Caterpillar,Inc.

ExpansionofIndianOperations

JustinChura
MartinDain
GregDever
NancyOConnell
RobinRoberts

December4,2009
1

TABLEOFCONTENTS
Executive Summary .............................................................................................................................................3
Introduction ..........................................................................................................................................................5
Vision 2020 ...........................................................................................................................................................6
Code of Conduct ................................................................................................................................................8
Internal Audit .......................................................................................................................................................9
Financial Analysis .................................................................................................................................................9
Geographic Segments ...................................................................................................................................... 11
Operating Segments ........................................................................................................................................ 13
Value Chain ........................................................................................................................................................ 14
External Audit ................................................................................................................................................... 17
Porters Five Forces ......................................................................................................................................... 18
Global Competitors......................................................................................................................................... 21
India Specific Competitors ............................................................................................................................. 22
Evaluation of India as Target Country ......................................................................................................... 25
Political Overview ............................................................................................................................................ 25
Economic Overview ........................................................................................................................................ 26
Preliminary Screening ...................................................................................................................................... 28
In Depth Screening .......................................................................................................................................... 29
Final Decision .................................................................................................................................................... 32
CAT China: A Model for Emerging Market Growth.............................................................................. 32
CAT India ........................................................................................................................................................... 34
Strategic Issue ................................................................................................................................................... 35
Issues to address .............................................................................................................................................. 38
Strategic Objectives ......................................................................................................................................... 39
Dealer Network ............................................................................................................................................... 39
Backhoe Loader ................................................................................................................................................ 41
Crawler Dozer.................................................................................................................................................. 44
Asphalt Finishers............................................................................................................................................... 46
Projected Outcomes ....................................................................................................................................... 49
Appendices..............................................................................................................................................................

EXECUTIVESUMMARY
Caterpillar, Inc. (CAT) is the world's largest designer and manufacturer of construction
equipment, mining equipment, and diesel and natural gas engines. For over 75 years, the
Caterpillar name has been associated with the highest level of quality products, services and
support. CAT operates through more than 200 independent dealers and over 3,500 outlets
serving182countries.

The global construction equipment industry is a cyclical industry that follows the peaks and
valleys of the global economy. Not surprisingly, CAT and its competitors were negatively
impactedduringthelatestglobaleconomicrecession.CATsalesfromfiscalyear2008to2009
plungedbyover30%.Asthecompanylooksforwardandplansforfuturegrowth,itsprimary
targetswillbeemergingmarkets,includingIndia.

Indiahasoneoftheworldsfastestgrowingeconomiesandagovernmentthatplanstoinvest
nearly $500 billion in infrastructure over the next five years. This very attractive combination
represents an enormous opportunity for growth that CAT, and all of its competitors, will
attempttosecure.

After analyzing CAT, its key competitors, the Indian infrastructure market, and CATs previous
emergingmarketexperienceinChina,thekeystrategicissuethatCATmustaddressishowto
bestpositionthefirmtotakeadvantageofthegrowthopportunityavailableinIndia:nowand
inthefuture.

Given the Indian governments specific infrastructure plans for road development and CATs
presentoperationsinIndia,theintersectionofthesetwoelementsrepresentsalogicalchoice
forproductandserviceexpansioninIndia.

CATskeyobjectivesaretoincreasetheIndiandealernetwork,augmentproductionofbackhoe
loaders, and expand manufacturing to include crawler dozers and asphalt finishers in India.
Theseinitiativesareestimatedtorequireacapitalinvestmentof$160millionresultingin$7,601
millioninadditionalrevenuesand$570millioninadditionalnetincome.

INTRODUCTION
Caterpillar, Inc. (CAT) is best known for manufacturing and selling construction and mining
equipment,dieselandnaturalgasenginesandindustrialgasturbines.Inadditiontomachinery
andengines,CAToffersfinancial,logistics,remanufacturingandrailservices.1Thecompanyis
headquartered in Peoria, Illinois and has nearly 120,000 fulltime employees operating on six
continents.2

Caterpillar Tractor Co. was formed in 1925 from the merging of Holt Manufacturing Company
andC.L.BestTractorCo.;bothcompaniesbegantheirworkwithsteampoweredfarmtractors.
Once merged, the company continued to experiment and expand its product offerings and
manufacturingtechniques.ThefirstinternationaloperationswereestablishedinGreatBritain
in1950.In1963,CATandMitsubishiHeavyIndustriesLtd.formedonethefirstjointventuresin
JapantoincludeU.S.ownership,nowknownasShinCaterpillarMitsubishiLtd.CATsfinancing
productswereexpandedworldwidein1983andCaterpillarFinancialServicesCorporationwas
formed.ThecompanywasrenamedCaterpillarInc.in1986tobetterreflectitsexpandedrole.
CAT reorganized and decentralized its operations in 1990 to focus on return on assets and
customer satisfaction. Throughout the 1990s and 2000s, CAT continued its expansion via
international acquisitions, new product introductions and improvements in existing offerings.
ThecompanylaunchedaglobalSixSigmaprogramin2001andsawpositivereturnsinyearone.

CaterpillarInc.10K,PartI,Item1.FiscalyearendedDecember31,2008.

CaterpillarInc.2008AnnualReport.FiscalyearendedDecember31,2008.

More recently, CAT launched a revised strategic vision and code of conduct to improve CATs
employer,investorandglobalmarketpresence.3

VISION2020
In2004,CATsstrategicplanningteamcreatedVision2020,whichwasdesignedtomeetspecific
goalsregardingproduct,operationandgrowthimprovements.4Inthe2005chairmansletterto
stakeholders,JimOwens,ChairmanandCEOofCAT,statedthatthecompanysvisionistobe
recognized as a great employer, an outstanding investment and an admired global leader
committedtomakingprogresspossiblearoundtheworld.

Vision 2020 was launched in 2005 and is focused on better execution in the areas of people,
product and process performance, and profitable growth. 5 This strategic plan has been
describedasCATsaspirationalbeaconofthecompanyitwantstobein2020,specificallyin
the areas of market leadership, products and services, distribution systems, supply chain,
businessmodel,people,sustainabledevelopmentandfinancialperformance.6AccordingtoJim
Owens,therearesevencriticalfactorsforCATsstrategy:7

Caterpillarwebsite.AboutCatCorporateOverviewHistory.AccessedOctober27,2009.
http://www.cat.com/corporateoverview/history
4

TaylorIII,Alex.Caterpillar:Bigtrucks,bigsales,bigattitude.Fortune.August13,2007.

CaterpillarInc.2005AnnualReport,LettertoStakeholders.

CaterpillarInc.8K,Exhibit99.1/AnalystMeetingHandout.October31,2005.

InterBusinessIssues.AnInterviewwithJimOwens.PeoriaMagazines.CentralIllinoisBusiness
Publishers,Inc.December2005.

