China sales fall short of Caterpillar forecasts

Caterpillar, the world''s biggest maker of earthmoving equipment by revenues, said it had overestimated Chinese demand for construction equipment, adding that its inventories in the country were so high that it was now exporting machines to other developing countries where demand was tight.

The industrial bellwether said it was now expecting demand for construction equipment to decline in China this year, down from its prior forecast of growth of 5-10 per cent, a assessment that illustrates the difficulties facing industrial multinationals that have made big bets on the Chinese economy.

China makes up 10 per cent of Caterpillar''s business in Asia and 3 per cent of its overall sales. The development is a sharp reversal of fortunes for the company''s China operations, which have fuelled its profits in recent years as demand has been sluggish in developed economies.

It also calls into question Caterpillar''s plan to ramp up capacity in China. The company has 16 manufacturing facilities in the country – the most recent of which opened only last month – with nine more under construction, most of them due to open this year. It also plans to double its China workforce from its current level of 11,000.

The company on Wednesday reiterated those plans. Doug Oberhelman, chief executive, said, "Our mid- to long-term forecast has not changed."

The industrial bellwether said stronger than expected demand in the US though would offset the weakness in China as well as Brazil.

It said the US recovery was entrenched and raised its forecast of new home construction as it reported profits for the first quarter that were well ahead of Wall Street expectations. Caterpillar also raised its full-year profits outlook.

Caterpillar shares however were trading down 5 per cent at $103 by early afternoon in New York however as investors focused on the China market news.

The company earned a record net profit of $1.59bn or $2.37 a share in the quarter, up from $1.23bn or $1.84 a share a year ago and above analysts'' average forecasts of about $2.13 a share, boosted by acquisitions and strong sales of mining equipment.

The company raised its profit outlook for 2012 to $9.50 a share at the midpoint of its $68bn-$72bn forecast for sales and revenues.

The prior outlook was for about $9.25 a share.

Mr Oberhelman said much of the demand in the US was accounted for by resource and construction companies replacing ageing machinery.

Ed Rapp, chief financial officer, told the FT Caterpillar plans to export 2,300 excavators from China to other emerging markets, principally the Middle East but also Africa, eastern Europe and Latin America.

"The primary focus we''ve had for our manufacturing facilities in China is to build for China," said Mr Rapp. "However, we are now diverting units out of China." He said the company last did so at the time of the China''s 2004-05 economic slowdown.

"CAT built inventory in China for a sales ramp that did not materialise," Rob Wertheimer, an analyst at Vertical Research Partners, wrote in a research note.