|Caterpillar Revenue (2009-2019E)|
Rising world population and prosperity is driving the demand for energy, resources and infrastructure in the emerging countries. Many Chinese heavy equipment makers companies have realized this global opportunity and are become more active internationally. This has become a major threat for Caterpillar as experienced with Sany Heavy’s strategy to undercut Caterpillar prices by 20%, making them the largest hydraulic excavator manufacturer in China. Similarly, other Chinese companies such as Liugong, XCMG, Zoomlian and Shantui are gradually striving to capture market share in emerging countries.
With Chinese companies aggressively being offensive by improving their ability to produce efficiently and better finance through government funneled tax breaks and grants, Caterpillar has implemented a strategy to focus primarily on the Chinese market in order to gradually take out Chinese competitors. As said by Chief Executive Ed Rapp, “The best way to beat Chinese outside China is to compete and win with them inside of China”. Caterpillar’s strategic plan in China includes number of key steps:
- Capture Low-Price Segment: Shandong Engineering
Machinery Co. (SEM), now wholly owned by Caterpillar, has expanded
Caterpillar’s product line to inexpensive equipment which usually sell 30%-50%
less than Caterpillars branded products. Similarly, Caterpillar is acquiring
other small companies in China to weed out competitors and defend market share.
- Expand R&D for Emerging Countries:
Caterpillar is expanding their R&D facilities in China to develop models
specifically for the emerging market. R&D costs are considerably lower in
China and having a model specifically for the emerging market allows them to
further reduce price and build targeted equipment.
- Build More Manufacturing Facilities in China: Caterpillar is building number of new manufacturing facilities in China to serve the emerging market, specifically for China and India.
Will this strategy help Caterpillar, considering other foreign competitors such as Volvo are heavily investing in China? Instead of focusing only in China, should Caterpillar expand their facilities in India and Brazil as well?