The Uprising of the original Scout II,

In 1971, International Harvester Company brought in Keith Mazurek a former Chrysler Corporation executive from Canada, to bring along that super-sell Detroit-type thinking. However some would not believe that he could persuade management to double the advertising budget, to $3.5 million, in a recession year. However when he said he wanted to blow more than a third of the total budget to introduce a single new product -- well think of what they thought of that!

IH took every possible commercial minute on three successive nights in NBC’s Johnny Carson Tonight Show, CBS’s Merv Griffin Show, and ABC’s Dick Carett Show. The total cost of each program -- a different show each night was $450,000, and the money used to introduce this week’s new Scout II, along with International’s light -- truck line. Also in addition to the television spots in prime time and in Sunday sport shows, along with the Sunday newspaper supplement ads in 380 markets, total an introductory budget of $1.2 million for the Scout. The Scout II is a Four-wheel-drive sport utility vehicle for hunters, campers, skiers, and other recreational users to just get out of town for the weekend.

New tack.

The big push highlighted an all-out campaign to make IH a strong competitive force in the marketing of light trucks as it has long been in heavy trucks. Since it started in 1907 with an “auto wagon” for its farm implement customers, IH has offered a great deal of variety of work vehicles. Truck sales accounted for $1.336-billion, or half of the company’s total volume. For a long time now IH has traditionally concentrated on heavy duty vehicles (gross weight of 26,000 pounds or more), and held a hand full of shares for that market since World War II. In 1964, the best year had come. It owned 31% of the heavy duty market, in the early 70s IH hovered around 25%. In a different weight class, penetration in the medium-weight market (14,00 pounds to 26,000 pounds) has varied from 17% to 21%. The absolute best IH could achieve in light truck share-of-market was 9.5% and in 1969 it was down to 4.1%.

William E. Callahan, Executive vice-president of IH, saw that something needed altered to make full capability of International’s huge light-truck production facilities. Callahan recruited Mazurek, who had started 20 years earlier as a graduate student at the Chrysler Institute of Engineering and Subsequently held numerous engineering posts. Mazurek had been “a plant-oriented guy who thought in terms of production.” Now he became a marketing person.

Modern design.

Mazurek changed the IH division’s name from “Motor Truck,” that smacked of the 1930s, to simply “Truck.” He also changed the color design in the plants from a uniform “kind of greasy Sherwood Forest green” to bright blue. Then he reorganized the company’s dealer organization, dropping some 650 who handled the Scout Travelall (a truck-like station wagon), and pickups-who had a low volume and limited service capability. He added a total of 150 new dealers and ended up with a total of 2,840 dealers, 840 that sell the IH vehicle lines along with various others that range from Rolls-Royce and Checker to Chrysler-Plymouth and Oldsmobile. Then he cut prices from $100 to $150 and modified warranties to make his trucks more competitive with Detroit’s.

“To sell light trucks,” Mazurek says, “we had to get onto automobile row." Pickups mostly sold out on the farm but that was years ago. Another step was to consolidate sales regions and establish a profit-center set-up.

Archie R. McCardell, 54, who was head chairman and chief executive of International Harvester has had a busy year. From November 1979 until late April 1980, McCardell suffered a devastating strike that he mistakenly thought he could win. In mid-October he took in a $150-million sale of Harvester convertible preferred stock on excruciating terms: an 11.9% dividend cost (after tax because preferred dividends are not deductible) and a structure permitting conversion into common at about 70% of book value. What also happened in October, he closed the books on a fiscal year in which Harvester lost approximately $400 million and watched its net worth dropped by 20%. In August, Harvester’s directors, leaning on a “spectacular performance” clause in his compensation contract, bequest McCardell forgiveness of a $1.8-million loan that he owed the company.

The $1.8-million loan was part of a wealthy package that lured McCardell in 1977 from Xerox, where he was president and Number 2 man. Not bad as a starter, the package included a kind offer, though more or less standard, salary and bonus arrangements (worth more than $800,000 in fiscal 1979).

Wrinkles in a record year

Lo and behold Harvester’s 1979 profits, despite a $45-million blow from LIFO, were record high at the amount of $370 million and its ratio, at 9.55%, exceeded parity. McCardell’s cost-cutting drive and good marketing supplied the main heave ho. Some problems included U.K. tax credit, amounting for Harvester to $49 million. The other one was anticipatory buying on the part of Harvester’s dealers, who began to load up on inventory when they learned that a serious strike could develop at the end of the fiscal year.

