Caterpillar targets lower-level markets for more sales
08 August 2009 - 7:49AM
Dow Jones News
Construction and mining equipment maker Caterpillar Inc. (CAT)
is trying to expand its sales of lower-priced machinery in
developing markets without undermining its reputation as a
premium-priced brand.
The durability and reliable performance of Caterpillar's
bulldozers, excavators and other earth-moving machinery allows the
company to sell at the highest price ranges in the U.S. and
Europe.
But Caterpillar's quality proposition hasn't been an instant hit
in developing countries, such as China, where many cost-conscious
buyers continue to opt for less expensive brands with fewer
performance features and enhancements.
To capture these customers, Caterpillar intends to launch
alternative brands with no-frills machinery priced below its
namesake yellow equipment. It's an unprecedented move for the
Peoria, Ill., company as it tries to adjust its position in
emerging markets to capture more of the anticipated surge in
equipment demand from the increases this year in
government-sponsored spending on roads, bridges, railroads and
other infrastructure.
Caterpillar is specifically aiming for the midprice equipment
market in developing countries. In China, that segment accounts for
about half the construction equipment sold annually. Caterpillar
executives hope their middle-market lines will distinguish
themselves enough to convince customers to move up to
Caterpillar-brand equipment, allowing the company to scale back or
discontinue the alternative brands.
"The end game is not to compete in the midtier long-term," said
Rich Lavin, group president for emerging markets, during a
presentation this week to Wall Street analysts. "The end game is
still to sell Cat-branded products through Cat dealers. We need the
volume and scale associated with a broader midtier line to move the
market over time."
The strategy, though, includes significant risks for
Caterpillar, the world's largest construction equipment company by
sales. It faces a host of tough and growing competitors, especially
in China, that specialize in midmarket machinery. Moreover,
analysts say there are no guarantees that enough customers will
switch to higher-priced Caterpillar models to make the strategy pay
off.
"By making machines under different names and lowering their
prices, you're cutting your margins to get into the game," said
Charles Yengst, president of Yengst Associates Inc., an equipment
market forecasting consultant in Connecticut. "You might see a
percentage of these customers that buy into that lower level move
up, but it will take several years."
Developing markets accounted for nearly 15% of Caterpillar's
$51.3 billion in sales and revenue last year, up from 7% in 2005.
Lavin predicts that in 10 years, 70% of equipment sales volume
worldwide will come from China, India, Russia, Indonesia and other
emerging countries, compared with 37% last year.
"If we're going to be the global industry leader 10 years from
now, we've got to be the leader in those markets, principally
China," he said. China accounted for 27% of global equipment sales
volume in 2008.
Caterpillar's sales and revenue from China totaled $2.6 billion
in 2008, or 5% of total sales. The company wants annual sales from
China to reach $4.2 billion by the end of 2012.
Caterpillar's SEM brand will be a primary platform for the
middle-market expansion in China. The company acquired the brand
with its purchase of Shandong Engineering Machinery a year and a
half ago. Lavin said he's considering other purchases or joint
ventures to increase Caterpillar's penetration into the market
segment. The company also is expanding production in China of older
models of Caterpillar motor graders, wheel loaders and bulldozers.
Lavin said that equipment, some of which will likely be sold under
other names, will be "aggressively localized" to compete with
midprice Chinese brands.
Lavin said China will be the blueprint for the middle-market
machinery build-outs that Caterpillar will deploy in other
developing countries in the coming years.
"I think Cat will work it out," said Charles Rentschler, an
analyst with Wall Street Access. He added that most developing
countries' ambitious agendas of construction and mining projects
will favor greater use over time of Caterpillar's high-performance
equipment. "Those things aren't going to get built by mom-and-pop
contractors," he said.
Caterpillar closed Friday at $47.78, up 64 cents, or 1.4%.
-By Bob Tita, Dow Jones Newswires; 312-750-4129;
robert.tita@dowjones.com