Speaker Series: Edward J. Rapp

thank you all for being here this afternoon I’m Bruce Walker and it’s my privilege to serve as dean of the Robert J true last senior college of business we really appreciate your attending today’s SRAM lecture in international business the outset I would offer two reminders or requests I hope you’ll check to make sure that your cell phones are off and I ask that you stay until the completion of the program including the Q&A session so as to minimize disruptions our college is very fortunate to be able to bring you these lectures through the generous sponsorship of John SRAM who for decades has negotiated and implemented international agreements international business agreements especially sourcing across diverse cultures a graduate of em use business school John worked for Sears and then Levi Strauss during about the first 20 years of his career and with John’s guidance and I think leadership both companies started ventures with state-run textile manufacturing firms in China I invite you to read john’s full biography in your program but this time would you join me in welcoming and thanking john SRAM for being here Dave Johnson number the students had a chance to meet with John either for breakfast or lunch and I know that our feedback is always that those are wonderful sessions so John thank you for doing that as well as I trust you know by now the true last College of Business places a very high priority on collaboration with alumni companies and of course our academic colleagues and the SRAM lecture in international business is one way in which we seek to fulfill our educational mission through collaboration with business executives who have both extensive experience and substantial expertise about global business so with that high bar it’s my pleasure and really an honor to introduce our schramm lecture speaker a trap mr. Rapp is a group president for caterpillar which as you know is one of the world’s largest manufacturers of construction mining and agricultural equipment a fortune 500 company caterpillars annual sales exceeded 51 billion dollars in 2008 and like it or not mr. Rapp is going to cover the firm’s sales revenues and profits as they might be in 2009 the bio of mr. Rapp in the program gives more details about his background so I’ll just mention that he graduated from mu in 1979 with a BS ba degree area of emphasis in finance for those of you who might be in finance and you’re wondering if you should be paying close attention you never know what will happen in the future because mr. wrap now has five divisions of Caterpillar including finance reporting to him so he says he’s glad that he paid a fair amount of tension during his finance classes mr Rapp began his career with caterpillar as a price analyst in Peoria Illinois he spent several years in Johannesburg South Africa also in Geneva Switzerland managing parts of caterpillars international operations he then returned to the US North Carolina specifically as a divisional vice president mr. Rapp moved into his current position in 2007 and as I mentioned he’s responsible for five divisions of Caterpillar I’m very grateful that he has become a member of our colleges national advisory group the strategic development board so today mr Rapp will address the impact of the global economic downturn from the perspective of a very very large manufacturer and like many companies caterpillar situation is certainly challenging and it is very fluid to mention a couple examples and perhaps mr. Rapp will elaborate on these earlier this month aggravated caterpillar employees in France held a plant director and for managers hostage that’s

the term used by the wall street journal held them hostage for 24 hours seeking improved compensation for soon to be laid off workers closer to home just yesterday caterpillars CEO and CFO offered their views about how the stimulus plan enacted in the US and in China how those two plans are working or are likely to work and which one is has the greater potential I suspect mr rapaz had a lot of opportunity to revise update his talk daily if not hourly so at this time it’s really my privilege to introduce a trap to present the John schramm lecture in international business the global financial crisis our crises mr. Rapp ok right good afternoon you know when i was here in 2005 the deal with Bruce was I’ll come back when the Tigers win the big a basketball tournament so well done the other thing I know from having set were you set today when somebody tells you that this person has extensive experience you translate that into he’s just another old guy from corporate America okay but my job this afternoon is really to engage you and you know why in preparation for this session could have talked about a whole lot of different topics I think the one that is so prevalent and impacting people across virtually every industry is what’s going on with the global financial markets and how that’s impacting business people and it spans the globe and talking about grenoble Asia and other parts so what I really want to do is in get the engagement out of the group so it would be a big disappointment if I flip through the slides we get to the end and you exit the Q&A session is where I really get something out of these and so I just ask you to keep that in mind as I go through the material all right let me start up front this is a typical disclosure that I have to do based on the fact that I have the finance part of the organization anytime I talk publicly I have to you know just tell you that I’m going to talk about some stuff and the lawyers always make me do it but as I get thinking about this session today instead of the traditional disclosure in terms of safe harbor I thought maybe this one would be more appropriate what’s going on around the world is disheartening and and it is tough and it’s leading to a lot of really difficult decisions and I’m going to give you a little bit of perspective in my mind of how that happened but then also how do we manage out of it and i’ll try to relate to it not only from a global manufacturers perspective but it was a few years ago since I’ve been in your chair but I at least offer some perspective on maybe some things you may want to keep in mind as you deal through that ok now the bio is in the material and I’m not going to take you through the steps along the way in terms of my career at caterpillar june fourth it will have been 30 years I know your parents probably tell you it’s going to go faster than you think trust me it does I’d say the only line item for today’s discussion item maybe focus on is the pre caterpillar every time I get up and give a talk that has anything to do with leadership ice start with I hail from paella Grove Missouri most of you probably know where that’s at and it’s only 40 miles from here population 700 and it was a great place to grow up the second part says I’m one of seven I’m the middle child I have three older brothers and three younger sisters and I spend my life trying to convince my mom that I was the neglected middle child and her response always was when you got seven kids you’re all neglected but the point of that one and the pie to grow is I came from a great foundation a very loving family a great mom and dad you know six brothers and sisters that mean the world to me and with that foundation I came to the University of Missouri as you heard earlier actually came here to be a basketball coach and somewhere along the way decided finance was was a great option and in 1979 a recruiter came on campus from cat and I did the preparation just like you are for resumes and

