Those good years won’t come back.
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.
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
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Isn’t this decline in sales due to the fact that there’s already a heck of a lot of hydraulic excavators already in China? How long do they last, and how many do they need, even at a 7% GDP growth rate?
My impression is that Caterpillar is a quite well run company, and they actually manufacture products in the USA. All the best to their management and employees!
Yes, I suspect that the demand bubble during China’s empty city and infrastructure construction bubble after 2008 to keep the plebes employed and not revolting has led to China now having more than enough construction equipment. I’ve see a chart of Komatsu sales and they aren’t selling much either.
Caterpillar equipment is expertly designed, extremely rugged and reliable, and their maintenance support is second to none. They don’t design products to wear out and that hurts them in times like these.
Not to put too fine a point on it, but it is exactly the longevity of Cat equipment that gives Cat a population to sell parts to.
Parts are a large piece of Cat’s sales and profitability.
And only customers of Cat will tell you- a good, used Cat is most often better than a new no-name brand from companies that have either no dealer or weak dealers that don’t stock parts.
Yes, never thought of it that way. Of course, if your equipment is extremely rugged as their’s is, parts don’t fail as often, although I guess there’d be no way to avoid wear and the need for replacement with parts like track segments and such and with things like air and oil filters. They also do amazing engine rebuilds. They look brand new when completed. I think I saw them do that on one of the “Ultimate Factories” TV shows.
“They don’t design products to wear out and that hurts them in times like these.”
Rubbish, the fact that they have longevity, is what sells them. If they didnt have that longevity, they would have been eaten by Hitachi, decades ago.
People will do what they always do, park up their Cats until they need them again. Whilst dumping the other brads apart from Hitachi.
Cat Excavators are one of the few things that have not, as yet, been turned into short lifespan, planned obsolescence, consumer items, Cat changes that at it peril.
Caterpillar is a follower, not a leader in HE design. They are all underpowered. They are however designed to be maintained and repaired easily, in the field.
You can still EASILY order parts for 60 year old machines, and they will last that long and more, if well maintained, that is what sells them.
The day they step back from that, they are dead.
If an economy was an engine, China put her “pedal to the Metal” for far too long. Now it’s a-leaking and a-knocking, and the only parts available for repair are “made in China”.
Somehow that seems deliciously ironic.
If an economy was an engine, China put her “pedal to the Metal” for far too long.
No china didnt do any Repairs or maintenance, whilst keeping at full throttle to nowhere, for no reason, other than greed.
Now its falling apart way to early, and can not be repaired.
Isn’t it ridicule that economy of entire world is tied up to Chinas GDP and for how long this will be sustainable?
Do they need to build more of Ghost Cities in order to keep engine running? No, Chinese leadership is applying breaks to slow down this steam train running out of control, political control. Too much was given to very few and corruption inside communist leadership is at all time high.
It is time to clean the house (country was too much westernized for their taste) and go back to hibernation.
You are on to something here. For at least a couple of years there have been rumors filtrating from China about an attempt to arrange a “soft landing” for their overheated economy.
Problem is nobody has any idea exactly how in control Beijing still is: the monster they created seems to have taken a life of its own.
In a chilling parallel with Japan, it seems the Communist Party got a taste of the soft landing earlier this year when the Shanghai and Shenzen stock markets crashed. Instead of simply controlling the free fall, the Party went into overdrive to prop it up again.
The Bank of Japan attempted defusing the Zaitech Bubble by progressively hiking interest rates between 1989 and 1990 but when the Nikkei and property values started their free fall towards more, shall we say, sustainable levels the BOJ panicked and set in motion the chain of events which eventually led to the 1997 Asian Crisis and the Two Lost Decades.
Will the Party panick or stay the course? Which path to a soft landing will they choose? And how will China’s contraction affect the world long term?
Stay tuned, same Bat-channel, same Bat-hour!
Caterpillar has lots competitors in Asia like Sany and Komatsu and smaller firms, Cat was getting beat pretty well on market share already.
The other side of “new”.
The worlds largest auction house for used heavy equipment, Richie Brothers is having a banner year, for the sheer number of auction lots. With the majority going on the block without reserve.
