RERMAG

No Longer a Secret

Despite having more than $4.5 billion in sales in 2006, JCB has been called “the best-kept secret” in the United States. CEO John Patterson started 37 years ago in the service department and has led the company through amazing growth in recent years. At the recent ConExpo convention, RER editor Michael Roth sat down with JCB CEO John Patterson and talked about the importance of rental, the worldwide growth of the company, its family culture, product development plans for the next stage of growth and more.

RER: When you started with JCB 37 years ago, did you expect someday you’d be chairman and CEO of this company?

Patterson: You know I never asked for a job in terms of the next job, it always just happened. In my career it happened fairly quickly, so I figured I must be doing something right. I always operated the business with Mr. JCB [founder Joseph Cyril Bamford] and in recent years, Sir Anthony [Bamford], but you keep doing things until someone tells you you can’t do things. And I very seldom ever have been told I can’t do something. It’s been suggested you might do it a little different next time, but never: “You can’t do it.” And I think that’s a very good philosophy for people as well, do what you think is right, until someone tells you you can’t do it.

I guess you just worked hard and had a good business mind.

Yes. I think a farming background helps you in that too. Farming tends to create practical people, mechanically minded people, self-sufficient, inclined to use your own initiative. So I think these are all good personal characteristics that succeed in business.

JCB is unusual in this industry in that you have virtually no debt.

We don’t borrow money. Very simply, we don’t want to be beholden to anybody, to banks in particular who can hurt the business if they decide it’s time to call a note back in and you’re not ready to pay it. They can put you out of business. So, no borrowings at all. If we can’t afford it, we can’t buy it. It’s just that simple. But most of our earnings go back into the business. There are no dividends, there are no external shareholders. So all the profits get plowed back into the business. And being a private company, we can take longer-term decisions on investments.

The engine was a good example. People thought we were crazy to manufacture our own engine, but we were doing it from a clean sheet of paper so we could design an engine thinking ahead for future legislation requirements on emissions and noise levels. So when we started building our engine in 2005, it was a Tier-2 level at that time, we knew the engine was capable of Tier 3 without any engineering work whatsoever. And the same engine is now being prepared for Tier 4 and it’s through bolt-on accessories for emissions control.

The basic architecture of the engine is capable of meeting Tier-4 standards. But there’s not many companies in the last 30 years have started with a clean sheet of paper and started manufacturing an engine.

I imagine it helped knowing what the regulations were.

Yes, we knew what the regulations were. Also, our largest supplier of engines was also our largest competitor. That’s not a very comfortable feeling when you’re reliant on your largest competitor as your engine supplier. That was another consideration.

Will the percentage of your own machines that use JCB engines continue to increase?

Currently 60 percent of our products use our own engine. The other 40 percent use engines that are larger than we make. Isuzu in Japan makes large engines for the large machines. And we still buy the very small engines from Perkins, the 2-liter and 3-liter engines.

One of the interesting things about this project was that it gives [our engineers] a very useful education on what the engine was capable of. We had two of these engines stretched up to 750 horsepower in each engine. So the engine last year was increased from 4.4 to 4.8 liters, which takes us up to roughly 150 horsepower. I think there’s more capacity in the engine to take it further, probably up to 240 horsepower, which would satisfy our own requirements for the large machines.

Smaller engines require a different design, a lighter block, different combustion and so forth. So smaller engines for the moment we’re not doing anything with.

In terms of products as you look ahead, are there other niches you might consider, such as aerial work platforms or generators?

Generators, yes. We’ve started producing our own gensets. But that again was possible because of our own engine. So we’re using our own engines in our own gensets. And last year was our first year of production of gensets. I think that’s got a very promising future. Worldwide there’s a demand for power-generation products, whether it be the Middle East, Africa, China, South America, even the United States. So that is a new product altogether that is quite promising.

Your results in India are off the charts.

Staggering.

You started there in the late 70s?

In 1979. Started with a joint venture partnership. For two reasons. One was import tariffs to India were extremely high and it was a government policy to protect manual labor. Second reason was that foreign companies were not allowed to operate in India by themselves. So you had to have a majority Indian partner. We had a partner. In the late 90s, we reversed the shareholding to where it was 60 percent JCB. In the late 90s we bought 20 percent more. Then the Indian law changed in 2002 to where foreign companies could have 100 percent ownership. So we purchased the remaining shares and we’ve never looked back since. Today we have three factories in India, an engineering center in India, a new parts center. It’s an amazing market, an incredible story.

But we were the first manufacturer of construction equipment in India. So we had a good start on everybody. While most of our competitors were focusing on China in recent years, we focused on India. We only recently got ourselves involved in China. Now everybody is focusing on India trying to catch up.

Obviously somebody at JCB recognized the potential, realizing that sooner or later India will come into the modern world.

Again it’s full circle back to the backhoe loader. It’s the most versatile product, it’s acquisition cost is not that high, it can operate a lot of different attachments for different applications. So the customers who were buying it, it wasn’t categorized or defined as a rental company, but a man would buy the product and he’d rent himself and the machine to somebody who wanted to dig a trench or whatever. We don’t have large customers in India, we very seldom sell more than five machines to a customer. Which is a good way to do business. The majority are small owner-operators.

