How Caterpillar Successfully Navigated The Pandemic Turbulence

Aug. 24, 2021

Toilet paper hoarding and empty grocery shelves were not that long ago. The pandemic had a meaningful impact on global equipment sales and production, and today many supply chains remain strained. Caterpillar's proactive approach paid off.


The pandemic caused tremendous volatility for the global economy during 2020 and 2021, given the initial uncertainty and rapid changes in demand. Large swings in orders and demand led to strained global supply chains, and today we are still experiencing the after-effects as suppliers of raw commodities and factories producing finished goods struggle to keep up. This has led to input cost inflation and shortages for many goods and services.

Caterpillar, among many other heavy equipment manufacturers, performed exceptionally well in this challenging environment. Several of Caterpillar's equipment segments saw rapid declines of up to 30%, then a strong recovery of 30-50% from that lower base - all within one year. These huge changes in demand over a short time frame are extremely challenging for any manufacturer of high value-add equipment such as excavators, dozers, mining trucks, articulated dump trucks and loaders.

In this post, we cover Caterpillar's actions during the pandemic, stepping through the timeline and analyzing the outlook at each time interval, as well as looking at what the Company did to balance the needs of its various stakeholders (customers, dealers, employees, shareholders, etc). Caterpillar's employees and dealers deserve a round of applause for their performance during the pandemic.

Our World Changed Rapidly

We all can remember watching outright panic during the onset of the 2020 pandemic. The stock market was plunging, many grocery stores began rationing food due to hoarding, toilet paper was on its way to becoming more valuable than gold, $0.50 N95 masks were selling for $30+, and you were lucky if you had secured a small supply of hand sanitizer.

That was a once-in-a-lifetime experience, no doubt. During the Spring of 2020, we all began to realize the pandemic would change the world as we knew it, but we still did not know everything about the new enemy. Many feared and prepared for the worst.

The economy contracted during the first half of 2020 at a pace faster than the Great Financial Crisis of 2008. The Institute for Supply Management (ISM) Manufacturing Purchasing Managers' Index, one of the best barometers for US manufacturing activity, experienced one of the largest and fastest declines on record for New Orders and Production. This signaled that companies across the nation were stepping on the brakes hard by canceling orders, cutting budgets and laying off workers.

ISM Manufacturing PMI during pandemic

Source: ISM Report On Business
Takeaway: New orders and production plunged rapidly at the beginning of 2020 as businesses prepared for prolonged uncertainty. Anything above 50 means the economy is growing, and anything below 50 means the economy is shrinking.

Large changes in orders and production cause ripples through the global supply chain. Similar to throwing a big stone in a still lake, those ripples repeat and travel much farther than you would anticipate. When a manufacturer cancels orders from its suppliers, those suppliers then cancel their orders from their suppliers, and the ripple travels up the chain. Eventually, it becomes self-reinforcing because end consumers lose their purchasing power.

Business leaders are faced with a tough challenge - deciding if the pause is short-term or long-term and making plans to keep as much of the workforce employed as possible while balancing budgets and ensuring survival. Uncertainty and limited demand visibility make it extremely tough to forecast the future.

As with any complex situation, it pays off to be well-informed and monitor events as they unfold. Caterpillar is a global company with ~$50 billion in annual sales and almost 100,000 employees located around the world. Caterpillar produces machines and parts for thousands of its equipment dealers located in countries around the world. Caterpillar's global dealer footprint enables it to keep a close pulse on world events as they unfold.

Early during the coronavirus pandemic, before many global governments moved to restrict travel and the media barely focused on it, Caterpillar acknowledged the coronavirus risk and stated it was monitoring events and planning for a variety of outcomes. Caterpillar saw a potential storm forming on the horizon.

Caterpillar's Actions & Response

1/31/2020: Full-year 2019 earnings report, before the panic had begun

Caterpillar reported its full-year 2019 results on January 31, 2020, when the virus was primarily in China and had just begun spreading across the world. The vast majority of companies and economists did not anticipate the soon-to-be global panic ahead. At the time, there was little media coverage of the virus, and economic activity was fairly steady. Caterpillar reported its fourth-quarter results slightly below its original expectations but within normal quarterly fluctuations.

