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The Financial Crisis and the U.S. Economy - A CEO's Perspective

Speaker: James W. Owens, Chairman and CEO, Caterpillar, Inc.
Presider: Edward S. Knight, Executive Vice President and General Counsel, The Nasdaq Stock Market Inc.
April 23, 2009, Washington D.C.
Council on Foreign Relations

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EDWARD S. KNIGHT: Good afternoon, everyone. I'm Ed Knight, the general counsel of NASDAC, OMX. We have a very interesting program for you today.

A couple of Council instructions first: please completely turn off, not just put on vibrate, your cell phones, Blackberries, all other devices. This helps us avoid interference with the sound system. And this meeting is on the record.

We are pleased to welcome James W. Owens, the chairman and chief executive officer of Caterpillar. As we all know, Caterpillar is an icon in the business world. It's the largest manufacturer of construction equipment in the world. It's a key indicator of the state of the U.S. and the world economy in many respects. You have Jim's bio in front of you. Jim has spent his career at Caterpillar starting as a staff economist. I think you've run, what, 15 or 13 of the 25 divisions of the company?

JAMES W. OWENS:  At one time or another.

KNIGHT:  Headed up operations in Indonesia and in Europe and in many parts of the world. I have to say, he is also a very direct and honest individual. I know that from reading an article about him in the New York Times where he admitted his first few years in college were mainly social, not academic. And I intend to remind my son there's hope for him because he's following your footsteps.

But the importance to the U.S. economy of Caterpillar has been underscored in many ways in the last few months. One of course was President Obama's visit on February 12 to the Peoria, Illinois, plants that you have. At that time, President Obama said this about Caterpillar: "In many ways you can measure America's bottom line by looking at Caterpillar's bottom line. Caterpillar builds the equipment that moves the earth. Your machines plow the farms that feed our families, build the towers that shape our skylines, lay the roads that connect our communities, power the trucks that deliver our goods."

But on Tuesday you announced your first quarterly loss in 16 years and projected the worst sales slump since the '30s for your company going forward, at least in the near term. On the other hand, 2008 was an outstanding year for Caterpillar, and so something happened. And I think we had a sense, but I really think we'd appreciate hearing from you how you saw it happening from the control room, if you will, and why it happened.

OWENS:  And I think it's a great way to get started with our conversation because if any of you have looked at and followed Caterpillar, we had a period of very explosive growth starting in late 2003 and running through 2008. As the global economy -- we sometimes forget the global economy had its best three years since World War II, '04 to '06, and global GDP growth was very robust. In 2008 we actually still had an all-time record year in 2008.

Our sales were $51.3 billion. We kind of hit our 2010 goal of $50 billion a couple years early. And as late as even September of 2008, we still had a pretty optimistic view of the global economy, at least in terms of our business and how we'd participate in that, even with the expectation that we would have recessionary conditions in the United States, Japan and Western Europe.

But with the September, mid-September collapse of Lehman and the subsequent, literally, seizure in global credit markets, it really capsized the boat, if you will, in terms of the macro economy globally that we were very successfully serving. Particularly the global mining industry, the global oil and gas industry, and emerging markets as a broad theme -- these were the strengths that we were riding on, and, by the way, creating a lot of American jobs with because we exported last year about $16 billion worth of product, principally to these markets around the world.

And so even with the U.S. in recession, Europe in recession, Japan in recession, we had an all-time record year. But when these events happened in the 90 days following the collapse of Lehman, just take this one quarter of one year, essentially every major commodity market that we serve including oil and gas, copper, iron ore, go right down the list, dropped between 35 (percent) and 70 percent in price. Equity markets all over the world, not just here in the United States, but every major equity market in the world dropped between about 35 (percent) and 80 (percent) or 90 percent. And currencies all flipped upside down. This would include depreciation of the pound versus the dollar by 30 percent, the Euro by 15 percent, and appreciation of the yen by 15 (percent) and of course the Russian, the South African and Brazilian currencies, and Australia, all went in the tank.

For a global manufacturer, we manufacture in 50 countries around the world, we sell in virtually every country, you can imagine what this does to your relative competitive position that you now have to rethink through. It has a big impact on relative prices in all these countries, relative material costs that you've got to acquire, and of course it has a profound impact on your customers.

Big customers of ours, particularly the global mining industry and global oil and gas industry, saw their equity values drop on the order of more than 50 percent almost across the board in the 90 days. So we found that we'd get to about, literally we almost went to Thanksgiving with more than a three-year order backlog of large mining trucks, large engines, etcetera. And about then we started getting major cancellations of orders.