you know Andy reports and all the other things and in the back of the caterpillar annual report was a map of the world and i said to the recruiter is it really possible to see all these different locations and his response is when i’ve used a hundred times since then he said young man caterpillars a company that you apply yourself work hard you can see the world and get paid to do it and that’s all you need to know about everything else that’s on that list I went to Peoria I work there then to San Francisco then to Jonas Berg saw a burger then to geneva switzerland in raleigh north carolina and then back to peoria illinois and had a wonderful time every step of the way the other thing in the class I just had with Joe I spent a lot of time talking about is why I really feel good about that part of my career the part that’s even more important is my wife and I and we’ll celebrate our 26 wedding anniversary here in a couple weeks we’ve got three kids and being the world of us to us and my only advice for you as you think about your future career if you only going to measure your success by what you achieve professionally you’ll get to the inner to be a pretty shallow victory never forget that striking the balance is a key part to leadership but that’s a topic for another day under the discussion okay just in terms of the issue of leadership I use this picture on a regular basis and the point of the picture is is I’m still growing into the shoes of what it takes to be a good leader you know I remember the last time I was here I was in a Q&A session and a young lady in front of the class raised her hand and she says you know I’ve just had it up to here with learning I can’t wait to get in the real world tell me what it’s really like and I said I got good news and I got bad news the good news is the real world is a lot of fun and we get to solve real problems we get to take on great challenges we get to do it around the globe the bad news is the learning never stops and that supplies to me I learned some great things in a session earlier today I’m sure in the Q&A I’ll pick up some things along the way it’s AG ongoing journey structure of the learning is going to change but but it is a journey and I always keep that in mind so let’s get to the the required commercial break in terms of who caterpillar is in case you don’t know most of us most people know us by these kinds of products you’ll see them along the road we’re probably the only company that likes delays due to construction it’s an opportunity for us to do a check on market share in fact coming back from lunch today one of the young ladies I had lunch with was complaining about the construction of a new facility on campus and I said I’m probably the wrong one to complain to but most people identify with us in terms of the products that we build and sell but some other statistics first of all we’re global you know with 200 manufacturing operations around the world and this is part of our heritage caterpillar was formed in 1925 and in our first year we had 21 million dollars in sales but those 21 million dollars in sales went into 29 different countries in the world in 1925 it’s a real part of the heritage of our company a real testament to some of the leaders back in those early days so you’ll hear me talk a lot about globalization international business because it’s part of the fabric of who caterpillar is secondly leader were more than twice the size of our nearest competitor and that’s exactly where we want to be and we spend about five million dollars every day in research and development with a lot of good Missouri engineers to make sure we stay there because we have an absolute belief that with that type of leadership position and what the gains that come from that it allows us to reinvest in people capability products and allows us to build that leadership position we’re obsessed with maintaining that leadership position around the world next heritage more than 50 consecutive years on the fortune 500 on the new york stock exchange for more than 80 years there’s a lot of companies that come and go we take great pride in fact that we’ve gone for the long haul haul infrastructure development is what we’re all about that’s why when you hear global stimulus package infrastructure that’s kind of music to our ears that’s that’s what we do that’s what we we get excited about growth oriented 22 billion in 2003 51 billion in 2008 but I’m going to give you the other side of this thing and just how radically that number is going to change as we go into 09 more than 300 products we have a full array of services our basic philosophy is when

somebody buys our product we like to say bright buy the product get the company will finance it will ensure it will rent it will buy it back will redistribute it we really want to capture customers for the entire cycle because that’s where you truly get the value out of our equipment so broad array of services we have a great dealer organization that has twice the money invested in the business then our next four largest competitors combined and it’s a huge competitive advantage and integrity a lot of people debate this these days and a lot of stories on the front page of The Wall Street Journal and everything else about CEOs and integrity and the business and the financial meltdown and everything else we’ve had a code of conduct that you know goes back to 1975 we’ve had a complete outside board of directors for more than 20 years we’ve had some of the governance in place that was really ahead of the time of sarbanes-oxley and a lot of other issues in fact if you go back to the 1966 caterpillar annual report flip it to the inside of the front page it says we think it’s in the best long-term interest of employees and shareholders too conservatively managed the balance sheet and having responsibility for that part of the business these days with the liquidity issues that are exist in the world market I’m I’m pleased that that’s been a long-standing part of the caterpillar history so just a little background in terms of the company Bruce talked about our growth you can see the numbers 03 208v it in sales and revenue or earnings per share it’s been a lot of fun you know the other thing I tell you is it’s relatively easy to manage in an upturn where you really find out how good you are when you manage in periods of adversity and challenge and we’ve just released an update to our outlook for next year if you go back to September first our plans for 2009 was 57 billion in sales that’s the that’s the plan we were working toward it is the capacity investment we were makin and we’ll talk later about September 15th the meltdown of the global financial markets but we updated our outlook and right now we’re looking at 35 billion in sales for 2009 now if you knowing about a capital-intensive asset intensive type business that’s that’s what we call getting whip salt it’s a massive shift in an incredibly short period of time in fact this will be the single largest year-over-year change percentage change in sales since nineteen thirty-one okay I’m going to talk to you a little bit how do you manage through challenges like that but before getting to that let’s talk about how we got to this point and there’s a lot of theories that go into it if you think those are scary numbers look at these you know this current financial crisis there will be over 2 trillion dollars in write offs on us originated debt of that two trillion dollars one trillion is going to be absorbed by US banking institutions or finance companies the other billion one of the realities of globalization is with international banks probably the hardest hit it can be the UK and continental Europe the two trillion dollars of wealth destruction if you would on us originated credit next lowest housing starts since 1945 this will be the poorest year of global growth in the post-world War period next up value of worldwide companies decline 14.5 trillion a third since last September US taxpayers me probably many of you we have dedicated 10 trillion dollars in bailouts loans or guarantees if you think you’re not interested in this subject you may want to set up in your chair because somebody’s going to have to pay that back over the long haul and as I look at it you’re the ones entering the workforce this may be a little bit of a peak to the future if not managed correctly most significant change since the 1930s us family networks this is you know more than twenty percent decline this is really painful and the one that really hurts is the International Labour Organization is estimating that somewhere in the

