* Company expands quickly to meet demand
* Dealers, buyers cite shortages of machines
* Risks from fragile recovery, Asian competition
By John D. Stoll
VICTORIA, Texas, April 9 It hasn't been long
since Caterpillar Inc 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
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."
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.
"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
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 and Japan's Komatsu
, 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
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, General Motors
Co, Chrysler 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
"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.