Friday, November 30, 2012

Caterpillar's China Strategy ... Best Defense is a Good Offense

In sports like basketball, the really good teams find a way to win on the road.

These teams frequently employ the "best defense is a good offense" strategy by taking aggressive offensive actions, making their opponents concentrate on stopping them from scoring at will. And when that happens, the other teams often find their own offensive game plans faltering.

Since the objective is to win the game, that means simply outscoring your opponent through the 1-2-3 approach -- (1) playing smart, (2) together and (3) hard.

Put more points on the board and your team will win. It's that simple.

That 1-2-3 aggressive approach has been used successfully by Caterpillar with its Japanese competitor Komatsu, and it's being employed again in China. Cat management is smart to do so.

Caterpillar Strategy in China: Go Low discusses Cat's low cost and no frills approach to competing with the Chinese in their own back yard:

"When Komatsu pledged to "strangle" Caterpillar in the U.S. three decades ago, executives at the Peoria, Ill., company countered by taking on the Japanese construction-equipment maker in its home market.

Now as Chinese companies emerge as global players, Caterpillar is hoping to take a similar tack.

Many of China's top construction equipment makers, such as Sany Heavy Industry and Zoomlion Heavy Industry Science and Technology are becoming more active internationally, building production facilities and distribution networks. Chinese companies can be expected to win "in the international competition," Sany Group Chairman Liang Wengen told reporters this month.

Caterpillar is pushing back. "We're bringing our game to China," Group President Ed Rapp said. "The best way to beat Chinese outside of China is to compete and win with them inside of China."

Shandong Engineering Machinery Co. is at the core of Caterpillar's strategy. Since SEM became a wholly owned unit in 2008, Caterpillar has expanded the Chinese company's product line beyond wheel loaders, adding motor graders, bulldozers and paving machinery. The aim: Manufacture no-frills, inexpensive equipment for the price-conscious Chinese market. SEM products sell at 30% to 50% less than their Caterpillar-branded counterparts. . . .

That low-price segment increasingly is critical for Caterpillar as its core business is pressured in China. The construction-equipment market took a nose dive in the second quarter of last year from which it has yet to recover. Analysts say sales in some categories have plummeted while inventories have skyrocketed and that recovery seems far off.

Other foreign makers of construction equipment in China also are stepping up the fight against domestic competitors by producing more lower-price models, typically under separate brand names.

"Sales of new machinery may pick up next year but not that much," said Shi Yang, of Off-Highway Research, a construction-management consulting firm. . . .

Caterpillar says it will reduce the pace of investment in China by re-evaluating its expansion plans. The company has pushed back plans to add a building at its facility at Xuzhou, about 500 kilometers northwest of Shanghai. . . .

For Caterpillar's Mr. Rapp, success in China is crucial. "If you are going to be a good baseball team, you have to win on the road," he said. "Winning in China is us winning on the road."

Summing Up

China is not only going to be a big market for Cat, but Chinese companies are emerging as much bigger and forceful global competitors.

Accordingly, Caterpillar is well advised to develop a meaningful competitive presence and winning Chinese game plan, if only to make it more difficult for Chinese competitors to target the U.S. market.

SEM, Cat's wholly owned Chinese subsidiary, is able to sell its no-frills products for much lower prices than Caterpillar branded products, thereby enabling it to compete on equal terms with its Chinese competition.

While it won't be easy taking on the Chinese in the Chinese market, it's essential if Cat wants to win globally and also successfully defend its North American home turf.

Thinking globally while acting locally is an absolute imperative in global competition.

So who will win the global competition? My bet is that Caterpillar will do just fine.

They've long had an aggressive, smart and hard working competitive approach to business, and that's the winning way.

Thanks. Bob.

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