Chinese regulator signs off on Linde-Praxair merger

FRANKFURT (Reuters) – Linde AG (LING.DE) said on Sunday that it had received approval for its proposed $83 billion merger with Praxair (PX.N) from the Chinese antitrust authorities.

The Praxair logo is seen during a news conference with Linde in Munich, Germany, June 2, 2017. REUTERS/Michaela Rehle

Linde and U.S.-based Praxair are in the process of selling additional assets in an attempt to win approval for the tie-up by an Oct. 24 deadline from regulators in the United States, South Korea and the European Union.

Reporting by Douglas Busvine; Editing by Madeline Chambers

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GM will recall more than 3.3 million vehicles in China: market regulator

BEIJING (Reuters) – General Motors’ joint venture in China, Shanghai GM, will recall more than 3.3 million Buick, Chevrolet and Cadillac vehicles from Oct. 20 because of a defect with the suspension system, China’s market regulator said on Saturday.

The GM logo is seen at the General Motors Lansing Grand River Assembly Plant in Lansing, Michigan October 26, 2015. REUTERS/Rebecca Cook

The recall includes cars produced between 2013 and 2018, the State Administration for Market Regulation said in a statement.

GM will contact those affected and repair the vehicles free of charge, it said.

GM Shanghai said in a text message the suspension arm may be deformed under extreme operating conditions, but there are no known casualties related to the issue.

Reporting by Josephine Mason and Hallie Gu; additional reporting by Yilei Sun; Editing by Shri Navaratnam and Michael Perry

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Exclusive: Insider favored as Airbus speeds CEO search – sources

PARIS (Reuters) – Airbus is moving swiftly toward appointing planemaking head Guillaume Faury as its next chief executive after accelerating the search for a successor to outgoing Tom Enders to address a growing leadership vacuum, people familiar with the matter said.

FILE PHOTO – Airbus Commercial Aircraft President Guillaume Faury poses during the unveiling of an Airbus A220-300 aircraft after ist landing in Colomiers near Toulouse, France, July 10, 2018. REUTERS/Regis Duvignau

The board could announce a decision within weeks, ahead of its end-year target, as the European planemaker juggles a trio of pressures from management changes, industrial delays and a paralyzing corruption probe, they said. Airbus declined comment.

Faury, 50, was appointed head of the core planemaking business last December after Fabrice Bregier agreed to quit following a power battle with Enders, in a shake-up that also saw Enders draw back from plans to seek a third term in 2019.

The main external candidate, Thales Chief Executive Patrice Caine, is reluctant to leave the French defense company but could do so if asked to by the French government, reports say.

The timing of the transition was not immediately clear, but two sources familiar with the company said it had not been excluded that Faury would become CEO as early as this year, advancing plans for a handover at a May 2019 shareholder meeting.

The board could make a final decision by a Nov 13 meeting.

Reporting by Tim Hepher; Editing by Sudip Kar-Gupta

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Accenture quarterly revenue rises 11 percent

(Reuters) – Accenture Plc (ACN.N), a provider of consulting and outsourcing services, reported an 11 percent rise in quarterly revenue on Thursday as it benefited from investments in digital and cloud services.

FILE PHOTO – Visitors look at devices at Accenture stand at the Mobile World Congress in Barcelona, February 26, 2013. REUTERS/Albert Gea/File Photo

Net income attributable to the company rose to $1.03 billion, or $1.58 per share, from $932.5 million, or $1.48 per share, in the fourth quarter ended Aug. 31, a year earlier.

Net revenue rose to $10.15 billion from $9.15 billion.

Reporting by Arjun Panchadar in Bengaluru; Editing by Shailesh Kuber

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Exclusive: With six months to go before Brexit, 630 finance jobs have left – Reuters survey

LONDON (Reuters) – As few as 630 UK-based finance jobs have been shifted or created overseas with just six months to go before Brexit, a far lower total than banks said could move after Britain’s surprise vote to leave the European Union, according to a new Reuters survey.

Workers are seen crossing London Bridge during the morning rush hour in London, Britain, September 25, 2018. REUTERS/Toby Melville

Many bankers and politicians predicted after the June 2016 referendum that leaving the EU would prompt a mass exodus of jobs and business and deal a crippling blow to London’s position in global finance.