On these special occasions alone, the directors should have argued the point more conscientiously should have taken a conservative approach toward a forgiveness award in 1979. Moreover they did not get around to determining the award until August 1980, and by that time the company was in so much trouble that one would think the directors might have been heading for the escape pod. The strike, called by the United Auto Workers, was over by then. Harvester had largely failed in its goals and expectations of eliminating certain operating practices that put it at a disadvantage to its competitors, and in the strike’s nearly six months Harvester had lost a lot of money: $479 million. Emerging in a recession, Harvester had no expectations of recuperation much in the second half. As things developed, more things went wrong in the way of money, the estimated $400 million the company lost for the full year more than wiped out the $370 million made in 1979.

In addition, Harvester’s balance sheet, not strong when the strike began, was a total wreck by August. The balance sheet showed substantially more debt than equity and an acute shortage of working capital. The company had an intense need by then to sell equity, but was burdened with a stock price back down near $30 (which was its level also in mid-November).

Working with an agenda prepared by Harvester insiders. The committee took up the question of what, if anything, McCardell should get in the way of a forgiveness award for 1979. Was that brief, shining moment justification for total forgiveness? OR did the warts on 1979’s performance and the tumble into trouble in 1980 makes a case for only partial forgiveness or none at all?

The directors did not have to start from scratch on this decision. The committee accepted the advice from the legal counsel to give him total forgiveness. Adhering to a command of the contract that says literal forgiveness would spread out over five years--that is, in one portion of $359,250 immediately and four such portions to come.

Joseph Lanterman, one of the directors presents that day, says he does not remember facing the word “required.” He thought forgiveness would be proper: “It was all justifiable by virtue of the contract.”

Rettaliata, chairman of the committee, says he thought McCardell was doing “a fine job.” He also said, “We were just carrying out the contract.” The media has asked him whether he had thought about the U.K. tax credit, the prestike buying, and the contract’s admonition that the committee should consider other matters beyond a “rigid formula.” Upon that, he said, “Maybe we should have had you in the meeting.” It was not clear whether he was being sarcastic or had just expanded his knowledge of the situation.

There may have been reluctance

Rettaliata says there was no argument about McCardell’s award at either the committee meeting or on the following day, when the full board accepted the committee’s decision. That action was unanimous, but Rettaliata speaks of it in a way that suggests one or more of the directors gave their okay reluctantly. One such person may have been Mary Garst, manager of the cattle division of Garst Company in Iowa and a relatively new Harvester director. When FORTUNE magazine had asked Mary Garst to give her personal opinion about forgiveness of the loan, she said, “I really cannot--and the fact that I cannot should suggest how I feel about it.”

Another director, Andrew F. Bremmer, a former Fed governor and now head of his own Washington consulting firm, says firmly that he believes the board was not “required” to forgive McCardell’s loan. He for one, wanted to do it. “I believe the terms were met and I was enthusiastic about the forgiveness." “Brimmer says he knew all about the escape clause." “I didn’t choose to use it.”

Brooks McCormick and other directors felt some obligation to McCardell. Rettaliata noted recently that Harvester’s poor profits will mean no bonus for McCardell this year. He added: “You know, he gave up a lot when he left Xerox.”

The last chance maybe

That would have been a poor reason for giving an incentive-based loan, but Rettaliata and other directors may believe that McCardell has made real progress and that the company has just bumped into bad luck that year. They could well expect him to be ultimately innocent. They might be right, though the company financially strained so it is hard to imagine a prompt recovery. The implication of a slow recovery is clear: 1979 may have been the last year during the contract term in which total forgiveness would only remotely justify their actions. Maybe that’s why the directors tendered it now.

Investors, pondering this affair, might find some comfort in the knowledge that this exotic contract has now gone. They should be apprehensive, however, that there is at least one other such contract extant, and it too is at Harvester. The contract belongs to Warren J. Hayford, who in 1979 left Continental Group to become president under McCardell. Hayford got a loan worth $973,000 to buy Harvester stock, and the contract says forgiveness, beginning in fiscal 1980, that dismal year at Harvester, was to be linked to the speed at which McCardell’s loan was forgiven. That link broke, since McCardell’s forgiveness been based on fiscal 1979. So what is to happen now? Harvester said last week that Hayford will get forgiveness merely by remaining at the company until 1984.

