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FEATURES/Cross Border | Mar 13, 2013 | 6451 views

How Caterpillar Got it Wrong in China

Caterpillar says it was duped when it lost half a billion dollars in China on an acquisition gone wrong. But maybe it should have seen it coming
How Caterpillar Got it Wrong in China
Image: Getty Images
Williams is a China veteran but insists he was taken in

W

hen Caterpillar’s new CEO, Douglas Oberhelman, went to Wall Street in August 2010 to pitch his global strategy, China was on his mind. “We are stepping it up big-time and putting our money where our mouths are,” he said. “We’re going to play offenCe, and we’re going to win. We will win in China.”

As Oberhelman spoke, a defunct video-distribution company in Hong Kong was finalising a reverse merger that would come to haunt Caterpillar. On September 30, 2010, ERA Holdings became the proud parent of a Chinese manufacturer of roof supports for mines. Now, its principal, Emory Williams, a US entrepreneur in Beijing, was looking to raise more capital for the company called Siwei.

Two months later, Caterpillar acquired South Milwaukee-based mine-equipment maker Bucyrus International for $7.6 billion. In China, Caterpillar faced stiff competition from domestic producers of trucks and diggers. Now it had a bulked-up mining division in a country that shovels the most coal in the world. So, in November 2011, Caterpillar agreed to pay up to $886 million for the renamed ERA Mining Machinery. The new owners promised to invest in Siwei and expand distribution in China and overseas.

For Williams, 56, it was the exit of a lifetime: He and his business partner owned 46.9 percent of ERA. Associates say he saw Siwei benefitting from Caterpillar’s deep pockets and global distribution. “The ERA guys thought, ‘Great, if we’re aligned there’s no stopping us,’” says a source close to Siwei.

Not so fast. To hear Caterpillar tell it, it sank its money into an alleged fraud. On January 18, it said it had uncovered “deliberate, multi-year co-ordinated accounting misconduct” by Siwei to inflate revenues. Just seven months after closing, Caterpillar announced a stunning $580 million writedown of its asset. “I recognise the decision to acquire Siwei happened on my watch, and the buck stops at my desk,” a crestfallen Oberhelman said on January 28.

On the scale of corporate malfeasance, Caterpillar got off easy. Its impairment pales next to Hewlett-Packard’s recent $8.8 billion writedown for Autonomy. And with revenues up 10 percent in 2012 to $66 billion, Caterpillar can take a half-billion hit. But its failure to spot the danger signs at Siwei is a fumble for a US industrial icon and raises doubts about the way it does business abroad. In the scramble to “win in China”, did Caterpillar executives lose sight of the risks?

China is awash in tales of foreign investment gone awry. The twist in Caterpillar’s troubled takeover is that the seller, Williams, is a fellow American, a pillar of the expat business community. As executive chairman of ERA, he was a confidence-booster for foreign partners. A Chinese newspaper referred to the fallout as “Americans cheating Americans”.

In a statement, Williams said that Caterpillar’s revelations came as a complete surprise and that requests for clarification had gone unanswered. As directors of ERA, Williams and his business partner “took the company’s fiduciary and reporting responsi- bilities very seriously”. He declined to speak on the record to Forbes.

Williams hasn’t been accused of wrongdoing, and Caterpillar has signalled it faults “senior managers”, not Williams, for the misconduct. But Cat isn’t done yet, and litigation is likely. At stake is more than wounded pride: Caterpillar paid for ERA in cash and loan notes payable in 2013 and 2014, with the first payment due in April. Oberhelman told analysts, “We are considering all options to recover our losses and hold those responsible accountable for their wrongdoing.”

The loan notes add to the mystery over Williams’ role. While minority shareholders could opt for all cash, Williams and his partner had to accept 30 percent in notes indexed to future profits. They apparently believed the hype. By the time the acquisition closed in June 2012, they held 60 percent in loan notes from Caterpillar, worth up to $233 million. Not exactly the tactics of sellers who were in on an alleged scam.

This article appeared in the Forbes India magazine issue of 22 March, 2013
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Comments (1)
Hash Mar 22, 2013
Not only China...a serious giant like CAT has messed up India too.
They've been here for decades, tied up with the wrong partner, spent years trying to de-clutch themselves from their Indian partner, and even now look totally lost. Look at how Cummins (engines/gensets), Komatsu, JCB have played their cards in India...the truth should have dawned on CAT long, long ago.
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