But as Brexit Day nears, the number of jobs that UK-based financial institutions say they expect to move in the event of a “hard” Brexit was around 5,800, just 500 more than the last survey in March, and with more firms responding. That compares to around 10,000 in the first survey in September 2017.

The results are based on answers from 134 of the biggest or most internationally-focused banks, insurers, asset managers, private equity firms and exchanges to a survey conducted by between Aug. 1 and Sept. 15.

Nearly all of those surveyed said they are moving as few people as possible, hoping for a last-minute political deal that protects access to the EU’s $19.7 trillion-a-year economy after Britain leaves the bloc.

The likelihood of a “hard” or “no-deal” Brexit has increased substantially since Prime Minister Theresa May’s plan for maintaining ties with the EU has been rejected by Brussels as well as by many politicians in her own Conservative Party.

Many business chiefs fear Britain could be heading for a chaotic split that would spook financial markets and dislocate trade flows across Europe and beyond. Some politicians on both sides put the odds of talks collapsing at more than 50 percent.

The survey findings suggest London, which has been a critical artery for the flow of money around the world for centuries, is likely to remain the world’s largest center of international finance. While New York is by some measures bigger, it is more centered on American markets, while London focuses on international trade.

Extreme forecasts for UK job losses in a hard Brexit scenario have ranged from about 30,000 roles, estimated by the Brussels-based Bruegel research group in February 2017, to as many as 232,000 by the London Stock Exchange in January 2017.

Iain Anderson, the executive chairman of Cicero, a public affairs company, which represents many finance companies, agreed with the survey findings that the impact of Brexit is likely to be much more modest than initially predicted.

Anderson said early estimates were made by executives in a period of unprecedented emotional turmoil following the vote.

“They have now moved through the five stages of grief,” he told Reuters.

Workers are seen crossing London Bridge with City of London skyscrapers seen behind during the morning rush hour in London, Britain, September 25, 2018. REUTERS/Toby Melville

BANKERS BLUFF?

Ninety-seven of the companies that responded said they would have to move staff or restructure their businesses because of Brexit, although only 63 specified numbers. The rest said it would have no impact, that they were still deciding what to do or they declined to comment.

HSBC, which has publicly said up to 1,000 jobs could move to Paris, has so far not moved any staff, a source at the bank told Reuters as part of the survey. Royal Bank of Scotland, which expects to move 150 to Amsterdam, also has not moved any employees, an RBS source said.

Many other large international banks said in the survey that although they have moved or hired a small number of staff in European cities, they are aiming to shift as few jobs as possible and will take decisions about staff redeployment over several years.

Goldman Sachs, which has taken a new office in Frankfurt and plans to move 500 people to Europe, has only moved or hired about 100 so far. JPMorgan, which has publicly said up to 4,000 jobs could move, said recently in a staff memorandum it has only asked “several dozen” staff to move.

The 134 firms who responded to Reuters for this survey – against 119 who responded in March and 123 in September 2017 – employ the bulk of UK-based workers in international finance.

The respondents included the 20 investment banks that earned the most fees from investment banking in Europe, the Middle East and Africa in 2016, according to Thomson Reuters’ data.

Some companies predicted the number of job moves will increase significantly over the next few months. For example, Bank of America plans to move more than 100 staff to Paris early next year.

Slideshow (13 Images)

Many companies said they hoped to use a transition agreement already agreed in principle between the EU and Britain that would maintain the current level of access to the EU until the end of 2020.

Over the longer term, they were counting on an internationally accepted banking mechanism to allow them to conduct trades in the EU through their existing bases in Britain.

Richard Small, a financial regulation lawyer at Addleshaw Goddard, said companies probably exaggerated at first and lowered estimates on more careful consideration.

Companies are now focusing on ensuring they have the right infrastructure in place, including licenses and real estate, so that they can ramp up their operations if they have to.

“They’ve got themselves in a place that they will be nimble and can scale up and down more quickly,” he said.

Bankers said it is still too early to say what the long-term results of Brexit will be.

“The truth is no one wants to move anyone and it all depends on what happens with the negotiations,” said one executive at a U.S. bank.

