According to a Financial Times article, Caterpillar Inc. (CAT) plans to fulfill the complex parts requirement of its current as well as upcoming manufacturing facilities in China by sourcing the same from Chinese suppliers rather than importing from Japan.
The company currently imports around 40% of components for its Chinese factories from Japan. The company intends to cut it down by at least a quarter within five years. Chinese suppliers will now have to expand their production beyond basic parts toward more complex components.
The company is currently running pilot programs to assess the ability of the Chinese workers and the speed with which the Chinese supply base can meet the requirement.
Caterpillar has to date remained focused on building as well as enhancing its facilities in China as part of its strategy to expand in emerging markets to meet its long-term goals. Recently, Caterpillar announced its largest ever facility investment in China, of $300 million, to build a state-of-the-art manufacturing facility in Tianjin that would manufacture the industry leading 3500 series engines.
Earlier, the company had announced plans to build a new facility in Wujiang to produce mini-hydraulic excavator models for China and expand its excavator facility in Xuzhou. The company consequently needs to strengthen its supply base in China to meet the demand for parts.
Last week, Caterpillar’s subsidiary, Caterpillar Financial Services Corporation, issued a two-year RMB 1billion ($150 million) bond at a coupon rate of 2% to institutional investors in Hong Kong. This marked the company as the first foreign industrial multinational and the second non-financial multinational company to issue debt denominated in Chinese currency. The proceeds will be used to fund its operations in China.
China surpassed Japan in the second quarter to become the world’s second largest economy behind the United States. China’s economy is projected to expand by about 10%, continuing a remarkable three-decade streak of double-digit growth. This has led companies around the world to eye China as a viable expansion option.
Caterpillar currently retains a Zacks #1 Rank (short-term Strong Buy recommendation). We maintain our Outperform recommendation on the stock.
Peoria, Illinois-based Caterpillar is the manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. Caterpillar is one of the few leading U.S. companies in an industry that competes globally. The company operates three divisions –– Machines, Engines and Financial Products.
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