How do you say Caterpillar in Chinese?
By Edward Matloub, Thomas McIntyre, Peter Rohlfer, Caelie Fryers, Bert Valencia Jr. and Aditya Koyyalamud
Caterpillar has survived the recession and enhanced its global presence, but at what cost? Caterpillar is a quintessential American company with a highly differentiated brand that is recognized for quality and dependability. Founded in 1925, as a result of the merger of the Holt Company and C.L. Best Tractor Trailers, the company has left an indelible mark on American society. The Holt Company gained notoriety during the First World War with the production of heavy-duty tractor-trailers. The company also produced other machinery during World War II to build bridges, airstrips and an entire logistical network used to support the Allies. This cemented the company’s position as an all-American brand capable of attaining the highest quality. This image has remained with the company for three generations, and in 2008 Global Brands ranked Caterpillar number sixty-eight out of the top one hundred global brands. Despite this rich legacy, the firm operates in a highly competitive industry and is at a crossroads which will determine the future of the company and potentially re-define its image throughout the world.
The leadership team at Caterpillar is facing an unusual predicament: How can the firm maintain high growth rates given the remarkable success over of the past decades? This point was poignantly illustrated during the recent recession. To prevent Caterpillar from becoming a victim of its own success while mitigating the downturn in American markets, the corporate leadership decided to aggressively pursue opportunities in emerging markets. While this policy could prove successful, one must consider all the potential trade-offs and pitfalls of Caterpillar pursuing an international strategy.
Caterpillar has implemented its new growth strategy through a series of acquisitions and capital investments. Purchases like Lovat, and more recently, Bucyrus have significantly enhanced the company’s position within the sector. Acquiring Gremada and Equipamentos e Serviços Ferroviários extended Caterpillar’s reach into the engine and global infrastructure markets abroad. This diversification was further aided by huge capital expenditures made in China and India. These investments resulted in jobs being re-located to these locations at the expense of previously established locations.
While these actions have significantly enhanced Caterpillar’s position in emerging markets, they raise several strategic concerns. As Caterpillar expands its presence in the developing world, and continually spreads production operations throughout East Asia, the company will have an increasingly difficult time defending its position as a truly American entity. By becoming a global company with a global presence, Caterpillar risks alienating their traditional clients in North America and other established markets. The “Made in America” label is an effective marketing tool. Unfortunately, Caterpillar’s contract with the United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) expires in March 2011, and it may become increasingly expensive to keep jobs in North America. Nevertheless, the company needs to recognize the value of these established markets, and view already sold equipment as annuities that require attention as a major source of revenue.
As Caterpillar expands oversees, it should be very careful to maintain and even strengthen its relationships in American and other markets where it has an established position. The equipment sold to clients offer long-term revenue streams for any company in the heavy equipment manufacturing industries. The production of replacement parts is often three to five times more lucrative than the initial purchase. Factoring servicing in to the equation, one can see the value of these relationships. Therefore any new strategies employed by Caterpillar must not endanger its current and profitable relationships.
The issue of brand and marketing is especially important in this context. Caterpillar’s brand and established position in the industry are incredibly strong assets for the firm. The company sells an entire range of clothes and toys with its name. This is an important position for the company to defend, as they offer ways for Caterpillar to differentiate itself against competitors. Nevertheless, becoming an increasingly global entity with more employees overseas may endanger this market and image. Caterpillar’s brand must represent their vision and strategy; failing to do so will create confusion, both internally and externally. The damage done by such a scenario is not easily mended, and would have long lasting implications for the firm. These potential pitfalls, along with other operational issues, may put Caterpillar in a difficult position.
It is important to note the company’s rising debt levels, which are compounded by the activities of the financial services division. Cheap financing offers are beneficial to sell expensive products and build relationships with clients, but simultaneously hurt the company’s overall balance sheet. The leadership must therefore carefully judge this division in perspective of total sales. Indeed, the company’s debt to equity ratio has risen from 2.6 in 2006 to 3.8 in 2008. Caterpillar is becoming increasingly dependent on the global debt capital markets, and the current strategy to compete based on price undermines its ability to raise additional funds should they be desired or needed.
The current investments and acquisitions also pose an interesting quandary concerning the company’s revenue stream. Analysts are quick to note that in 2008 construction and mining accounted for 18.9% of total revenue, with infrastructural development accounting for a further 18.5%. While the company is diversifying its presence globally, it is taking no steps to diversify its core source of revenue, and thereby protect it from potential market crashes. Given the economic events of the past five years, one would expect Caterpillar to pursue a more diversified approach to growth across a variety of industries.
Operating in emerging markets offers a unique mix of opportunities and hazards. Many countries like China are adamantly protective of their economy, and seek to promote local companies. Governments have actively promoted specific companies, which increased competition in already fierce environments. National loyalties could hinder Caterpillar’s expansion, as regional businesses often prefer to work with other firms based in the same country. Caterpillar should therefore seek joint ventures or further acquisitions in emerging markets to overcome these challenges, while cautiously protecting intellectual property and tech transfer.
The opportunity of emerging markets cannot be ignored, however investment in these regions also raises considerable concerns. As China continues to develop by building a vast infrastructural network fueled by an insatiable demand for energy the country offers a great opportunity for growth. India mimics this scenario. By establishing a strong presence and placing its products throughout the area, Caterpillar will create a long-term income stream to sustain it through market volatility.
Company executives should rigorously work to develop a strong strategy that will achieve two goals: allow further growth in the developing world while maintaining its differentiated brand name in established markets. Caterpillar has made decisions in the past that indicate they understand this fundamental issue. When Caterpillar made its acquisitions of Gremada and Equipamentos e Serviços Ferroviários, it preserved those traditional Latin American companies, and kept their brands independent. This allowed Caterpillar to be a South American company in South America, and an American company in America. The leadership team should employ the same strategy in China and India. It is important for Caterpillar to develop marketing and sales strategies to fit each and every local market. Future acquisitions should consider corporate fit and the importance of a unique Caterpillar brand. By buying existing brands, or developing new Chinese or Indian brand names, Caterpillar can overcome nationalist tendencies in those countries while maintaining its core American business.
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This report was a group project for the Global Strategy class of Thunderbird School of Global Management Professor Nathan Washburn, Ph.D.