Caterpillar Inc. (CAT) announced that its wholly-owned subsidiary, Caterpillar Logistics Services Inc. is opening a new 9,000 square-meter Logistics Center in Suzhou, China. The initiative is aimed at strengthening Caterpillar’s growing manufacturing presence in China and enhancing supply chain and operational efficiency in its manufacturing operations in that country and the Asia-Pacific region.
The Logistics Center will provide inbound logistics support to Caterpillar’s manufacturing operations in China and in the Asia-Pacific region. The logistics center will also help in the movement of goods in and out of China, supporting the company’s global production as well.
The new facility will employ approximately 50 full-time employees. The center will apply the company’s Caterpillar Production System (CPS) to drive efficiencies throughout the new facility. By utilizing the CPS Guiding Principles, the company plans to ensure high speed delivery, increase inventory turns and make material available to its manufacturing facilities in Asia.
This is another development in a series of investments carried out by Caterpillar in line with its long-term strategies to tap the growing Chinese market. In the second quarter, Caterpillar had announced its intention to expand its excavator facility in Xuzhou, China.
This will almost quadruple its excavator capacity once the expansion plans are completed in 2014. In late September, Caterpillar announced another expansion plan of a new facility in Wujiang, China, to produce mini-hydraulic excavator models in the under 8-ton range.
In 2008, China had announced a RMB4 trillion ($586 billion) economic stimulus package to prevent the global financial crisis from ravaging its economy. Under the package, the lion’s share of RMB1.5 trillion was earmarked for public infrastructure development. Projects that were lined up included railway, road, irrigation and airport construction.
The second largest allocation of RMB1 trillion was for reconstruction in the earthquake hit regions of Sichuan. This has spurred construction in China, triggering demand for construction equipment, which bodes well for companies like Caterpillar.
Further, China has passed Japan in the second quarter to become the world’s second-largest economy behind the United States. This year, even though growth has begun to moderate slightly, China’s economy is projected to expand by about 10%, continuing a remarkable three-decade streak of double-digit growth.
China is thus a viable option for expansion, and we appreciate Caterpillar’s focus on expanding its presence in that country as well as in the Asia-Pacific region and Latin America. Further, Caterpillar is well positioned to expand margins through its CAT Production System initiatives, market leadership and ultimate pricing power.
We believe once President Obama’s $50 billion plan to rebuild the U.S infrastructure is approved, Caterpillar will benefit immensely. Consequently, we have recently upgraded our rating from Neutral to Outperform. We have a Zacks #1 Rank (short-term Strong Buy recommendation) on the stock.
Peoria, Illinois-based Caterpillar Inc. 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 from a principally domestic manufacturing base. The company operates three divisions –– Machines, Engines and Financial Products.
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