And so we radically retuned our expectation for what the year 2009 was going to foretell for our industry. Capital goods are always sensitive to confidence in the near-term future, so we saw a lot of cancellations of orders, a three-year older backlog, in many cases they just said, 'Well, we don't want it now; we'll take it later.' And they delayed it. And we ended up by January even a $40 billion outlook. So a drop of $11 billion in top line sales for 2009, versus our previous expectation of an 8 to 10 percent increase.

And that has been followed as the global economies, we're looking at now high single digit, negative GDP drops pretty much across the OECD world in the fourth quarter, first quarter, second quarter. We are relatively optimistic about the global economy beginning to turn in the second half of this year. And there's a lot of debate about that right now.

But we've had to spend a lot of time helping our employees understand how things could have changed so radically so quickly because we were literally hiring people through September and then had to radically downsize. You just cannot afford to build inventory of the kind of products that we build when global demand drops as sharply as it did almost overnight.

KNIGHT:  Of course policy-makers around the world had tried to react to this and one common nostrum they've been using is "stimulus direct investment in various projects," many of which I think it appears, at least to me, are designed at getting more of your trucks turned on and moving. I think $5 trillion is one estimate of the amount of dollars being spent around the world on, quote, "stimulus packages." We have one in the United States of course. IBM in their earnings announcement earlier in the week pointed to that stimulus as something that would sustain their public sector part of their business and why they had some reason for optimism in their business.

How do you look at that: the U.S. stimulus program and, say, the Chinese stimulus program?

OWENS:  Yes. We commented on both of those two in our outlook. First off, I think it's very good that the United States had a substantive stimulus program, got it passed on a timely basis. It makes it a little challenging to forecast the global economy right now because there isn't, while we're in an unprecedented period of global GDP shrinkage, certainly the worst since the early 1930s, and I think we're in a classic liquidity/risk trap. And we need a fiscal policy stimulus globally in order to help break us out of this. And personally I think the two most critical countries in the world to think about are the United States and China.

We have the reserve currency, we have the wherewithal, we have the demand if you will to drive and make a significant difference in global demand if we have a very substantive fiscal stimulus in the United States. And the Chinese now have reached critical mass. They have a huge reserve position and very large savings rate in their country and a lot of need. They now can move the needle, if you will, in the global economy. They're big enough. So the combination of our two stimulus packages, coupled with the stimulus that's going on in all the other countries in the world, I think are key to kind of breaking this kind of classic liquidity trap and lifting demand and beginning to move the global economy back.

We can worry about fiscal responsibility, balanced budgets after we get through this, I think, freefall in the global economy we're currently in.

So I'm very pleased that we have a stimulus package in the U.S. I'm very pleased the Chinese have one. The Europeans' quite frankly is very modest, but a number of other countries across Eastern Europe and across South America -- Brazil's got a pretty good stimulus package -- it is happening to a certain extent all over the world.

We've never had a period with this much fiscal stimulus, monetary easing, relatively low interest rates, all of which should help a recovery once it gets started. We found very few economists, by the way, who are optimistic about any kind of a robust recovery, but it seems to me that we, government-wise, are beginning to put in a lot of the right pieces for it.

The Chinese stimulus package, for example, I jokingly said when I was there recently that theirs is very heavy on infrastructure. I would call it a hard infrastructure: namely, roads, railroads, fast-rail, more airports, ports. The good thing about capital projects like that is they are one-time-only. They don't create a permanent spend pattern. If they are actually really needed and would be around and help the economy's efficiency for the next 20 years, they should be viewed more as an investment so they stay with and help the economy long-term. So they have a lot of virtues.

And the multiplier on job creation associated with infrastructure spend is very high. It's not just the construction jobs but it's the manufacturers of the equipment, it's the cement, it's the Corian aggregates, it's the steel, and it's all the other things associated things that go with it that are big job creators. And if you're looking for a stimulus program that creates jobs, that's one of the big virtues of this.

The U.S. package did have fiscal stimulus in it. I want to be clear about that. And we were very pleased to see some hard investment in infrastructure because I think we've under-invested in infrastructure in this country for awhile. And we particularly need fast-rail, better rail, more efficient. And we need to uncongest some of our roads as well as just pure maintenance. So we have an opportunity to do it even more I think with physical infrastructure.

By the, I'd say, relatively modest amount for hard infrastructure in the U.S. stimulus plan, by our estimates, it's about 6.5 percent of the total construction spend a year ago.
And what's happening is, the private sector demand is dropping more than that.

KNIGHT:  Right.

OWENS:  So demand is still going down.

KNIGHT:  Let's talk about that demand. In terms of the world economy, trade between countries has dropped precipitously in the last few months, although you are an icon in the U.S. culture, 75 percent I believe of your revenues come from outside --

OWENS: About 65.

