| CHICAGO, July 24
CHICAGO, July 24 Few U.S. companies have had a
harder time in recent months defending their enthusiasm for
China than Caterpillar Inc.
In January, executives acknowledged that accounting
misconduct at a Chinese subsidiary would wipe out nearly half of
Caterpillar's expected earnings in the fourth quarter of 2012.
Last week, its China exposure was criticized by a top
short-seller who warned China's economic growth was essentially
a state-sponsored bubble that was about to burst.
But on Wednesday, executives at the Peoria, Illinois-based
maker of earth-moving equipment were unapologetic, not only
defending the long-term wisdom of their China strategy but
highlighting how the country had been a bright spot in an
otherwise disappointing quarter.
"I am not one in the camp of a China implosion - that China
will implode and drag the world down into a massive black hole,"
Caterpillar Chairman and Chief Executive Officer Doug
Oberhelman told analysts during a call to discuss the company's
earnings miss in the latest quarter.
In an earlier appearance on CNBC, he was even more blunt:
"We think China has bottomed" - referring to the moderation in
that country's GDP, which grew at 7.5 percent rate in the second
quarter, according to the country's National Bureau of
Statistics, down from 7.7 percent in the first quarter and 7.9
percent in the last three months of 2012.
Not so long ago, Caterpillar's big exposure to China was
welcomed by Wall Street, not questioned. Sales in that country,
which remained largely unscathed during the recession that
walloped the developed world, helped Caterpillar's sales snap
back in 2010, 2011 and 2012 - even as many other companies
continued to struggle with sluggish demand in the United States
And on Wednesday, even as Caterpillar was cutting its
full-year forecast, it was talking up China again. Sales in the
country, excluding acquisitions, were up 20 percent year-on-year
in the second quarter, Caterpillar said, driven by demand for
construction equipment and power system products.
Caterpillar said the gains came even as overall industry
sales were down, meaning its market share is growing
"We're quite happy with that," Oberhelman said.
Not everyone thinks Caterpillar investors should be happy -
or that the Chinese slowdown is over. In recent weeks, signs of
a continued strain in the world's second-largest economy have
prompted some investors, including short-seller Jim Chanos, who
argues China's economic miracle is a mirage, to predict that
companies with strong China ties are facing major risks.
Caterpillar, which has benefited from the Chinese domestic
construction boom as well as the global mining boom tied to
China's demand for industrial commodities, is at the top of
Chanos' list of such companies.
Chanos, who is perhaps best known for shorting energy giant
Enron Corp before its collapse, says he believes that as China
falters, it will curb the demand for raw materials that has
driven demand for Caterpillar's earthmoving equipment. Last
week, Chanos announced he was betting against Caterpillar
because the company was "tied to the wrong products at the wrong
part of the cycle" - a reference to the big investment
Caterpillar has made in mining equipment in recent years.
On Wednesday, Oberhelman acknowledged - not for the first
time - that the mining industry is in a slump and that this
downturn is hurting Caterpillar's business. That was a major
reason Caterpillar's profit dropped 43.5 percent in the second
quarter and the company cut its outlook for the year in
Wednesday's results announcement, sending its shares down more
than 2 percent.
"Having been in this business 38 years and lived though
cycle after cycle around the world, we're definitely in a cycle
in mining," Oberhelman told CNBC. "There's no question there's a
slowdown. But long term mining is a great place to be."
The slowdown was illustrated by figures on Wednesday showing
that activity in China's vast manufacturing sector slowed to an
11-month low in July.
In the conference call with analysts, Oberhelman embraced
both areas that Chanos says make the company vulnerable: "Long
term, China and mining, are appealing to us," Oberhelman said.
Caterpillar Controller Mike DeWalt pointed out that the
country is continuing to grow despite the doomsayers and that,
even at a reduced clip, that growth is impressive.
"We do not expect the significant economic growth rates that
China experienced over the past 10 years will continue
indefinitely," DeWalt said. "But we do believe that China will
continue to grow at a much faster pace than the rest of the
He added that because China has grown so much over the past
decade, economic growth rates of 7 to 7.5 percent have a greater
impact today than a 10 percent growth rate would have had 10
"It's a big economy that, relative to the world in total, is
Alex Blanton, a senior analyst at Clear Harbor Asset
Management in New York, says China's stated policy of
accelerated urbanization - the government plans to move more
than 20 million people a year from the farm to the cities in the
coming decade - will drive growth. China will continue to
require massive investments in infrastructure and other kinds of
construction that will drive demand for the heavy machinery and
other goods made by U.S. industrial companies like Caterpillar,
"China's been slowing down for a couple of years now,"
Blanton said. "But it's still growing at more than a 7 percent
rate - more than double what we're seeing in this country."