Peoplecreateaninclusiveculturethatengagesallemployeesinasafeenvironment

Qualityacceleratecontinuousqualityimprovementsforallproducts

Productimplementimprovednewproductintroductionprocess

Velocityreduceordertodeliverytimeversuscompetitors

Distributiongiveimprovedretaildistributionchannelstoeachproductlineandbrand

ChinaestablishmarketleadershipviaholisticCATbusinessmodel

Troughestablishflexiblecoststructuretoimprovecyclicaldownturnearnings
performance

Vision 2020 was founded as a series of three fiveyear plans, the first of which set goals for
2010;thosegoals,asdescribedbyJimOwens,include:

Achievebreakthroughsinfactorydeliveredproductquality

BenumberoneforeverymajorproductgrouponeverycontinentinthemarketsCAT
serves

Achieve$50billioninsalesandrevenuesby2010

Deliverearningspersharegrowth,averaging15to20%annuallythrough2010

Dramaticallyimproveearningsperformanceinanyfutureeconomicdownturn8

AchievingVision2020couldmean$100billioninannualsalesforCAT.Inordertoachievethis
vision,CATexpectstohireapproximately80,000newemployeesbetween2005and2020.8CAT
is dedicated to developing and diversifying its work force and leadership team over this same
timeperiod.

InterBusinessIssues.AnInterviewwithJimOwens.PeoriaMagazines.CentralIllinoisBusiness
Publishers,Inc.December2005.

CODEOFCONDUCT
The Code of Conduct is the most important document we produce at Caterpillar, says Jim
Owens in the opening sentence of Our Values in Action, Caterpillars Worldwide Code of
Conduct. 9 CATs Code of Conduct was first published in 1974 and described the ethical
standards the company believes. The code was updated in 2005 as part of Vision 2020; the
updatedversionexplainsingreaterdetailCATsvaluebasedcultureandprovidesaframework
for putting the companys values into action, as described by the title.10 The code hinges on
fourcorevalues:9

Integritythepowerofhonesty

Excellencethepowerofquality

Teamworkthepowerofworkingtogether

Commitmentthepowerofresponsibility

ForCAT,thevaluesoutlinedwithinthecodeprovidethecohesiveframeworkforallemployees
regardlessoftheirvastdiversity.

Caterpillar.OurValuesinAction,CaterpillarsWorldwideCodeofConduct.Caterpillar.2005.

10

InterBusinessIssues.AnInterviewwithJimOwens.PeoriaMagazines.CentralIllinoisBusiness
Publishers,Inc.December2005.

INTERNALAUDIT
FINANCIALANALYSIS
CATs financial performance has mirrored that of the global economy in recent months. In
termsoftotalsalesandrevenues,CAThasexperiencedcontinuedgrowtheachyearsince2002.
On average, the firm has achieved 17.1% growth per year over that interval. In the fourth
quarterof2008,however,CATandmostoftheindustryexperiencedasharpdropinrevenues.
This decrease was symptomatic of the worldwide economic crisis and subsequent recession.
ThispromptedCATtooriginallydecreaseits2009salesandrevenuesprojectionsto$40billion
(10%)andtolaterfurtherdecreaseitsprojectionto$33billionwhenithadachievedover$51
billion for 2008. Of note is that CAT had set $50 billion in revenues as a goal for 2010 and
achievedthismilestonetwoyearsearlierthananticipated.

Since1999,CATsassetturnover(salesassets)hasbeenaslowas0.61in2002toapeakof
0.82in2006.Sinceitsapex,ithasdecreasedslightly,downto0.76for2008,theyearforwhich
themostrecentdataisavailable.Assetturnover(AT),ameasureofthefirmseffectiveness,can
beinterpretedas$1.00investedinthefirmin2008generated$0.76insales.CAThasbeenable
tomaintainitsasset turnoveroverthepastdecadedespiteasignificant increaseinthefirms
totalassets, from$26.6billionin1999to$67.8 billionin2008,a155% increase. Thisfurther
highlightsthefirmseffectivenesswithregardstoassetutilization.Asonepointofreference,
theindustrymedian(SIC3531,constructionmachinery)forassetturnoveris0.02.Clearly,CAT
haseffectiveoperations.

Regarding liquidity, CATs current ratio (current assets current liabilities) has remained
consistently above 1.0 since 1999, with its most recent ratio at 1.21. When inventory is
9

subtractedfromthecurrentassetsintheequationabove,thequickratioisderived.Inthiscase,
CATanditscompetitorsallhavearatiolessthan1.0.CATsmostrecentquickratioisestimated
at0.88,whichcomparesfavorablywithKomatsu(0.81)andTerex(0.99).

CATs return on equity (ROE)

of

58.4%

in

2008

ReturnOnEquity

is

significantly greater than the

CAT

KMTUY

2005

2006

TEX

70.0%
50.0%

ROEs

of

its

global

competitors. CATs investors

30.0%
10.0%
10.0%

2004

2007

2008

have been enjoying annually

increasingprofitsforthepasteightyears,withtheexceptionof2007,whenROEfellto39.9%
from2006s51.6%.ThevastdifferencebetweenCATsROEandthatofitscompetitorsismainly
duetotheeffectofitsequitymultiplierorleverageratio.CATsequitymultiplieris3.5to4.5
timesgreaterthanthatofTerexandKomatsu,respectively.CATsassetshaveincreased57.3%
overthepastfiveyearswhileitsequityhasremainedfairlyconstant.Theincreaseinassetsis
primarily due to CATs accelerated investment in recent years; 64% of total assets increase is
attributedtoproperty,plantandequipmentandinvestments.
ThestockpricetrendforCAT,whencomparedtotheaveragefortheS&P,demonstratesthat
CAT has felt the effects of the recent economic downturn and that the firm is gradually
recovering as the market recovers. More importantly, earnings per share have been steadily
increasingsince2005to$5.83in2008.CATleadscompetitorsKomatsuandTerexinthisregard.

10

CaterpillarStockTrendandTradingVolumeComparedtoS&P500

TheoverallassessmentofCATsfinancialhealthisreassuring,despitetheglobaleconomiccrisis.
Projectionsfor2009areappropriatelyreducedcomparedtotheboomyearof2008andCAThas
plansinplacetodrivefuturegrowth.

GEOGRAPHICSEGMENTS
CAT operates 576 locations in 52
countries. These locations are split

GeographicRegionSales
NorthAmerica

rather evenly between the U.S. and

EAME

Asia/Pacific

$6,008
12%

outside of the U.S., although well

$20,215
39%

$8,980
18%

overhalfofCATssales(66.3%)areto

$16,121
31%

customers outside of the U.S. CAT

officially reports financial data for
two geographic segments, U.S. and

11

LatinAmerica

Outside U.S., but provides financial data for four geographic regions: North America, Europe
AfricaMiddleEast(EAME),Asia/PacificandLatinAmerica.NorthAmericarepresentsthelargest
regionwith39.3%ofsales,followedbyEAMEwith31.4%.WhileAsia/PacificandLatinAmerica
are significantly smaller geographic business regions for CAT, they are the experiencing the
greatestsalesgrowth,+40.3%and+32.1%,respectively.11

Acomparisonof2008and2007salesandrevenuesbygeographicsegmentisreportedbelow.