neighborhood of 20 to 50 million people will lose their jobs through this global recession and the range is just dependent upon how quickly some of the traction takes hold be it global stimulus that’s being applied being it monetary action deployed around the world but this is this is going to be a tough one this is going to be a tough one now if you read the papers there’s a lot of people speculating as who do we blame and you know you pick up the wall street any one day and I think you’re going to find there’s all kinds of people to blame there’s they want to talk about insufficient regulation there’s the the repeal of the glass-steagall know maybe that was the wrong thing to do did we have proper regulation over banks c.d.s facilities so there’s no doubt there’s people questioning regulation yeah we probably need some more I think the other thing we need to be concerned about is making sure that the cure is not worse than the symptom and government involvement and business is going to be a key issue that’s going to get debated as we go forward there’s people talking about 20 of interest rates did the Fed coming out of the recession in the early 2000 periods leave interest rates too low too long you know perhaps they are quote unquote to blame there’s people that talk about you know the captains of industry the finance world’s who basically turn to John Desai to the issue of risk management in all their models if you go back and look at the way they built their financial models the way they built the subprime mortgage put them into packages most of the assumptions they made were correct they just made one false assumption they built their models around the assumption that home prices would not decline and when that happened it all unraveled and that’s what led to as this says the parade of foreclosures now to me in business it’s not about figuring out who to blame it’s all about figuring out how you fix it and so I want to take you through a little bit of a root cause analysis at least from my view what what may need to happen to stabilize the patient and get this thing turned around because I do think it talks starts with the decline in home prices when the decline started to happen in the old days if someone were foreclosed but housing crisis were continuing to climb the banking Institute was fine because he would just simply resell it but when home prices started to decline that led to massive Bank write-offs I talked about a two trillion dollar figure on a global basis what did the write-offs do it put tremendous pressure on the banking industry and led to the banking crisis and if everything you read in terms the banking crisis I think the one event that if the government had to do all over again that they would do differently is they would not have allowed Lehman Brothers to fail when you hear the term you know institutions too big to fail when lehman brothers went under the global credit market seized up and think of that as your blood system in the business world if you don’t have money flowing around the world on a global basis businesses just seized now as caterpillar we have somewhere in the neighborhood of four to five billion dollars in commercial paper with durations from 30 to 90 days following September 15th we could only get overnight commercial paper that’s how tight the global system went and if you can’t have if you don’t have credit you can’t spend money no one can get investment what happens you get a massive slowdown in global GDP gross domestic product when growth slows down companies haven’t yet shut off their production lines you get a buildup in inventory you got more inventory than you can sell what do you do bring the production rates down unfortunately get into the tough decisions of laying people off and you get into a situation of unemployment and unemployment it’s beyond just unemployment as the caption says it’s also a function of a loss of confidence if you look at the US economy it’s seventy percent driven by consumer spending and so for sure if you lose your job it’s going to dramatically impact your spending habits but it’s also impacting the spending habits of people who have jobs because of the fear of are we going to lose our job and internationally that number of Ares us is kind of the high was seventy percent

