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Caterpillar Shifts Production Into Overdrive

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Caterpillar Inc., the world's largest construction and mining equipment maker, is shifting its economic engine into overdrive with several new capital projects following a record-setting second quarter.

Caterpillar Shifts Production Into Overdrive
Photo: Caterpillar Inc.
Cat's Model 336 excavator is one of the machines to be produced at a new plant in Victoria, Texas.
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Fueled by industrial market strength in mining, energy and infrastructure, the Peoria, Ill.-based company saw second-quarter profits increase 91% to $707 million, up from $371 million a year ago. Caterpillar has since upped its annual outlook based on higher expected machinery sales and revenue, which could top $40.5 billion. Other construction equipment manufacturers are seeing similarly bullish results.

“Equipment markets overall have stabilized and are showing some signs of improvement, after declines in the 50% range during the recession,” says Dennis Slater, president of the Association of Equipment Manufacturers, a Milwaukee-based trade group. “Export demand will continue to play an important role in the recovery, especially equipment sales to emerging markets.”

Caterpillar's sales rebound began earlier this year aided by transportation-related federal stimulus projects, low interest rates and China's brisk growth in mining fueled by rising metal demand. Asia was the company's fastest-growing market, with sales improving by 62% to $1.7 billion, the company reports. China's economy is anticipated to grow 10.5% this year, Caterpillar adds, followed by India at 8.5%.

“Growth in emerging markets is central to Cat's strategy,” says Ann Duignan, managing director, JP Morgan Equity Research, New York. “Organic growth will likely be focused on infrastructure expansion in developing economies like China, India and Latin America, [and] growth of its mining business through product expansion.”

Caterpillar announced in late June it is building an excavator plant in Xuzhou, China, as well as a backhoe and small wheel loader facility in Piraciccaba, Brazil. The U.S. economy, meanwhile, is expected to expand by just 3% this year.

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Even so, North America saw a 43% second quarter sales gain, and it remains Caterpillar's biggest market by sales. The brightened outlook has prompted ambitious U.S. expansion plans, including a new $120-million, 600,000-sq-ft hydraulic excavator manufacturing plant, in Victoria, Texas, about 120 miles southwest of Houston.

Expected to add 1,000 jobs upon completion in mid-2012, the plant will produce hydraulic excavators now produced in Akashi, Japan, and Aurora, Ill., where excavator production will be phased out. The Texas plant is part of a long-term U.S. manufacturing shift from the Midwest to the South, where production costs are cheaper thanks to reduced labor costs—fewer unions, that is—and inexpensive shipping.

“For Caterpillar to maintain industry leadership, it is critical that we continue to invest in our operations,” says Rich Lavin, Caterpillar group president, in a statement. Caterpillar additionally gets $3 million in cash, 320 acres of land, and tax breaks from state and local authorities for the move.

Caterpillar in August also announced plans for an 850,000-sq-ft mining axle assembly plant in Winston-Salem, N.C., a 270,000-sq-ft compact construction equipment facility expansion in Sanford, N.C., and a 3,100-sq-ft engineering design center on the campus of South Dakota School of Mines & Technology in Rapid City. The projects will finish between late 2010 and early 2012, adding about 825 jobs combined.


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