“It could be lower. It could be higher. If you can tell me what will happen with the negotiations then I will be able to give you an accurate estimate of how many jobs will move.”

(For a graphic on ‘Brexit and the City’ click tmsnrt.rs/2xBCbGf)

(For a graphic on ‘A weekly Brexit round-up’ click here)

Editing by Guy Faulconbridge and Sonya Hepinstall

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Comcast crosses 30 percent Sky threshold after buying shares

LONDON (Reuters) – Comcast (CMCSA.O), the victor in the $40 billion auction for Sky (SKYB.L), said on Tuesday it had bought more than 30 percent of the European pay-TV group’s shares in the market.

FILE PHOTO: The NBC and Comcast logos are displayed on 30 Rockefeller Plaza in midtown Manhattan in New York, U.S., February 27, 2018. REUTERS/Lucas Jackson/File Photo

Crossing the 30 percent threshold means that the U.S. cable company must offer to buy out other investors at the formal offer price of 17.28 pounds per share, valuing Sky at around 30.6 billion pounds ($40.2 billion).

That knockout Comcast bid beat a 15.67 pound offer from Rupert Murdoch’s Twenty-First Century Fox (FOXA.O) in a rare auction held over the weekend.

Shares in Comcast, owner of Universal Pictures and NBC network, fell on Monday on concerns about how much the company had paid to clinch the deal.

Fox holds a 39 percent stake in Sky, stemming from Murdoch’s role in its creation nearly three decades ago, which it is selling to Walt Disney (DIS.N) as part of a separate deal.

Neither Fox nor Disney have said what they intend to do with the stake.

Comcast’s winning bid quickly received the backing of Sky independent directors on Saturday. They said Comcast’s offer was “materially superior” to Fox’s, and they urged shareholders to accept it immediately.

Comcast said it was seeking to make further market purchases of Sky shares at a price of 17.28 per share.

Sky’s shares were trading at 17.27 pounds in early deals on Tuesday.

Comcast needs 50 percent of the stock plus one share to complete its takeover. It is hoping to wrap up the deal by the end of next month.

Reporting by Paul Sandle; Editing by Louise Heavens/Keith Weir

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Singapore fines Grab and Uber, imposes measures to open up market

SINGAPORE (Reuters) – Singapore slapped ride-hailing firms Grab and Uber with fines and finalised restrictions to open up the market to competitors after concluding that their merger in March has driven up prices.

FILE PHOTO: A view of Uber and Grab offices in Singapore March 26, 2018. REUTERS/Edgar Su/File Photo

Uber Technologies Inc [UBER.UL] sold its Southeast Asian business to bigger regional rival Grab in March in exchange for a 27.5 percent stake in the Singapore-based firm.

While the combined S$13 million ($9.5 million) fine was small compared with the firms’ multi-billion dollar valuations, that and the other measures imposed by the Competition and Consumer Commission of Singapore on Monday represent the strongest censure by a regulator since the deal was unveiled.

The anti-trust watchdog said it would require that Grab drivers not be tied to Grab exclusively and that Grab’s exclusivity arrangements with any taxi fleets be removed.

Uber will also be required to sell its car rental business to any rival that makes a reasonable offer and will not be allowed to sell those vehicles to Grab without the watchdog’s permission. The car rental business, Lion City, had a fleet of some 14,000 vehicles as of December.

Fining Uber S$6.6 million and Grab S$6.4 million, the regulator said effective fares on Grab rose 10 to 15 percent after the deal, and that the firm now holds a Singapore market share of around 80 percent.

Uber said it believed the decision was based on an “inappropriately narrow definition of the market” and would consider appealing.

Grab said it completed the deal within its legal rights, and did not intentionally or negligently breach competition laws. It would abide by remedies set out by the regulator, it added.

Indonesia’s Go-Jek, which plans to launch services in Singapore, said it welcomed the regulator’s steps.

“We’re encouraged to see the measures being taken to level the playing field – it will have a significant effect on our strategy and timeline,” the company said.

Other new entrants to the market include Singapore-based Ryde.

Grab said it had not raised fares since the deal and argued that all transport firms, including taxi operators, should be subjected to non-exclusivity curbs.