KNIGHT:  --about 65 outside of the United States. So you have a large stake in trade policy. The G20 announced some steps in terms of trade finance. This morning a committee that you chair at the Business Roundtable announced a blueprint for reenergizing trade policy in the United States. And one of the things it focused on is bipartisanship. I'm old enough to remember Lloyd Benson and Bob Dole working together on trade matters when they were considered generally, that was a bipartisan subject.  But we live in a much different world today: the economic circumstances, the emotion around the economy, the highly charged politics that we live in.

Are you very optimistic that we can change the agenda in the trade area? And how would you describe the challenge in solutions there?

OWENS:  I'd describe myself as hopeful, not necessarily optimistic. But I think you make a great point, and one of the things we were trying to do with this Business Roundtable paper is to get trade back on to the bipartisan agenda. In a way it's tragic, over the last decade or so it's become increasingly partisanized. And it's so much in our national interest, and it's one of the reasons I wanted to do this program here at the Council is because I think we need to engage our business leadership and political leadership in helping our public understand how important trade is to our country.

I am absolutely convinced as an economist and a citizen, certainly as well as a business leader: we cannot build a wall to greatness. I jokingly say, and it's not too much of a joke: "You know, if you want me to build a lower quality and sell them at a higher price tractor, just give me protection."

I think, the Business Roundtable members are quite willing to compete and are confident that we can compete on a level playing field with anybody in the world. So we have championed for a very long time trade liberalization.  Open markets -- we should encourage our country to focus on: what do we need to do to position the United States to be more competitive in the world market?

You know, we've given little thought. I mean, the Japanese and the Germans have always thought about: how do we create export competitiveness so we create jobs domestically? We rarely think about: how do we create export competitiveness from the United States? In fact in many cases we constrain our exporters in a host of ways.

Oh, by the way, wouldn't it be nice if we attract foreign direct investment? Some comes here because we have a very large market, but are we aggressively out there trying to attract foreign firms to invest in our country and create jobs and employment here and better products and services for our citizens?

So I think we've got to work as a business community in sort of a post-Enron world. People kind of hunkered down and thought if they did their job that was good enough. I think we have to be engaged in leadership. We've got to get back out to the Kiwanis and the Rotary and the Main Street communities and talk about the benefits to our country of being engaged in the global arena.

We're only going to be a great country if we have companies that have the best products and services and that we're able to compete. And our companies -- we're 5 percent of the world's population. If we're going to serve the world and be competitive with other leading multinationals, we have to invest around the world and create market opportunities.

KNIGHT:  The CEO of GE today I think said something like that 'world capitalism is being reinvented; it will not be the same again after this crisis.' And if you accept that, what is the role of the U.S. economy in basic manufacturing? Should we be investing more in that? Should that be a priority?

OWENS:  I think Jeff Immelt now would certainly agree on this. We are both major exporters of manufactured products from the United States. In terms of sophisticated, large equipment, capital equipment, the U.S. is very competitive in global markets, and a big net exporter. Interestingly enough, in the 17 or 18 countries we have FTAs with, we have a net positive balance of trade in manufactured products. We import a lot of toys and textile items and most of our consumers think we don't make anything in this country anymore. I say, au contraire. We make a lot of stuff, and we're very competitive, and we can be very competitive in this country.

So I don't know exactly what context Jeff might have said that, but he was probably thinking in terms of the rapid movement of capital in maybe the financial sectors and the total unregulated status of that as opposed to trade flows in manufacturing type investment around the world.

I know he, like I, is a huge champion of competitiveness and opening markets and trade liberalization, and GE should be forced to compete with Seaman's and Mitsubishi and other major companies so that we get the best products and services from them, the same as I compete with Kimatsu and Volvo and Hitachi and emergent Chinese competitors. Our customers get better served. But I don't, it would be tragic, tragic I think if trade continued to drop.

I think the biggest risk of this very serious recession, again turning into a three-year depression-like scenario, would be a turn towards nationalism and isolationism. If that happens, it's going to be a very ugly world we live in economically.

KNIGHT:  Let's turn to one key case. My business, Adarpa (ph), IPOs -- one place we have hope for is China. And we have a number of Chinese companies; we hope to have more. And they are still doing IPOs. I think that's true throughout the economy where people look to trade with China.

If you were advising President Obama in terms of relationship with China now and how to manage that, what would be your advice at this stage?

OWENS:  Well, maybe I'll have an opportunity. I think, first off, I think I was very encouraged with Secretary Geithner's work this week that kind of recognizes that China has made some progress on their exchange rate. They have appreciated quite a bit. And he kind of took them off the manipulator list. I think it's important that exchange markets function, that exchange rates not be used to try to derive competitive advantage for your manufacturing base.

And I think the Chinese need to understand that it's in their long-term interest to have their currency appropriately valued and that they have to import as well as export.