Caterpillar noted that some mining equipment customers were cautious, but they were still asking for machine quotes. North American oil and gas markets were slow, but solar and rail were strong. North American construction equipment was softer than expected too. Caterpillar noted that the outlook was somewhat uncertain, and it had already started planning for changes in the outlook. Management spoke publicly about the coronavirus risk in China, stating that the Company was monitoring the situation and would be ready to respond quickly. China represents around 10% of Caterpillar's $50 billion global equipment sales, so the Company has a good sense of economic activity in the region.

"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. Upleby touched on the coronavirus topic with the 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."

3/26/2020: Caterpillar issued a statement regarding the coronavirus situation after the White House declared a national emergency and held a formal press conference on 3/13/2020.

By mid-March 2020, the virus was spreading across the globe, and countries began introducing stricter travel and safety restrictions. The stock market was in free fall and business activity slowed rapidly. There was an abundance of caution and uncertainty as we struggled to learn more about the new risk.

Caterpillar had already started planning for an uncertain future by working with its equipment dealers, supply chain and banks. The Company increased its cash reserves to ensure a sound financial position, keep factories open and employees on the payroll, and keep suppliers paid on time.

The Company anticipated that its supply chains could become strained, so it started working with its supplier partners to ensure availability. It also looked for alternative second source suppliers for critical parts and components in the event one supplier could not deliver. Caterpillar correctly anticipated that some of its suppliers may be forced to shut down by local regulations.

During this time, the Company continued to operate most of its factories around the world.

"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."

4/28/2020: First Quarter 2020 Earnings, the point of greatest uncertainty

By April 2020, the panic was in full-force. Everyone was focused on the issue, and demand was in free fall. Caterpillar acknowledged the uncertainty and continued operating to ensure the availability of machinery and parts to keep critical industries such as hospitals, data centers, utilities, etc open.

Caterpillar noted it saw some early signs of supply chain constraints, mostly due to forced closures of plants. Broader industrial demand at this time was weak.

Even during the worst point of the downturn, Caterpillar was already focusing its sight on the eventual recovery. It began planning for a potential rise in activity at some point down the road so it would be able to keep its dealer lots adequately stocked with new machines and parts.

"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 fright 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."

10/27/2020: Third quarter 2020 earnings, the economy is rebounding

By October 2020, it became clear that the worst was behind us, and the economy was rebounding. Large fiscal stimulus distributed by governments worldwide helped reignite global growth and consumer demand. Hospitals and medical professionals had learned by then how to address the issue and stabilize patients.

Broader industrial demand showed a clear sign of rebound from the low level. Commodity prices began to rise slightly, but there were not many signs of strong input cost inflation or supply chain shortages from demand.

"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."

4/29/2021: First-quarter 2021 earnings, supply chain pressures increase

By April 2021, the global recovery had lasted about nine months, and more industries began to cite rising input cost inflation and strained supply chains as headwinds. Many factories were unprepared for a 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."

7/30/2021: Second quarter 2021 earnings, supply chain pressures remain

By mid-2021, after a year of strong demand, supply chains continued to show strain. Semiconductors became a focal point as many industries such as automotive, trucking, computer, aerospace, etc competed for the same scarce semiconductor chips.

Caterpillar seems to have planned ahead for this event as well - it has not cited semiconductors as major supply concern. In addition, its business margins remained healthy despite a rising input cost environment 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.

Caterpillar Equipment Sales during 2020 pandemic

Note: View this interactive table on our Tableau page
Takeaway: Caterpillar's segments experienced extreme volatility in a short time frame.


Through careful planning and by paying attention 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 happy, and maximize employment at lower activity levels.

Caterpillar's foresight to monitor the coronavirus situation early on and create contingency plans for its supply chain helped it thrive as global demand rebounded quickly. Caterpillar maintained open lines of communication with its equipment dealers and suppliers across the globe to assimilate and process business intelligence quickly, which enabled it to address a wide spectrum of outcomes during an uncertain time.


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