Big CAT wheel loaders, just a few years old worth $2.8 million when new are going for $15,000 At bargain basement prices!
This proves the drastic downturn in the global economy, as heavy construction companies and mining corporations down size and liquidate assets for whatever price the market will pay.
Hand-in-hand with the equipment down sizing, go their labor force that used to operate such equipment. Much more downside to come.
Excavators, wheel loaders and big mining equipment is being sold for scrap in Australia
As with all Chinese announcements like the absurd 6.9 % growth rate- I suspect the announced ‘shift to service sector’ is an attempt to make a necessity look like a decision.
Where do laid off factory workers go anywhere? They go into the service sector, almost always for much less pay.
The reason the world economy has not collapsed into complete economic depression is because advanced economies like the US have replaced tangible production with technology-related economic fantasies.
Few people stop to recall that at its peak, AOL had a market capitalization of some $222 billion. Today, it’s a subsidiary of Verizon, worth perhaps $4 billion. That’s a 98% haircut.
No one today ever considers that an AOL-style debacle might be the ultimate fate of companies like Facebook or Alphabet (formerly known as Google) or Twitter or Netflix. Everybody thinks this time is different.
I don’t believe it will be that much different in the long run.
My sense is that Twitter will never turn a profit and will be circling the drain before too much longer.
Facebook is a huge time-waster for adult crybabies. When Facebook advertisers figure out that paying for Facebook ads does not really benefit them very much, they’ll stop the ads and Facebook will start circling the drain as well.
Netflix will turn into a cash furnace as soon as it starts actually paying for the billions in production costs for the content to which it has committed. I don’t think Wall Street will like that very much.
As for Google, who knows? I haven’t figured out Google’s Achilles’ Heel yet, but I suspect there will be one.
VB- I think you nailed it. It does seem like we have bet the farm on a Will-of- the-Wisp economic model. I don’t see much out there that is anchored to bedrock. May be that this latest “New Economy” is beyond my grasp. That isn’t a reach. But it seems to me that much of it is the equivalent of the old “million monkeys with typewriters” meme. Maybe one will write the next great novel. Now it is give a lot of nerds and conmen unlimited money and hope the next great thing will be developed. So far, what has stuck to the wall appears to be rather insubstantial. Lots of flash, but little bang; although, the Wall Street boys and girls have done a heck of a job monetizing what little bang there is.
Spot on. Recall the dot com days? Companies with little or no revenue but Sun Microsystems boxes for their websites were valued at millions of dollars. Sun made billions then. California gold rush. We sold the Sun tools and boxes then. All forgotten.
Once you reach the state of economic “progress” where the main products are fabrications with no substance beyond their numbing effect (like Facebook & Twitter) there is nothing left for the rabble to eat but BS. Maybe that is enough for flies, but not for homo sapiens.
GOOGLE’S ACHILLES’ HEEL ?
Come at it from this angle : I read repeatedly that half ( or more ) of Americans cannot come up with $1000.00 to meet a car or house-repair “emergency” .
Meaning they have no savings. So how does this affect GOOGLE ? I am not sure how advertisers realistically assess the value of the ads that they place through Google, its search engine, etc. But they pay handsomely for the ads, and that is the source of GOOGLE’s billions.
ONE OF THESE DAYS, the long-spending and ( apparently ) never-suffering American Consumer ( 70% of the economy they say ) will finally realize this :
The blessed American Consumer ( with no savings ) is (1) spending money they do not have, (2) on things they do not need, or even really want ( the ads convince them that they want this junk ) and finally (3) on things they will never really use, but rather rent storage space to stockpile them !
THEN SOPENDING WILL SCREECH TO A SUDDEN HALT – – and saving as a lifestyle will be reborn, and advertising revenue will halt.
That’s the death of GOOGLE, IMO. As a mental exercise, ask yourself how the NO-TALENT KARDASHIAN KLAN OF IDIOTS HAVE GOTTEN SO WEALTHY, while producing nothing of value ?
Advertising dollars, my friend, high-priced ads for American produced fashion JUNK.
