Caterpillar stung by Chinese investment

When Caterpillar bought ERA Mining Machinery Ltd and its subsidiary Zhengzhou Siwei Mechanical & Electrical Manufacturing Co. Ltd last year, it hoped it would provide the company with a platform for growth in the lucrative Chinese market. That platform is now looking shaky, as the global heavy equipment manufacturer announced a “goodwill impairment charge” of US$ 580 million on the acquisition after uncovering what it describes as “deliberate, multi-year, coordinated accounting misconduct” at Siwei.

The charge represents two-thirds of the original acquisition price of US$ 886 million. As a result, several senior managers at Siwei have been removed and a new management team put in place. “The actions carried out bay these individuals are offensive and completely unacceptable. This conduct down not represent, in any way, the way Caterpillar does business or how we expect our employees to work,” said Doug Oberhelman, Caterpillar’s chairman and CEO, in response to the news.

Despite this, the company has defended its decision to acquire Siwei and its strategy to expand into China: “We continue to believe that the Siwei acquisition is well aligned with our strategy to expand our role as a leading equipment and solutions provider for the Chinese coal industry,” said Steve Wunning, Caterpillar group president with responsibility for resource industries. In a statement, the company emphasised that its strategy to expand its coal mining business in China was “unchanged”, saying that it was “optimistic about the underground coal mining equipment opportunities [in China].”

Earlier in January, the company had celebrated the opening of two new facilities in Tongzhou, Jiangsu province: a proving ground and a large wheel loader manufacturing facility that will produce the Cat 986 large wheel loader. With these facilities, the company now has 23 existing facilities in China, four new facilities under construction, four R&D centres and three logistics and parts centres, employing over 15,000 people in the country.

The write down will be included in the company’s Q4 2012 results.

In other news, the company also announced the departure of Luis de Leon, vice president with responsibility for the mining products division, who had joined Caterpillar following the take over of Bucyrus International. In a statement the company said de Leon was leaving to “pursue other opportunities” and said a replacement would be named in the near future.

Written by Jonathan Rowland.

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