The amazing thing is that very few Americans appreciate or understand even that China is now our third largest market for U.S. exports and, oh, by the way, the fastest growing. So in terms of bilateral economic relationships, it seems to me -- I mean the Chinese are huge investors in U.S. treasuries. It's in our interest to keep them happy investors. They are huge suppliers of pretty high quality, low cost products in the world competition, that many of our citizens have a higher standard of living because they are available to them. And they are the third largest market in terms of export growth.

And together I think they are recognizing that China is a better country since it opened up. It opened up, you know, 25, 30 years ago to trade and investment, and it has geometrically improved the standard of living of their citizenry. Again, sometimes I think Americans feel we're worse off because the Chinese are better off. We need to get over that idea. We will be better off when the Chinese have a higher standard of living. They will also buy more of our products and be a more peaceful nation and we'll work better together.

So I'm pretty optimistic. I think as President Obama -- you know, a lot of the campaign rhetoric tended to be playing to different bases and it got very protectionist in its sound and very concerning to the business community. I've been very encouraged. I think he did a great job when he went to Europe and worked with the G20 and the strong statements they had regarding resisting protectionism and isolationism. And that's, first and foremost we have to do that. So I was very encouraged by that.

And the same with his recent meetings last week in Latin America. I think he comes back with an appreciation of the economic interdependence. And we have been the beacon in the world economy for progressive trade liberalization and competitiveness since WWII. We've been the champion. When we turn inward, even maybe Americans perceive it as a small thing with a 'buy America' provisions in the stimulus plan for example; it sends all the wrong signals to the rest of the world. We who championed now not only are not championing, but we're starting to turn inward.

So I think he has to kind of resist that. And again, I think as he's beginning to settle into his job as the leader of the free world and the champion of the market economies that he's going to move to try to find ways to constructively work together with the rest of the world. I feel like my job as an advisor to him certainly, he knows when he appointed me to his advisory board that I have been steadfastly and still am a very strong champion of trade, global engagement of the United States.

And I think he's going to want to thoughtfully think about, how do we best compete in the world, and not how we protect our self.

KNIGHT:  In the trade agenda an increasingly important subtext is the whole question of labor policy. And earlier this year you had a number of executives in Grenoble, France, taken hostage by employees at your plant there. You have had to go through a lot of lay-offs. You still have tens of thousands of employees around the world. What is your strategic view with regard to labor policy when you look at expanding again, when you look at doing business in the United States versus other countries? What goes through your --

OWENS:  I think first and foremost no company can be a great company without being a great employer. I mean, we are the sum of all the people we employ. One of the things we've had to work very hard to help our employees understand is that with the cyclical markets which are in many cases the demand for new excavators, wheel loaders, traxcavators, mining equipment is off on the order of 60, 70 percent. You just can't keep running a factory building inventory. So if you don't have a flexibility including labor market flexibility, to adjust, you really can't be competitive through the cycle.

And by the way, we've gone from 68,000 people to114,000 people in my tenure, and I felt really good about that. I feel terrible about having to lay anybody off.

We have done a very intensive job of stepping up our communications, helping our employees understand the global economy, providing a safety net under the employees who did get laid off. For example, we're picking up health care for a year in our plans for laid off employees. We've provided supplemental. That's why we took a $700 million write-off, or $550 million write-off in the first quarter and we think $700 million for the year, because we're helping our employees.

I think that helps build loyalty. But we have to help them understand economics too, and we're providing a lot of training services and even college voucher opportunities we're working on ways to do that while they're laid off so they come back hopefully even better employees.

In the case of our Grenoble facility, in fact this gets very political but I think the political movements, the left/right struggle within France creates an atmosphere where there's an element on the left that wants to create anarchy.  And we've had about 3,000 people in this facility; I think about 2,800 when we ran into this big downturn in demand for product. We announced redundancies were about 775. This led to a strike, and about 100 militants basically in front of our gates, about 40 of whom work for us, 60 of whom I would consider in the thuggery dimension. They did take over our, they had kind of breaking and entering issues several times. They took over the plant, held the plant manager and all the department heads for about three hours in the plant. They cut all the phone lines in the plant. They threw away cell phones, they blared music; there was a lot of pushing and shoving.

The French government was very supportive. They asked us if we wanted to send in the storm troopers and take them out. We said, "No. We think, we want to resolve this amiably if possible." And there were indications of some support. But eventually we resolved this. We went back to the table. This has been an ongoing negotiation for a very long time, but I had a call from France's finance and economy minister to discuss this issue. Her big concern, Christine's, was, "Are you going to stay in France long-term?"  I assured her we've been in Grenoble for over 40 years. My two senior executives in Europe both have been plant managers there. They know local people. One is French and one is Italian, but they both speak French. Terrific leaders. They care about the community. It would be my sincere intent that I would like to be there for the next 40 years.

