Caterpillar's China woes warn foreign investors
Caterpillar's revelation it found fake accounts at a just-acquired Chinese firm which will cost it hundreds of millions of dollars is a cautionary tale for those looking to enter the hugely promising market.
The United States equipment giant said this month it would take a US$580 million charge after uncovering "accounting misconduct" at Siwei Mechanical and Electrical Manufacturing, which it bought last year for at least US$650 million.
Caterpillar, one of the first US manufacturers to start exporting to China nearly four decades ago and which opened its first Beijing office in 1978, said it had removed several top Siwei managers for overstating profits.
Analysts said the stumble by a Chinese market veteran served as a reminder of the pitfalls of doing business in the country.
"This is going to teach firms that they've really got to do due diligence, especially when they see a company as large as Caterpillar run into a situation like this," said Ben Cavender, of Shanghai-based consultancy China Market Research Group.
But there would still be strong demand to invest in it, he added.
Foreign investors have poured more than US$1.0 trillion into China since it launched economic reforms in 1978, with US$112 billion last year alone.
Foreign companies that arrived early and persisted are now among the most successful, analysts say, but some met spectacular failure.
The travails of American Motors Corp - later bought by Chrysler - to produce its iconic Jeep brand in China in the 1980s are documented in the book Beijing Jeep by the author James Mann.
US aircraft maker McDonnell Douglas announced in 1994 it would manufacture 20 MD-90 planes in China, but fell way short due to technical and regulatory issues. The project was quietly scrapped after Boeing took over the company.
Siwei become publicly traded by taking over Hong Kong-listed ERA in a reverse takeover. In turn, Caterpillar announced it was buying ERA in 2011, saying the deal would allow it to find more customers in China.
Caterpillar discovered the problems five months after completing the transaction, and said it believed its process for vetting mergers and acquisitions was "rigorous and robust", according to a statement.
It said it was still investigating and would consider options, including litigation, to recover its losses, adding it was unaware of any criminal investigations by the Chinese or US governments.
The Wall Street Journal reported that two foreign investors controlled just under half of ERA's shares before the Caterpillar deal: former head of the American Chamber of Commerce in China, Emory Williams, and James Thompson III, son of the founder of moving company Crown Worldwide Group.
A spokesman for Caterpillar, based in the US state of Illinois, declined to comment on Friday.