In an effort to cut more than $1.5 billion per year in operating costs, heavy equipment manufacturer Caterpillar announced that it will be cutting up to 10,000 jobs between now and 2018 — with about 5,000 of those cuts mostly coming by the end of this year.
The move is in response to a shrinking market for its products, according to a Caterpillar news release. So far this year, the company’s sales and revenues outlook are down about $1 billion from the $49 billion projected at the beginning of the year. And next year’s projected sales are expected to drop another 5%.
Caterpillar will offer a voluntary retirement enhancement program for qualifying employees. This program is aimed at trimming the company’s workforce as much as possible by the end of this year.
Cutting Production Costs
Layoffs and early retirements are only expected to account for less than half of the $1.5 billion annual savings the company hopes to achieve. The remaining cuts will come from lower period manufacturing costs, including savings from plant consolidations and closings.
About 20 Caterpillar facilities could be on the chopping block, or about 10% of the company’s total manufacturing space. Closings will be scheduled throughout 2016, 2017 and 2018.
Response to Industrial Shifts
The budget cutting moves come as a result of changes in many industries that traditionally use Caterpillar heavy equipment, according to Cat chairman and CEO Doug Oberhelman.
“We are facing a convergence of challenging marketplace conditions in key regions and industry sectors, namely in mining and energy,” Oberhelman said in a company news release. “While we’ve already made substantial adjustments as these market conditions have emerged, we are taking even more decision actions now. We don’t make these decisions lightly, but I’m confident these additional steps will better position  Caterpillar to deliver solid results when demand improves.”
Unprecedented Decline in Sales
If 2015’s sales projections are accurate, it will be the third consecutive year that Caterpillar’s sales and revenues have decreased. And if the trend continues into 2014 as predicted, it will mark the first time in the company’s 90-year history that there have been losses four years in a row.
Something had to give, said Oberhelman.
“Our strategy is to deliver superior total shareholder returns through the business cycle, and growth is a key element of that strategy,” Oberhelman said. “However, several of the key industries we serve — including mining, oil and gas, construction and rail –have a long history of substantial cyclicality. While they are the right businesses to be in for the long term, we have to manage through what can be considerable and sometimes prolonged downturns.”
Pre-tax costs associate with Caterpillar’s announced layoffs and plant closings are expected to total about $2 billion.
Other Equipment Makers Follow Suit
A week before Caterpillar’s announcement, the British heavy equipment manufacturer JCB announced that it was cutting 400 jobs by the end of the year in respond to a “dramatic” slowdown in world markets.
The company cited a 43% decrease in many of the world’s biggest heavy equipment markets, including Brazil, Russia, China, and India.