NorthAmerica

EAME

AsiaPacific

LatinAmerica

Total

2008

2007

2008

2007

2008

2007

2008

2007

2008

Machinery

12,769

12,596

9,220

8,588

5,709

4,026

4,106

3,149

31,804 28,359

Engines

5,445

5,092

6,311

5,245

2,910

2,136

1,574

1,130

16,240 13,603

Financial

2,001

2,007

590

479

361

240

328

270

Total

20,215

19,695

16,121

14,312

8,980

6,402

6,008

4,549

3,280

2007

2,996

51,324 44,958

CATexperiencedfourthquarterdeclineswhencomparing2008and2007inNorthAmericaand
Europe.Thesedeclines,however,wereoffsetbygainsinAsia/PacificandLatinAmerica.CAT
has not achieved its potential in these emerging markets, and there is opportunity for
expansion,particularlyinIndia.

CATs organization can currently be described as a global business with transnational

tendencies.WhileCAToperatesthroughouttheworld,itsassetsandcapabilitiesarecentralized
nearitsheadquarters.OverseasoperationswithinCATplayaparamountroleasbusinessunits

11

CaterpillarInc.2008AnnualReport.FiscalyearendedDecember31,2008.

12

and locations contribute to segmented, yet integrated worldwide operations. Similar to the
centralization of assets and capabilities, CATs knowledge is primarily developed and retained
nearitscore.However,whilethevastmajorityofCATpatentsfirstcarryanIllinoisemployees
name,thereissomecrossunit/crosscountrycollaborationbeingdone.ItappearsthatCATis
beginningtomorebroadlydevelopandshareknowledge.Thismindsethasbeenputintoaction
as CAT has opened its largest research and development facility outside of North America in
India.12

OPERATINGSEGMENTS
Within its portfolio, CAT has three main business lines: Machinery, Engines and Financial
Products.Withinthesebusinesslines,CATsdecentralizedorganizationalstructureiscurrently
arrangedintoninereportableoperatingsegments(listedbelowfromlargesttosmallest)andan
AllOthersegment.

12

HeavyConstructionandMining

InfrastructureDevelopment

MarineandPetroleumPower

FinancingandInsuranceServices

ElectricPower

BuildingConstructionProducts

LargePowerSystems

IndustrialPowerSystems

EAMEOperations

CaterpillarInc.2008AnnualReport.FiscalyearendedDecember31,2008.

13

The three largest operating segments are also those experiencing the greatest sales growth;
Heavy Construction and Mining +11.0%, Infrastructure Development +13.2% and Marine and
PetroleumPower+38.4%.Asthe

OperatingSegmentSales

organization structure continues

4% 2%

AllOther

to grow and evolve, so do the

HeavyConstruction&Mining

6%

reported operating segments;

22%

7%

InfrastructureDevelopment
Marine&PetroleumPower

7%

CAT restructured its segments in

2006 to better align with its

Financing&InsuranceServices
ElectricPower

7%

19%
8%

BuildingConstructionProducts
LargePowerSystems

18%

businessandtobeinaccordwith

IndustrialPowerSystems
EAMEOperations

IAS14.13

VALUECHAIN
CATsrealworldfunctionalvaluechainisquitecomplex.14Initssimplestformitismerelythe
movementofrawmaterialstosuppliersandmanufacturersandthenthemovementoffinished
goods and parts from suppliers and manufacturers to distribution centers to dealers to
customers. Research and development and logistics run parallel to all other operations
throughoutthechain.

13

CaterpillarInc.2008AnnualReport.FiscalyearendedDecember31,2008.

14

SeeAppendixA:Caterpillar,Inc.ValueChain

14

Caterpillar,Inc.FunctionalValueChain

Research&Development

Raw
Materials

Manufacturing,
Remanufacturing
&Overhaul
Facilities

Subsidiary&
Outsourced
Suppliers

Distribution
Centers

Dealer&
Rental
Network

Customers

Logistics

RawMaterialsandComponents

CATsourcesitsrawmaterialsandcomponentsfromseveralsuppliersaroundtheworld,often
from within the country where its manufacturing and distribution facilities exist. CAT works
with multiple suppliers to diversify potential risk. It has developed global strategic sourcing
models and built long term relationships with its suppliers, ensuring continuous supply to its
globalproductionfacilitiesandprotectionofitsintellectualproperty.15

SubsidiaryandOutsourcedSuppliers

CAT has over 300 subsidiaries and affiliated companies organized around the world. These
organizations are highly integrated into CATs global operations and include everything from
componentssupplierstofinancialandinsuranceproviderstoproduction,salesandservicefirms
offullproductlines.CATcurrentlyhasfivesubsidiariesandoneaffiliateinIndia.16

15

CaterpillarInc.10K,PartI,Item1.FiscalyearendedDecember31,2008.

16

CaterpillarInc.10K,Exhibit21.FiscalyearendedDecember31,2008.

15

Manufacturing,RemanufacturingandOverhaulFacilities

With179machineryandenginesmanufacturingfacilitiesin25countries,CATsmanufacturing
operationsarequiteexpansive.16Currently,justover55%ofCATsmanufacturingislocatedin
theU.S.,withinternationaloperationscontinuallyincreasing.InBrazil,forexample,CAThasa
largemanufacturingplantthatservesitsentireglobalbusiness.

DistributionCenters

Distributioncentershandlethedistributionofbothfinishedgoodsandpartstodealers,rental
agencies,andcustomersworldwide.Thereare13partsdistributioncentersintheU.S.and16
outsideoftheU.S.,twoofwhichareinIndia.16

DealerandRentalNetwork

CATs finished goods and parts are delivered to end customers primarily through an
independent network of dealers and rental agencies. 52 dealers in the U.S. and 128 dealers
outside of the U.S. operate 3,537 branches, including 1,467 dealer rental outlets. CAT also
interacts with customers via subsidiary dealer networks; Perkinss network distributes some
reciprocating engines through its 131 distributors in 172 countries and FG Wilsons network
distributes most electric power generation systems through its 157 dealers in 180 countries.
CATsturbinesandlargemediumspeedreciprocatingenginesarealsosoldthroughacompany
employedsalesforce.17

17

CaterpillarInc.10K,PartI,Item1.FiscalyearendedDecember31,2008.

