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Caterpillar’s cost-cutting plans a mark of struggling global economy

Caterpillar is facing its third consecutive year of declining sales and a further decline in 2016.

Daniel Acker/Bloomberg

It must have seemed like a good idea when Caterpillar Inc. forked out $7.6-billion (U.S.) in 2011 to acquire mining machinery heavyweight Bucyrus International Inc.

At the time, Caterpillar could not keep up with the soaring demand for massive trucks, earth-movers and other heavy equipment in the midst of a global resource boom.

So the company happily paid more than a 30-per-cent premium to get its hands on Bucyrus and its hydraulic shovels, draglines and other expensive specialized gear it did not produce on its own.

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But as it soon turned out, the timing of the costly expansion could not have been worse for the world's biggest maker of construction and mining equipment.

The resource balloon began deflating by mid-2012, and things have been going from bad to worse for Caterpillar ever since.

Facing its third consecutive year of declining sales and a further decline in 2016 – the four down years in a row would mark a first in the nine-decade history of the company based in Peoria, Ill. – Caterpillar plans to slash about $1.5-billion in operating expenses.

It has reduced its previous revenue forecast for 2015 by another $1-billion to about $48-billion. And its outlook is equally clouded for next year, when it expects a further 5-per-cent drop in sales due to falling resource demand in China and feeble growth or retrenchment just about everywhere else.

As part of an effort to cope with the new reality, the company plans to shed up to 5,000 jobs by the end of 2016 from a global work force of more than 126,000. The company is weighing plant closings and other production cuts, and as many as 10,000 jobs will be gone by the end of 2018.

Total employment has shrunk by 31,000 since mid-2012.

As this industrial bellwether goes, so go the equity markets. Caterpillar's heavy equipment sales, nearly 70 per cent of which are in overseas markets, have long been regarded as a reliable gauge of global economic health in general, and China, Brazil and other big emerging markets in particular.

The downbeat news is a clear sign that the global economy is nowhere near a turnaround. In fact, it appears to be heading the wrong way, even as the U.S. economy continues to show signs of life.

Caterpillar's latest restructuring is troubling because of "what it signals about the overall health of the global economy," employment firm Challenger, Gray & Christmas said in a statement.

"Undoubtedly, many companies beyond Caterpillar are worried that this marks the first domino down in a chain that could impact many areas of the economy, including manufacturing, retail and technology," said John Challenger, the placement firm's chief executive.

"We are facing a convergence of challenging marketplace conditions in key regions and industry sectors – namely in mining and energy," Caterpillar CEO Doug Oberhelman said in a statement.

"While we've already made substantial adjustments as these market conditions have emerged, we are taking even more decisive actions now. We don't make these decisions lightly, but I'm confident these additional steps will better position Caterpillar to deliver solid results when demand improves."

That was not his tone in 2011, when he added Bucyrus as Caterpillar's biggest acquisition. "The mining industry is very attractive to us for the long term," he said at the time. "With all the things going on around the globe with globalization, urbanization and demand for minerals, things in the earth, we will be strong for a long period of time."

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As the travails of Caterpillar and other heavy-machinery makers underscore, it remains a sound investment strategy to steer clear of equipment, materials and resource companies that enjoyed boom-like conditions thanks in large part to heavy stimulus spending in China and elsewhere after the Great Recession. Those halcyon days are not coming back any time soon.

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