“THEN SOPENDING WILL SCREECH TO A SUDDEN HALT … That’s the death of GOOGLE, IMO”
such an event would be the death of the monetary system. so, it will not be permitted. if the people won’t spend their money, then the government will spend it for them. it will tax, it will borrow and assign the debt to the citizens, it will impose negative interest rates, it will impose taxes on the use of cash, it will ban cash and mandate electronic money and immediately mandate certain spending, deducting money from your account as necessary to maintain gdp. and google will be subsidized according to imputed usage.
Mark may have stumbled onto something so obvious that it’s hard to see with his comment about China applying the brakes to its steam engine economy. To which I add the following observation, it is a steam engine economy in a Diesel engine world.
Literally a steam engine economy.
Thank you for this article. Enlightening.
I have long suspected that the Chinese massage their numbers and that the stats we read from the US and UK depend more on a need for positivity and wishful thinking, than facts.
It is only when we see a CAT check that reality sinks in.
Personally I hope that this is CAT that is in the poo and not the bleakness of the future of the world economy we are seeing.
Not sure how long you have followed CAT, but they are usually the first to predict an economic downturn at the macro level. They are well known for being a very good predictor of the future. It is also a well-run company.
Cat, John deer, Komatsu, and Hitachi, take their marching orders from a place called “Port Headland”.
The “fuel stop”,of the “global economic engine” demand has fallen over in port headland, you are all going nowhere until it returns.
Simplest indicator in the world, of the world, that nobody looks at, as it a huge quiet market.
A 200% increase on current spot prices is needed to put the market back where it was. The 08 recession is not over, it has simply been staved off with financial engineering.
Now the sticking plasters of financial engineering are starting to peel off.
The question is can O bummer keep pushing them back on until he is out of office and it all falls off. As for the last seven years that’s all he’s been doing.
Were they really so STUPID they thought those numbers would remain that high forever??? They never heard of BOOM and BUST???/
Some “executives” Now I suppose they want the cooks and dishwashers to BAIL THEM OUT!!!!
I’m surprised it’s not mentioning the real problem. China COPYCATTING Caterpillar products and building and making their own, THEN SELLING it themselves!
Dan Romig has the core story: a durable good in a slowing economy. China’s done building its “interprovincial” highway system as well as the core of a high-speed train system, while urbanization is slowing (in many parts of the countryside only the old and the very young remain [lack of access to urban schools means they’re left home]. This has been foreseeable for a long, long time (see the 1995 background papers to the World Bank China 2020 book).
China is now entering the phase where services are the lead sector, and that is inevitably matched by lower levels of growth and investment. This means that historic links between aggregate economic growth (GDP) and sectoral growth are/will be different.
Don’t read bad times for CAT as reflecting GDP growth – manufacturing in China is entering the maturing phase as the first round of consumption / acquisition is being replaced by … replacement demand. Watch the passenger car industry for similar shifts: demand for new cars will slow, while the market for used cars will mature. Companies trying to sell low-priced new vehicles will get hammered, amidst an overall decline in margins. VW’s double-digit China profits won’t return, either.
Wolf , why blame China for Caterpillar’s woes? The fault, paradoxically, lies with the company for manufacturing such high quality Cats that seem to last forever, without any inbuilt obsolescence.
If what you say is true that in China in 2010, “the industry sold over five times as many: 120,000 excavators.” and “in March 2011, the industry sold 27,000 units – in just that month! – more than in the entire year 2015!”, why would China want to buy more Cats?
No, Caterpillar’s economic salvation lies not in China but with the fixing of America’s extremely rickety infrastructures, which need at least US$3.6 trillion to repair, instead of wasting money on endless wars in the Middle East, Yemen, Somalia and Afghanistan.
‘The American Society of Civil Engineers has given infrastructure in the United States a D (poor) rating, with no element of infrastructure receiving more than a B- rating. The country’s levees, such as the ones that failed during Hurricane Katrina in 2005, received a D-, while roads received a D, as did schools, transit, aviation and dams. The country needs to invest an additional $3.6 trillion to raise its infrastructure to the level of a “B” rating by 2020, according to the group.’