16

Customers

CATscustomerbaseisaswiderangingasitsproductportfolio.CATproductcustomersinclude
individual residential users and small, medium and large scale corporations. These customers
are most often involved with industrial, infrastructure, mining and quarrying, energy (electric
andpetroleum),waste,forestryand/ormarineoperations.18

EXTERNALAUDIT
AllCATproductsaresoldworldwideinahighlycompetitivemarket.Inallmarketsitcompetes
on the basis of product performance, customer service, quality and price. According to CAT
documents, from time to time, the intensity of competition results in price discounting in a
particular industry or region. Overall, however, CAT distinguishes itself as a premium, high
quality product with excellent after sales service. Overseas competitors enjoy certain
advantagesintrinsictooperatingathome.

BecauseofCATsglobalpresenceinmultiplemarkets,itfacesdifferentcompetitorsbasedupon
thesegment.Whereaswithitsmachines,KomatsuandTerexwouldbeconsideredkeyglobal
competitors,thesameisnottrueforCATsenginesegment.Inthisanalysis,ageneraloverview
of CATs key global competitors is presented. When analyzing the Indian market for specific
products, however, the focus lies upon key competitors within that specific market segment.
This is done to make the analysis more relevant to the market. As an example, Komatsu is
considered a key global competitor, but within the specific market of Indian backhoe loaders,

18

Lavin,Rich.CaterpillarinEmergingMarkets.CaterpillarCLSAAsiaInvestorsForumPresentation.
2009.

17

Komatsuisnotakeycompetitor.Thus,forafirmasextensiveasCAT,competitorsexistforeach
productlineandforeachmarkettheproductlineserves.

PORTERSFIVEFORCES

BargainingPower
ofSuppliers

Caterpillar,Inc.
Competition

Commodity&
NonCommodity

BargainingPower
ofCustomers

Competitive
Rivalry
Numerous&Diverse

Threatof
SubstituteProduct

Leverage
CompetitiveFactors

ThreatofNew
Entrants

Relationship
Dependent

BarrierstoEntry

BargainingPowerofSuppliers

Commodities:

CATusesorisimpactedbymanycommoditiesincludingcopper,nickel,aluminum,oilandsteel.
By far, steel is the companys primary raw material. It is procured in multiple forms and is
brought into the production process at several stages of the supply chain. As with all
commodities,priceandavailablyareuncertain.Whileunlikely,anydisruptioninthesupplyof
steel would cripple the companys manufacturing facilities. More likely, price increases could
adverselyimpactoperatingprofits.

18

NonCommodity:

CATreliesuponglobalstrategicsourcingmodelsinordertomeetitsglobalfacilities'production
needs while building long term supplier relationships and leveraging the companies buying
power.Thecompanyexpectsanextremelyhighlevelofservice,qualityandontimedelivery.
CAT has entered into a variety of agreements that put in place processes to monitor and
mitigate risks that the supply base could potentially cause a business disruption. The risks
monitored include supplier financial viability, business continuity, quality and delivery. CATs
sizeandoverallbuyingpowermitigatethepotentialforexcessivepriceincreasesbyitssupplier
base.

BargainingPowerofCustomers

Allofthemajorandsecondtiercompaniesintheheavyequipmentindustrycompeteonmany
factors that allow customers to leverage this competitive environment in their favor. These
factorscanincludebuyervolume,informationavailabilityandpricesensitivity.

ThreatsofNewEntrants

Theheavyequipmentindustryhasmany,ifnotall,ofthetextbookbarrierstoentryincluding:

Tremendouscapitalrequirements

Accesstodistribution

Customerloyaltytoestablishedbrands

Brandequity

Cost/Economiesofscaleadvantages

Learningcurveadvantages

19

Legalbarrierspatents,etc.

Expectedretaliationbyincumbents

Thebiggerthreatisindustrycontraction.Theconsolidationofseveralexistingcompanieswith
differing geographic and sector expertise could result in an equally sized rival for CAT, which
wouldintensifycompetition.
ThreatofSubstituteProducts

While several companies have similar offerings as CAT, the industry is built upon long term
relationshipsbetweencustomerandmanufacturer/dealer.Threatofsubstituteproductsisnot
a significant factor except as it relates to competitors (for example, substituting Komatsus
backhoeloaderforTerexsbackhoeloader).

CompetitiveRivalry

The construction equipment manufacturers make and sell construction equipment and also
producemachineryforotherindustries,suchasagricultureequipmentandenergyandmining
equipment. They provide other services, such as logistics, remanufacturing, parts
manufacturing and maintenance services. The largest companies in this sector also have
financialservice subsidiaries that can provide financing solutions to both the client company
and its customers. The largest manufacturers are true global conglomerates, operating in
virtuallyeverycountryontheplanet.

Theglobalconstruction,farmmachineryandheavytrucksmarketisdominatedbyfirmssuchas
CAT,Komatsu,TerexandJCB.Competitionbetweenlargefirmsisintenseduetoanumberof
factors including high fixed costs and lowswitching costs for buyers. In addition to the large

20

multinationalcompanies,severalIndianfirmsholdsignificantmarketshareinkeysegmentsand
arealsoconsideredkeycompetitorsinIndiaslandscape.19

GLOBALCOMPETITORS20
KomatsuLtd21

Komatsu Ltd (Komatsu) is a diversified company engaged in manufacturing and selling

construction and mining equipment, industrial machinery and vehicles. In addition, the
company has interests in other business areas such as housing, transportation and logistics
equipment. The company has global operations spanning four continents (Asia, Americas,
EuropeandAfrica)andin16countries.Themanufacturingoperationsofthecompanyandits
subsidiaries are conducted primarily at plants in Japan, the U.S., Germany, the U.K., Sweden,
Indonesia, Brazil, Italy, China and Taiwan. Komatsu is headquartered in Tokyo, Japan and
employs39,267people.

The company recorded revenues of $19,694 million in the fiscal year ending March 2008, an
increaseof18.5%over2007.Theoperatingprofitofthecompanywas$2,922.4millionforthe
sameperiod,anincreaseof36%over2007.Thenetprofitforthisperiodwas$1,833.2million,
anincreaseof26.8%over2007.

19

GlobalConstruction&FarmMachinery&HeavyTrucks.(2009).RetrievedfromDatamonitor:
www.datamonitor.com
20

SeeAppendixE:FinancialComparisonDataofCaterpillar(CAT),Komatsu(KMTUY),andTerex(TEX)

21

KomatsuLtd.CompanyProfile.(2009).RetrievedfromDatamonitor:www.datamonitor.com

21

TerexCorporation22

Terex Corporation (Terex) is a global manufacturer of a broad range of equipment for use in
variousindustriesincludingtheconstruction,infrastructure,quarrying,surfacemining,shipping,
transportation,refiningandutilityindustries.Terexoffersacompletelineoffinancialproducts
and services to assist in the purchase of Terex equipment through Terex Financial Services as
well. The company primarily operates through five business segments: cranes, materials
processing and mining, aerial work platforms, construction and road building, utility products
and other. Terex has operations throughout the Americas, Europe and Asia Pacific. It is
headquarteredinWestport,Connecticutandemploys20,000people.