And she said, "What about employment levels?" I said, "This plant is going through a lot of restructuring; the world is changing. Western Europe demand is much lower than some other parts of the world. But I think it's probably going to be in the 18 or 2000 probably, sustainable range." But I said, "The chief thing is we have to have a good environment."

You know, I just had read that the French, in a public opinion poll, 47 percent of the public thought it was okay to take captives of management. What's wrong with this picture? And I told her, I said, "Thuggery and the tolerance of it is not something that's going to help attract my investment or any multinational country investment to your country." And she knows that, and she knows it's a serious problem, so --

And again, we've had a long history in France. It's a key country in the heart of Europe. We have wonderful French employees. We have 60 or 70 thugs who have unacceptable behavior, and we should prosecute them in the courts as they should be prosecuted.

KNIGHT:  Well, I think you'll get much gentler treatment from this audience.  (Laughter.)

We will now turn to the Council members to join in the discussion. I ask that you wait for the microphone and speak directly into it. State your name and affiliation, and if you could keep your questions concise.

QUESTIONER:  I'm Deborah Miller. The Midwest has been particularly hard-hit by the current financial crisis, current economic downturn, and Midwest manufacturing in particular. I wonder if you could recommend to the vice president or to the president particular policies to strengthen manufacturing in the Midwest, what they might be?

OWENS:  Well, Peoria is kind of, some would say, the heart of that Midwest. Actually our economy was performing extremely well. In fact even, if I look at the Caterpillar dealers across the heartland, middle of the country, because of a combination of agriculture, oil and gas and manufacturing that's export-oriented, our economies were all doing remarkably well compared to the coastal economies even because we didn't have the housing crisis either. We never had the big boom in housing and we never had the big bust in housing.

So overall economically I would say the heartland in general, in terms of unemployment and things, has done much better than the coastal communities, different than previous recessions.

And as we think about driving demand, I think we have to keep in mind that we were at virtually full employment a year ago in our country, and we can be and we are competitive I believe. It's a matter right now we have housing at 65 year low last year and probably going lower this year. I told the security analyst we should think about the fact that this year we're going to build about 700 to 750,000 start new homes in this country. The trend-rate in our econometric modeling over the next 10 to 15 years ought to be between 1.6 (million) and 1.8 million starts a year. So if you want to look at this glass is half full, the housing industry is going to more than double just to get back to serving the demographic needs of our country and the wear-out needs out of the existing housing.

We have a lot of other industries that are severely depressed right now because of the demand situation. So I think back to physical stimulus, expansionary tax policy -- monetary policy, excuse me -- one of the things we want to avoid is deflation and the other fundamental thing, structural problem with our economy long-term.

I jokingly told the Chinese when I was over there, I'd much rather be President Hu than President Obama. I mean, President Hu has got to convince his public, "We've got to relax and spend a little more, enjoy a little more," because they are saving about 40 percent and they need to import and create domestic demand for their own manufacturers.

In our case, we've saved for the last decade very, very little, nowhere near enough to sustain economic greatness over time. So President Obama's challenge is, he's got to encourage the American public to save more and us to invest more, to create the economic dynamics for leadership and sustain one of the top economies in the world going forward. That's a big challenge. I'm not sure we can afford to have 17 or 18 million new cars consumed a year and throw them away every three or four years. I think there are some fundamental -- Jeffrey I know is pleased to say we need to hit the reset button. That's one of the reset buttons we need to hit in terms of our domestic economy.

We're going to have to save and invest more and probably have a little less conspicuous consumption and reengage with very much focus on export competitiveness. And that creates jobs.

QUESTIONER:  Gary Horlich (ph). You mentioned you're on the President's Advisory Committee on Trade Policy. What specific actions would you suggest he take?

OWENS:  Well, you know, I think this is a delicate time politically, but what we're suggesting at the Business Roundtable as a good bipartisan agenda, first of all, is we need to vigorously resist nationalism and isolationism and leading a charge to more protectionism and encourage other countries to do that. So that's first and foremost.

Secondly, I think there's a chance to move forward incrementally with the existing work that's been done. We have existing FTAs that have been negotiated with Panama, with Columbia, and with South Korea. Panama, it's small in terms of its macroeconomic impact, maybe even insignificant, but I think if the president and his new USTR and NESTA  Kirk could just move the Panama Agreement forward it would send a signal to the world "we're open for business." We spent a lot of time negotiating this agreement, and it's got a lot of the labor positions and things in it. So I think there's some hope on that front.

Clearly, from the business community perspective, all of us would like to see forward movement on the Doha Round. Not concluding something there, even if it's modest and less than perfect, gives us a lot of concern that the world might backslide on trade. So I'd say the Doha Round is way up there in the list of the agenda. And it's close. We were very close. We had all kinds of lengthy negotiations in Geneva, and I'd like to see that get reactivated.

