Caterpillar (NYSE:CAT), the global construction and mining equipment manufacturer, is eyeing huge growth in China over the next three years. China’s engineering machinery industry is expected to register a growth of ~100% by 2015, increasing from over $73 billion in 2011 to $145 billion in 2015. Caterpillar is working hard to ensure that it captures a majority of this growth. The company has decided to double its 11,000 strong workforce in China by 2015 while its dealers are also expected to boost their staff in a bid to serve this anticipated increased demand.
Caterpillar principally competes with other industrial equipment manufacturers like CNH Global NV (NYSE:CNH), Komatsu (KMTUY.PK) and Volvo AB (VOLVY.PK). We currently have a Trefis price estimate of $108 for Caterpillar’s Stock, which is slightly below the current market price.
The growth in the Chinese market will primarily be driven by the central government spending which is expected to reach levels of 1 trillion yuan in affordable housing over the next 5 years and 4 trillion yuan in water conservancy projects over the next decade. The increasing trend of urbanization, which is prevalent in other South East Asian countries in addition to China, will further contribute towards driving the growth of construction industry. China is also embracing prefabrication construction techniques as the need for more efficient construction and less transportation of raw materials is being felt. This will require technological innovation from construction players as well as construction equipment manufacturers.
The growth in China will be impeded by rising interest rates as the Chinese economy starts to focus on more domestic sources of growth and encourages consolidation in certain industries. Chinese construction machinery companies have already started to feel the pain from tighter monetary policy.
According to the Business & Finance Review, the total cash flow of China’s 11 construction machinery companies, whose annual sales surpass 10 billion yuan ($1.5 billion), was minus 2.634 billion yuan by mid-2011, while the figure was 5.613 billion yuan in the same period of 2010.
China may also become a victim of oversupply in the construction market as it is open to all the players. Excavators are a good example of this where the domestic production capacity for excavators is outstripping demand. However, in spite of these concerns, Caterpillar feels that the country’s construction machinery industry will witness continue to post impressive growth rates of around 5-10% in 2012 and justifies its push in the country.