of GDP driven by consumer spending China’s kind on the other end of the spectrum with about forty percent of their economy driven by consumer spending no but if you think about unemployment and loss of confidence that puts even more pressure back on home price declines which puts more pressure on the banks which puts more pressure on GDP and really what we got ourselves into is a vicious cycle so what the government’s been trying to do you with everything they’re throwing at it is really break that cycle and at least from my perspective the way we’re going to get that done is get back to root cause and stabilize housing prices and and I think we’re getting close if you look at the decline in home prices if you look at how far mortgage rates have come down right now housing affordability is the best it’s been in the u.s. in a lot of years but there’s there’s still more to do and this is just not a US issue pulling the GDP charts up into more detail this shows you North America we look at Europe Africa Middle East and the CIS together Latin America Asia Pacific in Japan and you can see the red 07 blue 08 and green 09 and you can see the decline now like I said worst year of global growth post-war and the u.s. you know down 2.7% Japan really struggling at minus 3.5 and throughout most of OA US Europe and Japan were under pressure but it was held up by some of the growth from the emerging markets China India Africa Latin America that were strongly you know pushed by high commodity prices but with the squeeze on credit the halt in terms of new investment it reduced the demand on commodity prices in between September and december of last year commodity prices came off and that’s really you take the third week of Thanksgiving the world just shut down and you know leads to some of the challenges that we’re dealing with a lot of people want to debate is this going to be the great depression again what this chart does this kind of lays out a comparison of the Great Depression and where we’re at today and as you can see GDP changes are dramatically different not nearly as bad as the Great Depression length we’re not there yet a key one though look at the money supply change Great Depression they took money out of the system where today you have global governments pumping money into the system a big difference a big difference in fact there’s a great book out that talks about the central banks of the great depression and the mistakes they made and one of the great students of the great depression has ben bernanke current Fed Chairman and so I think he’s doing everything to turn the right dials to keep a repeat you can see the unemployment rate back then hit twenty-five percent now I don’t want to downplay the impact of eight and a half percent unemployment if that’s 5.1 million people and that’s painful but if you want to compare it to the Great Depression a very different number home price changes is the place where the big adjustment has changed and then also a lot of the things that were put in during the Great Depression in particularly the FDIC has protect the banking system and you can see the difference in terms of failures as I said you know Bernanke’s a real study and if you look at the levers they’ve been trying to pull to avoid if you would another recession the first one starts off with cutting interest rates as low as possible I’d say on the positive side and I give it a green here is that there’s probably been better coordination by global central banks than we’ve observed maybe ever in terms of systematically bringing interest rates down around the world and and it’s it’s pretty well done pretty well run the course on a global basis so I give that one a thumbs-up the second one is put massive amounts of money in the money supply and they’re trying to do it but it’s really right now if you look at the flow of money based on the credit standards based on the the financial situation the banks are in it hasn’t started flowing into business those in New York a couple weeks ago and one of the bankers from JPMorgan described it as we got about a hundred people jumping up and down on a beaver dam right now there’s no water getting through but we know the dam is going to break and when it does you will start to get this thing to flow will probably have an inflation issue and some other things we have to deal

with but it’s the next key step so I put it as a red because it hasn’t started to happen yet the next one increased government spending dramatically we track it around the globe rough numbers are there’s three trillion dollars that have been dedicated to global stimulus around the world and if you think back to the earlier chart with concede EP driven by consumers by the money you spend the money I spend if that money all gets put on the sideline and you want growth somebody has to replace it and that’s where the government stimulus is coming in now I give the yellow because I’d like to see it better structured especially related to creating jobs and I think there’s parts of the world that have got that equation right i I’d be fairly critical of the u.s. stimulus package I think there was way too many special projects in there I was frustrated by the fact that I think you know the government struggled to step back and say this is not about taking care of something I’ve wanted to do over the last 10 years this is all about creating jobs I think we’ll get some positive boost out of it but it could have been better but when you throw three trillion dollars at it globally it’s going to have an impact it will make a difference next up don’t support currencies that was a key issue and the great depression as well as the early 80s I think it’s being managed fairly well there’s a few countries making some noise but for the most part good and then the last one don’t put up trade barriers and I’m going to come back to this one because it’s a it’s a real risk that if we get into a protectionist type environment this could really prolong this recession and cat’s been a proponent of free trade and i’ll come back on this one in a minute but overall I’d say more action is required and as we communicate with our employees internally the one message we try to get across to them is that this is serious this is not your run-of-the-mill recession it’s not business as usual it’s not going to be over tomorrow because you’ve got to make the right decisions to run the company and protect the enterprise for the long haul and one of the ways we create that awareness take a look at the list of companies on this sheet you know the Merrill Lynch’s do you think there was a group of Merrill Lynch employee set around 18 months ago saying that we’re going to have to get folded up and out of business I mean in essence royal bank of scotland probably one of the proud banking institutions in the world is today eighty-five percent owned by the UK government you know this this one is not for the faint of heart and it’s not a drill and as a business if you if you’re not staying ahead of it making the tough decisions and protecting the enterprise for the long haul you’re really putting yourself at risk because every one of these companies have one gone bankrupt to been absorbed or three gone to Washington or London or other parts of the world for help and trust me as hard as boards are to deal with shareholders now or you know customers I’d much rather deal with any of them then go to Washington and ask for money and so we’re absolutely focused on running our business and taking care of things at home the other one I wanted to touch on was this issue of free trade you know if you think about it the US has five percent of the world population so how do you project yourself is wanting to be a global leader if you allow rhetoric that says you’re going to put walls up around your country and if you look at our stimulus package it has language in there by American now as a bumper sticker that may sound good but as you start to think about the realities of competing on a global basis as a company do we want to compete for a three trillion the benefits of a three trillion-dollar stimulus package or the 600 700 million it’s going to be spent the US as a consumer what kind of options do you think you would have on cars today if your only choice was GM Chrysler Ford and they didn’t have the competitive pressure from other automobiles you pick out your phone your BlackBerry your laptop and tell me that from a cost or quality perspective it would be as good as it is if it wasn’t the product of global competition you know we want to complete compete on the global stage and and one of the reasons that that I engage in audiences like

