The pandemic wreaked havoc on the global economy during 2020 and 2021, creating unprecedented levels of volatility as demand shifted rapidly. Initial uncertainty led to erratic order patterns, causing severe disruptions in global supply chains. Today, we're still grappling with the lingering effects, as suppliers of raw materials and manufacturers of finished goods struggle to keep pace with demand. This has resulted in rising input costs and shortages across many sectors.
Among heavy equipment manufacturers, Caterpillar stood out, excelling amidst this chaos. Certain segments of Caterpillar's equipment business plummeted by up to 30%, only to rebound by 30-50% from those reduced levels within a single year. Such dramatic shifts in demand posed immense challenges for high-value equipment manufacturers like those producing excavators, bulldozers, mining trucks, articulated dump trucks, and loaders.
In this post, we’ll walk through Caterpillar's response during the pandemic, breaking down its timeline and examining the company's strategic moves at different stages. We'll also explore how Caterpillar balanced the needs of its various stakeholders—customers, dealers, employees, shareholders, and others. Caterpillar's employees and dealers deserve credit for their remarkable performance during this tumultuous period.
The World Changed Overnight
Remember the sheer panic that gripped us at the onset of the pandemic in 2020? Stock markets were collapsing, grocery stores were limiting supplies due to hoarding, and toilet paper became more valuable than gold. Masks that once cost $0.50 were now selling for $30+, and securing even a small amount of hand sanitizer felt like winning the lottery.
It was an unparalleled experience. By spring 2020, it became clear that the pandemic would reshape the world as we knew it. Yet, there was still much uncertainty about the nature of the threat. Many braced for the worst, fearing the long-term implications.
The economy contracted sharply in the first half of 2020, faster than during the 2008 financial crisis. The Institute for Supply Management's (ISM) Manufacturing Purchasing Managers' Index recorded one of its largest and fastest declines ever, signaling widespread cancellations of orders, budget cuts, and layoffs across the nation.
Source: ISM Report On Business
Takeaway: New orders and production collapsed dramatically at the start of 2020 as businesses prepared for prolonged uncertainty. Any reading above 50 indicates economic growth, while readings below 50 signal contraction.
Disruptions in orders and production reverberate through the global supply chain, much like throwing a large rock into a calm lake. Manufacturers canceling orders trigger a domino effect, with suppliers canceling their own orders, and so on. Ultimately, this creates a self-perpetuating cycle as consumer purchasing power dwindles.
Business leaders face a difficult decision: determining whether the slowdown is temporary or permanent, while balancing budgets and keeping employees employed. High levels of uncertainty and poor demand visibility make forecasting extremely challenging.
As with any complex situation, staying informed and monitoring events is crucial. Caterpillar, a global company with nearly $50 billion in annual revenue and almost 100,000 employees worldwide, has a vast network of dealers across numerous countries. This global footprint allows Caterpillar to stay attuned to unfolding world events.
Early in the pandemic, before many governments imposed travel restrictions and the media paid minimal attention, Caterpillar acknowledged the risks posed by the coronavirus. The company stated it was closely monitoring developments and preparing for various scenarios. Caterpillar recognized a potential storm brewing on the horizon.
Caterpillar's Strategic Response
January 31, 2020: Full-year 2019 earnings report, before the panic set in
Caterpillar released its full-year 2019 results on January 31, 2020, when the virus was largely confined to China and just beginning to spread globally. Most companies and economists at the time underestimated the impending global panic. Media coverage of the virus was sparse, and economic activity appeared stable. Caterpillar reported slightly lower fourth-quarter results compared to its original expectations, but within typical quarterly fluctuations.
Caterpillar noted that some mining equipment customers were cautious but still seeking machine quotes. North American oil and gas markets were sluggish, though solar and rail markets remained strong. Construction equipment demand in North America was weaker than expected. The company acknowledged uncertainty in the outlook and had already begun adjusting its plans accordingly. Management discussed the coronavirus risk in China, stating that Caterpillar was monitoring the situation and prepared to respond swiftly. China accounts for roughly 10% of Caterpillar's global equipment sales, so the company has a keen understanding of regional economic trends.
