Caterpillar has been having a topsy-turvy time in the markets this year. The equipment giant has gone from having a buoyant stock in 2014 that suggested the worst effects of the economic slowdown were behind it to a quite severe situation in the wake of the slowdown in China and the mining sector at large — both of which have hit Caterpillar’s business hard.
The company’s position is only made more exposed by its presence on the Dow Jones Industrial Average and its presence on the Forbes Global 500 — exposing it to greater than average scrutiny in both the public sphere and markets.
Crucially, Caterpillar recently announced that it is planning to cut a total of 4,000 to 5,000 jobs in 2015 and up to 10,000 jobs heading through to 2018 — equating to more than 8% of its 126,800 employees globally. This on top of the 31,000 jobs the manufacturer has already trimmed since the middle of 2012, according to the Press Association.
The revelations predictably rippled through the markets, affronting the collective psyche of the US enough to provoke a mid-campaign mention from Republican presidential candidate Donald Trump, who noted on MSNBC’s morning programme: “People are buying Komatsu tractors instead of Caterpillar tractors. I’m telling you, we’re in trouble.”
Indeed, Caterpillar has been on a predominantly downward cycle all year, and the value of its stock is currently down by more than 25% on its 52-week high and at its lowest point in over five years. To press the message home: the last time the stock price was this low was June 2010, which was before the company’s value had fully recovered from the 2008 property crash and economic recession.
Caterpillar’s inventory days, or how long it holds onto machinery before being able to sell it, are also at their highest level since 2013, when the ratio reached a 15-year high — and when the manufacturer’s share price double-dipped over fears that global equipment markets were over-saturated.
In 2015, the company’s revenue outlook has already weakened, with sales now expected to settle at $48bn — $1bn lower than the previous outlook of roughly $49bn. Meanwhile, looking forward, the turnover in 2016 is expected to be about 5% lower again than that of 2015.
As 2015 is already the company’s third consecutive year of decline for sales and revenue, a low performing 2016 would mark the first time in Caterpillar’s 90-year history that sales and revenues have decreased four years in a row.
Fighting back
Sympathetic analysts have pointed to the limited range of action open to Caterpillar given that the source of its distress is the ailing markets themselves. A manufacturer as large a Caterpillar can hardly avoid market slumps by sleight of hand or shifting of resources. It instead remains constantly and perilously exposed to the market’s whims and fortunes.
However, at the same time the manufacturing giant is neither slumbering nor standing idle. On the contrary, Caterpillar is restructuring like never before — and nowhere is this more prevalent than in its mining division, which has been hit by both the slowdown in metals extraction and China’s slump.
Cat’s mining side is being heavily reorganised, with its sales and support divisions for mining, surface extraction and underground operations being merged into the Global Mining, Surface Mining & Technology, and Material Handling & Underground business divisions, respectively — bringing production, sales and support together in each arena.
Rob Charter, Caterpillar group president with for dealer and customer support, noted: “These organisational changes will drive needed simplicity, enabling us to meet customer and dealer needs by becoming more nimble, lean and responsive and increase accountability at the divisional level.”
Caterpillar’s actions should lower operating costs by about $1.5bn annually once fully implemented. Just under half of this cost reduction is expected to come from lower ‘sales, general and administrative costs’, and will largely be in place and effective by the end of 2016.
And the shuffling doesn’t stop there: in what is arguably an attempt to avoid the possibility of additional job cuts at its Texan manufactory, Caterpillar has ended its 2011 deal outsourcing its dump truck fabrication to Navistar.
From 2016, the group will fabricate trucks in Japan and assemble them in North America at its plant in Victoria — creating work for the facility at a time of falling demand for the construction excavators it was built to produce.
The decision hits two birds with one stone, as the Navistar-built, Caterpillar brand trucks have struggled in the market, averaging sales of about 1,000 units annually for the past three years. It has been suggested that by handling the fabrication itself, Cat stands a better chance of capitalising on the value its brand.
The remaining savings are expected to come from lower manufacturing costs that could impact more than 20 facilities and 74ha (eight million square foot) or “slightly more than 10% of our manufacturing square footage”, read a statement — with the implementation scheduled from 2016 through to 2018.
