Caterpillar digs up trouble

Tue, Feb 5, 2013, 00:00

Its huge urbanisation programme means that China makes up about half of the world’s demand for building machinery, so US company Caterpillar knows that it needs to own the China market if it wants to remain as the biggest construction equipment company in the world.

It is the world’s largest maker of tractors and excavators, well used to working in hostile environments, but Caterpillar appears to be struggling here.

In its bid to gain access to the booming China market, Caterpillar bought a Hong Kong-listed mining company, ERA Mining Machinery, last June.

However, on January 18th Caterpillar said it would write off most of the $654 million (€479 million) it paid for ERA after uncovering “deliberate, multi-year, co-ordinated accounting misconduct” at its mine-safety equipment unit, Zhengzhou Siwei.

Well-known businessmen

Zhenghzhou Siwei’s balance sheet looked good and its controlling shareholders were well-known expatriate businessman James E Thompson III and Emory Williams, a former head of the American Chamber of Commerce in China.

So what happened? Caterpillar, based in Peoria, Illinois, has not given many details but it clearly believes the accounting misconduct was aimed at making the balance sheet look good. It has found discrepancies between ERA’s actual and recorded inventories, is all it will say. The company has blamed “several senior managers” whose misconduct, it says, began some years before it acquired Siwei.

Some analysts believe Caterpillar might have misjudged the obsession with keeping costs low and with forging strong political connections when it made its move into China.

Manufacturing

China remains central to the company’s plans for growth – it has 23 manufacturing facilities in China and four more under construction, and expects group sales to improve in the second half of 2013.

Early last year, Caterpillar put former US ambassador to China, Jon Huntsman, on its board of directors.

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