The company recorded revenues of $9,889.6 million during the fiscal year ended December
2008,anincreaseof8.2%over2007.Theoperatingprofitofthecompanywas$402.6million
forthesameperiod,adecreaseof58.1%comparedto2007.Itsnetprofitwas$71.9millionfor
thisperiod,adecreaseof88.3%comparedto2007.

INDIASPECIFICCOMPETITORS
Because of the highly specific nature of the machines and the markets they serve, additional
backgroundonkeycompetitorsfortheIndianmarketisprovided.

22

TerexCorporationCompanyProfile.(2009).RetrievedfromDatamonitor:www.datamonitor.com

22

JCBBackhoeLoaders23

JCB, a family owned company, is one of the largest construction equipment manufacturers in
theworldandhas17factoriesintheU.K.,Germany,Brazil,NorthandSouthAmerica,Indiaand
China. The company employs over 8,000 people. JCB currently makes over 300 types of
machinesfortheconstructionindustry,agricultureandmilitaryengineering.Thecompanyhas
approximatedyearlyrevenuesof$3,696million.

JCBisthelargestmanufacturerofbackhoeloadersinIndiabyaconsiderablemargin,andsince
2005itsoutputhasmorethandoubledtoreach16,066unitsin2007.Outputhasinfacttripled
inthelastthreeyearsandquadrupledinthelastfouryears.

Thepopular,twowheeldrive,76horsepower3Dmodel,hasbeenmanufacturedinIndiasince
1987andatotalofover50,000unitshavebeenproducedtodate.Productionoftheallwheel
drive4Dmodel,oftenusedwithahydraulicbreakerinminesandquarries,beganin1997and
reached390unitsin2007.Thefourwheeldrive3DSupermodel,fittedwithamorepowerful
engineandhydraulicsystem,isamorerecentintroduction.Allthreemodelsareassembledat
theJCBBallabhgarhplantattherateof60machinesperday.

TheBallabhgarhplantinHaryana,whichisnowsolelydedicatedtotheproductionofbackhoe
loaders,isintheprocessofbeingextendedandreorganizedatthecostof$75millionandupon
completionshouldhavethecapacitytomeetJCBsneedsfortheforeseeablefuture.

23

OffHighwayResearch.EquipmentAnalysis:India:BackhoeLoaders.(2008).Accessedvia:
www.offhighway.co.uk

23

BemlCrawlerDozers24

Beml was established in Bangalore in the 1960s and produces a wide variety of construction
equipment at multiple facilities. Currently, it is the only domestic manufacturer of crawler
dozers. Bemls strength lies in its ability to provide a comprehensive product range, at
competitive pricing levels, to government owned mining companies and the Indian Army, the
maincustomersofcrawlerdozers.Overtheyearsthecompanyhasdevelopedauniqueinsight
in understanding the operations of its core customers and has a broad network of product
supportcentersatstrategiclocationstoaddresstheirservicingneeds.

Bemlsmarketshareof crawlerdozersasin2008was50%,anditis thedominantfirminthe

market.Itsmarketsharehashoweverbeenindeclineoverthepastseveralyearsasimportsof
crawlerdozershaveincreasedtomeettheheighteneddemand.
GujaratApolloIndustriesLimitedAsphaltFinishers25

GujaratApollohasbeenaleadingIndianmanufacturerofroadconstructionequipmentforover
20yearsproducingover2,500asphaltfinishers.With75%oftheIndianmarketshare,itisthe
dominant competitor. The company has multiple production facilities, employs over 1,000
peopleandhassalesofapproximately$75million.

24

OffHighwayResearch.EquipmentAnalysis:India:CrawlerDozers.(2009).Accessedvia:
www.offhighway.co.uk
25

OffHighwayResearch.EquipmentAnalysis:India:AsphaltFinishers.(2008).Accessedvia:
www.offhighway.co.uk

24

EVALUATIONOFINDIAASTARGETCOUNTRY
POLITICALOVERVIEW26
In spite of regional and cultural differences, India has, for the most part, functioned as a
democracy. The key challenges India has faced in the past and continues to face relate to its
relationshipswithneighboringcountries,whicharepartlyresponsibleforthehighincidenceof
terrorisminthecountry.IndiahasfoughtthreewarswithPakistanandonewarwithChinaand
continues to have border disputes with both nations. The relationship with Bangladesh
continuestobestrained.Indiacontinuestorankhighlyinregardstocorruption,butlacksthe
politicalwilltoimplementtoughpolicies.Mostofthepoliticalbattlesarefoughtonthebasisof
casteandreligionratherthandevelopment.

CurrentStrengths

Strongdemocraticsetup

Stablemacroeconomicpolicies

ImprovedrelationshipswithEuropeandNorthAmerica

CurrentChallenges

26

IndiasuneasyrelationswithChinaandPakistan

Terrorism

CountryAnalysisReportIndia.(2009).RetrievedfromDatamonitor:www.datamonitor.com

25

FutureProspects

Initiationofeconomicreforms

Improvedaccountabilityofpoliticians

RighttoInformationAct

FutureRisks

Emergenceofstrongregionalparties

Eraofcoalitionpoliticsandriseofcommunism

Socialandcommunaltensions

ECONOMICOVERVIEW27
The Indian economy continues to display favorable macroeconomic indicators with robust
performancesbythemanufacturingandservicessectorsthatbufferanerraticperformancein
theagriculturesector.Infrastructureisexpectedtowitnessthelargestincreaseinexpenditure
in the next four years. The Indian economy has experienced an 8% growth rate over the last
twoyears.Astrongperformancehasbeenwitnessedacrossallsectors.Specifically,significant
booms have been witnessed in the technology, telecoms, retail and financial services sectors.
Furthermore, the dynamic growth seems to be broad based and well spread out across the
entire spectrum of urban society, leading to rising disposable incomes, which has fuelled
consumption. The overall investment climate has seen improvement as foreign direct
investmentsandportfolioinvestmentshavebeenincreasing.Overthepastseveralyears,the
government has initiated large, previously neglected, infrastructure projects which include

27

CountryAnalysisReportIndia.(2009).RetrievedfromDatamonitor:www.datamonitor.com

26

expansionofroadlinks,expansionandmodernizationofportsandsignificantprojectsrelating
toexplorationandpowergeneration.Significantproblemsstillpersistwhenitcomestorural
areas where more than twothirds of the Indian population lives. There has been a growing
dividebetweenurbanandruralareas,andrapidlydevelopingandunderdevelopedstates.