I don't think all this will happen in the next few months. There's a lot of things on the agenda. But I think these are the things the president hopefully will be moving forward on and that we'll be encouraging him.

QUESTIONER:  Thank you. My name is David Apgar (sp). Although I'm an independent consultant now, I've led best practices research programs at the Corporate Executive Board for a number of years and had the pleasure to get to know and work with your marvelous CFR Dave Bert (sp) over the years.

Just, I was hoping that you could say a few words by way, if you will, of advice to other American CEOs about leadership. And I was hoping that you might touch on two aspects of it. One is public-mindedness. A lot of people, for example, have been critical of financial institution leaders in this country for not looking more broadly at U.S. national concerns even as they work to save their institutions. The other aspect of leadership that I hope you might address is just a greater willingness of CEOs to ask what may be going wrong with their strategies to get away from the habit in American business that I think has grown over the last 10 years of blaming a lot of problems on poor execution and not questioning so much strategy that top management teams have set for their companies.

OWENS:  It's a pretty good question. You know, I have been strongly encouraging, and I need to do more of it. All of us do. First off, I've tried to walk the talk myself, taking opportunities to speak to forums like this and Rotary Clubs and to get out and talk to people who want to engage in discussion about the international economy and business and how it works and to encourage more understanding of that. So Business Roundtable -- you know, I've chaired the International Trade and Investment Committee now for a couple years, and that's one of the things that I have been championing, and that we move trade back to bipartisanship. We have been meeting with, for the last two or three years, not just with the change in administration, with Blue Dog Democrats and New Democrats and trying to reach out to people who have very serious concerns about trade and the trade agenda and what that means for our country, and try to get them again focused on facts and data and what we need to do to help our country be more competitive and to broaden their understanding that we can compete, it's important that we do compete, and that turning inward is going to be a tragic mistake.

You know, I find when I talk to congressmen they say, "Well, I agree with you; it's my constituents that don't. I can't vote for that if I'm going to stay in office." That would be the quiet conversation.

So I think the business community has a key role to play in helping our employees. I was very proud the other night when CNN was outside of our gates when we had a lay-off asking our employees that are exiting the plant, "Aren't you part of this 'buy America' provision in the Stimulus Bill, because it will keep your jobs?" And our hourly employees, many of who are getting laid off because of the drop in demand said, "No, we're a global player. You know, if we have 'buy America,' maybe the Chinese are going to have 'buy Chinese' and the Brazilians 'buy Brazil' and Europeans 'buy Europe.' We'd lose a lot of business." This is our hourly workforce, because we spend a lot of time stressing this point to them.

So we've been doing at Business Roundtable, Business Council, we've been talking about this yields, what are best practices in this area. Are you talking to your employees? I get one vote. I have 60,000 employees or so in the United States, and so I want all them to understand the issue. That's first.

Then suppliers. You know, Dennie Hastert says, "Jim, you support trade; all your suppliers are against trade. Why is that?"  Well, we haven't done a good enough job of educating our small suppliers. They too are involved in international trade.

So I think we're trying to drive home as the leadership group now in the Business Roundtable and others, we need to get business backing. "You know, Enron is over. Get out there. Get over it. You need to be involved, and you've got to be a leader in your community. Otherwise, we're going to have really silly legislation that's bad for not only your company, but our country."

I like to think I'm an American first and I run a company second.

In terms of strategic leadership, you know I think really it's up to boards of directors to set very high expectations for a strategy and long-term direction of corporations and to monitor the performance of the executive leadership team in terms of having a very robust, thoughtful strategy that makes sense that they're delivering on over time in order to keep the job, and not be so transfixed on just current quarterly results. And a lot of boards in the country are that way, not all. So I think they are the ones represent the shareholders. They have to hold the company leadership responsible for having a good long-term strategy.

KNIGHT:  Do you think, Jim, the U.S. style, if you will, of CEO leadership versus let's say the European approach to corporate governance in today's crisis, trouble you the criticism, focused attack on American corporate leadership?

OWENS:  Yes, it's troubling. I think we've had some lapses quite frankly in American corporate leadership, and they should be held accountable for the lapses that occurred. I wouldn't suggest that the United States needs to just emulate the European economic model. We've grown substantially faster than they have for a couple decades. The financial market excesses aside, our corporate sector has outperformed theirs. Our labor markets have been more flexible, and we have outperformed by any kind of economic measure I could think of.

So I don't think we have any apologies to make there. Would we be better off? There are a lot of shareholder activists. This is something I guess we all deal with, but I like to think, you know I spend my time thinking about 'how will I make Caterpillar one of the great companies in the world 10 or 15 years from now?' I do think about strategy. I do think about our position, how we compete in the world market.

