Caterpillar Using Cost Cutting Measures to Cope with Tariffs

The U.S. placed tariffs on imported aluminum and steel six months ago and Caterpillar Inc. is using a cost cutting strategy to protect its profits.

At one of its sprawling factories in North Carolina where Caterpillar manufacturers small front end loaders, it laid off workers back in 2016 following a huge drop in sales as it consolidated two shifts to one.

Although demand has since increased, the plant maintains just a single shift and operates just four days per week and one third of the employees at the factory have flexible contracts.

The end result is CAT produces more loaders at that plant with 30% less workers on the floor than in years past, said the company this week.

The company redesigned all its new machines with more than 20% fewer parts, thereby lowering its steel consumption, which lowers the cost.

The cost cutting measures are helping to counter the impact of the trade wars started by U.S. President Donald Trump.

The maker of heavy-duty equipment estimates that import tariffs will inflate costs of raw materials by as much as $200 million during the second half of 2018.

Caterpillar said it was offsetting the impact through price increases that took effect July 1 and cost cutting measures that will help it to post a 2018 full year record profit.

The increasing emphasis of Caterpillar on operating efficiency proved to be timely, helping it bring down production costs during a time when its material expenses mounted on the import tariffs placed by Trump and capacity constraints have driven freight costs up.

CAT as well as Deere & Co. and Harley-Davidson are amongst many manufacturers attempting to keep expenses down in an effort to cope with a rise of 30% in steel prices in the U.S. since the beginning of 2018.

The rising costs, together with the tariff war waging with China, have brought a murky outlook for earnings for many industrial companies, which in turn has weighed on shares prices causing them to drop.

Despite this month’s rally, Caterpillar shares remain 9% down from levels in late January, in comparison to a drop of 0.4% in the S&P 500 industrials showing that investors have not yet rewarded the company for its efficiency results that lead the industry.

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