"Sales to users for all three segments were lower than our expectations. In Resource (Mining) Industries, we continue to see strong quoting activity in mining as most commodities remain at investible levels, but customers are being cautious due to global economic conditions," said Caterpillar CEO Jim Umpleby.
"While we experienced a decline in mining sales in the fourth quarter, we continue to believe there will be a gradual recovery in our sales to mining customers. Our mining sales are lumpy, so there can be significant variation between quarters," he continued. "Energy & Transportation was a mixed bag due to the diversity of our end markets. North American onshore oil and gas activity remained depressed as we expected. Both solar and rail had a solid fourth-quarter.
"In Construction Industries, end user demand has softened, particularly in North America. As our earnings guidance indicates, we see some slowing across all three primary segments. We are ready to respond quickly to positive or negative developments in our end markets."
Mr. Umpleby addressed the coronavirus outlook for China by stating, "We expect our sales in China to be flat to down 5%. We are actively monitoring the coronavirus for any potential impact."
March 26, 2020: Caterpillar issued a statement regarding the coronavirus situation after the White House declared a national emergency on March 13, 2020.
By mid-March 2020, the virus was spreading globally, prompting stricter travel and safety restrictions. The stock market was in freefall, and business activity was slowing rapidly. There was a heightened sense of caution and uncertainty as people tried to understand the new risk.
Caterpillar had already begun planning for an uncertain future by working with its dealers, supply chain, and banks. The company increased its cash reserves to ensure financial stability, keep factories operational, and maintain payroll while keeping suppliers paid on time.
Anticipating potential supply chain strains, Caterpillar collaborated with its suppliers to secure availability. It also sought alternative second-source suppliers for critical parts in case one supplier couldn't deliver. Caterpillar correctly anticipated that some suppliers might be forced to shut down due to local regulations.
During this time, the company continued operating most of its factories worldwide.
"The continued spread of the COVID-19 pandemic is starting to impact Caterpillar’s supply chain, a possibility the company disclosed in its risk factors included in the company's Form 10-K filed on February 19, 2020. The company is monitoring the situation closely and supply chain teams have been executing business continuity plans, which include, but are not limited to, being alert to potential short supply situations, and, if necessary, utilizing alternative sources and/or air freight, redirecting orders to other distribution centers, and prioritizing the redistribution of the most impactful parts. Caterpillar is committed to continuing to execute these plans and will remain in close contact with its supply chain to monitor future possible implications, especially on production facilities," read the statement.
"At this time, Caterpillar is continuing to run the majority of its U.S. domestic operations and plans to continue operations in other parts of the world, as permitted by local authorities. However, due to uncertain economic conditions resulting in weaker demand, potential supply constraints and the spread of the COVID-19 pandemic and related government actions, Caterpillar is temporarily suspending operations at certain facilities. The company will continue to monitor the situation and may suspend operations at additional facilities as the situation warrants.
"The magnitude of the COVID-19 pandemic, including the extent of any impact on Caterpillar’s business, financial position, results of operations or liquidity, which could be material, cannot be reasonably estimated at this time due to the rapid development and fluidity of the situation. It will be determined by the duration of the pandemic, its geographic spread, business disruptions and the overall impact on the global economy."
"To protect the safety, health and well-being of employees, customers, dealers, suppliers and communities, Caterpillar continues to implement several preventive measures while also meeting the needs of global customers. They include increased frequency of cleaning and disinfecting of facilities, social distancing practices, remote working when possible, restrictions on business travel, cancellation of certain events and limitations on visitor access to facilities."
April 28, 2020: First Quarter 2020 Earnings, the height of uncertainty
By April 2020, panic was at its peak. Everyone was focused on the pandemic, and demand was in free fall. Caterpillar acknowledged the uncertainty but continued operating to ensure the availability of machinery and parts for critical industries like hospitals, data centers, and utilities.
Caterpillar noted early signs of supply chain constraints, primarily due to plant closures. Broader industrial demand was weak.
