January 30, 2012: LONDON, Ontario—Outside a rail locomotive factory owned by Caterpillar Inc. here, locked-out workers have set up a trailer and a wooden shack to keep warm between bouts of waving union flags and shouting slogans. In a high-profile test of union clout in Canada, they are digging in for what looks like a long struggle.

The workers, who are resisting a new labor contract that would slash their wages by about 50%, hope Caterpillar will soften its demands soon rather than face the risk of delaying deliveries of locomotives to customers.

Caterpillar Chief Financial Officer Edward Rapp said in an interview that the company can make the locomotives it needs to deliver this year by using other plants, including new ones in Muncie, Ind., and Brazil.

"We can meet the demand," Mr. Rapp said. The company wouldn't say how many locomotives it is due to deliver this year.

Caterpillar also has an agreement with Bombardier Inc. under which that Canadian company builds locomotives for it at a plant in Sahagún, Mexico. That agreement predates the lockout.

Caterpillar, based in Peoria, Ill., locked out the 450 locomotive workers on Jan. 1. Before the lockout, Caterpillar and the Canadian Auto Workers union were in talks for more than six months over the company's push for cuts in wages and benefits. Each side has blamed the other for the failure to reach a pact. Caterpillar extended the terms of the old contract for six months until the end of 2011 but refused a union request for more time, saying it didn't "see the value of any further extension."

Employers across Canada are "watching what Cat is doing," said Rolf Gerstenberger, president of a United Steelworkers of America local union that represents workers at a plant in Hamilton, Ontario, owned by U.S. Steel Corp. Mr. Gerstenberger and workers from the Hamilton plant drove 75 miles to London last week to wave flags in front of the locked plant.

"This Caterpillar lockout is an absolute test case of the union's resolve," said Mike Moffatt, an economist at the University of Western Ontario in London.

The showdown with Caterpillar, known for its willingness to fight organized labor in the U.S., comes when Canadian unions are on the defensive. The CAW, which represents the Caterpillar workers in London, is discussing a possible merger with the Communications, Energy and Paperworkers union in an attempt to bulk up. In a recent discussion paper, officials of those unions wrote that, unless unions become more effective and attract more workers, "we will steadily follow U.S. unions into continuing decline."

About 32% of Canadian employees are represented by unions, compared with 12% in the U.S. Excluding government employees, the percentage of Canadian workers represented by unions has dropped to about 18% from 21% in 1997, according to Statistics Canada.

One factor in the decline has been a trend since the mid-1990s for Canadian provinces, including Ontario, to provide for secret ballots by workers on whether to certify unions rather than having workers merely check a box on a card, said Benjamin Dachis, an analyst at the C.D. Howe Institute, a Toronto-based conservative think tank. Unions are less likely to win support in secret ballots.

"We face an incredibly hostile environment both economically and politically," said Jim Stanford, an economist at the CAW, adding that accepting the wage cut Caterpillar wants "would be a horrible, horrible precedent." Workers note that Caterpillar is demanding concessions even as it trumpets record profit.

Caterpillar has said wage cuts and other contractual changes are needed because the plant isn't "sufficiently flexible and cost-competitive."

The dispute may boil down to whether Caterpillar believes it can do without the Ontario plant, its main assembly center for locomotives. The CAW notes that the Muncie plant is still gearing up to produce on a larger scale. "Brazil is not even up and running yet," said Bob Scott, the CAW's plant chairman in London.

Workers at the Ontario plant say Caterpillar last year hired some of their retired colleagues to help train employees at the new Muncie plant, where workers aren't represented by a union. Caterpillar has advertised jobs there at wages ranging from $12 to $18.50 an hour. Wages for most workers at the Ontario plant are 35 Canadian dollars (US$34.94) an hour, the CAW says.

Caterpillar declined to discuss the prior wage at the Canadian plant.

The Canadian workers say it will be hard for Caterpillar to find enough workers in Indiana, Brazil or Mexico with the skills needed for the intricacies of such tasks as welding train parts together. "It takes time" to learn those skills, said Shaun Oliver, who has worked as a welder at the plant for six years and was standing near a scrap-wood fire in a steel drum outside the plant one recent evening. His union flag snapped in a prairie gale as sparks swirled around half a dozen workers. "You have to know what you're doing," Mr. Oliver said. "It's not a Lego piece."

By James Hagerty for The Wall St. Journal