I spend very little time thinking about quarterly results. A lot of time thinking about annual results because I know I have to deliver. But most of my thinking about strategic positioning and how we win and trying to have a board of directors who understands the company and who's thoughtful and who's asking those kind of questions and not trying to help me run the day-to-day side of the business.

So we have shareholder activists who want to elect every director every year, and they're not really interested in continuity. They're interested in quarterly results.

You know, there's a little bit of a conflict there that's pretty intense right now in the U.S. public company sector. And I'll leave it there.  Yes, ma'am.

QUESTIONER:  Nancy Smith-Mislie (ph) with the State Department. I just have a quick question kind of following along what you've been discussing already. How is this global economic crisis affecting your appropriate social responsibility activity around the world in the countries in which you operate?

OWENS:  Thank you.  Good question. I'm actually very proud of our corporate social responsibility and our civic responsiveness. We've had a worldwide code of conduct since 1974 which was very compliance-oriented initially, which we translated into our values and actions, which is an integral part of our corporate strategy, which we expect all of our leaders to communicate on an ongoing and consistent basis. And this deals with sort of fundamental values of integrity and commitment and etcetera, community engagement around the world.

And we survey, first off we teach that. Our leaders are expected to teach it. Then we survey annually, all of our employees have to fill out a Worldwide Code of Conduct Questionnaire. It involves even taking essay questions, reading them, understanding them, to test your understanding of the Code and it's in 14 languages around the world. So we're very comprehensive in that space.

We also have sustainability commitment. We've been on the Dow Jones sustainability index now for eight years running. We have a corporate sustainability guideline with commitments five and 10 years out on everything from employee safety to water consumption, energy consumption by facility to greenhouse gas emissions. So we've been a leader in all those spaces, and that policy has not been changed by this global economic crisis.

KNIGHT:  Yes, sir.

QUESTIONER:  Thank you. My name Joniama Ometri (ph).  I'd like to ask two specific questions about your business. I understand dealers overall construction machineries are suffering with a huge inventory. Do you have any plan to rescue about those dealers?

The second question is that you mentioned stimulus package for China and the U.S. positively, but could you elaborate more completely to what extent and how soon the stimulus package is effective for your business?  Thank you.

OWENS:  Good questions. For those of you that don't know Caterpillar, we tend to market our products, particularly our construction equipment products, through an independent global dealer network. And there are only 186 dealers in the world. Those are big companies, generally speaking. They have more capital and more employees than the parent company. Happily they are very financially stable. They give us a strong vocal presence everywhere we do business, and as we look at our value chain in this kind of economic, very sharp correction in total demand, we are very comfortable that our dealers are financially stable. There's only maybe two or three in the world that we have to be concerned about, and we will help.

What I more worry about is our suppliers. Many of our suppliers that make very large, sophisticated, say, castings and forgings are relatively small companies, and we are a large percentage of their sales. So we have to worry about their survival and their ability to ramp back up with us as volatility in this global market makes a very uncertain world.

So your second question was, oh the stimulus packages. Yes. We think, again no joking aside, the Chinese, given the nature of their economy and sort of the command and control, when they put a stimulus package in place and what they've done is essentially pulled two years forward of their existing five-year plan and told all the provinces and cities, "We want that infrastructure; you start investing on that now." And when they talk shovel-ready, it's probably nine weeks or so.

I mean, we had, when this global economy went into seizure late last year, our demand in China dropped like a stone in December and January. We were selling 10 percent of type things. But it bounced back pretty smartly in mid-February, and March and April are probably going to be back to kind of record levels of sales because these projects are near genen (ph).

In the United States, even the stimulus money that's in the plan, first off you've still got to get it dispersed and then you've got to get the matching money from the states, and then you got to go out for bid. And there will be multiple contractors bid for a road project, or whatever. And then you probably got to get final approvals on the design and then you've got to probably get little environmental checks, I's dotted, T's crossed. We're talking nine months realistically before dirt starts moving around, and then there's a lot of existing equipment.

So I think we realistically see the stimulus effects in the United States beginning late in the year, but principally in the first and second quarter next year. There's that kind of a lag time.

QUESTIONER:  Lloyd Hankeggens Palling (ph). Mr. Owens, I want to commend you on the leadership qualities with the corporate world that you've exhibited here today. But I think most of us know that over the years Caterpillar has been in the forefront of supporting positive and progressive trade policies for the U.S.  But it's also been a longstanding policy of the U.S. that recognizes the need to protect our markets against unfair trade practices. And at the moment I'm sure you're aware that there is a case that China has filed before the WTO that some say if successful could go a long way toward eroding some of those trade remedies of longstanding in the U.S., particularly against subsidies, unfair trade practices that have including dumping and a vote to countervailing duties. Would you comment on that, please?