Even during the worst of the downturn, Caterpillar was already planning for the eventual recovery. It began preparing to stock dealer lots with new machines and parts to capitalize on rising demand.
"As the COVID-19 pandemic spread around the world, many governments classified Caterpillar’s operations as essential activity for support of critical infrastructure. Working with our dealers, Caterpillar is delivering products and services that enable our customers to provide critical infrastructure that is essential to support society during the COVID-19 pandemic," said Caterpillar CEO Jim Umpleby.
"Customers use our products to provide prime and standby power for hospitals, grocery stores, and data centers; to transport food and critical supplies in trucks, ships, and locomotives; to maintain clean water and sewer systems and to mine commodities and extractive fuels essential to satisfy global energy demand. While we are serving these important needs, Caterpillar remains dedicated to the safety, health, and well-being of our employees.
"We’ve also introduced a number of enhanced employee benefits to help them deal with the pandemic. These benefits vary by country based on local medical care systems and various regulatory requirements. Since Caterpillar was founded, our world-class global dealer network has provided us with a competitive advantage. And during this pandemic, our 165 dealers and their employees around the world continue to support our customers as they maintain critical infrastructure.
"We are working through a number of operational challenges related to the pandemic and have suspended operations at certain facilities due to a combination of supply chain issues, weak customer demand, and government regulations. As of mid-April, approximately 75% of our primary production facilities across our three main segments continue to operate. Some facilities that were temporarily closed have reopened, such as in China.
"We have worked quickly to mitigate disruption to our supply chain by using alternative sources, increasing air freight as needed, redirecting orders to other distribution centers, and prioritizing the redistribution of the most impactful parts. Our employees and dealers continue to serve our customers.
"We expect the impacts of the pandemic on our results to be more significant in the second quarter and to linger until global economic conditions improve. Due to the uncertainty associated with COVID-19 and its affects, we withdrew our financial outlook for 2020 in March 26, and are not providing one today.
"However, the impact of COVID-19 on our business has been significantly more severe and chaotic than any cyclical downturn we had envisioned. Governments have closed suppliers with little or no notice impacting Caterpillar’s operational efficiency. Importantly, while we have taken actions to reduce costs, we have made a conscious decision to continue to invest in enablers of services growth and expanded offerings key elements of our strategy for long-term profitable growth.
"Our goal is to emerge from this crisis as an even stronger company, better positioned for long-term profitable growth."
October 27, 2020: Third quarter 2020 earnings, the economy rebounds
By October 2020, it was clear that the worst was behind us, and the economy was rebounding. Massive fiscal stimulus from governments worldwide reignited global growth and consumer demand. Hospitals and medical professionals had learned how to manage the situation and stabilize patients.
Broader industrial demand showed clear signs of recovery from the low levels of the previous months. Commodity prices began to rise slightly, but there were no strong indications of input cost inflation or supply chain shortages yet.
"I'm proud of how our global team has performed in a challenging environment, providing the essential products and services that enable our customers to support a world in need. We continue to leverage our strong safety culture, remaining both safe and productive in this pandemic altered work environment," said Caterpillar CEO Jim Umpleby.
"We went into the pandemic with a strong balance sheet, and it continued to invest in expanded offerings and services to make our customers more successful.
"The situation remains fluid. Overall, we are cautiously optimistic. We continue to work closely with our suppliers to be well positioned to meet changes in market demand. We're maintaining good product availability levels for the vast majority of our products. Availability of our aftermarket parts is solid as well."
Andrew Bonfield, CFO, said "Machine orders increased by double digits percent comparing to the third quarter versus the second quarter. This is one reason we believe that despite their destocking dealers are seemingly more confident about the future. We saw dealers become more positive about demand in construction industries."
April 29, 2021: First-quarter 2021 earnings, supply chain pressures intensify
By April 2021, the global recovery had lasted about nine months, and more industries began citing rising input cost inflation and strained supply chains as headwinds. Many factories were caught off guard by the rapid rebound in demand.
Caterpillar's foresight helped it prepare for this environment because it had correctly anticipated an economic rebound and secured supply agreements.
