Caterpillar, one of the icons of American industrial might and a “bellwether” for the global economy, has been having a hard time. It forecast that sales would drop 5% in 2016, an IBM-like fourth year in a row of declining sales, the worst such spell in its history.
Now Caterpillar threw in the towel on its formerly most promising market, China. Not for the current year, or even next year – those are already toast. But for future years. And for the entire industry.
It isn’t just CAT’s problem; the industry as a whole is getting whacked in China because of China’s economy. That’s Tom Pellette, Group President of Caterpillar Inc., with administrative responsibility for Construction Industries, told the Financial Times in an interview.
He cited some terrible industry-wide numbers for China, without disclosing Caterpillar’s own: in 2015, sales of hydraulic excavators between 10-90 tons are expected to be in the “23,000 range,” he said. Back during the China heyday in 2010, the industry sold over five times as many: 120,000 excavators. This would include excavators from Japanese, German, and Chinese competitors. In March 2011, the industry sold 27,000 units – in just that month! – more than in the entire year 2015!
Those were the good times when China’s huge stimulus program from the Financial Crisis was reaching corporate pockets.
“That shows how far off the peak we are,” Pellette said. The market might never get back to where it once had been, despite the official GDP growth rate in the third quarter of 6.9%, which would be considered a blistering hot pace in other major economies that have somewhat less opaque economic reporting.
On September 24, Caterpillar had already warned of another round of big trouble. Its statement – evocatively titled in perfect corporate speak, “Building for a Stronger Future, Caterpillar Announces Restructuring and Cost Reduction Plans” – announced “a total possible workforce reduction of more than 10,000 people…” and “the contemplated consolidation and closures of manufacturing facilities occurring through 2018.”
“At this point, we are experiencing continued weakness in key industries that we serve,” it said, with sales declining “in all three of our large segments,” namely Construction Industries, Energy & Transportation, and Resource Industries.
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Shrinkage, shrinkage, shrinkage. Because of the global economy. Because of collapsing investment in mining and energy. Because of “a convergence of challenging marketplace conditions in key regions and industry sectors.” Because of China.
Turns out, Caterpillar has been an excellent leading indicator for the slowdown in China. While China’s boom at the time was still the star of the global economy and was still considered its miraculous engine, CAT sales in the region were already declining.
True to corporate form, Pellette still exhibited the required optimism for the global markets next year, wrapped in caveats and buts: “My expectation is within China and globally that the market will pick up to a level above where we are in 2015,” he said, despite Caterpillar’s own forecast of declining sales. “But for China specifically, our expectation is that the market will rebound but we are not planning [for it to] get back to 2011/2012 levels.”
So forget those hot sales figures in China. They won’t come back. And that “rebound” in China from today’s low levels to slightly higher but still low levels that he just mentioned, when is that going to happen? Not yet:
“We haven’t seen a big turn in terms of improvement on the ground yet,” Pellette said. “It’s still a struggling market place with some signs of hope with the optimistic among us.”
He actually said that: “…some signs of hope with the optimistic among us.”
China’s government is trying to “rebalance” the economy, shifting it from low-end, cheap-labor manufacturing and helter-skelter investment in ghost cities, infrastructure projects, industrial overcapacity, and empty shopping malls toward consumer spending. And equipment makers are feeling the pain.
But Urbanization is continuing, he said. So there would be more construction. And he cited the official hope expressed in China’s new five-year plan to double GDP and income between 2010 and 2020. So maybe there would be, if everything else fails, more ghost cities….
“There is still fantastic growth and that will drive a strong need for our products’ services, but just not at the level seen in 2011 and 2012,” he said, while facing the fourth year in a row of sales shrinkage that the company is going to combat by laying off more than 10,000 people and shutting plants.
Caterpillar isn’t in this China pickle all by itself. Equipment makers in Japan have been complaining about the demand problem in China. And in Germany, the German Engineering Federation, an association for equipment makers, has spoken up about the China slowdown and its larger impact, as “ripples are now spreading to other key markets.” Read… China Slowdown, “Global Turbulence” Trigger Collapse of Export Orders for German Equipment Makers