CurrentStrengths

StrongGDPgrowth

Largestworkingagepopulationpoolintheworld

CurrentChallenges

GDPfluctuateswithmonsoons

Unemployment

Energyconstraintsandoverdependenceonoilimports

FutureProspects

StronginfrastructurespendingandFDIexpectedtodriveindustrialgrowth

Expanding domestic market driven by rising disposable income and improving

penetration

Sectorspecificopportunities

FutureRisks

Inflation

Imbalancedregionaldevelopmentandwideningeconomicdisparities

Impactofappreciatingcurrencyonneweconomysectors

27

IndiaKeyFundamentals(act/est)28

2006

2007

2008

2009

2010

2011

GDP,Constant2000Prices($billions)

708.1

772.6

835.1

904.5

980.4

1063.6 1155.0

GDPGrowthRate(%)

9.36

9.1

8.1

8.3

8.4

8.49

8.59

GDP,ConstantPrices,perCapita($)

637

684

727

776

828

885

947

Inflation(%)

5.3

6.2

5.9

5.64

5.4

5.18

4.98

Exports,Totalas%ofGDP

21.7

23.5

25.8

27.7

29.7

31.7

33.6

Imports,Totalas%ofGDP

26.7

28.7

31.3

33.4

35.6

37.7

39.8

MidYearPopulation,Total(million)

1,112

1,130

1,148

1,166

1,184

1,202

1,220

UnemploymentRate(%)

7.8

7.84

7.88

7.92

8.03

8.19

8.35

2012

PRELIMINARYSCREENING
InfrastructurePlans

AccordingtothePoliticalRiskYearbook,Indiasmostproblematicfactorfordoingbusinessisan
inadequate supply of infrastructure. 29 For most firms in most industrys this could be
problematic. For CAT, and all other firms in the heavy equipment sector, this represents an
opportunityforgrowth.Nearlyhalfofatrilliondollarsofinfrastructurespendingareplanned
overthefiveyearperiodendinginfiscalyear2011.Withtheinfrastructureplan,theincreased
development in commercial/residential construction and growth in the mining sector, the
potentialforCATontheshortandlongtermhorizonsisimmense.

28

CountryAnalysisReportIndia.(2009).RetrievedfromDatamonitor:www.datamonitor.com

29

PoliticalRiskYearbook:IndiaCountryReport.(2008,June1).Retrieved2009,fromThePRSGroup:
www.PRSgroup.com

28

The table below displays the Indian governments most recent plan for infrastructure
investment:

AnnualInfrastructureInvestmentPlan
US$Billions

2007 2008 2009 2010

2011

Total

Electricity

18.1

22.6

28.4

35.8

45.4

150.3

Roads&Bridges

12.5

13.2

14.3

16.6

19.4

76.0

Telecommunications

8.1

9.7

12.3

15.5

19.6

65.2

Railways

8.1

9.7

11.9

14.6

18.7

63

Irrigation

6.6

8.3

10.4

13.2

16

54.5

WaterSupplyandSanitation

6.3

7.6

9.2

11.4

14.1

48.6

Ports

2.4

2.9

3.5

4.2

5.1

18.1

Airports

1.5

1.6

1.7

1.8

1.9

8.5

Storage

0.9

1.1

1.2

1.3

5.5

Gas

0.7

0.8

1.1

1.3

4.9

Total

65.2

77.4 93.8 115.4 142.8 494.6

INDEPTHSCREENING
Overview:GlobalConstruction&FarmMachinery&HeavyTrucksIndustry30

Theglobalconstructionandfarmmachineryandheavytrucksmarketpostedfluctuatingratesof
growthbetween2003and2007.Thisgrowthrateissettodeclinefortheforecastperiod2007

30

GlobalConstruction&FarmMachinery&HeavyTrucksIndustryProfile.(2009).Retrievedfrom
Datamonitor:www.datamonitor.com

29

to2012.Theglobalconstructionandfarmmachineryandheavytrucksmarketgeneratedtotal
revenues of $122.23 billion in 2007, representing a compound annual growth rate (CAGR) of
6.0%fortheperiodspanning2003to2007.Incomparison,theAmericasandEuropeanmarkets
grew to reach respective values of $51.73 billion and $33.60 billion in 2007. Earthmoving
equipmentsalesprovedthemostlucrativefortheglobalconstructionandfarmmachineryand
heavytrucksmarketin2007,generatingtotalrevenuesof$22.82billion,equivalentto18.7%of
themarket'soverallvalue.Incomparison,salesofharvestingequipmentgeneratedrevenuesof
$15.56 billion in 2007, equating to 12.7% of the industry's aggregate revenues. The
performanceofthemarketisforecasttodecelerate,withananticipatedCAGRof4.8%forthe
fiveyear period 2007 to 2012, which is expected to drive the market to a value of $154.67
billionbytheendof2012.
Overview:IndianMarket31

Growth in the Indian construction sector, including roads, power, housing and other
infrastructure projects, has more than matched the expansion of the wider economy. The
sector,whichisthesecondlargestemployerafteragriculture,hasaworkforceof33millionand
saw growth of 12.1% in 2008. Largescale civil engineering work to improve Indias
infrastructure as well as a booming residential and nonresidential construction sector have
been the main drivers of this growth. The total investment in the sector amounted to $60
billion during 2006. The Five Year Plan ending in 2011 calls for an investment of $494 billion
being allocated to infrastructure development alone. The construction industrys value is
forecastedtoreach$143billionin2011.

31

OffHighwayResearch.EquipmentAnalysis:India:BackhoeLoaders.(2008).Accessedvia:
www.offhighway.co.uk

30

InfrastructureDetail:Roads

The Indian road network is the second largest in the world with 3.3 million kilometers, but of
this,approximately1.6millionkilometers,or50%ofthetotalroadnetwork,isstillunsurfaced.
Roadscarryaround65%ofthetotalfreightand80%oftotaltraffic,sothissectoriscrucialfor
expansion. Of the total 200,000 kilometers of National and State Highways only 10% is four
lane, 55% is doublelane and 35% is single lane. National Highways constitute only 2% of the
totallength,butcarrymorethan40%ofthetotaltransportdemandandwillbeapriorityfor
development.

IndianRoadNetwork KM

NationalHighways

66,590

2%

StateHighways

137,711

4%

DistrictRoads

467,763

14%

RuralRoads

2,650,000

80%

Total

3,322,064

100%

In 1995, the National Highway Authority of India (NHAI) was established to implement and
manage the NationalHighwayDevelopmentProject(NHDP).Thisinitially consistedofbuilding
13,146 kilometers of four to six lane national highways ranging from North to South, East to
West,andconnectingmajormetropolitanareas.Futureplansincludeconnectinglargevillages
tothehighwaysystemandexpandingthenumberoflanesonexistingroads.32

32

SeeAppendixB:NationalHighwayDevelopmentProjectMap

31

FINALDECISION
While a multitude of potential issues detract from the overall attractiveness of the Indian
environment,theoverallmarketsizeandpotentialcombinedwiththefactthatCATalreadyhas
establishedamanufacturingpresenceinthecountryleadtothedecisionofpursuingincreased
expansioninIndia.33

CATCHINA:AMODELFOREMERGINGMARKETGROWTH
CAT operates on every inhabited continent and has developed a successful global business
model. This model is employed, to
some extent, in each of CATs
geographic regions. Multiple facets
of this model are currently in
commission

in

CATs

China

operations and plans are underway

fortheinclusionofadditionalfacets.