International Harvester: When cost-cutting threatens the future

When International Harvester Company closed its books on fiscal 1979, ended last October 31, Chairman Archie R. McCardell savored a momentary taste of the fatter profits he covets for the $8.4 billion manufacturer of trucks, farm implements, and construction equipment. Thanks to a surge in all three key markets-and the success of a cost-cutting campaign that McCardell says has saved $460 million in two years-the company’s earnings soared 98% last year to $370 million, producing an after-tax margin of 4.4%, a $15-year high.

The turnaround has dangerously suspended in to midair. McCardell has chosen 1980 as the year to engage the powerful United Auto Workers in the most risky battle of Harvester’s cost reduction war. By demanding union work rule concessions in a new contract rather than simply granting wage and benefit increases already won by the UAW at competitor companies, Harvester triggered a strike on November 1 by 35,000 workers, or 36% of its work force. The company has estimated it will lose $225 million in the quarter ending January 31 an amount equal to 10% of Harvester’s equity. Union officials perceive this struggle as an outgrowth of McCardell’s obsessed in slashing costs.

Outspent by competitors. For the long term, the strike may throw a monkey wrench into McCardell’s ambitious capital expansion program, under which Harvester plans a capital outlay of $2.5 billion from 1980 through 1984, compared with $1 billion in the previous five-year period.

Already, however, the strike has forced McCardell to reduce his company’s capital spending plans for 1980 from $500 million to $400 million. Nevertheless, he vows to continue fighting for concession from the UAW, which he contends are as essential as capital improvements to put Harvester on an equal footing on costs with its competitors and give it the financial muscle to carry out future spending plans. Nightmarish scheduling. Among other things, Harvester wants the UAW to give the company more flexibility in mandating overtime work. At Deere, UAW members must work three Saturdays a month if asked, although they may refuse on five occasions per year. At Harvester, prior labor contracts have always entitled workers to turn down Saturday overtime whenever they please, making weekend scheduling a nightmare. Because of such practices, McCardell says, “We are losing between 1.5% and 2% in our margins through plant inefficiencies. If we’re going to be competitive we have to get at that cost penalty, so we are really serious about the strike.”

Unfortunately, so is the UAW, whose strike fund--kept intact when an auto strike failed to materialize in 1979--now totals a comfortable $300 million. Both sides are so entrenched, that no negotiations been scheduled for most of December and January.

By taking his tough stand with labor, McCardell is raising questions in the investment community and among competitors. They sympathize with Harvester’s plight. “The company by far has got the worst union contract in the business,” agrees one industry labor negotiator. There is concern about the strike’s cost and its impact on McCardell’s schedule to catch up in plant modernization and product development. Even with a quick end to the strike, Harvester will barely break even in 1980 and may have to cut its dividend. It looks as if the company will be at least a year behind where it hoped to be [with its turnaround plan]. No better time. Although McCardell seems fully aware of the costs of the strike, he maintains there will be no better time in the near future to drive a hard bargain with the union. He also knows that because Deere and Caterpillar endured shorter strikes of their own late last year, they do not yet have the inventory to exploit fully the openings in their markets, where growth is expected to slacken this year because of the Soviet grain embargo and general economic conditions. As a former Ford Motors Co. Executive before moving to Xerox, McCardell also knows the union he is up against.

Thus, apart from the stymied effort to improve labor efficiency, McCardell sees himself as essentially moving ahead with the other aspects of his plan. Potter had hired 300 scientists and engineers to staff 22 new corporate technology teams, which will report to him on projects ranging from vehicular electronics to development of exotic body and structural materials.

More technological stretch. In 1979, Harvester spent 2.6% of its sales on R&D, well under the 3.8% of sales spent by Deere and about 3.5% by Caterpillar. McCardell has picked this area as a specific target for reversal. Harvester hopes to boost R&D spending sharply that year despite the strike, and within five years McCardell sees Harvester as being among the most generous spenders.

Such rhetoric is typical of most executives trained in the word processing industry but is atypical of McCardell. At Xerox, McCardell was known as an effective budgetary and organizer, but the company’s record of innovation declined noticeably during his tenure as president and chief operating officer from 1971 to 1977.

