#172 Caterpillar in China
Caterpillar, a leading American manufacturer of construction and mining equipment, has been in China since the 1980s when it launched technology transfer agreements with Chinese manufacturers. Later, it opened manufacturing facilities, distribution centers, and corporate offices in more than a dozen cities around the country, employing a local workforce of about 20,000. One would think that such long history in a market would shield a foreign company from certain challenges typically associated with international market entry, but Caterpillar’s experience was different.
Early on, Caterpillar struggled to compete with local Chinese competitors and faced issues with intellectual property theft. In China’s growing infrastructure sector of the last 40 years, Chinese companies such as Sany and XCMG had emerged as major players in the construction and mining equipment industry and have been able to offer highly similar products at lower prices than Caterpillar. These companies also had much stronger relationships with the Chinese government enabling them to secure lucrative contracts, making it difficult for Caterpillar to gain a foothold in the market. Caterpillar’s challenges with intellectual property theft ranged from patent infringement to trademark issues. On multiple occasions, the company had accused Chinese firms including competitor Sany of copying its designs and products, leading to lost sales and profits. Caterpillar had taken legal action against some of these companies, but the judicial process proved to be lengthy, costly, and with limited success in protecting its intellectual property. Caterpillar’s superior technology was clearly outweighed by the market’s emphasis on the right Guanxi and “good enough” products that come at low prices.
One of the biggest challenges for Caterpillar in China came around 2010 when the company realized that it was missing out on the market for large excavators. A peak in the market for coal, oil, gas, and other commodities at that time had created demand for mining and construction equipment, and Caterpillar was eager to participate. Plans were hatched to take over ERA, the holding company for Zhengzhou Siwei Mechanical & Electrical Equipment Manufacturing Co Ltd (or, short, Siwei), one of China’s biggest makers of hydraulic coal-mining equipment. Despite several warning signals ranging from missing permits to losses that were mounting or the urgent and unexpected need for working capital at Siwei, Caterpillar’s board ploughed ahead (no pun intended), relying on the word of other American investors with strong ties to in the Chinese market. In 2012 the deal was completed, but unfortunately as early as 2013 accounting irregularities were discovered. Consequently, Caterpillar not only had to write off much of its investment, but it was also entangled in legal proceedings over fraud and saw its share price decline. Most importantly, Siwei’s customers neither paid their bills nor placed new orders. Roughly around the same time, Chinese economic growth had somewhat cooled off and the global commodities boom had eased, further reducing demand for Caterpillar’s equipment.
A few years later, in 2017, growth in construction activity seemed to provide a silver lining for Caterpillar, mainly in the 10-ton-and-above excavator industry. At the same time, however, trade tensions between the USA and China started to mount and as early as 2019, Caterpillar had to warn of plummeting sales in China. And then in 2020, of course, came the COVID-19 pandemic during which local competitors Sanvy Heavy Industry and Zoomlion Heavy Industry Science & Technology benefitted from the virtual lockdown of the entire country to foreigners and a slowdown in inbound trade.
Overall, Caterpillar’s experience in China is a good example for the multiplicity of challenges that foreign companies can face when attempting to enter and compete in the Chinese market. Local competition, a lack of transparency, and intellectual property theft are just three of the issues that these companies must navigate in order to succeed in China. It remains to be seen whether Caterpillar will be able to overcome these challenges and establish itself as a major player in the Chinese market.
Baldwin, C. & Ruwith, J. (2014). How Caterpillar got bulldozed in China, Reuters, https://www.reuters.com/article/us-caterpillar-china-special-report/special-report-how-caterpillar-got-bulldozed-in-china-idUSBREA0M03720140123.
Caterpillar (eds., 2022). Caterpillar in China, https://www.caterpillar.com/en/company/global-footprint/apd/china.html
Ganapavaram, A. (2022). Caterpillar gets wrapped in slowing China demand and supply-chain woes, Reuters, https://www.reuters.com/business/retail-consumer/caterpillar-adjusted-profit-rises-higher-equipment-prices-2022-08-02/
Khan, W. (2022). How big of a headwind is China for Caterpillar Inc.? Invezz, https://invezz.com/news/2022/05/18/how-big-of-a-headwind-is-china-for-caterpillar-inc/
La Monica, P. R. (2019). Caterpillar hurt by US-China trade war and shale slowdown, CNN Business, https://www.cnn.com/2019/07/24/investing/caterpillar-earnings-us-china-trade-war/index.html
Linnane, C. (2017). Caterpillar’s big bet on China may finally be paying off, MarketWatch, https://www.marketwatch.com/story/caterpillars-big-bet-on-china-may-finally-be-paying-off-2017-10-24
Montlake, S. (2013). Cat Scammed: How A U.S. Company Blew Half A Billion Dollars In China, Forbes, https://www.forbes.com/sites/simonmontlake/2013/02/13/cat-scammed-how-a-u-s-corporation-blew-half-a-billion-in-china/?sh=3b05fcc978f5
Murphy, C. et. al. (2013). Deal Gone Wrong Adds to Caterpillar’s Troubles in China, The Wall Street Journal, https://www.wsj.com/articles/SB10001424127887323301104578255740261180404
Seeking Alpha (eds., 2010). Caterpillar Acquisition to Boost China Presence, https://seekingalpha.com/article/212573-caterpillar-acquisition-to-boost-china-presence
The Guardian (eds., 2018). Caterpillar investors fearful as US-China trade war drives up costs, https://www.theguardian.com/business/2018/oct/23/caterpillar-shares-fall-after-disappointing-earnings-forecastYu, X. (2021). Caterpillar’s Chinese Rivals Power Through the Pandemic, The Wall Street Journal, https://www.wsj.com/articles/caterpillars-chinese-rivals-power-through-the-pandemic-11611570606
March 5, 2023 @ 5:15 pm
The post highlights a very important aspect that companies underestimate, apart from the competition the Chinese industry is satisfied with “good enough” products. The mining industry in China is no different. While the US and EU apply highest safety standards in this sector, accidents are part of daily business in China. Caterpillar is known for its high quality and safety standards in the mining industry worldwide. Considering the strong competition and strategic disadvantages compared to local companies, Caterpillar would need to adapt its standards to the local market and produce lower quality but cheaper equipment. However, this step could potentially backfire and damage Caterpillar’s reputation in other markets. With the Chinese mining industry being the largest in the world and providing a huge market for Caterpillar, the company should still try to find a way to increase competitiveness. To limit the damage and not completely withdraw from the Chinese market, Caterpillar could possibly consider cooperating with a Chinese company for example in the form of a joint venture, and no longer produce under its own name. This might offer advantages by increasing acceptance of Chinese government, and limit issues of IP theft as Caterpillar would produce downgraded products in China.
Hannes P. Haeusler
March 6, 2023 @ 4:48 pm
Ouch! The example of Cat in China clearly shows that even being four decades in the market doesn’t necessarily mean one can wipe out all challenges around competition and transparency.
This case is comparable to those of other international firms operating in China, especially in industries with intense domestic rivalry. Foreign automakers such as General Motors and Volkswagen, for instance, have experienced comparable obstacles in China’s extremely competitive car market. Domestic Chinese automakers such as Geely and BYD have been able to deliver highly comparable vehicles at lower rates and have stronger ties to the Chinese government, allowing them to achieve favorable policies and subsidies. These companies have also been accused of intellectual property theft in the past, copying designs and technology from foreign automakers. BYD was renowned in its early years for reverse engineering whatever its competitors produced.
Caterpillar’s experience highlights the importance of understanding local markets and competition, building strong relationships with the Chinese government, and protecting intellectual property.