CATsolditsfirstproductsinChinain1975andopeneditsfirstChineseofficein1978.During
the 1980s, CAT initiated technology transfers that allowed for the local manufacturing of CAT
licensed products. In the 1990s, CAT accelerated its Chinese expansion with more significant
local production and the formation of Caterpillar (China) Investment Co. (CCI) in 1996, more

33

SeeAppendixC:AdditionalInformationRegardingIndiaforfurtherinfrastructureandpolitical
information.

32

than 20 years after its first Chinese sales. CCI was formed to increase local investment and
businessdevelopment.34

CAT now manufactures six product lines in China. In addition to these significant product
manufacturing operations, CAT locally provides components manufacturing, remanufacturing,
logistics via two logistics and parts centers, financial leasing, training, marketing and research
and development in three research and development centers. CATs Chinese dealer network
currentlyincludesfiveCATdealerswith58branches;itisexpectedtoexpandtoinclude29CAT
dealerswithmorethan220branchesby2010.35

CAT has seen significant yearonyear growth in China; sales and revenues increased by more
than230%from2005to2008.CATs2008globalrevenuesincreasedby14%comparedto2007;
CATChinarevenuesforthesameperiodincreasedby70%.CATprojectsthatitsChinesesales
and revenues will continue to increase by an estimated 80% between 2008 and 2010.35 This
growth will stem from increased sales and an aggressive expansion plan that includes the
introductionof10manufacturingfacilities,alogisticsandpartscenterandtwodemonstration
andprovinggrounds.ThisexpansionisprojectedtoincreasethenumberofemployeesinChina
from 5,100 to 12,000.35 The Asia Pacific region helped to curtail the negative effects of the
globalrecessiononCATsoverallbusinessin2008andwillcontinuetodoso.

34

SeeAppendixD:CATChinaExpansionTimeline

35

Lavin,Rich.CaterpillarinEmergingMarkets.CaterpillarCLSAAsiaInvestorsForumPresentation.
2009.

33

CATINDIA
WhilenotasdevelopedasCATsChineseoperations,CATsIndianoperationsareexperiencing
similargrowthratesandplansareeverevolvingtoincreaseitsgrowthandcontribution.AsRich
Lavin, Group President has said, Caterpillar will establish a profitable leadership position in
eachoftheemergingmarketsbyleveragingtheholisticCaterpillarbusinessmodel.36

CATs first Indian manufacturing operations began in 2003. Previous to 2003, CAT branded
productswereimportedandCATproducts,underotherbrandnames,were manufacturedvia
contracts.37 Local manufacturing has increased significantly in recent years and now includes
mining and earthmoving equipment, engines, engine components and generator sets in three
facilities.38 Plans for two additional manufacturing facilities are already underway. 36 In
addition to manufacturing, CATs local operations include five offices, two logistics and parts
centers and a research and development center. CATs Indian dealer network includes two
dealers with 80 branches, including 20 CAT Rental Stores (CRS). CATs goal is to increase the
numberofCRSinIndiato75by2010;theCRSmodelfitstheIndiancustomersjobsiteneeds
well.InadditiontoestablishingtheCRSnetwork,CATanditsdealersestablishedContractors
College,whichisdesignedtoeducatemachineownersanduserstoincreaseproductivity.38

36

Lavin,Rich.CaterpillarinEmergingMarkets.CaterpillarCLSAAsiaInvestorsForumPresentation.
2009.
37

Jagannathan,Venkatachari.TheCatisnotMeowing,ItsRoaring.Domainb.com.TheInformation
CompanyPrivateLimited.Sep14,2003.
38

SKKandS.A.Faridi."Caterpillar'sPresenceinIndiaisStrongerthanEver".NBMMediaConstruction

Information.2007.

34

CATmayhaveContractorsCollegeinIndia,butitdoesnothaveatrainingcenter.This,along
with increased local production and research and development presence, are areas of
opportunityforCATbasisthesuccessfulexpansionmodelusedinChina.Thedevelopmentof
CATs Indian operations is occurring at a faster rate than the development of CATs Chinese
operations did; primarily due to the fact that CAT is now a more structured and experienced
globalcorporation.Itappearsthat,inIndia,CAThasbeenfollowinganacceleratedversionof
itsChineseexpansionmodelandisdoingmanythingswell.Itisbecauseofitsstrongresultsand
aggressiveplansthatthestrategicobjectiveandassociateinitiativesthathavebeenidentified
aimtobuilduponandthissolidfoundation.

Recently, CAT committed to a four year, $200 million investment to expanding production in
India.ThefundsallocatedforthisprojectwillallowCATtoincreaseproductionofoffhighway
trucksinitsplantnearChennai,expandengineproductioninHosurandincreaseproductionof
itsbackhoeloaders.WeareveryencouragedbythefocusoninfrastructurebuildupinIndia,
especiallytheroadsandhighways,Lavinsaid.Wearelookingatopportunitiesinworkingwith
ourdealersandpartnerstobeapartofthat.39

STRATEGICISSUE
TheIndianinfrastructuremarketisacomplexarenawithamyriadofvariablestoconsiderwhen
developing a comprehensive growth strategy. The primary strategic issue that CAT must
addressis howtobest positionitself toachieve continuedgrowthintheIndianinfrastructure
market.Withanestimated$750billiontobeinvestedininfrastructureoverthenextdecade,

39

Abraham,T.K.(2009,November6).CaterpillartoInvest$200MilliontoMeetRisingIndianDemand.
Retrieved2009,fromBloomberg.com:http://www.bloomberg.com

35

CATmustbepreparedtoexploitthisexpansion.Becauseinfrastructureissuchabroadconcept,
CAT will start by focusing upon machinery and equipment for road construction. The
intersectionofroaddevelopmentwithCATspresentoperationsinIndiaallowsthefirmtogrow
inthismarketimmediately.

AlthoughthenetworkofroadsinIndiaisdescribedasthesecondlargestintheworld,50%of
the roads are unsurfaced. India has a road network of 3.3 million kilometers.40 Of the 3.3
millionkilometers,66,000kilometersiscomprisedofthecountryshighwaysandexpressways.
Itisthis66,000kilometersthatcarries40%ofthenationstraffic,makingthemaintenanceand
development of new infrastructure, especially roads, very important. According to Public
Private Partnerships of India, the Indian government spends approximately $3.71 billion
annuallytofurthertheexistinghighwayinfrastructure.40

During this time of roadway improvement, India plans to develop nearly 9,000 kilometers of
roads, expanding 27,000 kilometers of national highways to four lanes, widening 6,500
kilometersoftheGoldenQuadrilateraltosixlanesandwidening20,000kilometersofnational
highwaytotwolanes.