Well, let me just as the second question, if I may, unrelated to that but triggered by your earlier comments. And that is, given the underlying resilience as you say the U.S. economy has, when there is a turnaround, would you see that we would be in a worldwide competitive advantage compared to other countries of the world?  Thank you.

OWENS:  I'm not familiar with all the details. There are constant trade frictions and assertions of protectionism, and I worry a lot about the U.S. aggressively pushing our standards for labor and the environment on every country we have free trade agreements with. And that's been a little bit of a partisan debate: how much can we enforce, or can we require countries that trade with us to have similar standards for labor, for trade unions? There are a lot of countries in the world.

Clearly there are going to be big wage differentials because countries are at various stages of development. I think what trade and investment globally does is, it's the great equalizer. You can take, China is probably the classic example. It was when I first went there in the early 1980s, 1983, everyone was poor, everyone wore little gray Mao suits, and it was a very egalitarian society. As they have begun to  open their markets to investment and to trade, literally hundreds of millions of people have been lifted out of poverty, a lot of that on the backs of exports initially, but now they are beginning to create a middle class and their economic development is coming along nicely. And as I mentioned, they are our third largest export market.

And the standard of living of like I say hundreds of thousands of people has gotten better. Their labor standards have gotten better. Real wages have gone up. There are provinces in Eastern China now with per capita incomes of $10,000 and a real middle class emerging, which is changing the political dynamics, etcetera.

I worry that if we want to set those standards to our Western way of thinking at the beginning of negotiating bilateral trade agreements or multilateral trade agreements, we'll just never get anywhere.

So there are a lot of issues around that, and what I think we need, and the reason I suggested as a top priority for the business community I think should be a Doha Round and establishing a WTO which is a good rules-based court of appeals, if you will, to help all countries keep a level playing field and fair trade practices and live up to the trade agreements -- is a Doha Round could help us strengthen WTO. And we can't unilaterally do it from the United States.

KNIGHT:  The second aspect, since we got into this sooner and quicker than the rest of the world, are we going to come out of this quicker and better?

OWENS:  Well, our macro-economic view of the world is, the United States will come out of this recession better, faster than our brethren in Western Europe or Japan. But I personally think the emerging markets are going to come out of it faster. I still think, the decoupling has been kind of debunked as an idea. I still think there's -- the reality is over the next decade or two, and I'd have to think strategically about our business, the emerging markets of the world, and that would be China, India and greater Southeast Asia, Latin America, Eastern Europe and Russia, are likely going to grow real GDP-wise as somewhere between 2 and 3 times as fast as the United States, Western Europe and Japan. I think the U.S. is positioned to grow slightly faster than Japan or Western Europe; the demographics are more in our favor; we have more dynamic, more flexibility than either of those two western economies.

But the emerging markets are going to be key, and strategically I think for me as a business leader I've got to position my company to succeed and win in the rapidly-growing emerging market theater to be a leading company in the world 15, 20 years from now.

KNIGHT:  We have time for one more question. I remind everyone this has been on the record and I ask your indulgence. Jim has to get to a meeting very quickly, if you wouldn't mind keeping your seats when we're done. Yes, ma'am.

QUESTIONER:  Hi.  Betsy Fisher with NBC News, Meet the Press. And I was wondering if you think that there's an important aspect or element to this financial crisis that you think has been under-reported in the press?

OWENS:  Well, sometimes I think the press by focusing in on the excesses and reporting on it 24 hours a day creates more apprehension, both domestically and the world markets, which creates uncertainty. To a large extent economic health and vitality is about confidence. The big thing with the failure of Lehman and perhaps it should have failed, was the recognition on the part of big financial institutions that one of them could fail and therefore the unwillingness to even put money in the bank, if you will, or to trust the banking system to work.

If you look now for example, and maybe this is an interesting story, the pro-cyclical things that were driving, procyclical, as we try to reform the financial sector and the rating agencies which did a pathetic job in my opinion of assessing the risk associated with mortgage derivative instruments, etcetera, has all of a sudden found religion.

So look what's happening across the corporate world. Massive build-up in cash. The high end of the quarter, $3.6 billion in the bank, and I've got to worry about my credit rating. I used to run almost cashless. Now every good company in the country is building up a big cash reserve position, liquidity position, because we're concerned about the functionality of credit markets. That hasn't been reported on too much, I don't think.

It is a procyclical driver, and we need to get this confidence restored. We need to get our financial system restored and credit markets functioning in a normal fashion in order to kind of flush out all this cash which is beginning to constipate not only the U.S. but the world economy.

KNIGHT:  Well, please join me in thanking Jim for being here. I know we share a high regard for your leadership and a lot of optimism for your future.  (Applause.)

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