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Eastern Exposure: 5 Equipment Makers To Watch in 2013

Howard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As China’s once supercharged growth rate has slowed to a more realistic level, Western original equipment manufacturers doing business in the country are finding that expectations there may never again be as lofty as they were during the recent boom years. A huge upside remains for machinery makers with significant exposure, of course, as the Chinese government continues to orchestrate an urbanization program unlike any the world has ever previously seen. And what’s already our second-largest economy will likely grow more quickly again once other regions, like Europe and the U.S., get their own acts together.

Nonetheless, questions about China's impact have grown as a persistently squishy global economy and aggressive domestic policies designed to tame inflation have accelerated what is now more than a minor slowdown. The nation’s economic growth slipped to 7.4% in 3Q12, the lowest level in more than three years, and the impact on some industries has been more noticeable than on others. At the end of 2010, for example, Chinese mining companies reported annual spending on equipment had risen by about 25% over the previous year. At the end of last year, the increase was about 15%. Figures are not yet in for this year, but expectations are for the high single digits — followed by mid-single digit growth in 2013 — which are leaving Western companies serving that market with supply surpluses and order shortfalls that are negatively and severely transforming their projections and bottom lines.

Despite 'Signs of Life,' Slow Recovery Expected

With its dominant global presence in the construction and mining spaces, Caterpillar (NYSE: CAT) is one of the more visible firms with a big stake in the China story. Sales there have fallen by $250 million to $300 million and Chairman and Chief Executive Officer Doug Oberhelman admitted on Thursday in an interview with Bloomberg Television that while some hopefulness is warranted the picture is not yet quite as encouraging as he and others would like. “China is showing some signs of life,” said Oberhelman, whose company realizes about 3% of its sales there. “I’m convinced we are going to see positive changes in the next few months. I’m pretty optimistic about China, not a big boom like we’ve seen, but slowly recovering.”

Oberhelman’s position is based in part on a Chinese government announcement earlier in the week that new leader Xi Jinping will be actively promoting the type of urbanization programs that drive construction and mining equipment sales. These in turn could push other firms back into the positive zone. So, with the New Year approaching, a few  related companies are also worth watching as the story unfolds.

4 More Businesses With Exposure to Chinese Development

Joy Global (NYSE: JOY) — The other big original equipment manufacturer of mining machinery along with CAT, JOY expects to realize 12% of its total sales from China this year — up from 9% in 2007, and on its way to a goal of 20% in 2017. As we reported a few days ago, a sustained slowdown there will cause short-term pain and could spark a long-term reevaluation.

Komatsu (NASDAQOTH: KMTUY) — This Japanese company is the world’s second-largest manufacturer of hydraulic excavators behind CAT, and its share in China is significant with sales growing over 200% between 2006-2010. Executives recently said they expect demand there for heavy equipment during 4Q12 to be down 40% from last year. Demand in 1Q13 will “at best” be level with the year-earlier period, they said, although at the low end they could fall by 20%.

Cummins (NYSE: CMI) — This company designs, manufactures, distributes, and services diesel and natural gas engines that are used in construction equipment as well as heavy-duty trucks and various industrial applications. As recently as 1Q11, CMI saw China sales of its imported and domestically made products rise by 66% from the previous year and it announced plans to dramatically increase production at its local plants. By 3Q11, however, the market had tanked and sales turned negative. This past summer, the company reported 2Q12 revenue from the Chinese construction market was down 55% from a year earlier.

Deere (NYSE: DE) — The world’s largest maker of farm equipment also manufactures construction machinery, and it is beginning to occupy three new plants in the country designed to expand its capacity. Nonetheless, it also has not been able to escape the downturn in recent quarters and while DE does not break out China results specifically, executives said in their fiscal 4Q12 earnings report that they expect little improvement there in 2013.


Some growth is obviously better than no growth. And the vast size of China's population, combined with the government's strategy of relocating massive numbers of people from old rural villages to new urban centers, means opportunities for a wide array of Western businesses will continue. But the lofty expectations of a few years ago — followed by a push to ramp up capacity to meet them — have left the companies above and others in a tough spot. Those who have prepared properly and possess the resources for the long haul will likely be rewarded. The full benefits just won't arrive as quickly as they and their investors had initially hoped.

Fool blogger Howard Rothman does not own shares in any of the companies mentioned in this entry. The Motley Fool owns shares of Cummins and Joy Global. Motley Fool newsletter services recommend Cummins. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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