Responsa: Dealing With the Disposable Backhoe

Caterpillar 12G grader.

Image via Wikipedia

In the Hutong
Managing the Phoenix
1330 hrs.

Jack Perkowski continues our serve-and-volley on the future of China’s construction equipment makers here on his Managing The Dragon blog, and he brings out the Caterpillar fanboy in me when he notes:

“How should Cat, Komatsu, and the other global leaders prepare for Chinese competition overseas? By far, the best way is to compete successfully with them in China.  That is why the battle for the construction equipment market in China is so critically important.”

That seems obvious, but the next logical question is how?

They Drive ‘Em Different Here

The global majors are geared up to compete in very different kinds of markets. In any ordinary market, you are selling a piece of equipment to a construction company that is concerned about things like the total cost of ownership of a road grader over a 10-20 year life. To serve markets like that, companies like Caterpillar design their equipment to maybe be a bit more expensive up front, but cheaper to own over the long term. They support that with a dealer network, and they have a growing division that rebuilds the big machines, extending the lives of the equipment even further.

China is not an ordinary market. There are exceptions, but I am willing to bet that the average construction equipment customer is thinking rather less long term. He probably wants to buy a backhoe that will be less expensive up front, will save enough money so he can buy two rather than one, that can be repaired cheaply, and that may even be dumped or sold to someone in one of the inland provinces after a couple of major jobs.

As an aside, I know a little something of what I speak. The Hutong Party Secretary spent a good bit of time in her career trying to sell Linde forklifts to both Chinese and Western companies here in China. (For those who are not in the materials handling business, it is worth noting that Linde are the Porsche of forklifts, and offer many of the advantages over their local competition that Cat and Komatsu do.) No surprise: the western companies, concerned about total cost of ownership and the lot, bought lots of Linde forklifts. But our Hutong Party Secretary was extremely challenged trying to sell any to local firms.

The pushback? They didn’t care about the quality. Breakdowns a problem? No worries – if we can buy three local machines for the price of one Linde (the differential wasn’t that large, but this is for illustration), we’ll buy two local machines and one will be operating while the other is being fixed, and we’ll still save money.

How does a company that extols its innovation, quality, durability, technology, and dealer support go head to head against companies that are ready to sell two disposable backhoes for the price of one good one?

Playing A New Game

At some point, in order to fight back without undermining their own corporate image, Caterpillar, Komatsu, Volvo, Bobcat, Kubota, and any other global equipment maker who wants to compete in China is going to have to find a way to win on the customer’s terms. And they are starting to get that.

Late in August, Caterpillar’s new CEO, Doug Oberhelman, came through China in the wake of a promise he made to Cat shareholders that he would make the company the leader in construction equipment in China by 2015. In an interview with Andrew Browne at The Wall Street Journal, Oberhelman hints at the foundation of a new China strategy.

[Oberhelman] said Tuesday that some Chinese equipment companies have become “pretty darned good” and that Caterpillar is studying their operations, including their product designs, as it goes toe-to-toe with them in China and, increasingly, in the U.S. and Europe, where good-quality Chinese exports are taking hold.

The exercise is driving down costs at Caterpillar and encouraging innovation, he said. Already, Chinese engineers are developing parts for Caterpillar wheel-loaders, a type of tractor that is made in China for a domestic market. Of the company’s 6,200 employees in China, only about 100 are expatriates, Mr. Oberhelman said, including managers brought in from other Asian countries. “We’re pretty Chinese,” he said.

Based on these and other directions that the market is taking, I would expect a global construction equipment maker to pursue some mix of the following three approaches in the effort to go head-to-head with the locals.

Three Strategic Directions

First would be to sell second-hand, factory refurbished machines. As I noted, Caterpillar has made a huge businesses rebuilding and refurbishing construction equipment. China might be a good place to sell some of that gear, especially since I suspect there is plenty of it floating around in the depressed construction markets of the world.

Second would be to buy a local construction equipment manufacturer. That might be tough, though: China has proven itself rather touchy about selling off healthy companies, especially in this sector. As other companies have discovered, betting your future on a complex local acquisition often takes management attention away from other means of building business. But if the right opportunity comes along (an underperforming factory, for example) and the government gives a quiet nod, expect a bidding war.

Third – and I like this best – would be to launch an OEM line of construction equipment carrying a different brand, using local designs but with inspectors and other “soft inputs” from the international company. It would not be necessary to own the factory, just to contract the production capacity. The separate brand creates the division between the quality standard of the core brand, while offering many of the advantages of working with the global brand. The company would offer that brand alongside its own in China and in export markets in the developing world, where Perkowski notes the Chinese manufacturers will be looking when it is time for them to export.

The Stakes

I am reflexively skeptical of any company who makes the case for doing business in China by saying that success elsewhere depends on success in China. That sort of thinking tends to lead to bad business decisions, like foregoing profits for market-share victory. If you are not planning on making money in a given market, you are effectively declaring it a money sewer, and down that path lies heartache.

But for the world’s leading construction equipment manufacturers, what is at stake is that in order to thrive on the development of the world’s emerging economies, those companies need to build large and profitable businesses in China serving the full range of customers. China is a must win, but the Big Iron merchants must win on China’s terms, not their own.


About David Wolf

An adviser to corporations and organizations on strategy, communications, and public affairs, David Wolf has been working and living in Beijing since 1995, and now divides his time between China and California. He also serves as a policy and industry analyst focused on innovative and creative industries, a futurist, and an amateur historian.
This entry was posted in China Breaks Out, Development, Policy & Governance. Bookmark the permalink.

2 Responses to Responsa: Dealing With the Disposable Backhoe

  1. Pingback: Managing The Dragon » Blog Archive » China’s Disposable Backhoe

  2. Pingback: Caterpillar’s China Challenge - China Tracker - What a superpower wants - Forbes

Comments are closed.