Shani Wallis, TunnelTalk

The potential was there, and the noises coming from Caterpillar when it bought out the Lovat TBM manufacturing company in April 2008 were bullish and confident. The appointed President of the renamed and rebranded Caterpillar Tunnelling Canada Corporation (CTCC), Dick Cooper, stated in a face-to-face interview with TunnelTalk in July 2009 that other TBM manufacturers should be worried by the fact that the largest construction equipment manufacturing company in the world had decided to go into competition with them.

Caterpillar TBMs on the Spadina Line

That, however, has proven not to be the case. In a corporate statement last Thursday, 2 May 2013, Caterpillar announced that it is to cease taking new orders for TBMs and will have ramped down manufacturing activities by mid-2014. It will maintain support and spare parts commitments to existing customers and projects for a little longer, until the end of 2016, but the scaling down and ultimate end to tunnelling activities will impact heavily on the 330 existing CTCC employees worldwide.

"This was not an easy decision to break to the CTCC employees, and it was not a decision that was taken lightly," said Caterpillar's Media Relations spokesperson, Rachel Potts, who works in the company's Law and Public Policy/Global Government & Corporate Affairs Division. "The fact is that after evaluation, CTCC was found to have significantly underperformed financially, and the decision was taken to withdraw from the tunneling business."

Caterpillar chose not to explain to TunnelTalk how this evaluation had been made, or how its decision had been reached, except to say "the business was classified as no longer being a strategic fit." In another strategic policy, rather than sell off the division as a going concern, the decision is to "determine if the company can allocate the machinery in the workshops in Toronto to other parts of the Caterpillar manufacturing operations." Once existing TBM orders have been delivered and a period of after-sales support and spare-parts honored for existing customers, the entire operation will be closed down.

Caterpillar never did quite supersede the Lovat brand

"The option of selling the operation as a going concern was considered," said Potts. "But this was rejected as a nonviable option. Therefore the operations will be phased out and shut down." After closedown the various buildings that are owned by Caterpillar as part of the Lovat buyout will be sold off, and leases on others used by CTCC will not be renewed. "The majority of CTCC employees are based at the factory, offices and works in Toronto," said Potts. "We are committed to answering all their questions and concerns, and offering severance packages."

Over the past five years of its ownership it is hard to know which of the Caterpillar machines in the field were sold under the new brand and which were originally Lovat TBM orders, deliveries and reuses. The feeling among most in the industry, however, is that Caterpillar failed to make an impact in what is a highly competitive TBM sales market.

Caterpillar also found out early that the TBM tunneling market is unpredictable. One of the confirmed Caterpillar sales was the machine delivered to the troubled New York Harbor Crossing water tunnel project for the OHL/Tulley Spanish/US Joint Venture. In a disastrous set of circumstances, the starter shaft of the project, along with the beginning of the undersea drive by the TBM, were completely flooded out during Superstorm Sandy in November 2012. Flood water has since been pumped out of the tunnel and shaft, but the rehabilitation of the saltwater damaged TBM is said to be part of a stalemate of wrangling between the contractor, the client and the project insurance underwriters. At last report, no tunneling has been advanced since the inundation and the JV has withdrawn its staff from the standstill job.

A strategy to standardize TBM components and sizes to promote a more cost-effective range of 'off the peg' TBMs by Caterpillar also failed to take shape. The unpredictable nature of tunneling and the particular features needed on a TBM to cope with varying geological conditions continually defeats efforts to standardize machines and their sizes. TBMs are part of an overall and integrated system, rather than a standalone piece of equipment.

Geological section of the troubled New York harbor tunnel drive

In further discussions with Potts it was confirmed that Dick Cooper, who took the helm at Caterpillar in Canada after the Lovat purchase, has taken retirement, and that Paul Clark, a long term Caterpillar employee who manages another division of the company, has taken over to see the tunneling business through the last of its operations.

Until 1 May 2013, CTCC was part of the Diversified Products division of the company's main Resources Industries interests. Resources Industries principally includes the mining equipment ranges and equipment for various industries including paving, forestry, waste and defense. The other two main divisions of the company's three reporting divisions are Construction Industries, which includes equipment such as wheel loaders, backhoes, excavators and graders, and the Power Systems division that includes products such as diesel engines for various applications and gas turbines for energy generation, and the company's railroad interests.

Until its closure CTCC is moved to be part of the Parts Distribution and Diversified Products division, which resides in the company's Customer & Dealer Support business of the Construction Industries reporting sector.

Tough financial times
The tunneling division closedown announcement comes against a backdrop of disappointing results from Caterpillar Inc for the first quarter of 2013. The quarterly profit/share of $1.31 was down from the $2.37 first-quarter 2012 profit/share. First-quarter 2013 sales and revenues were $13.210 billion, down from the $15.981 billion recorded in the first quarter of 2012. Profit was $880 million, compared with the $1.586 billion recorded in the first quarter of 2012.

"In our year-end 2012 financial release we said the first quarter of 2013 would be challenging, and it certainly was," said Caterpillar Chairman and Chief Executive Officer Doug Oberhelman in a statement. "In the first quarter of 2012 Cat dealers added machine inventory of about $875 million. This year they reduced machine inventory by about $700 million. Those are significant year-on-year swings, and, coupled with moderating end-user demand, this resulted in sales and revenues being down 17%."

In light of the first quarter results Cat revised its outlook for 2013 to reflect sales and revenues in a range of $57 to $61 billion, with profit/share of about $7.00 at the middle of the sales and revenues outlook range. The previous outlook for 2013 sales and revenues was in a range of $60 to $68 billion with a projected profit/share of $7 to $9.

Oberhelman went on to explain that the revised 2013 outlook reflects a sales decline of about 50% from 2012 for traditional Cat machines used in mining, and a decline of about 15% for sales of machines from the Bucyrus acquisition that Cat finalized purchase of in July 2011 for a price of $8.8 billion. "While 2013 will be a challenging year, we are confident about the long-term prospects for our business, and when conditions improve the steps we have taken will position us well to serve our customers and deliver better financial results," said Oberhelman.

Dick Cooper, retired

Caterpillar worldwide full-time employment was 124,874 at the end of the first quarter of 2013, compared with 127,238 at the end of the first quarter of 2012, a decrease of 2,364 full-time employees. The flexible workforce decreased 9,047 for a total decrease in the global workforce of 11,411. Divestitures, including the sale of a majority interest in Caterpillar's third party logistics business and portions of the Bucyrus distribution business, decreased the global workforce by 7,736. The acquisition of Siwei added 4,317 to the global workforce.

While Caterpillar is feeling financial pain, smaller, specialized TBM manufacturing companies and others in the tunneling business are enjoying profitable times. The underground space industry is bucking the overall economic trend and logging high levels of activity.

There is no official comment about the turn of events from the Lovat family. Richard would be understandably saddened to see a company that he built from scratch come to an end. For Rick Lovat, while he will share the disappointment of the former Lovat employees that stayed on with Caterpillar, he has focused his attention on other pursuits. Among other things, he is currently TBM Technical Advisor to the Washington State Department of Transportation for the huge Hitachi TBM that has arrived in Seattle to complete the Alaskan Way highway bored tunnel. He is also a candidate for Vice President on the Executive Council of the ITA, the International Tunnelling Association.

References

A powerful partner for pushing forward - TunnelTalk, April 2008
New leadership at LOVAT - TunnelTalk, July 2009
Tough competition for TBM manufacturers - TunnelTalk, April 2010
Name change completes LOVAT acquisition - TunnelTalk, February 2011
Mega EPBM for Seattle tested in Japan - TunnelCast, December 2012

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