Doug Oberhelman, Cat chairman and CEO, stated: “We are facing a convergence of challenging marketplace conditions in key regions and industry sectors, namely in mining and energy. Several of the key industries we serve — including mining, oil and gas, construction and rail — have a long history of substantial cyclicality. While they are the right businesses to be in for the long term, we have to manage through what can be considerable and sometimes prolonged downturns.
“While we’ve already made substantial adjustments as these market conditions have emerged, we are taking even more decisive actions now. We don’t make these decisions lightly — we have a talented and dedicated workforce, and we know this will be hard for our employees, their families and the communities where we’re located — but these additional steps will position Caterpillar to deliver solid results when demand improves.”
Notably, while the company is suffering from the broad depression of certain key markets, its market share has still improved in products across much of the company.
Sustaining investment
Beyond the cuts, it is testament to Caterpillar’s long-sighted strategy that even at a time of significant reductions in spending it continues to target “data analytics, digital and innovation capabilities” with fresh investment.
Earlier this year, Cat entered into a strategic alliance with Modustri, a developer of an ultrasonic system and mobile data delivery system to facilitate wear inspections in the field.
Already a pioneer in the data field through its long-time tie up with Trimble in the provision of its Product Link system, Caterpillar believes that Modustri’s technology — which cuts machine inspection times in half — could save its customers “hundreds of hours and millions of dollars” managing part replacements.
“Our parts monitoring tool has been a leader in the equipment management industry for 75 years, but we’re always looking for ways to step up our game,” said Doug Hoerr, Cat VP for the components and remanufacturing division.
In the Middle East region, Caterpillar has poured $7m into a regional training centre — currently under construction — and will be running its first two courses from December 2015. It will officially open in April 2016, and host between 50 and 60 courses over the year.
The facility builds on the existing parts centre established at the Jebel Ali site in March 2013 to expedite the provision of parts to the whole Middle East and Africa region.
Cat is also energetically delivering fresh products to the market, including the D8R bulldozer and G300 GC Series trio of demolition and sorting grapples — both of which it launched in March; the Cat 14L motor grader, 950 GC wheel loader and 340D2 excavator — launched by Oasis Trading and Equipment, the OEM’s dealer in Muscat, in July; and, the F2-Series of backhoes — launched in August.
So, Cat rebounded from the 2008 recession thanks to a boom in global mining and infrastructure expansion in China, while its recent cost cutting after its revenue peak of $65bn expose it as a shrewd, if brutal, fiscal operator.
With the dip in oil prices and ominous IMF rumblings over Saudi Arabia, it will therefore be interesting to see whether the recent investment and trust in the Middle East’s market is a similarly sagacious move.
Cat in Malaga
Demand for skilled operators in the Middle East is high and can present a challenge to contractors, particularly where there are tight project schedules and operational productivity is especially important.
However, fully-trained operators burn less fuel while using the machine, know how to make use of all the features to drive efficiency, and avoid unnecessary wear and tear.
The Caterpillar Demonstration and Learning Centre in Malaga, Spain, which opened in 1971 and covers an area of 106ha, supports Cat dealers and customers across the Eurasian and African continents.
The site offers different soils and five kilometres of haul roads, with various grades for simulated work conditions to support product training in the right type of applications.
The inventory includes the latest models of heavy equipment, while Cat simulators familiarise operators with the machine controls in a safe and economical way, enhancing the traditional training. Experienced operators also benefit from simulator training by refining their skills to increase their productivity.
Three different levels of training are offered on heavy equipment from basic operating procedures to professional operator certification for more experienced operators.
Caterpillar‘s regional training centre in Dubai, opening this year, will supplement Malaga by offering technical training on the machines and power systems, as well as sales training, to Cat dealers and customers in the Middle East and Africa.
The centre will also feature a lab for ‘scheduled oil sampling’ (SOS) to expedite the analysis of oil samples from Cat equipment in the region to reduce downtime. It is located at the site of Cat’s Middle East parts distribution centre and regional marketing office in Jebel Ali, Dubai.
