Caterpillar Inc. (CAT) announced its largest facility investment to date in China of $300 million, to meet the burgeoning worldwide demand for its 3500 series engine. The company will build a state-of-the-art manufacturing facility in Tianjin, China.
Once commissioned in 2013, it is slated to become Caterpillar’s third global source for the company’s industry leading 3500 series engines.
Caterpillar 3500 series engines have over the past two decades provided power for Caterpillar’s machinery used in applications worldwide as well as in a wide range of industrial applications, including the oil and gas, marine and electric power industries.
The 3500 series engines were till date being manufactured in Caterpillar’s Large Engine Center in Lafayette, Indiana. The facility will continue to produce the 3500 series engines but will focus on supporting customers outside the Asia-Pacific region. The Tianjin facility will cater to customers in China and the Asia-Pacific region.
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. Recently, in October, Caterpillar announced that it is opening a new 9,000 square-meter Logistics Center in Suzhou, China to strengthen its growing manufacturing presence in China and enhance its supply chain and operational efficiency in its manufacturing operations in that country and the Asia-Pacific region.
Earlier, 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 an 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 passed Japan in the second quarter to become the world’s second-largest economy after 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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