How Caterpillar’s Big Bet BackfiredCEO Doug Oberhelman invested heavily in production of machinery and equipment. Then commodities began their slide A Caterpillar wheel loader runs among other CAT machines at a company facility in Suzhou, China. PHOTO: LIU BIN/XINHUA/ZUMA PRESS By BOB TITA Updated Oct. 17, 2016 9:39 a.m. ET 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 Mr. Oberhelman proclaimed in 2010. when he will retire from the company. “Everybody was convinced that this time would be different. Then oil prices fell.” Caterpillar said Monday that Mr. . In China. miners began shelving equipment-buying plans as commodity prices fell. From 2011 to 2014. Oberhelman is leaving ahead of schedule. Soon after. Caterpillar chiefs by tradition haven’t stayed beyond age 65. It had missed opportunities in China before. a company group president and 35-year veteran. The year 2012 would prove to be a peak for Caterpillar. Oberhelman will remain as executive chairman of Caterpillar until March 31. Its stock is up 29% this year—the best-performing in the Dow Jones Industrial Average—but trades 25% below its 2012 peak. Oberhelman would be succeeded as chief executive by Jim Umpleby. Caterpillar roughly doubled its number of plants and facilities there to 26.” Mr. along with demand for related equipment. the longest decline in its history. which suggests Mr. China’s growth slowed.gain a position in giant open-pit-mining shovels and underground-mining machines Caterpillar didn’t make. “They thought the Chinese market was so hot.” said Ken Banks. who retired in 2013 as manager for Caterpillar’s electric mining shovels. that commodity prices would continue to be very strong and Caterpillar would increase sales substantially. Caterpillar now faces its fourth straight year of falling sales. Caterpillar was “going to play offense and we’re going to win. has long been a flagship American firm.Caterpillar CEO Doug Oberhelman. invested heavily in production of machinery and equipment. Oberhelman. and has said it expected to close or consolidate as many as 20 plants. too. it has closed one plant and is operating many others at low production rates. Caterpillar.000 jobs. Caterpillar has reduced its workforce 20% in the past four years.” Mr. Oberhelman available for comment for this article. a reliable blue chip in the Dow industrials and a major job creator with plants around the world. Caterpillar in August said it would sell off some of the mining-equipment lines it gained with the Bucyrus acquisition. 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. Now. The company declined to make Mr. Slumps are common in Caterpillar’s world. though. 63 years old. it has fallen behind in the slow-growing economy. and rivals are suffering. . taking over in 2010 during a global commodities boom. about 30. Caterpillar said. In China. PHOTO: MICHAEL NAGLE/BLOOMBERG NEWS “Everybody was surprised by the size of the downturn and the length of it. Then commodities began their long slide. Oberhelman’s tenure. ENLARGE Its stock. trails the S&P 500 index’s 107% rise. including in China.” Mr. company has posted annual profits throughout Mr. and the safety in our facilities is world class. we’re proud of what we’re accomplishing. “They overlooked the possibility that the whole market would collapse. Ill. The Peoria. product quality continues to be at high levels. a Connecticut equipment consultant. especially in China. up 46%from the beginning of Mr. “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. adding that “our machine market position has increased.” .” said Charles Yengst.” Caterpillar is still the world’s largest seller of construction and mining equipment and continues to gain market share. Oberhelman’s CEO tenure. “In what is likely to be our fourth down year for sales and revenues.. Oberhelman said in a July release. ” The possibility of a market collapse was almost unthinkable when Mr. strong crude prices were driving sales of oil-field-related equipment. a Caterpillar director who left the board in 2010. The northeast-Illinois native.” she said. salesman. “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. whose father was a Deere & Co. Guinea.” said Gail Fosler. he set sights on markets such as Brazil and China where mining and infrastructure construction were running full tilt. Oberhelman. “The company has learned a lot of lessons on how you drive more capacity without spending on capex. In particular. “We’re lowering our cost structure. Meanwhile. “Doug had been in the succession pipeline for a number of years. especially in North America. such as this CAT excavator at work near Boke. who joined Caterpillar in 1975. had been chief financial officer in the 1990s and developed a cost- reduction contingency plan credited with helping Caterpillar navigate the last recession. . became CEO in July 2010. PHOTO: WALDO SWIEGERS/BLOOMBERG NEWS Caterpillar spokeswoman Amy Campbell said Caterpillar expects to handle the next upturn with a more-nimble manufacturing operation.Caterpillar invested in increased production of its flagship construction machinery. Texas.Mr. He increased production of the equipment that contractors use to construct buildings and roads and pipelines—Caterpillar’s forte—in existing plants. ENLARGE Mining companies were telling Caterpillar they wanted to buy more of their equipment from one source. Caterpillar built new factories such as one in Victoria. for small dozers—machines it previously made overseas and imported. such as the giant dump trucks strip mines and quarries use. . to produce some excavator models and another near Athens.. Ga. Caterpillar already made some mining machinery. Oberhelman voiced determination to avoid production-capacity constraints that had clipped Caterpillar’s sales growth before the recession. Ill. for large bulldozers it mainly exported to mining customers. as it traditionally did.To produce more trucks at its Decatur. Oberhelman had turned Caterpillar into a full-line mining- equipment player. smaller plants. underground- mining equipment and large assembly plants in Wisconsin. Rather than building capacity in-house. the largest deal in the company’s history.. Pennsylvania and Texas. Ill. In less than six months on the job. Mr. Caterpillar agreed to buy Bucyrus. 