"We're pleased with our strong start to the year, and there are positive signs in a number of our end markets. However, we're monitoring a variety of external factors that could moderate the positive impact of continuing improvement in market conditions. These include the pandemic's recent acceleration in several overseas markets, the potential for supply chain disruptions and cost pressures. Areas of particular focus include semiconductors, transportation, and raw materials," said Caterpillar CEO Jim Umpleby.
"While none of these has significantly impacted our operations, there remains the potential for impact later this year. The situation remains very fluid. Our team has been developing contingency plans, including workarounds in our factories that may lead to increased costs. We're working very hard to avoid or minimize having supply chain issues lead to production shortfalls that might impact our ability to fully meet improving customer demand."
"I'll share some thoughts on our end markets based on what we see today. Starting with Construction Industries, North America will continue to benefit from strong residential demand. We see non-residential construction recovering at a gradual pace with infrastructure recovering faster than non-residential building.
"We anticipate continued improvement in demand, particularly in mining. Favorable commodity prices support higher CapEx for mining customers. We continue to feel optimistic about mining. We have a strong value proposition, particularly in autonomy-enabled products. We also expect growth in heavy construction in quarry and aggregates off a low base."
July 30, 2021: Second quarter 2021 earnings, supply chain pressures persist
By mid-2021, after a year of strong demand, supply chains continued to show strain. Semiconductors became a focal point as many industries like automotive, trucking, computers, and aerospace competed for the same scarce chips.
Caterpillar seemed to have anticipated this scenario—it hasn’t cited semiconductors as a major supply concern. Moreover, its business margins remained healthy despite rising input costs driven by higher prices for steel, copper, and other commodities.
"We’re encouraged by higher sales and revenues across all regions and in our three primary segments, which reflect continued improvement in our end markets," said Caterpillar CEO Jim Umpleby.
"Demand from residential construction remained strong, and demand related to non-residential improved. Mining was also up. Quotation activity for miners remains strong, and we've seen a significant improvement in orders through the first two quarters. We were also pleased that Heavy Construction and Quarry and Aggregates strengthened, as did several end markets within Energy and Transportation.
"In spite of the unprecedented challenges impacting the industrial sector, I'm proud of the work by our team to minimize disruptions, which were relatively modest during the second quarter. For the majority of our products, availability remains within our normal ranges.
"We mentioned on the last earnings call that the supply chain situation, including transportation, was challenging, and that our team was preparing contingency plans such as alternative assembly processes at our facilities.
"During the quarter, our team implemented some of those plans, and continue to work closely with our suppliers to mitigate supply chain impacts on production. We still anticipate that supply chain challenges will remain throughout the year, and our role is to minimize the impact on our ability to meet improving customer demand."
Visualizing The Rapid Changes In Caterpillar's Heavy Equipment Sales
Our team created the infographic below to help visualize the large swings in Caterpillar's heavy equipment sales during and following the pandemic. As you can see, several segments saw changes of ~40-50% in a very short time frame.
Caterpillar's three primary business segments saw very large fluctuations: Construction Equipment segment went from flat to down ~25% to up 20%, sales for the Mining Equipment segment went from up ~20% to down ~30% to up ~20%, and sales for the Energy and Transportation segment went from up ~5% to down ~27% to up slightly.
Normally retail sales fluctuate about 5-15% in a year. During the pandemic, Caterpillar's business segments experienced ~40-50% fluctuations, which is about 4-5x the normal level.
Note: View this interactive table on our Tableau page
Takeaway: Caterpillar's segments experienced extreme volatility in a short time frame.
Conclusion
Through careful planning and by staying attuned to global events as they unfolded, Caterpillar navigated a very challenging production environment. The company was able to accommodate large changes in its equipment sales, keep its customers and dealers satisfied, and maximize employment at lower activity levels.
Caterpillar's foresight in monitoring the coronavirus situation early on and creating contingency plans for its supply chain helped it thrive as global demand rebounded quickly. The company maintained open lines of communication with its equipment dealers and suppliers worldwide, enabling it to process business intelligence efficiently and address a broad range of outcomes during an uncertain time.
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