_______________________________________________________________________

I have spent considerable time thinking about globalization and what it means for a "global company" like Caterpillar.

First, Caterpillar has always been a very strong advocate for an open market in the global context. Initially, this meant that we were an advocate for no trade barriers (duty or non-duty) anywhere in the world. We are a capital-intensive industry with relatively high scale economies in some of our products. When we can sell these products globally through our global distribution capability, we have an advantage.

Later, as we developed local manufacturing and suppliers globally, this meant the ability to import and export componentry worldwide, without barriers. It also meant the ability to move people around the world.

However, the goal was to protect the scale economies and our ability to use a U.S. manufacturing base. Virtually all of our value chain was still in the US. It was kind of a mercantilist approach to globalization, not unlike imperialism or colonialism. This type of globalization is not intrusive to local cultures and socio-political systems. It is free trade in the classical context.

However, eventually some products did not really benefit from the scale economies. In fact, technology is driving down the advantages of scale economies. This meant that the logistics disadvantages of not being local outweighed the scale economies of central manufacturing. We started to install the rest of the value chain (mainly manufacturing) outside North America (mainly Western Europe and Japan). Nonetheless, the manufacturing remained closely controlled from North America. The product remained globally designed, but locally manufactured. The value chain remained directed from North America. Later Brazil was added to this system.

It has started to become clear that scale advantages of the global approach is offset by the inability to respond quickly to the local characteristics of the local markets. Some small local competitors are much more competitive locally for some types of products because they simply do not have the heavy global infrastructure costs. Here scale is less important in driving down costs.

The debate now is whether a monolithic global approach or a multi domestic approach or a regional approach is the best approach to the business. We believe it depends upon the balance of scale, speed and service in the competitive equation. But, to be able to pick and choose requires a free flow of resources within a global context.

The other important foundation of such a system is a business culture that can operate within a set of agreed upon rules around the world. People need to know each other. They need a common language. They need an understanding of different perspectives. At the core, the speed of learning and the obedience to the rules of efficiency and an acceptance of standards of integrity are required for the system to work.

When the business remains focused, it is an awesome competitive system. In the case of Caterpillar, the identity of the company is one of a leader in our industry as we define it. We compete for leadership, which depends upon the ability to satisfy our customers better than anyone else.

The financial returns are a metric of success, but leadership measured by (percent of industry sales) PINS as we call it, is equally important. This leadership leads to higher than average financial returns.

The global approach does drive a global ethic and mindset, but it is implemented locally and will diversify even more in time. This diversity accelerates learning. Those who cannot sustain this pace of learning eventually lose. This competition creates a sense of uncertainty and instability.

A global company can draw upon global resources to survive the tough times. The weaker competitors are swallowed. The process is slow and new competitors arise from unexpected quarters and regions.

The whole process depends upon open borders and a free flow of resources and knowledge. It is disruptive for many who become losers in this race.