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Caterpillar Expands Remanufacturing
Saturday December 25, 10:20 pm ET
By Karen Padley

CHICAGO (Reuters) - Used diesel engines, truck transmissions and other heavy-equipment components are getting a new lease on life at Caterpillar Inc. (NYSE:CAT - News).

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 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 percent to 15 percent annually for years to come.

"It's one (area where) we continue to invest, make small acquisitions, grow our business expertise and grow our technology, so that we can be a leading player," he added.

That's been especially true in the past year. 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 does remanufacturing at nine factories worldwide, employing 2,500 people, making it among the largest industrial remanufacturers in the world. Caterpillar does not provide financial data for its remanufacturing group, other than to say it is a substantial and rapidly growing business.

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.

"It's unusual for an OEM to exploit the remanufacturing aspects as well as Caterpillar has," Lund said. "I give them a lot of credit for some insight there."

Because remanufactured products are less expensive than new ones, analysts said they are likely to attract customers that otherwise wouldn't buy them.

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

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

Caterpillar argues that 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." (Additional reporting by David Bailey and Ben Klayman in Chicago.)
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