Second-hand strategy pays off for Caterpillar

CHICAGO - Used diesel engines, truck transmissions and other heavy-equipment components are getting a new lease on life at Caterpillar.

The world's largest maker of earth-moving equipment has stepped up its "remanufacturing" of products ranging from water pumps all the way up to military tank engines, returning more than two million of them to the market every year.

All items carry a like-new warranty and a price tag roughly half of what it would be for a product just off the assembly line.

Analysts say those efforts are likely to help Caterpillar as rising raw material prices and commodity shortages crimp margins and weigh on growth prospects.

"When you've got that many engines out there to reclaim, if you can do it on a low-cost basis, I think you're going to be at a competitive advantage over the next five years," said analyst Scott Burns of research firm Morningstar.

Remanufacturing is similar to recycling, but more extensive. It involves taking a product apart; cleaning, fixing or replacing worn parts; upgrading the technology where possible; then reassembling it.

Environmental concerns are also driving Caterpillar's remanufacturing push.

"We think there is going to be tremendous pressure going forward for reusing our natural resources as much as possible," said chief executive James Owens.

But the company is also thinking dollars and cents. Owens said remanufacturing had potential for major growth, perhaps 10 to 15 per cent annually for years to come.

In August, Caterpillar bought two remanufacturing companies that serve the car industry. And in November, it reopened a British plant that had been converted to remanufacture military tanks, railway engines and truck transmission systems.

The Illinois-based company now does remanufacturing at nine factories worldwide, employing 2500 people, making it among the largest industrial remanufacturers in the world.

Unlike Caterpillar, most, if not all, other original equipment manufacturers (OEMs) do not do their own remanufacturing. Instead, said Robert Lund, an adjunct associate professor at Boston University's School of Engineering, many in the United States subcontracted such work out to the small "mom-and-pop" operations that dominated the industry.

"It's unusual for an OEM to exploit the remanufacturing aspects as well as Caterpillar has," Lund said.

Because remanufactured products are less expensive than new ones, analysts said they were likely to attract customers that otherwise would not buy them.

"Not everybody can afford to buy a new Caterpillar [product]," Lund said. "What this does is broaden the market."

Burns agreed, comparing the heavy equipment sector with the car market. "Do used-car sales really cannibalise new cars? They're kind of different markets."

Caterpillar says the size and scale of its operation, plus the technology available to it, allow it to salvage more parts than its remanufacturing competitors.

"We're using laser technology on some of our parts to remanufacture them, to get the second, third and fourth lives," said Steve Fisher, general manager of Caterpillar's remanufacturing business.

"Other people would just throw those parts away."

- REUTERS