this is that as a company if we don’t enter the debate with people that are going to make a difference in the future generation and influence and at least force the dialogue and debate then that opinion is going to get shaped by TV commercials and politicians and so I tell you if there’s one thing that we have absolutely got to get right if we want to get out of this this challenging period of time keep the borders open promote free trade and compete on a global scale the US was the one that foster did coming out of the Great Depression no there’s all kinds of independent studies that talk about 200 million people that have been lifted out of poverty based on the merits of free trade we have got to stay on the high ground on this one it’s ours to leave okay now that gives you the background on some thoughts on how we got here some of the global issues let me talk a little bit about so what does a company like cat and I’ll in with maybe an individual like you do to manage through this period of time i’ll start with cat and i’m going to break my you know my thoughts into three different areas the first one I’m going to talk to you about is the power of focus and how times like this really do force the company to narrow their focus the next one I’ll talk to you about is fly the plane and I’ll explain that one when I get there and then I’ll finish up with the issue of choice and the choices that we have and the choices that you have so let’s start with the power of focus well aim Spears were three think about it planning for fifty seven billion going to 35 do you think at 35 billion we can do all the same things we’re going to do at 57 billion the answer’s no so in a business environment the thing that it really absolutely forces you to do is narrow your focus to what are those few things that make the most difference relative to your long-term competitiveness you know if you look at our situation we got major emissions requirements coming up called cheer for that’s an investment that if we don’t make we won’t have product to sell come 2011 so that’s a priority no cat production system making sure that our production facilities are operating at a high level of efficiency is critical when this thing comes out building out our capacity in some of the emerging markets with the major investments that we have in areas like China India and Russia because those will be some of the first markets to come out those are the priorities that we’ve identified that we’re going to continue to invest money but I tell you what there’s a whole lot of other stuff that’s going to have to go by the wayside now while it doesn’t feel like it most days I’m here to tell you there will be a period of time in our future that will look back on 2009 and the tough environment we have and will be thankful that it happened the reason is it’s a great time to really look in take a look at what adds value for your customer base what truly differentiates you versus your competitors what really makes the difference as a company and there’s a lot of other spending that’s going to go by the wayside probably spending that in in retrospect a bunch of it should have gone anyway because at the end of the day if the customers not willing to pay for it it’s not adding value so the first step that we’ve taken is we have dramatically narrow the focus to what are those vital few things the other thing to keep in perspective is that we’re not the only ones going through this you know we lived in Africa there was an old saying that if you ever saw a lion in the jungle you didn’t have to outrun the lion you just had outrun who you’re there with the reality of it is when we come out of this we want to be stronger than our competitors and and staying focused on those vital few things is part of getting that done the second one for us is fly the plane now some of you may know the story on the right hand side about the US air flight that landed in the Hudson let me give you the other side of the story on the left hand side for you this was a plane that was flying over the Florida Everglades the pilots had a warning light coming on telling them that their landing gear would not go down the pilots became transfixed on the warning light living through the manuals trying to figure out what to do and they forgot

that they had the automatic pilot on and the automatic pilot flew the plane into the Everglades and crashed killed every person on the plane when they went in and check the mechanical failure on the plane the landing gear was down all the time the failure was in the light but at the end of the day they forgot to fly the plane now contrast that with the US air flight coming out of New York going to charlotte north carolina flies in flock of birds shuts both engines down and do you think that pilot panicked or do you think he remained calm and flew the plane I decided he could probably do a better job of telling the story than I can what you’re going to hear is the audio between the pilot and the control tower as he went through and made the decision about what he did cactus 1549 per month in 270 cactus 15-30 night hit first response rustam hope your journey back towards LaGuardia okay you need to return a little buddy turn left heading about 22 there for 20 times copy departures got emergency returning this 1529 bird strike us all engine he lost the trust me engine to deterring immediate effect is 1529 which engines he lost thrusts in both ends is he said got it at his 1529 we can get it via do you want to try to land 1013 or like what we may end up in da juice Johnny 2760 turn 1070 7 2016 I kakoj 15.9 can be left traffic to runway 31 11 ok what do you need to win cactus 15.9 runway tours available if you wanna make laptop the runway for Cydia click anywhere wake up what support you are right it is a in New Jersey maybe Teterboro ok yeah off your right side at Teterboro Airport do you want to try to go to Teterboro yes que Bella Empire actually look wide apart guy emergency inbound hey good khakis 1529 over the george washington bridge once go to airport right now Consuela project as you need assistance yes he is a bird strike can I get him in for runway one what do I one that’s good cactus 15-20 turn right to 80 kilo and writing one at Teterboro we can’t do it okay which one way would you like at Teterboro or w those we’re gonna be a mess and I’m sorry say again cactus say again no response I mean if you listen to what he did you know got to come back they said we got you cleared don’t have time about 22 burrell they opened it up don’t have time I’m going into Hudson and if you can’t rass that to the Everglades you know this guy never lost sight of what he was there to do he was there to fly the plane now in our business and I we got warning lights going all over the place and we got global financial markets that are shutting down we got industry levels that are following the levels we haven’t seen in terms of percentage climbs declined sincerely 30s we’re going through the very tough decisions of rationalizing a workforce of taking costs out of our system but I think as companies or individuals go through this tough period of time it’s all about grabbing the controls and flying the plane you know we still have facilities we have to run we still have customers we have to stay care of we still have product developed for the future and we’re absolutely focused on getting our organization to understand that to stay focused and fly the plane because back to the earlier comment there’s going to be another day when this thing turns around and you’re going to have to ask yourself the question are you ready to respond to that need that demand better than your competitors are not key for us to be ready for that is fly the plane okay now the last one is taking you through the attitude part of it and if I talked earlier about this being a continual learning process if you want to read a great book read man’s search for meaning it was it was written

