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Caterpillar Expands Remanufacturing

December 28, 2004

PEORIA, IL – Used diesel engines, truck transmissions, and other heavy-equipment components are getting a new lease on life at Caterpillar Inc., according to Reuters. The company began “remanufacturing” products ranging from water pumps to military tank engines, returning more than 2 million of them to the market every year. All carry a like-new warranty and price tag that's 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 – the very factors fueling sales of remanufactured goods – 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; and then putting it back together. Environmental concerns are certainly 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," Chief Executive James Owens told Reuters recently. But the company is also thinking dollars and cents. Owens said remanufacturing has potential for major growth, perhaps 10 to 15 percent annually for years to come. In March, Caterpillar set plans to remanufacture products made by other companies. In August, it bought two remanufacturing companies that serve the auto industry. And in November, it reopened a British plant that had been converted to remanufacture military tanks, railroad engines, and truck transmission systems. The Peoria, Illinois-based company now remanufactures at nine factories worldwide, employing 2,500 people. Unlike Caterpillar, most, if not all, original equipment manufacturers don't do their own remanufacturing. Instead, many in the United States subcontract such work out to the small “mom and pop” operations that dominate the industry, said Robert Lund, an adjunct associate professor at Boston University's School of Engineering. Because remanufactured products are less expensive than new ones, analysts said they are likely to attract customers that otherwise wouldn't buy them. Caterpillar argues that the size and scale of its operation, plus the technology available to it, allow it to salvage more parts. "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.
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