CNBC also has the same opinion. Read:
China will soon launch the ‘One Belt and One Road’ multi-trillion dollar projects across Eurasia to Central Asia, Russia, Germany and the EU but if Caterpillar hopes to cash in on that it may have to wait till Hell freezes over, when the US military is inciting a war in the South China Sea.
“when the US military is inciting a war in the South China Sea.”
So your happy for china to ride roughshod over the nations in the western Philippine sea, steal their resources, and their land, as long a America gets what it want.
Yes it is the “Western Philippine Sea” there is no such thing as a “South china sea” outside chinas false narrative.
AS long as America gets what it wants is why this situation exists, America gave away other peoples territory, over their objections, to appease and reward their anti communist allies.
America helped create this mess with its colonial actions between 1890 and 1950.
America is part of the problem and your attitude that America is creating the confrontation in the Western Philippine sea is to say the least an unacceptable promotion of the Chinese false narrative.
The region would have been better off left under Japanese control than in chinese hands, with all as vassals to Beijing, which is where the militaristic aggressive thieving china is taking it.
“So your happy for china to ride roughshod over the nations in the western Philippine sea, steal their resources, and their land, as long a America gets what it want. ”
What are you smoking? The Spartly and Paracel islands were reverted to the Republic of China under the 1952 Treaty of Peace with Japan, which colonized these Chinese islands from 1939 to 1945.
The Philippines, which was a US colony till 1946, did not object. It was the egregious president Marcos who seized many islands and reefs in the Spratly islands by issuing a decree and then named them the Kalayaan islands. If that was legal so is a three dollar bill.
There is no West Philippine sea, only the South China Sea, There is an East Philippine sea and there are 7,180 islands in the Filipino archipelago, some of which are uninhabited. Did China claim any? No.
The Japanese bombed Pearl Harbor and killed over 2 thousand American sailors and then committed war crimes and crimes against humanity by kidnapping hundreds of women to force them into becoming sex slaves and experimented on humans with deadly diseases in China, Korea an, South East Asia and refuses to apologize officially.
Are you really serious that “The region would have been better off left under Japanese control?
“What are you smoking? The Spartly and Paracel islands were reverted to the Republic of China under the 1952 Treaty of Peace with Japan, which colonized these Chinese islands from 1939 to 1945.”
The Paracells belong to Formosa, which incidentally used to be part of the Philippines. However with the population change in Formosa, the Philippines no longer wants it, and respects that thus it can not have the Paracells.
WHAT AM I SMOKING???? WTF are you smoking .
For over a thousand years, imperialist, colonial, and religious, colonists oppressors, and aggressors, invaded the region, dividing the lands and waters between themselves. With no regard what so ever for the indigenous inhabitants, their wishes, or traditional ownership, control, or wrights, over those lands and waters.
The aggressive muslim administration in Jakarta was still doing this in the 1960’s, when it bullied the UN into giving them western New Guinea. Which the UN did, as it was the easy way out. Instead of uniting the Island under Port Moresby as was the original plan. Jakarta is still engaged in Ethnic cleansing, and Genocide, in Western New Guinea
Jakarta then invaded East Timor. The threat of war with Australia, put a stop to the annexation of East Timor by the aggressive muslims in Jakarta, and forced their Eventual Withdrawal.
The Treaty’s made by America, were made for America.
The Treaty’s and agreements mandated by the UN, were mandated for the convenience of the UN.
The local population’s, were simply told. This is what we say is happening.
That is a contract under duress, and not worth the paper it is written on.
This is the 21st century. Wrights of the indigenous Peoples of the land. Must be recognized, and respected.
The waters in Question, dont belong to Vietnam, or china. They never have.
They belong to the indigenous Peoples of Borneo, and The Western Philippine islands. Under the internationally recognized 200 mile and extended 200 Mile Economic zones. Which china is incedentally a signatory to.
china will surrender those, Resources, Waters, and Islands, or there Will be a expansion of the current Economic and Propaganda war being waged by china, against the States, in the western Philippine Sea, into a full shooting war. Which china will lose. For the same reason America lost in Vietnam. With or without the US. Simple.
For once America does the Wright thing in south East Asia. And People scream, Colonist, Warmongering, Oppressor, uninformed Knee-jerk ignoramuses, that they are.