by a guy named Viktor Frankl he survived the German concentration camps he wrote the book in seven days after coming out of it and there’s a whole lot of great learnings throughout the whole book but the one that stands out for this kind of event is everything can be taken from a man or a woman but the last of the human freedoms to choose one attitude given any set of circumstances to choose one’s own way now if under the today’s situation in leading an organization if the shoulders are kind of rolled over and yo man business is really tough and I know this has never happened during my career and I really don’t know how we’re going to survive this you know you find that really gets you excited in terms of fighting through this thing running the business beating competition coming out stronger this is no different than your situation you’re not the first student body who’s come to the end of your college careers or energy college careers in a tough economic situation now offer you’ve got the same choice you can get your shoulders back and you get your chin up and you’re going to talk about what you’re going to do to take advantage of the situation because as bad as 2009 is going to be it’s going to offer tremendous opportunities we’re going to have customers turn to us because they know we’ve stood the test of time we’re going to have competitors that come under pressure which may allow us to acquire some distressed assets and as I said earlier it’s going to allow us to really pull the organization together focus on those vital few things and come through it but this is not a time for everybody a sulk complain moan and groan it is time for thoughtful leadership to take the organization to the next level and really to put it in perspective at least for Caterpillar look at all these events Great Depression you know the 80s recession global financial world war two 70s any energy crisis and at least for our company what do all these events have in common there were leaders of Caterpillar that led our company through every one of them so why would we think that our generation of leadership can do the same we survived the Great Depression World War two and every major recession since 1925 the reality of it is this one just happens to our crisis and as we managed through this we’re going to do it with the attitude that we’re going to manage through it come out stronger and at the end of the day win and the confidence I have that we’re going to win is based on the foundation that those that have gone before us have put in place if you walk around the top global infrastructure needs are still there now I don’t have to tell anybody who lives in the state of Missouri just go down highway 70 meaning at some point in time we’re going to wake up to the fact that the u.s. infrastructure system is in a state of disrepair roads dams airports you know major inner-city for us you still have the opportunity to build out Eastern Europe the opportunities that are going to come with Russia the urbanization that’s taken place in droves in China and India the opportunity to develop what historically has been under developed parts of the world Latin America Africa the Middle East that that opportunity is still there it’s been put on a significant pause button but it is still there the second is we have the broadest product lineup in the industry that positions us to compete for it we have a global manufacturing footprint that allows us to build product around the world and really take advantage of those opportunities but also puts us in a position to naturally hedge our currency exposure because the global nature of our footprint we have a dealer organization that our competitors would kill for I said it has twice the money invested than our next four largest competitors and we have a strong service business that gives us stability during these tough times and then lastly the one who really makes the difference we have a very loyal customer base that’s being doing business with us for a long time that’s made us the leader in the industry and it’s our job to serve them during these tough times and based on that I’m confident that no company is better positioned to weather the storm and I think whether in this storm is all about that attitude that we’re going to come through this and win I companies or individuals that take on that attitude are going to be the ones that prevail now let’s take these three you know the

focus the fly the plane and the issue of choice and I’ve attempted to put in your perspective so let’s talk about first of all the issue of the power of focus if I’m in in your seat today in assessing what the opportunities are out there these are just a couple thought provoker ‘he’s on things you may want to do first of all when the market shrinks that means competition goes up you know did it get harder for mizzou when they went through the brackets in the bracket narrowed you draw that in the brackets it gets tougher and so there’s no time like this the bar has been raised I’d offer so it should your performance the second one treat the job search as a job get organized get structured you know look in fields beyond your field of study whatever it takes to increase the number of opportunities and the last one is feasible especially if you’re the sophomore junior your side is due insurance internships without pay and I have a great personal experience here no my son graduated with a degree in finance in December of 08 fortunately before he graduated he went into the ubs wealth management office in Raleigh North Carolina and applied for an internship and they said to him we don’t have internships he said not a problem I’ll work without pay the guy looked at him and says well we don’t really do that and he says not a problem i’ll do it for a month and at the end of the month if you don’t think it’s a good deal then you can send me home one month turned into two months two months turned into a full internship over the summer and at the end he said why don’t you work part-time during your last semester and fortunately at least as of today when i talked to him he still has a job but but you’re going to have to get creative and you’re going to have to get forceful you’re going to have to look for new opportunities the second one on fly the plane is your most valuable asset is probably the network you have and that network spans through your friends it spans through your parents its fans through the colleagues you got here you need to leverage the network and you need to look for every available opportunity I would suggest you be flexible I go on campus sometimes I run into student says you know I like those opportunities but I really want to work here and I don’t want to have to travel badr in there and for us that just doesn’t work I think on your location on where you go you’re going to have to open your minds up my guess is that you’re going to have to be very flexible on where those opportunities maybe start your own business had a great discussion earlier with some of the anima entrepreneurs you’re so much better positioned and prepared to start your own business than I when I was coming out of the University of Missouri quality of education you guys get the tools you have at your disposal is incredible if you don’t think that’s the case take a walk across campus go to middlebush hall that’s what I came through and I don’t remember any wireless in fact I remember finishing up my four train class and setting out behind the house with a good buddy of mine and burning every one of those cards saying I’m never going to touch a computer again okay that’s how backwards it was you got the tools and it may be an opportunity to start a new business on your own next one is a good option is grad school and there’s no doubt this school you have some great options in that regard and then lastly about choice I’ve seen some young individuals who have used this as an opportunity to give back to society volunteer Peace Corps there’s a lot of great organizations out there and a lot of people within great needs you’re going to have to find a time in your life at some point time to give back to society I think it’s one of our obligations and this may be a great time to do that it builds you as an individual and trust me from an employer perspective it builds your resume next be persistent you’re going to have to grow thick skin you’re gonna have to get used to know don’t take it personal just get up and do it all over again and then I’d say avoid the double blank and what I mean by that is the first one is avoid the blank on your resume as tough as the job market maybe take something that way when you’re out looking for the job that is that perfect job you want you show that you currently have a job I just think a blank space on a resume I don’t care if you’re going to work at the bar you bartend why you work here at a local grocery store I don’t care what it is but I an employer wants to see that the individual is willing to engage take on tough times and and and and I think it’s something you just have

