Caterpillar's big bet on the U.S. economy
VICTORIA, Texas (Reuters) - It hasn't been long since Caterpillar Inc (CAT.N) looked like the typical resident of the Rust Belt. Having misjudged how deep the U.S. economy would decline, the world's largest maker of construction machinery reduced its workforce by 33,000 people worldwide in 2009, closed plants and posted lower profits.
But the Peoria, Illinois-based company has mounted a quick recovery and is emerging as the poster child for America's manufacturing renaissance.
In 24 months, 15 Caterpillar facilities have been built or updated in the United States, tens of thousands of workers have been added to the payroll and $2 billion is committed for capital investments on its home soil this year.
"We haven't seen Caterpillar doing this much building in the United States since probably the 1960s," said Peter Holt, owner of the Holt Caterpillar dealership in San Antonio. Caterpillar is building a $200 million plant two hours southeast of his store, in Victoria, Texas, that is slated to start churning out badly needed excavators later this summer.
Underpinning Caterpillar's U.S. momentum is a flood of demand by heavy equipment users in America - ranging from construction companies to oil drillers to cement producers - who are looking to replace aging machines now that the economy is improving and credit is easier to obtain.
But a major U.S. expansion is not without risks for Caterpillar. The U.S. economic recovery could still derail, given high unemployment and weak housing markets. And the growth rate of global machinery sales is also tracking at its slowest pace since May of 2010, although U.S. demand is brisk.
Even Holt, the dealer whose family was influential in founding Caterpillar, has a bad taste in his mouth from previous downturns. "Caterpillar has always tried to forecast," he said. "We've never been any good at it (because) there is no consistency in the world economy."
Graphic-Nearly half Caterpillar's 31 global expansion projects are in the U.S.: link.reuters.com/gas27s
Graphic-Caterpillar's capital spending and employment hit record levels: link.reuters.com/tev27s
WIND AT CAT'S BACK
Caterpillar has money to spend. The company reports first quarter earnings on April 25, with analysts expecting $2 billion of profit on $16 billion in sales, or a 47 percent increase in earnings over the entire course of 2009. Revenue this year is expected to top $71 billion, which would be $20 billion more than the company reaped in 2008.
While the company has expanded quickly in emerging markets and new sectors, including mining and railroads, much of its confidence hinges on its faith in a gradually improving U.S. economy.
"We came out of the recession much stronger and faster than expected," Caterpillar Chief Executive Doug Oberhelman said in a company report in March. "I'm not one for passing up sales, so we really had to ramp up production quickly."
Key to this optimism is Caterpillar's record order backlog of $30 billion, three times higher than it was in 2009. Some customers will not get trucks they have ordered until as late as 2014.
For contractors in south Texas, one of the key drivers of demand is the oil-rich Eagle Ford shale.
"You can't get enough bulldozers and excavators right now," said Barry Peterson, who buys equipment for Bay Ltd, a Corpus Christie, Texas-based construction company. He often is in the market for used equipment with relatively little wear and tear, but machines made in 2009 and 2010 are nearly impossible to find, forcing Bay to rely on the new market.
Caterpillar Chief Financial Officer Ed Rapp said the company's business cycles typically run in six-year increments and the current upswing is still in its early stages.
"This time, we've tried to invest earlier in the economic cycle... you want to take advantage when the wind is at your back," Rapp told Reuters in an interview.
Meeting the needs of buyers like Peterson and the rest of the market is a risky but necessary proposition for Caterpillar. If it does not move quickly to boost production, Caterpillar risks losing market share to a growing group of global competitors that are edging in on its turf.
"There are a lot of them trying to come in," Peterson said of Caterpillar's competitors. He said many of those players, including South Korea's Hyundai (009540.KS) and Japan's Komatsu (6301.T), are effectively undercutting Caterpillar on price, and have better availability and adequate warranties.
"Hyundai has one of the best excavators on the market right now and their price point is 35 percent lower than Caterpillar's. I buy a lot of equipment and that's something I look at very closely."
Holt, the dealer, said that availability of machines is a roadblock Caterpillar needs to clear. "We've had allocation issues," he said, referring particularly to excavators - versatile machines that represent Caterpillar's largest volume product.
Despite the current demand-driven expansion, it is not that long ago that the U.S. manufacturing sector was in painful retrenchment. The U.S. auto industry laid off tens of thousands during the last recession as Ford Motor Co (F.N), General Motors Co (GM.N), Chrysler (FIA.MI) and scores of parts companies shut plants to compensate for overcapacity.
Frank Smith, a 31-year-old production worker at a Caterpillar facility near the company's headquarters who was laid off in early 2009, knows well the pain such moves can cause.
"You go from a lot of overtime and earning quite a bit of extra money to getting an unemployment check," Smith said, adding that he built a house in Metamora, Illinois only two years before the layoff. "We got rid of all the fun stuff; no more renting movies and going to McDonald's all the time."
Smith is back working for the company but with the "looming feeling that we are lucky... right now Caterpillar's going through the roof, exploding with business. But it's good to have an escape route in case it ever slows down again."
For shop owners like Kelly High in Victoria, a slowdown is not in the plan. His High Brehm western wear outfitter store is located about six miles away from the new excavator plant that Caterpillar has been rushing to complete. Every time the new facility adds a worker, Caterpillar gives them a voucher for a pair of work boots that can be bought exclusively at High Brehm.
"We look forward to when they've got 600 employees," High said while standing by racks of cowboy hats and boxes labeled with Stetson and Resistol logos.
High isn't the only Victoria resident rooting for the new employer in town.
Fossati's Delicatessen, a 130-year-old restaurant on Main Street, is often used to host corporate events. Down the street at a local grocery store, significant shelf space has been cleared to make room for a batch of yellow toy bulldozers and dump trucks dressed in CAT logos.
Victoria has typically hosted a boom-and-bust economic cycle due to its reliance on the oil industry. In the 1980s, after watching the crude market collapse, Victoria city planners set out on a mission to diversify the economy.
When Caterpillar came to town looking for land on which to build its plant, city officials offered a 320-acre site developed specifically for a manufacturer. For now, the company is only using half the land for manufacturing activities, but has plenty of room to grow.
(Reporting By John D. Stoll; Editing by Tim Dobbyn)
- Target says data from 40 million cards stolen in holiday period
- UPDATE 3-Saab wins Brazil jet deal after NSA spying sours Boeing bid
- Special Report: Why Ukraine spurned the EU and embraced Russia
- Facebook, Zuckerberg, banks must face IPO lawsuit: judge
- U.S. prosecutor defends treatment of Indian diplomat |