We also operate our own training schools for operators, so when a customer buys a machine, we can say, “Look, here’s a trained operator for the machine.” Because there are very few operators, there’s no market, there are no operators, so we train the operators and we supply an operator with the purchase of a machine.

Do a high percentage of buyers of your machines get trained by JCB?

Oh, 80 percent at least. It’s a complete package.

Might you introduce other products in India?

In India we make backhoes and we make hydraulic excavators up to 30 tons, wheel-loading shovels and compaction equipment — four products. We’re test-marketing telescopic handlers at the moment. But in India, nothing is palletized, so forklifts at this stage are not really in demand. We have to change the marketplace to palletization, for bricks, cement, whatever. That’s a development process. But if you’re the first people doing it, you end up with some customer loyalty eventually.

Your growth in China is very good now, and Brazil as well.

In Brazil, our business doubled there the past two years. We are now well established in Brazil, market share is increasing. Products are well accepted and our dealer network is strengthening. Five years ago, we had three dealers in Brazil, now we have 12. We are exporting products made in Brazil to Argentina and Chile and Paraguay. So that business is doing quite well. But we only manufacture backhoes there, nothing else. Sixty percent of the Brazilian market is backhoes.

Will you look at other products there?

I think telescopic handlers and skid-steers that we can ship from Savannah.

What about plans for the States? You recently talked about growing the distributor network.

That’s the number one priority. More market coverage, more dealer branches to provide better service, better support, local support for customers. So that’s the one big priority. The second big priority is to increase our product support capability. In that context we are building a new customer support center, which is parts distribution, training for service people, parts people, sales people, and a JCB University attached to that facility, it’s own campus. And that should be complete, hopefully by the end of this year if we can get through all the planning regulations and permits and so forth. But that project is underway. So those are the two priorities — increase our market coverage, we need to double the number of outlets in the U.S. And strengthen our product support capability.

The strange thing and the frustrating thing is JCB is still perceived as a foreign, offshore manufacturer who imports products. And therefore there’s a perception sometimes in the customers’ mind, “Well, we’re buying an imported product, can I get parts?” And if the answer is yes, he believes they are coming on a steamship once a year. But that’s not the case. We manufacture products in Savannah, by definition we have the parts. So these are the two priorities. It’s that simple.

We’re going to raise the profile of JCB.

How does independent rental fit into JCB’s plans?

Well, we supply to all the major rental companies at the moment. We also supply a lot of what I call the mom-and-pop rental stores as well, and that’s good business. We’re not involved in rental ourselves and we don’t believe our dealers should be involved in rental either because you end up competing with your own customer. And operating a dealership is very different from operating a rental company. There’s a conflict of interest sometimes. And different management techniques are required too.

But selling to rental companies is important and rental is a channel that we have to be involved in. It’s good brand awareness, product awareness. You can’t afford to not be in it.

Your products are so well engineered. What makes the engineering so strong?

Well, number one, it goes back to the founder who was an engineer and an inventor, so the culture started there. In terms of investment in R&D, we average between 3 and 4 percent of revenue going into R&D now. That’s probably the top end of the industry. But we believe very, very strongly that developing products is important. It helps increase our sales too. We’re always taking new products to the marketplace, so salesmen always have something new to sell. And customers always like it, they are always interested in new machines.

Very seldom do we have radical design changes. We tend to evolve the product. You take the backhoe, this year we might concentrate in the back end, next year maybe on the front end. The third year we’ll concentrate on the operator’s compartment. So there’s never a radical change, it’s more an evolutionary change. We simply believe that any product development program should never have any more than 20 percent new parts, very simply, to maintain the reliability and integrity of the product.

Continuity. That’s the philosophy. Very simply. It’s the most fun part of the business too, developing new products.

How many years do you look ahead in planning new products?

Three to five years, maximum. This marketplace changes so fast and getting faster. So three years will be firm plans, five years will be maximum outlook.

It seems that being a family-owned company makes it a comfortable place to work?

I think there’s a lot of benefits from being a private company. And I’m not the world’s biggest expert on this because I haven’t worked for anybody else. But it is entrepreneurial in spirit, number one. People tend to have a lot of latitude and leeway and scope to express themselves in ideas or in design or in marketing or in public relations and we encourage that throughout the company. Is it a good place to work? I guess the best measure of that is we have very little turnover of people and we’ve now got two and three generations of families working in the business and I think that’s a good measure of if it’s a good place to work.

Can a lower level employee feel free to go up to John Patterson and say “I have a good idea?” Can he e-mail you or call you?

It happens all the time. All the time.

Does he have to go through a channel?

We’re not big on bureaucracy. Bureaucracy kills a company. We have a management structure, but I think if people can express themselves, and you encourage people to express themselves, then you have to give them access. It’s a pretty informal operating structure. That’s part of what makes JCB what it is. We’re different I think from other companies. We make decisions much quicker, our decision-making process is very quick.

Why is it said that JCB is a well-kept secret?

A number of people have said to me “John, why is it you have the best-kept secret in the United States?” That got me thinking. Why are we a secret? It’s not by our choice. We should not be a secret. I think you have to keep re-inventing yourself all the time. If you keep doing the same thing all the time, then you’re very predictable. I think it’s nice to be unpredictable sometimes. Never be satisfied.

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