Caterpillar's Emerging-Market Strategy
Caterpillar (NYS: CAT) has long been in love with the kind of growth prospects that emerging markets provide the company. To that end, the construction-equipment giant announced that it will invest $210 million in India as it expects an increase in road-construction and infrastructure-development projects in the country to remain strong into the future.
Caterpillar said it will open a new factory in the country that will produce engines and also add to an existing heavy-duty truck-manufacturing facility. This new facility will add to Caterpillars count of three manufacturing facilities, an R&D center, and a logistics services center in India.
Go where the growth is
Of course, in terms of numbers, this deal is tiny in comparison with the big news from Caterpillar this month -- the company's offer of up to $885 million for Chinese mining manufacturer ERA Mining. There is huge demand in China for mining equipment, and the acquisition should offer solid growth prospects for the future. Caterpillar is competing with well-established rival Joy Global (NAS: JOYG) to supply mining machinery to China's growing coal industry, but I expect there to be enough demand for both to be successful long-term in the country.
After struggling in China for a while, Caterpillar recently said it's finally regaining market share in the country, which accounts for about half of the world's total demand for construction equipment. Caterpillar's China market share had fallen to 7% from 10% five years ago. Finally seeing a positive trend is huge for Caterpillar and its 16 China factories. These facilities helped Caterpillar increase its Asia/Pacific revenue growth 55% in its 2011 third quarter from the same period in 2010.
Caterpillar has also been relying on Latin America, and specifically Brazil, to drive demand for equipment this year. However, recent sales numbers from the region have been slightly disappointing. The company saw its sales increase 16% in Latin America in October, down from a 33% increase in September and a 43% increase in August. This trend may be slightly worrisome in such an important market, but it is certainly correctable. Caterpillar is still the largest global manufacturer of heavy construction equipment, and the company has seen greater unit volumes globally of late.
Emerging-market growth is critical for mature companies like Caterpillar, and this company knows it. Case in point: its recent investments in India and its huge offer for the Chinese company ERA Mining. Don't expect Caterpillar to relinquish its position as the largest manufacturer of construction equipment anytime soon. Instead, we look for the company to continue leveraging that position with investments in high-growth emerging-market countries like Brazil and India.
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At the time this article was published Brendan Byrnes owns no shares in any companies mentioned above. The Motley Fool owns shares of Joy Global. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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