure combustion technology that he invented in Germany at that time.  It blows my mind, not unlike a gasoline engine for that matter.

But over time as energy prices rise, there will always be a need and a place for an internal combustion engine.  Big heavy applications, maybe semi-trucks, maybe mining trucks, smaller things like skid steer loaders, automobiles, alternatives will come into play with those, depending on where the energy price goes over time.

MR. COLVIN:  Here please.

QUESTION:  Douglas Worshaw, contributing writer in Fortune.  I’m pretty sure it was Mark Twain who said everybody talks about the weather and nobody does anything about it.  There’s been a lot of bantering about about the immigration issue and the brain drain and finger-pointing at Washington.

Could you point to any particular points in Washington, feel free to name names, and what you guys are doing about the weather?

And if we don’t supplement that with supply that’s available, we are going to be less competitive.  It’s real simple in my mind.

QUESTION:  Well, what are the specific friction points in Washington?  Is it this committee, this Senator —

MR. OBERHELMAN:  Well, the friction points are really it’s a right and left thing.  We don’t want any immigrants, period, to come into this country, to take one of our jobs.  That’s one side of it.  The other side is we’ve got to have help in order to make our country more competitive.  It’s a right and left issue, pure as day, and it’s that simple.

Another one’s the tax rate, now that you’ve got me going.  When I started at Cat in 1970 —

MR. OBERHELMAN:  Hell, I’m not going to do that here.  In 1975 when I joined Cat, we had the lowest tax, corporate tax rate in the world.  I did tax analysis.  I was a little junior analyst with a pencil and we even had HP 12C’s at that time.  We were at 35 percent plus three for state and all of our competitors were way above that, twice as much, all the European countries.

We’ve got our priorities wrong in the country and anyway, another speech for another day.  But that’s what needs to happen.  We need to some strong leadership that we don’t have in the administration or in either House or Senate or political party today.  That’s as close as I’ll get.

MR. COLVIN:  Here please.

MR. OBERHELMAN:  Okay.

So I’m curious what Caterpillar is seeing, and whether it reminds you of anything that we’ve seen recently, a wave for what is bad and what you guys are thinking.

MR. OBERHELMAN:  We release our second quarter next week, so I’m going to be very careful with this.  But generally, I do not see anything today in 2012 that’s either a corollary to or parallel to 2008.  We may end up in the same position down the road, but nothing today is, in my mind, at all a correlation to what we saw in mid-’08.

Mid-’08, the economies were already in trouble.  We all knew it.  Housing had already busted two years before.  So I think what we’re seeing today is the Europe slowdown is real.  Northern Europe is actually doing pretty well.  China is doing all they can to restimulate.

But I do not see any parallel to September 15th, 2008, and then what led onto that.  Again, we may end up in the same place, but it will be for different reasons, probably other tough or stupid policy mistakes by government.  Today, I don’t see that.

MR. COLVIN:  Yes please.

But you know, in finance, for instance, you need the same math skills, and I don’t hear about a shortage of finance professionals.

MR. OBERHELMAN:  Yeah, great —

QUESTION:  What is the problem with engineering.

The expense of focusing on finance and emphasizing the importance of finance on the world was at the cost of manufacturing and STEM, STEM and manufacturing, because you have to have manufacturing if you’re going to have any kind of science, technology and math.

So we’re going to see that.  I am absolutely convinced we’ll see that game change back to not necessarily engineering, but certainly other things away from finance.  So I’m pretty optimistic about that over time, that that’s going to happen.

Finance is in a long term malaise for lots of reasons, good and bad.  So that talent’s going to go somewhere.  We’re going to have to help with it in this country, primarily led from government and society policy.  We don’t value teachers in this country, yet we pay them a fortune supposedly.

So there’s a lot of things in society that have the opportunity to move and will move, and I think we’ve got to help it a little bit as leadership to make that happen.

We’re going to take a look on some of these monitors, as you and I exit, at another side of Caterpillar that may interest people, and then the next folks will come on.  But let’s just say thank you, Doug.

(Applause.)