Caterpillar drives sales on China's new Silk Road

CHICAGO/NANTONG, China: At a Caterpillar facility in the eastern Chinese city of Nantong, an array of excavators, earth movers and road-making machinery is displayed on slopes and in mud pits.

The audience is Caterpillar’s local network of dealers, who inspect the machines for the latest technological innovations to help make their sales pitches to buyers in China.

However, much of the heavy equipment could find its way to construction and mining projects in places like Pakistan or Kazakhstan, or as far away as Africa.

Caterpillar has been investing heavily in China – the Nantong facility is one of 25 similar ones it has set up across the country – in the hopes of cracking the largest construction and mining equipment market in the world.

Helping fuel the growth of that market, Caterpillar executives and analysts say, is China’s Belt and Road Initiative, a huge infrastructure spending spree that builds on the old Silk Road trading routes. The ambitious and ever-growing $1 trillion initiative now includes projects spanning Asia, Europe, the Middle East and Africa.

“Belt and Road is becoming a very important driver for Caterpillar’s development,” said Chen Qihua, head of Caterpillar China, at the Nantong facility.

The world’s biggest equipment maker doesn’t reveal its sales tied directly to Belt and Road projects, or break out its China revenues.

But analysts say its Asia-Pacific sales figures reflect demand for machines destined for Belt and Road projects as contractors buy most of their equipment in China to take advantage of tax rebates handed out for the initiative. Chen said contractors prefer to buy machines in China to take advantage of the rebates.

Asia-Pacific sales increased 22 percent in the last quarter of 2017 over the previous year, with construction demand in China accounting for about half that increase, Caterpillar said in January. It said it expected demand to remain strong at least through the first half of 2018.

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Once purchased in China, the equipment is shipped off to projects across the vast geography of the initiative and put to work building power plants in Pakistan, constructing highways in Belarus or developing new mines in Africa. Most of the equipment sent is made in China, Chen said.

Lawrence Poh, executive director at Caterpillar’s largest dealer in China, told Reuters at his office in Kunshan, just outside Shanghai, that orders had increased due to demand from Belt and Road projects. He did not provide details.

COMPETITION

While China has been a bright spot for Caterpillar, it is facing competition from cheaper construction equipment made by Chinese companies, particularly in China. Other Western companies such as General Electric, Honeywell and Maersk are also vying for orders, particularly in the energy and transportation segment.

Joshua Yau, a Hong Kong-based Belt and Road analyst at Strategy&, an arm of the PwC consultancy, says Chinese construction equipment companies like Zoomlion and Sany Heavy Industries dominate sales inside China.

But Yau said that outside China, Caterpillar’s advanced technology and global network made it a better option.

“Caterpillar is mostly getting the orders where Chinese equipment suppliers are not competitive,” said Yau. He added that Chinese products were generally viewed as inferior in terms of quality and technology.

Caterpillar’s sales pitch is that its machines use less fuel and help construction teams work faster. Advanced software helps track the machines’ performance, and when things go wrong it has a network of more than 170 dealers and 2,000 branches around the world to help with repairs.

“In the geographies where they are newcomers, Chinese contractors can leverage CAT’s overseas network to help compete and win projects,” Yau said.

In Africa, for instance, a piece of equipment sold by a China-based dealer for a project in Kenya or Algeria could be serviced by a Caterpillar dealer on the continent.

“It’s very easy for us to align with other dealers,” Poh said.“Once our equipment goes abroad, they will need to provide good maintenance and upkeep for the customer in order to allow the equipment to perform at their best.”

Analysts said a lack of overseas dealer networks and a perceived shortfall in quality meant Chinese rivals were struggling to expand their share of the global market.

“The low-labour cost advantage associated with these Chinese companies will hold less sway as products become increasingly complex and quality standards significantly increase,” analysts at Morningstar wrote in a recent note.

Caterpillar is also deploying its financing arm to spur Belt and Road sales, company executives said. Since the launch of the initiative, the financing arm has started lending to Chinese companies, including state-owned enterprises, to help bridge their funding gaps. Caterpillar does not disclose specific data for such lending.

MULTI-YEAR BOOST

Still, Belt and Road is also providing opportunities for Chinese construction companies.

A study by Off-Highway Research found that countries along the Belt and Road accounted for 30 percent of Sany’s overall sales in 2016-2017. At XCMG Construction Machinery, 75 percent of overseas sales came from countries associated with the initiative. Sales figures were not provided.

Analysts and Caterpillar executives say Belt and Road, on which Beijing says it wants to spend as much as $150 billion a year outside China, offers ample opportunities for all manufacturers.

“As government funding for the BRI projects improves, this is expected to result in higher demand throughout the industry,” said Jeff Hardee, director of Asia-Pacific government & corporate affairs at Caterpillar in Singapore, referring to the initiative.