When Caterpillar, the world’s largest producer of earth-moving equipment, opened its first joint venture in China in 1994, the country was still among the poorest in the world in terms of gross domestic product per capita, and bicycles, not cars, dominated the streets of Beijing and Shanghai. Fast forward to today, when China is the world’s biggest market for machinery, accounting for about 9 per cent of Caterpillar’s annual revenues.
While many global brands have struggled in China’s consumer sector, Caterpillar has been relatively successful so far in maintaining its grip on China’s premium machinery market. A string of recent high-profile pullbacks by multinationals include Mattel’s closure of its flagship Barbie store in Shanghai, along with store closures by Best Buy and Home Depot.
Unlike the consumer sector, the heavy machinery sector has largely rewarded foreign companies – like Caterpillar and Japanese rival Komatsu – that offer better quality at higher prices than their domestic peers.
Today Caterpillar has about a 7 per cent market share in China, and in recent years the company has become more focused on China, relocating group president Richard Lavin to Hong Kong last winter. Caterpillar even took the unusual step of issuing renminbi-denominated bonds in Hong Kong last year, to raise funds for its leasing business in China.
“Our strategy is very straightforward, in support of the corporate strategy. We have got to win in China,” Mr Lavin told an industry conference in March.
There is tough competition, however, from Chinese rivals, who have gained market share in recent years from their foreign peers through aggressive marketing, attractive financing and improving technology. In the highly-prized excavator market, one of the fastest growing, Caterpillar’s market share has fallen to 7 per cent from 10 per cent five years ago, according to figures from consultancy Off-Highway Research.
Chinese heavy machinery makers – a group that includes groups such as Sany Heavy, Zoomlion, Xugong and Shantui – have excelled at wooing new customers through aggressive promotion by dealerships, says Shi Yang at Off-Highway Research. Some dealerships give buyers raffle tickets to win a Mercedes or a BMW car; others offer financing incentives like zero down payment. The technology gap between Chinese companies and their foreign peers is also diminishing.
Coming months are set to put some Chinese machinery makers to the test though, as demand for construction equipment in China falls on the back of a weakening real estate sector. Analysts and industry executives expect a period of consolidation for Chinese equipment makers that will eventually produce a handful of clear leaders.
Meanwhile, a handful of larger Chinese groups are already vying for global dominance with ambitious expansion plans overseas. Shantui, one of the world’s biggest makers of bulldozers, last week launched a new subsidiary in Dubai as a gateway to the Middle East and north Africa. Sany Heavy, which makes a range of equipment including excavators and concrete pumps, is set to complete its US headquarters and a manufacturing site in Peachtree, Georgia, later this year.
“I wouldn’t be surprised to see Chinese companies acquire overseas companies and build up manufacturing overseas,” said Edmond Huang, an analyst at Bank of America Merrill Lynch. “They are already doing things in Brazil, America and Germany that have made them closer to the market.”
Caterpillar says one of its greatest challenges is building up its supply chain in China; the company’s production capacity has recently lagged behind the growing demand. Finding managerial talent is also a key challenge in China, Mr Lavin told the Financial Times last year.
Despite these headwinds, Caterpillar’s story in China has been much happier than that of many foreign multinationals. In the area of high speed rail for example, Germany’s Siemens and Japan’s Kawasaki Heavy Industries have seen their technology “digested” by Chinese train companies. In the technology sector, many foreign firms have been hamstrung by regulatory barriers.
Caterpillar believes part of its success is that customers are willing to pay more for products that are more reliable. “In our industry, thankfully, the most important thing to customers when they buy a product is what that product earns them over its lifetime,” said Mike DeWalt, director of investor relations, in June, citing Caterpillar’s support for its equipment as a big advantage. “There were probably some product categories where the Chinese and the Koreans today can be more successful. And that’s probably in areas of the market that don’t require as much service support.”