UPDATE 3-Caterpillar unit to build rail locomotives in US

Fri Oct 29, 2010 5:39pm EDT

* Indiana facility will make diesel-electric locomotives

* Company currently assembles locomotives only in Canada

* Move could challenge GE's lock on US commuter rail

(Adds background on other Caterpillar investments, layoffs and hiring)

By James B. Kelleher

CHICAGO, Oct 29 (Reuters) - Caterpillar Inc (CAT.N) said it will begin building diesel-electric locomotives in the United States in 2012, a move sure to ratchet up its rivalry with industry leader General Electric Co (GE.N).

Caterpillar's Progress Rail unit said it will manufacture the locomotives in Muncie, Indiana at a massive plant that has been vacant since 1998. The facility will ultimately employ as many as 650 workers when it opens in 2012, the company said.

Progress Rail will invest about $50 million to update the 740,000 square-foot (68,748 square meter) facility and to build a test track on the 75-acre (30-hectare) site.

The plant was last operated by a U.S. unit of the Swiss engineering group ABB (ABBN.VX).

Until recently, Progress Rail, which Caterpillar bought in 2006, was focused strictly on repairing and remanufacturing rail equipment made by others, including GE.

That changed this summer when Caterpillar bought Electro-Motive Diesel, a locomotive manufacturer spun out of General Motors, for $820 million from Berkshire Partners LLC and Greenbriar Equity Group LLC and made it a subsidiary of Progress Rail.

EMD's headquarters, engineering facilities and parts-manufacturing operations are located in LaGrange, Illinois, just west of Chicago. But final assembly of the passenger, freight and road-switching locomotives EMD makes is performed at a plant in London, Ontario.

Assembly in Canada has effectively stopped EMD from selling its locomotives to many regional commuter rail lines in the United States, because the lines often require that the equipment they buy be assembled in the United States.

As a result, the business has gone to GE, one of the world's largest makers of locomotives, which has a locomotive plant in Erie, Pennsylvania.

In a statement announcing the plan, Indiana Governor Mitch Daniels said the facility would position EMD to participate in future transit rail projects.

Over the past four years, Caterpillar, which is also a big maker of diesel engines and gas turbines, has spent about $2 billion in the rail sector, half of it acquiring Progress Rail.

This was an industry that was viewed as important but dull until last year, when Warren Buffett's Berkshire Hathaway Inc (BRKa.N) (BRKb.N) bought Burlington Northern Santa Fe Corp for $26 billion.

It was Buffett's biggest acquisition in the 44 years he has run Berkshire, and one he characterized as "an all-in wager on the economic future of the United States."

Locomotives have been an underperforming business for GE lately. Profit at the unit slid 62 percent to $242 million in the first nine months of the year, as revenue dropped 27 percent to $2.34 billion.

Caterpillar's investment in Muncie is the latest in a series of U.S. plant openings and capacity expansions that the Peoria, Illinois-based company has announced this year, including a new hydraulic excavator plant in Texas, a new mining truck component factory in North Carolina and a new engineering and design center in South Dakota.

In addition, Caterpillar has announced capacity expansions at two of its Illinois plants in order to increase production of mining trucks and to bring back a popular mining shovel that it had discontinued.

Caterpillar, which laid off more than 30,000 permanent and contract workers worldwide in 2008 and 2009 as it scrambled to cut production in the face of the worldwide recession. So far this year, Caterpillar has added back 6,200 full-time employees worldwide and another 9,000 part-time, temporary or contract workers. (Reporting by James B. Kelleher; Additional reporting by Scott Malone in Boston; editing by Dave Zimmerman, John Wallace, Ted Kerr and Carol Bishopric)

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