Walter Theseira, an economics professor at the Singapore University of Social Sciences, said the regulator measured effective fares in terms of the average price consumers pay after accounting for subsidies and discounts, while Grab defines it as posted fares before any discounts.

Grab has also been told to maintain its pre-merger pricing algorithm and driver commission rates, which the regulator said would protects riders against excessive price surges, and drivers against increases in commissions that they pay to Grab.

The watchdog said it would suspend the measures on an interim basis if a Grab rival was able to garner over 30 percent of total rides in the ride-hailing services market in a month.

It would remove the measures if a rival attained 30 percent or more of total rides matched in the market for six consecutive months.

Rival services include third-party apps for calling cabs and private vehicles as well as taxi-booking services such as those provided by taxi operator ComfortDelGro Corp Ltd (CMDG.SI).

Uber and Grab have a month to appeal the Singapore regulator’s decision.

The deal remains under anti-trust review in Vietnam, which has warned that it could be blocked if the firms’ combined market share in Vietnam exceeds 50 percent.

Jerry Lim, Grab’s country head in Vietnam, said he believed the local regulator will consider the market’s unique competitive dynamics and regulatory landscape in its investigation.

In the Philippines, where the deal has been approved, the competition watchdog has said it is monitoring Grab’s compliance with conditions intended to improve the quality of service, with any breaches possibly resulting in fines.

Reporting by Aradhana Aravindan; Additional reporting by Mai Nguyen in Hanoi; Editing by Christopher Cushing and Edwina Gibbs

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In Nigeria, Shell’s onshore roots still run deep

BODO, Nigeria (Reuters) – Royal Dutch Shell wants to reweight its footprint in Nigeria to focus on oil and gas fields far offshore, away from the theft, spills, corruption and unrest that have plagued the West African country’s onshore industry for decades.

An overview of the Niger delta where signs of oil spills can be seen in the water in Port Harcourt, Nigeria August 1, 2018. Picture taken August 1, 2018. REUTERS/Ron Bousso

Graphic: Oil spills at Shell’s Nigeria operations – tmsnrt.rs/2KzACfH

But for the company that pioneered Nigeria’s oil industry in the 1950s, the Niger Delta remains as important — and problematic — as ever.

While Shell has cut onshore oil production and sold some onshore assets, it continues to invest in others. In fact, onshore production has risen in recent years as a share of Shell’s output in Nigeria, an analysis of company data over the past decade shows.

Graphic: Shell Nigeria production – tmsnrt.rs/2OB5wa0

Much of the increase comes from less polluting gas, used mainly in power generation, which Shell thinks will be key to the transition to lower carbon energy. Gas made up 70 percent of onshore production in 2017, up from 47 percent in 2008.

Graphic: Nigeria onshore production – tmsnrt.rs/2CLPxEU

The company still controls thousands of kilometers of pipelines connecting inland fields to coastal terminals through its subsidiary, Shell Petroleum Development Co of Nigeria (SPDC), however.

So while SPDC has cut oil production in the Delta by 70 percent since 2011, when it first started reporting data on spills, the incidence of spills and theft from pipelines has fallen at a much lower rate and has picked up again recently, the data shows.

Shell’s Nigeria Country Chair Osagie Okunbor hinted it was a sensitive balancing act.

“We are too big just to see ourselves as ‘there is a problem and we have to run’. That is not what we are thinking of doing,” he told reporters on a media trip to the country in July. “But at the same time we don’t want to spread our footprint.”

Two pipeline spills in 2008 in the small community of Bodo in Ogoniland are emblematic of the problems in the Delta, a vast maze of creeks and mangrove swamps criss-crossed by pipelines and blighted by poverty and oil-fueled violence.

On a speedboat trip to the site of a clean-up operation launched by Shell last year, a makeshift oil refinery stood idle on a charred landing. The ground was soaked with oil, the air heavy with petrol fumes and slicks glistened in the water nearby. There were few signs of birds or fish.

So far this year, 85 crude spills have been recorded, already higher than the previous two years. In 2016, militant attacks pushed the volume of spills to more than 30,000 barrels, a high since 2011.

Oil theft from SPDC rose to around 9,000 barrels per day (bpd) in 2017 – a loss of nearly $180 million for the year – from 6,000 bpd the year before.