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. plant. among other pieces of mining machinery. What Caterpillar still needed in its catalog were the gargantuan shovels used in open-pit mines and rock-shearing machines for underground mining. Caterpillar used a tack it repeated during the boom: It narrowed the plant’s assembly lineup by relocating some other work to new. Caterpillar thus secured a line of shovels. The company also planned to double production capacity in East Peoria.. Mr. revenue and inventory. Caterpillar had bought Chinese construction-equipment concern SEM. China’s GDP growth waned. Afterward. Caterpillar reported profit of $5. and equipment sales slowed around the world. It acquired ERA Mining Machinery Ltd. which sold hydraulic roof supports for mechanized underground coal-mining systems. Months after the 2012 deal closed. gaining a local brand to sell in lower price ranges. After the peak The year 2012 would prove to be the high point. In 2008. maker of the giant mining shovel pictured here at a Russian mine. Caterpillar eventually wrote down ERA’s value by $580 million. It expanded existing factories and built new plants to produce more machines and engines. it now invested to expand the brand. and Bucyrus made Caterpillar a stronger competitor there. Oberhelman’s strategy still looked like a winner. Caterpillar said. . prices for mined and other commodities began to fall. The market weakened in 2013 as developing countries cut construction and consumed fewer commodities. it discovered ERA had inaccuracies in reported profit.Caterpillar aimed to grab a bigger market share in mining equipment with its acquisition in 2011 of Bucyrus. in Zhengzhou for nearly $700 million. nearly 60% above 2008 results. PHOTO: ANDREY RUDAKOV/BLOOMBERG NEWS In China.68 billion in 2012. Mr. Caterpillar’s machinery and engine sales fell 16% in 2013 from 2012. Oberhelman went on an investing spree. ” said Denise Johnson. at the Las Vegas trade show.. U. too. down from $5. Oberhelman had aimed to expand in by acquiring Bucyrus.6 billion in 2012. Caterpillar sales fell 15% in 2015 as fracking drillers deployed less equipment. which in July agreed to acquire Joy. PHOTO:LUKE SHARRETT/BLOOMBERG NEWS In 2014. oil prices began falling.4 billion for its current fiscal year. Rivals were hurt. Mining-equipment maker Joy Global Inc.” . Japan’s Komatsu Ltd. Caterpillar continued layoffs and in September 2015 said it would make permanent job cuts that could exceed 10.Caterpillar added its newly acquired Bucyrus line to a catalog that already included mining machinery such as this heavy dump truck moving coal in Maryland. “We have to make choices in this environment. 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. of Milwaukee expects revenue of about $2. “The amount of investment it would take to make that business successful we thought was better placed elsewhere in our product portfolio. A significant sign of strategic retreat was Caterpillar’s August announcement that it would sell some underground-mining equipment lines that serve markets Mr.S.000 positions through 2018. coal mining fell as pollution regulations and cheap natural gas reduced the generation of coal-produced electricity. president of the mining- equipment group. plant.. Now Decatur didn’t have those lines to fall back on. according to market-research firm Power Systems Research. Karnes said. when big- truck orders waned. the lowest in more than 50 years and a third of 2012 levels. which forecasts 543 trucks this year. N. which it shifted to a new plant in North Little Rock. To focus on the giant trucks. Decatur’s production workforce has fallen to about 800 workers. “When we lost them. Mr. “Graders kept the lights on for a lot of years.” said Craig Karnes. used in road building.” Fewer than 600 mining and other off-highway dump trucks left the Decatur plant last year. as it had in many past downturns. PHOTO: DANIEL ACKER/BLOOMBERG NEWS Caterpillar confirmed the plant’s volume and production workforce have declined. Caterpillar’s mining emphasis has cost jobs. . Models of Caterpillar machinery at a CAT dealership in East Peoria. down 78% from the plant’s 2011 peak. but had no comment on the research firm’s or the union’s calculations. president of the United Auto Workers Union Local 751. The company plans to send some powertrain-assembly work back to Decatur that it moved to a new plant in Winston-Salem. Ill. Caterpillar moved away assembly of some other products including graders. Ill. Ark. it hurt us.C.In its Decatur. he said at the Las Vegas show. Mr. are being held down by a slow-growing economy and persistent inventories of used fracking-related equipment. In the mining-equipment market. Opalka.75 a share after restructuring expenses. Oberhelman now won’t likely be at the helm when fortunes turn. down 21% from the same period in 2015. we’ll be a very key player and a very solid performer for our customers. Caterpillar said it expects overall revenue—including sales and revenue from its finance business—of about $40 billion this year. sales droughts typically last seven or eight years. “When the industry emerges. down 68%. “I like building those big mining trucks. Through the first six months of 2016. profit dropped 60% to $821 million. Caterpillar has enough production capacity to benefit from the next upturn. though. Caterpillar’s overall revenue was $19. down 39% from 2012.” said Ms. “It took our pay and cut it in half. and profit of $2.S. industry analysts say. Each month without work puts more strain on her family. Opalka. driving its stock price up in 2016. Still.” .8 billion. who assembled hoods and cowls. construction-machinery sales. He recently warned that any recovery probably wouldn’t start this year. And investors have shown renewed confidence in Caterpillar.” said Ms.Charlotte Opalka was laid off April 2015. U. which has remained profitable by slashing expenses. 45. whose three small grandchildren live with her.
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