By Bob Tita
Doug Oberhelman spent his first years as Caterpillar Inc.'s
chief executive plowing billions of dollars into factories to build
more of its familiar yellow machines and move the company deeper
into mining equipment.
It was a bold bet, spectacularly mistimed. On Monday, Mr.
Oberhelman announced plans to step down as chief executive by
year's end.
In 2010, when he took charge, the world was gripped by a global
commodities boom, along with strong postrecession demand from
developing markets and the energy industry. The world was ordering
excavators and bulldozers and giant dump trucks at a rapid
clip.
Mr. Oberhelman bet he could grab an outsize share if he could
just make more equipment. He spent almost $10 billion world-wide on
plants and equipment from 2010 through 2013.
Much of that went toward building more of its flagship CAT
construction machinery. It also paid $8.8 billion in 2011 for
Bucyrus International Inc., a Milwaukee mining-equipment maker, to
gain a position in giant open-pit-mining shovels and
underground-mining machines Caterpillar didn't make.
In China, Caterpillar was "going to play offense and we're going
to win, " Mr. Oberhelman proclaimed in 2010. It had missed
opportunities in China before. From 2011 to 2014, Caterpillar
roughly doubled its number of plants and facilities there to
26.
"Everybody was convinced that this time would be different,"
said Ken Banks, who retired in 2013 as manager for Caterpillar's
electric mining shovels. "They thought the Chinese market was so
hot, that commodity prices would continue to be very strong and
Caterpillar would increase sales substantially."
Caterpillar said Monday that Mr. Oberhelman would be succeeded
as chief executive by Jim Umpleby, a company group president and
35-year veteran. Caterpillar chiefs by tradition haven't stayed
beyond age 65, which suggests Mr. Oberhelman is leaving ahead of
schedule. Mr. Oberhelman will remain as executive chairman of
Caterpillar until March 31, when he will retire from the
company.
The year 2012 would prove to be a peak for Caterpillar. Soon
after, miners began shelving equipment-buying plans as commodity
prices fell. China's growth slowed. Then oil prices fell, along
with demand for related equipment.
Caterpillar now faces its fourth straight year of falling sales,
the longest decline in its history. Its stock is up 29% this year
-- the best-performing in the Dow Jones Industrial Average -- but
trades 25% below its 2012 peak.
"Everybody was surprised by the size of the downturn and the
length of it," Mr. Oberhelman, 63 years old, said at a September
mining trade show in Las Vegas. "I firmly believe we couldn't have
forecast that at the time" of the Bucyrus deal. The company
declined to make Mr. Oberhelman available for comment for this
article.
On Monday, the company announced Mr. Oberhelman's retirement,
effective March 31, 2017. He'll be succeeded by Jim Umpleby, a
company group president and 35-year veteran. Caterpillar chiefs by
tradition haven't stayed beyond age 65, which suggests the CEO is
leaving ahead of schedule.
Slumps are common in Caterpillar's world, and rivals are
suffering, too. Caterpillar, though, has long been a flagship
American firm, a reliable blue chip in the Dow industrials and a
major job creator with plants around the world. Now, it has fallen
behind in the slow-growing economy.
Caterpillar has reduced its workforce 20% in the past four
years, about 30,000 jobs, and has said it expected to close or
consolidate as many as 20 plants. In China, Caterpillar said, it
has closed one plant and is operating many others at low production
rates. Caterpillar in August said it would sell off some of the
mining-equipment lines it gained with the Bucyrus acquisition.
Its stock, up 46%from the beginning of Mr. Oberhelman's tenure,
trails the S&P 500 index's 107% rise.
"They overlooked the possibility that the whole market would
collapse," said Charles Yengst, a Connecticut equipment consultant.
"They opened factories all over the place to operate at a market
peak that doesn't happen every year or even every 10 or 15
years."