Despite all the problems and costs, however, Nigerian onshore operations generate billions of dollars annually.

Shell does not break down profits by country, but a report on payments to governments that the company publishes annually showed it paid around $1.1 billion in royalties, taxes and fees to the Nigerian government in 2017.

That means Shell earned more than $4 billion from oil and gas production in Nigeria in 2017 – around 7 percent of its total global output.

A Shell spokesman declined to comment on the specifics of Reuters’ data analysis.

The Nigerian Petroleum Ministry declined to comment.

Shell has shown it can shut down if it is not making money. It stopped producing oil completely in Iraq last year after half a century in the country, although it retains substantial gas operations.

A Shell contractor photographer takes pictures of the Trans-Niger pipeline in the Niger delta in order to monitor oil theft and illegal refining, in Port Harcourt, Nigeria August 1, 2018. Picture taken August 1, 2018. To match Insight NIGERIA-SECURITY REUTERS/Ron Bousso

“It’s hard to think Shell would stay put onshore and weather all the problems if the assets didn’t offer decent returns,” said Aaron Sayne, a financial crime lawyer working at the Natural Resource Governance Institute (NRGI). “To some extent, the onshore must still be worth the trouble.”

THEFT AND SPILLS

Shell remains central to Nigeria’s economy and society. SPDC – operated by Shell with a 30 percent stake while the Nigerian National Petroleum Co has 55 percent, France’s Total has 10 percent and Italy’s Eni has 5 percent – is the country’s largest oil joint venture, employing thousands.

The Anglo-Dutch giant’s operations drew unwelcome attention in the early 1990s when residents of the Delta’s Ogoni region called for fairer distribution of oil wealth and compensation for spills. The government cracked down and in 1995 executed nine protest leaders, including prominent writer Ken Saro-Wiwa, prompting Shell to end production in the area forever.

It retained control of the Trans-Niger Pipeline, however, and nearly a quarter of a century later, little seems to have changed on the ground.

In 2015 Shell accepted responsibility for operational faults that caused the 2008 spills that dumped tens of thousands of oil barrels into creeks around Bodo, and paid a settlement of 55 million pounds to villagers.

Dozens of spills since, including one by a barge carrying stolen oil that sunk in July, are frustrating remediation efforts, clean-up officials said.

“You clean it up, you walk away, somebody goes back there and does the same thing. It’s like going around in circles,” said Ogonnaya Iroakasi, Ogoni restoration project supervisor and an SPDC member.

Around 80 percent of the spills are a result of sabotage, Shell data shows.

Shell has taken a number of steps to improve the situation in the area, including training youth to start up businesses and funding local community patrols, campaigns to raise local awareness and even a local radio station.

But critics say it is not enough.

Slideshow (8 Images)

“I am not minimizing the challenge of re-pollution but Shell are not doing enough to solve it,” said Daniel Leader, the Bodo community’s lead UK lawyer. “The pipelines are not equipped with the most basic leak detection technology and Shell is simply not present on the ground in these communities.”

Local residents are frustrated as the slow process stops many from fishing, one of the main sources of income. Much of the anger is focused on Shell but Eni has also struggled to cope in recent years. Since starting to report data to authorities in 2014, the Italian company has recorded more spills than Shell, according to Amnesty International.

“Please, don’t give up on us … I hope that you guys here can force Shell to do the right thing,” Michael Porobunu, chairman of Gokana council of chiefs, told the clean-up crew and reporters on his porch.

OFF THE COAST

SPDC has sold 10 of the 27 field licenses in the Delta it held in 2010, mostly to local companies. It has applied to renew the remaining licenses, which expire next year.

The divestments are a reminder of another cost of doing business in Nigeria – corruption. Shell has filed a criminal complaint against a former senior employee over suspected bribes in the $390 million sale of oil mining license 42 to local firm Neconde in 2011.

Offshore operations are an attractive alternative to the Delta in many ways. The Bonga field 120 km (75 miles) off the coast is one of Shell’s prized assets since starting up in 2005.

The giant tanker, with a drilling platform that pumps 225,000 barrels of oil and 210 million cubic feet of gas per day from a field one km below, won the company’s “asset of the year award” in 2016 for its safety and reliability.

