For a company reporting record quarterly profits, Caterpillar’s analyst conference call last week had a remarkably defensive tone to it.
“China is not a huge part of our business,” said Mike DeWalt, Caterpillar’s head of investor relations, making a point he reiterated several times.
“Sometimes people think that its significance to our machine sales in construction is a lot higher than it actually is.”
While Mr DeWalt noted that China accounts for one-tenth of company sales in the Asia-Pacific region and just 3 per cent of global revenues, the misperception is, at least in part, of Caterpillar’s own making.
The manufacturer, the world’s biggest maker of earthmoving equipment by revenues, has rapidly ramped up its capacity in China, building 16 manufacturing facilities in the country, with nine more under construction. It employs 11,000 workers in China, and plans to double its workforce there by 2015.
Last year, it moved its first senior executive to Hong Kong to demonstrate the importance of China to its growth.
By de-emphasising China this earnings season, Caterpillar signalled a retrenchment that is taking place across the US industrial sector.
Manufacturers that have counted on Asia for growth in recent years – while developed economies have been sluggish – expect that this year they will depend on the US and, to a lesser extent, Latin America, while Asia and Europe drag on their results.
Although the trend can be traced back to the middle of last year, the speed of the slowdown in Chinese demand has taken companies by surprise. Caterpillar said it had overestimated Chinese demand for construction equipment and now expected demand to decline in China this year, down from its prior forecast of growth of 5-10 per cent.
In the US, Caterpillar said sales had been stronger than anticipated, as resource and construction companies replaced ageing machinery. The trend was also evident at Eaton, the manufacturer of industrial equipment, which increased its demand growth expectations in the US to 9 per cent from 6 per cent while downgrading those elsewhere to 2 per cent from 4 per cent.
“We are seeing a sort of stark change from what we were all witnessing over the last few years, where most of the growth was in emerging nations,” Sandy Cutler, chief executive, told the FT.
Much attention, however, has been on the negative part of this equation.
Andy Kaplowitz, an analyst at Barclays Capital, says that although most big industrial companies’ quarterly results have exceeded expectations, slowing demand in China has cast a pall over earnings season.
“In a lot of these industrial calls, it’s been dismissed that North America is good. The focus is all on the tenor of China.”
While weakness in Chinese demand affected most US industrial companies, some have seen sales pick up in other emerging economies.
DuPont, one of the world’s biggest chemicals companies, said sales rose by 30 per cent in the Middle East and 23 per cent in Latin America from last year, while revenues fell 2 per cent in Asia.
3M, the diversified manufacturer, also singled out Latin America. “The western hemisphere is doing well, with Latin America leading the way,” said Inge Thulin, chief executive. “Western Europe has stabilised, but at lower levels. Growth in Asia is slow because of China, Japan and electronics markets.”
General Electric’s Chinese sales in the quarter rose 18 per cent from last year, but sales to Latin America were up by 35 per cent, while those in Russia doubled.
At United Technologies, the industrial conglomerate, Chinese orders fell by 15 per cent in the first quarter, with demand at its Otis elevator unit dropping by 21 per cent, but orders rose by one-fifth in Brazil, India and Russia. “The problem in emerging markets for us is really isolated to China,” said Greg Hayes, chief financial officer.
Ultimately, however, China’s economy has not yet slowed down to the extent that it is forcing manufacturers to rethink their long-term plans.
Doug Oberhelman, Caterpillar chief executive, made clear that as far as China was concerned, “our mid- to long-term forecast has not changed”.
That view was echoed by other manufacturing leaders such as United Technologies’ Mr Hayes.
“We … continue to make investments in China and China will be a growth market for years to come,” he said. “You’ll see ups and downs in China but a couple of quarters of China being down doesn’t dissuade us from the opportunity that’s there.”
In the meantime, however, US manufacturers are looking to their home market to offset weakness in the rest of the world.
That leaves them dependent on American economic exceptionalism.
“We continue to expect global manufacturing results this year to be influenced heavily by the extent to which US and Latin America buck the negative demand trends now being seen in China and Europe,” cautioned analysts at Fitch this week.
“Any faltering of the US economy would likely drive weakening global operating results for manufacturers in the second half of 2012.”