Introduction Caterpillar shocked the business world earlier this year when it announced that it would take a $580 billion write off for 2012 Q4. This write off was in relation to Caterpillar’s acquisition the previous year of Chinese firm Siwei. Caterpillar alleged that this was the result of fraud that had been committed by Siwei’s managers. There were a lot o f questions asked in the business press. People wondered if Caterpillar had done proper due diligence, how Siwei had perpetrated the fraud, and if any Caterpillar employees had been involved. The incident raised new fears and resurrected old ones about doing business in China and the trustworthiness of Chinese firms. There were rumors everywhere and few answers.
Caterpillar itself was not very forthcoming with particulars. This makes it difficult to know for certain what exactly what went wrong and why. Any analysis requires reliance on speculation and raises as many, if not more, questions than it answers. It is still worth looking into because it shows some important points that other companies can learn from.
Background
Caterpillar has had difficulty establishing a position in China comparable to its position in the rest of the world. In order to grow its operations China, Caterpillar decided to take a route that has proven successful for many MNCs operating in the PRC and use M&A rather than build things from scratch. After looking around, in 2011 Caterpillar proposed the acquisition of ERA Mining Machinery and its subsidiary Siwei for $886 million. ERA Mining Machines (ERA) was a mining machinery firm in China that was listed in Hong Kong and was the result of a reverse merger. While Siwei, ERA’s wholly own subsidiary, had always been a manufacturer of mining machines, ERA was a neophyte in the industry. ERA had previously “acquired” Siwei through a reverse merger. Before the