to avoid the other blank is the blank stare when you go into the interviews you know am I suggesting is you go in with the attitude but I’m going to fly this plane I’m going to I’ve made the choice I can make a difference in your company and it can’t be I’ve had 73 interviews I got no work and can you please help me out ok and it really gets to the last point I know this is tough and I one of the things i prided myself into my 30 years of caterpillar is you know when I lay my head down on the pillow I get a good night’s sleep I sleep with a clear conscience but when you gotta lay employees off trust me it is he eating me alive but the one thing I always keep in perspective is that my job is to protect the long-term viability of the enterprise yeah we’ve had to lay some people off but I’m trying to protect a hundred thousand jobs 120,000 jobs of the dealers that work with us or the hundred fifty thousand jobs that are impacted by suppliers who feed us so no matter how tough it gets in your pursuit of your opportunities are our pursue to stand strong through this thing honey you got to keep your chin up okay as I said earlier in the presentation the best part of these discussions is the exchange in the QA so what I like to do now bring Bruce up open it up to any questions you may have okay thank you great talk we have at least 10 minutes for some questions please remember to keep your questions concise and direct and if necessary you can have a follow-up question hope you can stay till the end of the session while we get our first question I’m going to use my prerogative and ask you a question okay we’ve got a strong balance sheet yep so how much do you need credit and how much do you need to borrow and have you been able to find loans when you need them yeah one of these we did when the Lehman Brothers seized up we we have an internal project called stay strong that is very focused on proactively managing liquidity and so we went out over about a 120-day period raised six billion dollars and we have three point six billion sitting in cash and our balance sheet because this thing is all about liquidity the companies that you see in are going under or ones who don’t have access to credit and we wanted to make sure we got ahead of it early built our balance sheet and you know typically a company like us you don’t want a bunch of cash in your balance sheet and it so it becomes a lazy balance sheet we typically hold somewhere in the neighborhood of 200 million think about that 3.6 billion at the end of March so we’ve we’ve got a nest egg we’ve got a strong balance sheet we got access to liquidity and we think that’s what’s going to allow us to get through this thing and also look for some of the opportunities that come along with people who don’t have that kind of position all right good we have a question in the middle two in the middle all right there you are hi on your slide earlier you were talking about what caused the global financial meltdown and the last stop and the vicious cycle was the unemployment and consume consumer confidence I’ve been wondering what do you think should or can be done to raise that consumer confidence so we don’t get back into that vicious cycle yeah I on the consumer confidence side of it I get to me the do I like government intervention the answer is no but when you’ve got global consumers that have moved on to the sidelines that’s the key driver to GDP government spending has to come in and fill that gap and so that’s why I think the very responsibility you think about three trillion dollars globally when I came out of school talking about a million dollars was a big deal later if you mentioned the b-word it was huge and now we’re throwing around trillions but if I look at what it’s going to take to get this thing back on track the stimulus which leads to employment is what will lead to confidence and that’s why I’m frustrated by the US package it’s not it’s not as focused on job creation as it could be now even if I didn’t work for Caterpillar I’d be telling the infrastructure is the best way to spend stimulus for two reasons one reports show that a billion-dollar spin on infrastructure roads dams you know that kind of stuff generates 50,000 jobs the other thing is is when you get done spinning the money you have something to show for it and the US backed into a tremendous competitive advantage in the