Many risks remain. In 2016, the Trans-Forcados pipeline was shut down for months after militants detonated a bomb at its sub-sea section. Shell and Eni face bribery allegations in a Milan court over the 2011 purchase of an offshore license. Drilling offshore is also more expensive and technically complex.

Shell and its partners will decide next year on whether to develop a new offshore field, Bonga Southwest.

“Such an investment will reopen the window for the next wave of investment in deep water Nigeria,” Bayo Ojulari, managing director of Shell Nigeria Exploration and Production Company, said in Lagos.

Additional reporting by Alexis Akwagyiram and Didi Akinyelure in Lagos, Julia Payne in London; Editing by Sonya Hepinstall

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White House optimistic on China trade; no date for more talks

WASHINGTON (Reuters) – The United States is optimistic about finding a way forward in its trade dispute with China, but it does not have a date scheduled for further talks as it assesses Beijing’s response to the latest round of tariffs, a senior White House official said on Friday.

FILE PHOTO: A worker places U.S. and China flags near the Forbidden City ahead of a visit by U.S. President Donald Trump to Beijing, in Beijing, China November 8, 2017. REUTERS/Damir Sagolj

The official said despite its protestations, China was well aware of U.S. demands it halt what Washington considers unfair trade practices. U.S. President Donald Trump has made clear his resolve on the issue, the official said, and the two sides remain in touch.

“We have been very clear in all of these meetings about what is … required,” the official said. “I am still optimistic that there is a positive way forward, and the president wants us to continue to engage to try to achieve a positive way forward.”

The official’s comments came ahead of a report by the Wall Street Journal that China had canceled mid-level trade talks with the United States, as well as a proposed visit to Washington by vice premier Liu He originally scheduled for next week.

Earlier this week, China added $60 billion of U.S. products to its import tariff list as it hit back at U.S. duties on $200 billion of Chinese goods that go into effect from Sept. 24. The escalating trade dispute has spooked financial markets.

FILE PHOTO: Shipping containers are seen at a port in Shanghai, China July 10, 2018. REUTERS/Aly Song/File Photo

Speaking to reporters at the White House on condition of anonymity, the official made clear the administration’s ultimate goal was not to separate the interlinked U.S. and Chinese economies, but he said companies could choose to alter their supply chains if Beijing did not change course.

“Our goal here is not to cleave off the Chinese market from the U.S. market, I don’t think that’s good for long-term growth,” he said. “In the short term there is of course a risk that if China continues on the path it is, that some companies as a result of this may start … to move supply chains.”

The official also said he hoped Canada would agree to join a U.S.-Mexico trade deal by the end of the month, while saying he thought U.S. lawmakers would support a bilateral deal with Mexico if that did not happen.

U.S. and Canadian officials have been engaged in talks to modernize the North American Free Trade Agreement, a 1994 deal that underpins $1.2 trillion in trade between the United States, Canada and Mexico.

The official dismissed concerns separate deals with Canada and Mexico would have a negative impact on supply chains.

“I think it’s overblown to say that if we have separate deals with these two, that there still can’t be a really high degree of integration,” he said.

Additional reporting by David Stanway in Shanghai; Editing by Paul Simao and Nick Macfie

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Caterpillar leans on old playbook to cope with Trump tariffs

CLAYTON, N.C. (Reuters) – Six months into the U.S. tariffs on imported aluminum and steel, Caterpillar Inc (CAT.N) is finding that one of the best ways it can protect profits is a cost cutting strategy that is more than two years old.

At this sprawling factory in central North Carolina where it makes small front-end loaders, the company laid off workers in 2016 in response to plunging sales, consolidating two shifts into one under a program it calls the Operation & Execution Model.

Even though demand has picked up since then, its Clayton plant still runs a single shift and operates only four days a week. One third of the facility’s 550 employees are on flexible contracts.

The result: CAT is producing more loaders here with 30 percent fewer people on the factory floor than in the past, the company told Reuters.

It has redesigned all new machines it makes with over 20 percent fewer parts, cutting back on the consumption of steel which brings down the cost, Tony Fassino, vice president at Caterpillar’s building construction products, said after a factory tour in Clayton.

“Fewer parts numbers are a huge win,” Fassino told Reuters. “It improves safety, it improves the quality, it improves the cost.”