Caterpillar is still the world's largest seller of construction
and mining equipment and continues to gain market share, especially
in China. The Peoria, Ill., company has posted annual profits
throughout Mr. Oberhelman's CEO tenure. "In what is likely to be
our fourth down year for sales and revenues, we're proud of what
we're accomplishing," Mr. Oberhelman said in a July release, adding
that "our machine market position has increased, including in
China, product quality continues to be at high levels, and the
safety in our facilities is world class."
Caterpillar spokeswoman Amy Campbell said Caterpillar expects to
handle the next upturn with a more-nimble manufacturing operation.
"We're lowering our cost structure," she said. "The company has
learned a lot of lessons on how you drive more capacity without
spending on capex."
The possibility of a market collapse was almost unthinkable when
Mr. Oberhelman, who joined Caterpillar in 1975, became CEO in July
2010. The northeast-Illinois native, whose father was a Deere &
Co. salesman, had been chief financial officer in the 1990s and
developed a cost-reduction contingency plan credited with helping
Caterpillar navigate the last recession.
"Doug had been in the succession pipeline for a number of
years," said Gail Fosler, a Caterpillar director who left the board
in 2010. "The board felt he would bring a performance discipline to
the company that it really needed."
Expansion strategy
His strategy was to expand Caterpillar's dominance into the
developing world. In particular, he set sights on markets such as
Brazil and China where mining and infrastructure construction were
running full tilt. Meanwhile, strong crude prices were driving
sales of oil-field-related equipment, especially in North
America.
Mr. Oberhelman voiced determination to avoid production-capacity
constraints that had clipped Caterpillar's sales growth before the
recession. He increased production of the equipment that
contractors use to construct buildings and roads and pipelines --
Caterpillar's forte -- in existing plants. Caterpillar built new
factories such as one in Victoria, Texas, to produce some excavator
models and another near Athens, Ga., for small dozers -- machines
it previously made overseas and imported.
Mining companies were telling Caterpillar they wanted to buy
more of their equipment from one source. Caterpillar already made
some mining machinery, such as the giant dump trucks strip mines
and quarries use.
To produce more trucks at its Decatur, Ill., plant, Caterpillar
used a tack it repeated during the boom: It narrowed the plant's
assembly lineup by relocating some other work to new, smaller
plants.
The approach would come to hurt the Decatur plant's workforce,
but during the mining boom it allowed Caterpillar to pledge a 30%
increase in mining-truck production capacity. The company also
planned to double production capacity in East Peoria, Ill., for
large bulldozers it mainly exported to mining customers.
What Caterpillar still needed in its catalog were the gargantuan
shovels used in open-pit mines and rock-shearing machines for
underground mining, among other pieces of mining machinery. Rather
than building capacity in-house, as it traditionally did,
Caterpillar agreed to buy Bucyrus, the largest deal in the
company's history. Caterpillar thus secured a line of shovels,
underground-mining equipment and large assembly plants in
Wisconsin, Pennsylvania and Texas.
In less than six months on the job, Mr. Oberhelman had turned
Caterpillar into a full-line mining-equipment player.
In China, Mr. Oberhelman went on an investing spree. In 2008,
Caterpillar had bought Chinese construction-equipment concern SEM,
gaining a local brand to sell in lower price ranges; it now
invested to expand the brand. It expanded existing factories and
built new plants to produce more machines and engines, and Bucyrus
made Caterpillar a stronger competitor there.
It acquired ERA Mining Machinery Ltd. in Zhengzhou for nearly
$700 million, which sold hydraulic roof supports for mechanized
underground coal-mining systems. Months after the 2012 deal closed,
Caterpillar said, it discovered ERA had inaccuracies in reported
profit, revenue and inventory. Caterpillar eventually wrote down
ERA's value by $580 million.
Mr. Oberhelman's strategy still looked like a winner.
Caterpillar reported profit of $5.68 billion in 2012, nearly 60%
above 2008 results.
