The Global Demographic Tailwind

[DewDiligence]

Caterpillar Seeks to Match China Success in India

http://www.ft.com/cms/s/0/8a7e79b8-d31b-11de-af63-00144feabdc0.html

›By Peter Marsh
November 17 2009 02:00

For Jim Owens, chairman and chief executive of Caterpillar, a true test of how well his company emerges from the recession will be its performance in the next few years in Asia.

In this regard, the score card for the world's biggest manufacturer of construction equipment is a mixture of good and bad. While Mr Owens is happy with Caterpillar's progress in China, he is "disappointed" with Caterpillar's weak showing in India.

In both countries, purchases of earth-moving machinery are expected to rise next year, in line with huge amounts of cash being ploughed into big infrastructure projects such as roads and buildings.

China is regarded by Mr Owens as a success story for Caterpillar, with the company's sales having held up against competitors such as Komatsu of Japan and state-owned Chinese machinery makers.

But in India, Caterpillar languishes in fourth position in sales of diggers, loaders and other construction machines, and well behind the industry leader - the much smaller JCB of the UK. "JCB has kicked our bums in India, and I am determined we will do better," Mr Owens says.

With Caterpillar's sales in other parts of the world having been pushed down by the economic downturn, its activities in Asia have taken on more importance.

In 2008, the Asia-Pacific region accounted for 17.5 per cent of Caterpillar's sales of $51.3bn. However, on the evidence of figures for the first nine months of 2009, this year the region is likely to be responsible for more than a fifth of full-year revenues, expected to be about $32bn.

Looking further ahead, Mr Owens has set his sights on Caterpillar's annual sales returning to about $50bn by 2011-2012; with Asia playing a big role in the intended growth, along with a strong contribution from the US as the country's economy picks up.

In the whole of Asia, a willingness to be patient and think ahead is a prerequisite for success, says Mr Owens - a 63-year-old economist who has had the top job at Caterpillar since 2004, and is stepping down next October.

"If you want to do well in Asia, you've got to think about the next 5-10 years, not just the next set of quarterly results," he says.

In China, Caterpillar started its first sizeable joint production venture in 1994, in partnership with state-owned Xuzhou Construction Machinery Group.

Since then, Caterpillar has not only gained control of the venture through an 87 per cent stake but followed a similar pattern to acquire 100 per cent of another former government owned business, Shandong SEM.

Mr Owens says that Caterpillar has worked hard in China to convince government authorities that it can be a responsible owner of such facilities.

"We're not a 'buy and then sell out' kind of company," says Mr Owens. "We've spent a lot of time in China spelling out how we aim to be good stewards of businesses in China for years to come."

Last year, Caterpillar had sales of about $2.5bn in China, where it now has 11 plants, and is keen to increase this revenue significantly in the next few years.

To help in this goal it has started a $1bn investment programme in China to strengthen its manufacturing and sales operations in the next few years.

As for India, the story is far less upbeat.

In 1986, the company signed a deal under which Hindustan Motors, an engineering supplier, made some of its machines under licence. But Caterpillar was slow to take control of manufacturing operations in the country, acquiring Hindustan only eight years ago.

Since then Caterpillar has moved ahead in India much less quickly than JCB - a company whose worldwide sales last year of £2bn [$3.3bn] were about a fifteenth of its own.

"Sir Anthony Bamford [JCB's chairman and owner] has recognised the importance of India for a long time and has done a good job there," Mr Owens says.

According to Off-Highway Research, a UK consultancy, in India last year Caterpillar was in fourth position in terms of sales of construction machines, accounting for only 7 per cent of the 34,500 units sold. JCB - the leader - accounted for 39 per cent.

Last year, Caterpillar started a $200m investment programme in India to improve its position in that market.

The investments by Caterpillar include new engine and equipment manufacturing operations and moves to strengthen its dealer network.

Mr Owens declines to give detailed figures for the company's sales in India, saying that last year they came to a "few hundred million dollars". JCB says its own sales in Asia are about £400m.

The one positive point that Mr Owens could make about China and India is that - at present - the former adds up to a much bigger market for construction machines than its economic rival. According to Off-Highway Research, last year in China sales of the equipment added up to $14bn, seven times as much as the comparable market in India.

However, by the time demand for construction machines in India start to rival those in its more economically powerful neighbour, Mr Owens hopes that Caterpillar's own performance in the country will have shown a considerable improvement.‹