Caterpillar Moves the Earth in China
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The world's largest producer of earth-moving equipment, Caterpillar (NYSE: CAT), has been a believer in the China growth story long before it became fashionable for investors.
The company opened its first office there in 1978 and started its first Chinese joint venture in 1994. Think about it...having set foot in China more than three decades ago, Caterpillar has seen nearly of China's economic and social change and its rise from being one of the poorest countries on Earth on a per capita basis.
But now China has become the world's biggest market for machinery and Caterpillar has grown its Chinese presence right along with it. The company now has 16 manufacturing facilities, nine new facilities under construction, four research and development centers, and three logistics and parts centers. In fact, China now accounts for roughly 10% of its annual revenues and is climbing rapidly.
To date, Caterpillar has been able to compete successfully in China, garnering a 7% share of the heavy machinery market. It will not be easy though for Caterpillar to make further gains.
Its Chinese rivals such as Sany Heavy, Shantui and Xugong are gaining fast. They have gained market share in recent years through quickly improving technology and aggressive marketing that includes offering very attractive financing.
One prime example of this trend is the lucrative and fast-growing excavator market. Caterpillar's share has fallen to 7% from 10% just five years ago, according to the British consultancy firm Off-Highway Research.
Caterpillar itself says that to compete better in China it must build up its supply chain in the country. The company's production capacity has at times lagged behind the fast-growing demand for its line of construction equipment. That is why it continues to make multi-billion dollar investments into China.
The company's Chinese rivals may prove to be a headache to Caterpillar on a global scale too. Shantui, one of the world's biggest makers of bulldozers, this summer set up a subsidiary in Dubai to serve as a gateway to the rapidly growing construction markets of the Middle East and north Africa. Sany Heavy, which makes a wide range of construction equipment, is expanding right here in the United States.
Despite these headwinds, Caterpillar has succeeded in China more than most American companies. Much of that success may be due to a combination of the Chinese willingness to pay more for reliable products and the company's corporate culture. Caterpillar is known for the service support its gives each piece of equipment for the life of the product and the Chinese love that.
Caterpillar also has the right attitude to succeed in China. The company showed it is very serious about gaining more market share in China when last winter it moved group president in charge of emerging markets, Richard Levin, to Hong Kong to be closer to that market. As Mr. Levin said, “For Caterpillar to maintain its industry leadership, it is critical that we continue to invest in emerging markets [like China] to support our customers.”
Some people think about how to stop China. Wrong attitude. It will be the largest economy in the world someday. You get in there and position yourself like Caterpillar has. The company's goal is to become the top brand in its industry by 2015. That's the right attitude.
Investors looking for a “safe” way to invest into China should consider looking at Caterpillar.
The author holds no positons in any of the companies mentioned above.