After the peak
The year 2012 would prove to be the high point. Afterward,
prices for mined and other commodities began to fall. China's GDP
growth waned, and equipment sales slowed around the world.
The market weakened in 2013 as developing countries cut
construction and consumed fewer commodities. Caterpillar's
machinery and engine sales fell 16% in 2013 from 2012.
In 2014, oil prices began falling. Caterpillar sales fell 15% in
2015 as fracking drillers deployed less equipment. U.S. coal mining
fell as pollution regulations and cheap natural gas reduced the
generation of coal-produced electricity. Caterpillar continued
layoffs and in September 2015 said it would make permanent job cuts
that could exceed 10,000 positions through 2018.
Rivals were hurt, too. Mining-equipment maker Joy Global Inc. of
Milwaukee expects revenue of about $2.4 billion for its current
fiscal year, down from $5.6 billion in 2012. Japan's Komatsu Ltd.,
which in July agreed to acquire Joy, said it expects a 5% to 10%
drop in demand for its construction equipment in its current fiscal
year and a 15% to 20% decrease in its mining business.
A significant sign of strategic retreat was Caterpillar's August
announcement that it would sell some underground-mining equipment
lines that serve markets Mr. Oberhelman had aimed to expand in by
acquiring Bucyrus.
"The amount of investment it would take to make that business
successful we thought was better placed elsewhere in our product
portfolio," said Denise Johnson, president of the mining-equipment
group, at the Las Vegas trade show. "We have to make choices in
this environment."
In its Decatur, Ill., plant, Caterpillar's mining emphasis has
cost jobs. To focus on the giant trucks, Caterpillar moved away
assembly of some other products including graders, used in road
building, which it shifted to a new plant in North Little Rock,
Ark.
Now Decatur didn't have those lines to fall back on, as it had
in many past downturns, when big-truck orders waned. "Graders kept
the lights on for a lot of years," said Craig Karnes, president of
the United Auto Workers Union Local 751. "When we lost them, it
hurt us."
Fewer than 600 mining and other off-highway dump trucks left the
Decatur plant last year, down 78% from the plant's 2011 peak,
according to market-research firm Power Systems Research, which
forecasts 543 trucks this year. Decatur's production workforce has
fallen to about 800 workers, the lowest in more than 50 years and a
third of 2012 levels, Mr. Karnes said.
Caterpillar confirmed the plant's volume and production
workforce have declined, but had no comment on the research firm's
or the union's calculations. The company plans to send some
powertrain-assembly work back to Decatur that it moved to a new
plant in Winston-Salem, N.C.
Charlotte Opalka was laid off April 2015. "I like building those
big mining trucks," said Ms. Opalka, 45, who assembled hoods and
cowls. Each month without work puts more strain on her family. "It
took our pay and cut it in half," said Ms. Opalka, whose three
small grandchildren live with her.
Caterpillar has enough production capacity to benefit from the
next upturn, industry analysts say. And investors have shown
renewed confidence in Caterpillar, which has remained profitable by
slashing expenses, driving its stock price up in 2016.
U.S. construction-machinery sales, though, are being held down
by a slow-growing economy and persistent inventories of used
fracking-related equipment. In the mining-equipment market, sales
droughts typically last seven or eight years.
Caterpillar said it expects overall revenue -- including sales
and revenue from its finance business -- of about $40 billion this
year, down 39% from 2012, and profit of $2.75 a share after
restructuring expenses, down 68%. Through the first six months of
2016, Caterpillar's overall revenue was $19.8 billion, down 21%
from the same period in 2015; profit dropped 60% to $821
million.
Mr. Oberhelman now won't likely be at the helm when fortunes
turn. He recently warned that any recovery probably wouldn't start
this year. Still, he said at the Las Vegas show, "When the industry
emerges, we'll be a very key player and a very solid performer for
our customers."
Write to Bob Tita at robert.tita@wsj.com
(END) Dow Jones Newswires
October 17, 2016 09:54 ET (13:54 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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