late 50s and early 60s with the building of the US highway system and and you know I think we’ve got to make a major investment in that infrastructure to generate the jobs and I think that’s what will drive the confidence because if I don’t care how much you know I stand up in front of you or the politicians try to make you feel good until you have the security of knowing that you got the access to the job the ability to get a paycheck you’re going to be cautious about you know buying that new house buying that TV whatever you’re going to do so I think it all starts we had a housing truck crisis that’s turned into a jobs crisis like the stimulus to create that employment is what we need okay next question yes sir yeah let’s see you hear me right I know earlier this year there’s a problem with the rising price of oil now it’s dramatically dropped off how is your company able to hedge the costs of rising costs of steel and right across transportation without raising the prices for your customers yeah the issue for us with commodities is we’re in a little bit of a unique position in that high commodity prices drive higher costs in terms of our product and so when you get in a situation like that you got to get more innovative from an engineering and design how do you design out costs that kind of stuff but we’re in a little bit of a unique position because what is high you know steel price mean what oh hi you know copper prices mean high iron ore it means mining expansion it meets more product into those minds and what do we do we’re one of the world’s leading providers of equipment to the mining industry so for us high commodity prices is a good thing yeah we got to worry about the input costs and how it impacts product costs and make sure we stay competitive but when we look at what’s going to turn this economy around our basic economic outlook is driven by two factors we think that China with a very responsible infrastructure package and the u.s who’s been in this thing longer than anybody else they have the chance to come out of this recession earlier and if they do then that will increase the demand on commodity prices and drive higher steel copper aluminum prices which and then in fact raises the emerging markets out because that’s where they get their wealth that’s where they get their their funding but but we’re one company that are looking forward to higher commodity prices I think the only thing we would look for in the next cycle as opposed to the last is there a ton of speculation that we driven into commodities hopefully some of those people that got burned really bad will understand that’s not a place it’s still a gamble it’s still a commodity and you know we won’t see the run-up but commodity prices right now if you look at copper coal oil and gold or actually above threshold investment levels in other words companies can expand and still make money but this loss of confidence you know that they’re wondering too is there another shoe to drop in the financial world what about commercial loans what about consumer credit if we can hold these commodity prices for four to six months then I think we’ll see that come back into play which will be a big boost for the global economy and a big boost for us next question well the question all the microphones going up you alluded to the difference between the US and China stimulus package and I know that caterpillar CEO and CFO had some observations about that yesterday when you give us a couple more sentences about that yeah let me just put in perspective China’s economy is a third the size of the u.s. China’s investment in infrastructure with their stimulus package is three times as large as the u.s. they are putting the investment into roads dams airports and they’re doing it to create employment and you know Jim’s come in was we just think that the US would have benefited from a in our view a more responsible more jobs oriented type stimulus package we didn’t get it we got to make the best of what we got how much risk is there in a bold statement like that I mean well I get back to the point earlier and Jim Owens our CEO he actually sets on Obama’s economic advisory council so he’s inside the tent and he’s inside the 10 he sometimes gets uncomfortable with that but you asked about making bold comments as I said earlier if business doesn’t engage in this kind of environment and have open intellectual

debate about what the realities of the situation are where are we going to have that good debate at you know I at lunch today one of the students says in an interview process is it okay to ask tough questions if if you’re interviewing for a job and you’re not asking about the realities of working at a company what are the best things about it what are the worst things about it then I get a sense that you’re not really interested in our company you just want a job and I think you got to have that kind of debate and i think is a company we’ve got certain principles we stand for you know free trade job creation and I think Jim’s willing to stand up and talk about it good okay we have time for two more questions we have one here since cat has experienced a decrease in revenues how does that affect research development and sales and globally since every other nation probably has different reasons for the recession the thing that makes this unique historically is we dealt with recessions we’ve had a regional downturn in sales I mean if you look at 2008 we had record sales and revenue even though North America was forty percent off its peak from 2006 because it was our business it was carried by the emerging markets in other parts of the world what makes this recession unique at least in my 30-year career is it’s its global we’ve seen an impact on growth and investment in every major region of the world at the same time and it gets back to the credit being the blood system of business and when it got seized up I mean we live in a global environment and we talk about globalization and people think well that’s interesting it’s reality and so what makes this thing a challenge for us at least is is adjusting globally and so we’re putting action plans in in every operation we have the only place that we’ve seen any signs of early recovery is we’re starting to see some of it in Asia and it’s it’s directly related to the infrastructure development which is really the business that we’re in but this this is a as I said it’s going to be hour of crisis I mean you know this is the fourth one I’ve been through in my career at caterpillar but this is it may not be called the Great Depression but it may be called the Great Recession based on the challenges we got it in question in your opinion do you think that the market is going to have a general upward trend obviously with some ups and downs or do you think that we’re going to see another bottom before things really improved steadily yeah do you have the answer to that if you did you could you can you get you’d be you’d be all right you know that’s the of course the big question these days we’ve done a lot of work of going back in simulating past crisis we’ve got a very good chief economist some really bright and talented people and we’ve simulated and we’ve done two things first of all for our business the only two recessions that are going to compare to this one are the great depression and the early 80s and there’s two common themes in in both the early 80s and the great depression is that it was a w they had a massive decline a brief period of growth and then it went back into recession before eventually coming out and and there’s a pretty good school of thought that says that that’s going to repeat you’re going to have this massive stimulus you’re going to see temporary growth inflation is going to take off governments are going to tighten in and you’re going to head back into another recession so I think the risks of that of it being another WR real but but let’s be honest you know with a global nature of the business the global financial markets we’ve never dealt with anything like this we’ve never dealt with bank a bank leadership around the world taking interest rates down on a coordinated basis we’ve never dealt with the three trillion dollar stimulus package at the same time so it’s it’s the big bet as a company we’re going to have to decide early on which way we’re going to bet in terms of investment employment some of those other areas the key thing though for this when people ask me how the markets doing they always talk about what the dowel did today I mean I could care less the answers to this recession and when we come out of it is all in the credit markets it’s all about the spreads over treasuries that corporations are having to pay you to borrow money it’s all about what they call CD s we probably got some finance majors in here credit derivative swaps you know getting credit to flow when that happens that’s when the seeds of recovery will come and we may get some bumps and grinds but if you have a strong credit system I think then we’ll be on our way to recover sooner the better well I know that a number of

you have commitments and obligations at five o’clock so we could probably be here for another hour but some of you would need to leave so we better let’s give mr. wrapped around of applause I’m going to present mr. Rapp with a black on our behalf and also we have a wonderful Tigers cap for him to wear around the world if anybody wants some one-on-one time come on down and thanks again every really appreciate