So far, however, Harvester has been more creative under McCardell than before. Despite limited budgets, the five product groups--truck, farm, construction, turbines, and components--recently have turned out some successful new machines. The $3 billion farm group, which contributed more than half of that one year’s corporate operating profit, gained market share with a new rotary combine which boasts a gentler rubbing action to separate grain from the chaff, and with a small, highly maneuverable four-wheel-drive tractor called the “2 + 2.” Work on both products actually began before McCardell arrived at Harvester, but the new chairman accelerated their development. He has also initiated design work on a new generation of fuel-efficient tractors. In the meantime, McCardell is moving forward with his cost-cutting plans. Since he joined the company, he claims to have eliminated 11,000 jobs out of 15,000 he wants to cut eventually. While he has had to add other positions in order to handle Harvester’s 40% sales growth during the last three years, the net result has been that total employment has risen only from 93,200 to 97,660.

Foreign growth. Once the impact of the UAW strike is absorbed, McCardell hopes to return to his five-year plan to invest $500 million a year to bring in more new and sophisticated production machinery as well as to broaden product lines and marketing penetration in the U.S. McCardell want especially to expand the company’s mix of Construction equipment, sales of which then totaled 1 billion. He is also attempting to grow internationally. Harvester bought its way into the booming Brazilian agriculture industry by purchasing one-third of the equity of a combine manufacturer there. McCardell says he also envisions a bigger role in Europe for his truck group, whose 1979 world revenues were $4 billion. Harvester falls flat on its bargaining goals.

International Harvester Company is on the verge of settling a bitter five-month strike by the United Auto Workers, but the $8.4 billion manufacturer of trucks, farm implements, and construction equipment is emerging from negotiations with deep financial wounds, lost market share, and no clear contract victories. In resolving the stickiest issue, Harvester backed down from its key demand, which was designed to enable it to force overtime work at its manufacturing plants. Moreover, the company is gaining only partial relief on its second pivotal proposal, aimed at restricting excessive transfers of employees between different jobs.

Harvester is paying dearly for its tough bargaining stance. The company took a $222 million loss in the quarter that ended January 31, and with most second-quarter production already wiped out, total strike related losses could exceed $350 million. Debt has ballooned 43% to about $1.9 billion, the company’s commercial paper rating has been lowered one notch to Prime-2 by Moody’s Investors Service, and Harvester’s stock has withered to less than $27 per share from a 12 month high of $45.50. On the overtime issue, the company apparently has given up trying to get the right to require at least 14 Saturdays of work annually.

At auto plants, workers would welcome some overtime. In a sister industry, extra hours became an emotional issue that fanned a long walkout.

While workers in other industries struggle to keep their jobs, 35,000 employee’s of International harvester have stayed on strike almost six months to protect something even more dear to them--their leisure time. Their determination appears to have had its effect. Management of the huge farm-equipment company has softened its demand that employees be required to work overtime, and a compromise that signals an end to the dispute sometime soon appears to have been hammered out. Effects of the walkout are being felt sorely by the company, the workers and businesses that rely on harvester trade. By the end of February, the strike had set a record as the longest against a multiplant company by the United Auto Workers, surpassing a 113 day walkout at General Motors in 1946. With 17 of its 21 U.S. plants paralyzed, Harvester reported a ? Wages, fringe benefit and other “bread and butter” demands by the UAW. The company made it clear from the beginning that it would match the three-year, 33 percent wage and fringe benefit increase negotiated at other farm implement firms last fall, but other details remained to be worked out. ? Job transfers. The company demanded a limit to excessive transfers of employees from on job to another. The issue was dropped from national talks and sent to plant level negotiations. Management neutrality. The union wanted company managers to remain neutral in union organizing drives at a handful of plants not represented by the UAW.

Both sides say they are not far apart on remaining issues. National talks have been stalled since early February and are not scheduled to resume until local contracts, covering 34 bargaining units, are settled. Officials say those agreements could fall into place soon. Both union and company sources say a tentative agreement has been reached on a compromise--short of a mandatory plan--that will help ensure adequate staffing of overtime shifts. With national talks about to resume, some say an agreement should come quickly now that the most emotional issue has been resolved.