Now, these cost cutting approaches are helping counter the financial impact of U.S. President Donald Trump’s trade wars.

The heavy-duty equipment maker estimates the import tariffs will inflate its raw materials costs by up to $200 million between July and December, though it does not provide a forecast for manufacturing costs in 2018. Caterpillar has said it would offset the impact through a price increase that went into effect on July 1 and general cost cutting measures, helping it post a record profit for all of 2018.

Caterpillar’s increasing emphasis on operating efficiency has proven timely, helping to bring down the cost of production at a time when material expenses are mounting on Trump’s import curbs, and capacity constraints are driving up freight costs.

(For graphic click tmsnrt.rs/2NG2DrF)

An internal calculation provided to Reuters, previously unreported, shows that the measures have accounted for half of the improvements in the profit margins since 2015 at the company’s construction industries division. Since January 2017, the efficiency model has been rolled out across the company, but CAT would not disclose more details.

CAT, Deere & Co (DE.N) and Harley-Davidson Inc (HOG.N) are among the many manufacturers trying to keep a lid on expenses to cope with a 30 percent rise in U.S. steel prices since the start of 2018.

Those rising costs, along with a tit-for-tat tariff war with China, have clouded the earnings outlook for industrial companies, dragging down their shares.

Despite a recent rally this month, Caterpillar shares are down about 9 percent from their late-January levels, compared with a 0.4 percent decline in S&P 500 industrials index .SPLRCI, showing investors have yet to fully reward the company for its industry-best efficiency results when it comes to operating margins and return on net operating assets.

(For graphic click tmsnrt.rs/2CN5P0g)

Slideshow (3 Images)

Steve Volkmann, a machinery analyst at Jefferies, attributes the stock’s underperformance to concerns that the company’s greater exposure to foreign markets and a sizeable presence in China make it more vulnerable to escalating trade wars.

“It is disappointing that they can’t get paid for good quarters these days,” he said, referring to the company’s strong earnings in the last quarter.

While overseas markets do account for more than half of Caterpillar’s sales, the company has an evenly spread manufacturing footprint across the globe, which Volkmann and other analysts say make it better placed to deal with the tariffs.

The company has also tried to put at rest worries about its operations in China, saying the trade tensions have not impacted its business there.

COST CONTROL

As part of its cost cutting effort, CAT business heads have been mandated to reduce the overall manufacturing cost of every new product by at least 5 percent, one Caterpillar company executive told Reuters. This entails cost cuts by suppliers as well.

Donaldson Company Inc (DCI.N) – which makes filters for CAT’s machines – told Reuters that it tries lower the cost of production every year through material substitution or automation or efficiency gains. Cuts in travel and entertainment budgets helped the company improve operating income by 40 basis points in the latest quarter.

CAT’s Operation and Execution effort affects both production strategy decisions and small details of every operation.

For example, it does not make smaller front-wheel loaders in the United States even though their sales in North America are growing. Instead, semi-finished machines are shipped in from overseas factories to the Clayton facility, where tires and buckets are installed, Fassino said.

This not only allows better utilization of the company’s factories, but also provides flexibility to tailor the machines to the requirements of local customers.

Similarly, CAT has been managing freight contracts for deliveries across North America since 2016. Apart from improving the predictability of deliveries, and reducing insurance and damage claims, the contracts are letting Caterpillar leverage its scale and volume to moderate transportation costs in its supply chain.

OPERATIONAL EFFICIENCY

At the Clayton plant, the company’s focus on lean manufacturing, efficiency and flexible cost is on full display.

Parts are put in a sequential order in stand-up bag carts next to the assembly line so that assemblers do not have to spend time looking for them.

Suppliers have been instructed to pack the parts in the same way. In case the parts do not arrive in the required order, workers in the factory warehouse are required to unpack and rearrange the parts before they reach the factory floor.

Automation is increasingly being used to test machines. Components and parts are moved on tugger trains instead of by fork lifts to save time and cost.

“Save one minute here and save five minutes there. Add all that up, you have two shifts to one shift,” said Caterpillar’s Fassino.

Reporting by Rajesh Kumar Singh; editing by Joe White and Edward Tobin

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