Will cash-rich CAT bankroll cash-poor suppliers?

CHICAGO Tue Oct 20, 2009 3:32pm EDT

CHICAGO (Reuters) - Top executives at Caterpillar Inc (CAT.N), the world's largest maker of earth-moving equipment, acknowledged on Tuesday that a rebound in demand for the company's products could whipsaw suppliers still smarting from this year's sharp production cuts.

"As fast as we went down, it's not inconceivable that we could head up just as fast," said Dave Burritt, the company's chief finance officer.

"That would mean a lot more pressure on our a supply base ... We're going to have suppliers who will struggle to ramp back up."

But in an interview with Reuters, Burritt and Mike DeWalt, its top investor relations official, downplayed the idea that the cash-rich company would use its balance sheet to help its vast network of vendors swing back into action.

Caterpillar had about $4 billion in cash on its balance sheet at the end of the third quarter, $3 billion more than normal -- an emergency pool of liquidity the company set aside in the wake of last year's unprecedented credit crunch.

During a conference call on Tuesday to discuss Caterpillar's latest earnings, Jim Owens, the company's chairman and chief executive, said his treasury and global purchasing teams were working with its suppliers "to know which ones are in trouble, to do everything we can to help them." In an emergency involving a critical supplier, Owens said, "We might do some things to help."

Ed Rapp, one of the company's six group presidents, then said that the Peoria, Illinois-based company was considering the possibility of a supplier finance program as part of its payables structure.

But in the interview with Reuters, Burritt and DeWalt downplayed the notion that Caterpillar would go into business as a lender of last resort for its many suppliers, opening a window and inviting them to use its cash as working capital.

"It's not that we built a warchest to fund suppliers," DeWalt said. "And we don't want to really have to do that. But we're just trying to figure out what all the options are."

The past year has been a tough one for Caterpillar and its suppliers as sales fell at their steepest rate since the Great Depression.

Just three months ago, Caterpillar said it might report a third-quarter loss because of production cuts and falling sales.

Instead, it reported a profit on Tuesday and raised its full-year forecast, hailing what it said were growing signs of a global economic rebound.

It also predicted that sales next year would rise somewhere between 10 percent and 25 percent, a rebound that could catch some suppliers flat-footed.

In the past, suppliers were often initially insulated from the effects of industrial cycles because their big customers were slow to cut production in the belief that the downturn would be brief or because slow internal processes made quicker cuts impossible.

But the industry's move from mass production to a build-to-order paradigm, and the sourcing of many parts that once were produced in-house to outside suppliers, have changed all that.

Analysts say the speed with which major manufacturers like Caterpillar cut output in this recession put unprecedented strain on thousands of small manufacturers that supply the industry with critical parts.

It has left the supply chain with an unknown number of suppliers who are so undercapitalized and overleveraged they will never raise the money they need to get their idle plants running again.

"We're in the process right now," DeWalt said, "if this thing takes off, what does it mean for suppliers? Who can react? Who can't react? And we're basically going through that major supplier by major supplier."

(Reporting by James B. Kelleher, editing by Leslie Gevirtz)