TheIndiangovernmenthaslongrecognizedtheimportanceofinfrastructureforIndiasgrowth.
After its independence in 1947, the government established the first Five Year Plan to focus
uponinfrastructuredevelopment.Currently,thegovernmentisinthe11thiterationofitsFive
YearPlanwhichspans2007to2011.Boththe10th(2002to2006)andthe11thFiveYearPlan
havefocusedheavilyuponinvestmentinroadsasseenintheexhibitbelow.

40

Highways.(2009).Retrieved2009,fromPublicPrivatePartnershipsinIndiaMinistryofFinance,
GovernmentofIndia:www.pppinindia.com/sectorhighways

36

ItemizedInfrastructureInvestments
10thPlan:20022006

11thPlan:20072011

US$(Billions)

Percent

US$(Billions)

Percent

Electricity(Energy)

71.18

33.10

150.37

30.40

RoadsandBridges

35.34

16.50

76.05

15.40

Telecommunications

30.10

14.00

65.12

13.20

Railways

29.18

13.60

62.93

12.70

Irrigation

27.20

12.70

54.42

11.00

WaterSupply

15.18

7.40

48.57

9.80

Ports

1.00

0.50

18.03

3.60

Airports

1.65

0.80

8.48

1.70

Storage

1.18

0.60

5.46

1.10

Gas

2.13

1.00

5.00

1.00

Total

214.76

100.00

494.43

100.00

Category:

Source:GovernmentStatistics.

Althoughelectricityandthedevelopmentofotherenergysourcesremainsthedominantareaof
infrastructure funding, CATs present position in India is better suited toward the immediate
expansion of its machines for road construction. This is based upon the firms current
manufacturing capabilities and future expansion plans as will be discussed. Additionally,
governmentfundingforroadsisprojectedtoincreaseby16%annuallyfor2010and2011.The
annual investment in roads for the 11th Five Year Plan is depicted graphically, with the total
estimatedtobe$76billionforthecurrentplan.

37

AnnualIInvestmen
ntinRoadss
11thFiveYearPlan

US$Billions

20
15

$12.5

13.2
$1

$14.3

2007

20
008

2009

$16.6

$19
9.4

10
5
0
2010

20
011

Source:GoveernmentStatistics.

Thus, theoverarch
hingstrategiccissuesCATm
mustaddresssinIndiaare competitivelyyrepresentin
ng
itself in the marke
et through an
n expanded dealer
d
netwo
ork and mesh
hing its curreent capabilitiees
withinfrastructure
eprojectsthaatwillallowth
hefirmtogro
owinthisregionandhaveanimmediatte
impacct on the bu
usiness. Roaad constructiion represents the secon
nd largest seegment of th
he
infrasstructuremarrketwhereth
hegovernmen
nthasmadeaandwillmakeesignificantiinvestmentsiin
thefu
uture. CATaalreadymanu
ufacturesthe backhoeloader,akeypieceofequipmentforroaad
construction, in India. In ad
ddition, CATs asphalt fin
nishers and crawler dozeers which arre
haveapresenceinthemarketthatcaan
preseentlyimportedfromItaly, Brazil,ChinaandJapan,h
beaugmentedbysshiftingprodu
uctionsitesandimprovinggavailabilityaandaftersaleesservice.

ISSUESSTOADDRESS

Current se
et up of two dealers and 80 outlets iss insufficient to provide adequate
a
salees
andafterssalesservicettoallowCATtogainfurtheermarketshaare

CAT has weak

w
market share in bacckhoe loaderrs, asphalt fin
nishers and crawler
c
dozerrs
whichreprresentproducctlineswithssignificantgro
owthpotentiaalinIndia

38

STRATEGICOBJECTIVES
CATs primary objective is to gain significant Indian market share through dealer network and
productionexpansionoverthenextfiveyears.

Mirrorthegeographicrepresentationofitslargestlocalcompetitortoprovideimproved
customeraccessandaftersalesserviceby2015

Forbackhoeloaders,obtain25%marketshareby2012(estimated12,500units)

Forcrawlerdozers,obtain30%marketshare,inannual5%increments,by2015

Forasphaltfinishers,obtain25%marketshare,inannual5%increments,by2013

DEALERNETWORK
Market

Asintherestoftheworld,CATsproductsandservicesinIndiaaredeliveredtoitsusersthrough
anetworkofdealers.Aspreviouslydiscussed,CATscurrentIndiandealernetworkiscomprised
of two dealers with 80 branches. CATs Indian dealer network is currently larger than CATs
Chinese network; however, like its Chinese operations, its Indian operations will need an
aggressivedealernetworkexpansionplaninordertofurthergrowthandcapturemarketshare.

The aggressive expansion strategy that CAT will pursue is to mirror the dealer network of its
largestlocalIndiancompetitor,JCB.Inordertodoso,CATwilldothefollowing:

39

Engage two additional dealers to establish 58 outlets in underserviced areas of the

country

Increasethenumberofoutletsunderitstwocurrentdealersto92(+15%)

Bydoingso,CATwillhaveanetworkoffourdealersand150outletsandbewellpoisedtotake
advantageoftheIndianmarketsgrowth.
Competition

CATsIndiancompetitors,mainlyJCBandTerex,dominatetheIndianmarketlargelybecauseof
thesupporttheirdealersandoutletsprovide.JCBhas46dealersand285outletsandTerexhas
39dealersand75outlets.IncreasingthenumberofdealersandoutletsinCATsIndiannetwork
willallowCATtoreachmorecustomersandadequatelycompetewithinthemarket.

Initiatives

Aftersalesserviceisoneofthemostimportantfactorsinthebrandselectionofinfrastructure
construction equipment. JCBs widespread dealer network helps account for its market
dominance as it is able to provide its customers with the service they desire. CAT needs to
increaseitsoutletstocovermoreterritoryinIndia.Increasednetworkcoveragecanbemost
quicklyachievedbybuildinguponthecurrentdealers;however,theintroductionofnewdealers
willbenecessaryforfurtherexpansion.Specifically,CATneedstoincreaseitsoutletsinTamil
Nadu which alone accounts for 10% of backhoe unit sales, one of the largest infrastructure
construction equipment segments. While CAT has engine manufacturing in Chennai, the
remainderofthestateisnotcompletelycovered.Additionally,thesouthernstatesofAndhra
Pradesh and Karnataka account for a combined 17% of backhoe sales, and additional outlet
coverage is needed in these states. In the north, Rajasthan accounts for 8% of backhoe unit
40

sales;additionalCAToutletcoverageisalsoneededhere.WhilemoreCAToutletsareneeded
in the eastern states, fewer are currently required because this area accounts for a smaller
portionofthemarket.

Byincreasingthenumberofoutlets,CATwillbroadenthereachofitsproductsandbrandand
betterprovideaftersalesservice,bothofwhichwillpositivelyimpactsales.Byincreasingthe
numberofdealersitworkswith,CATwilldiversifyitsdistributionsystemrisk.Anydisruption
within the dealer network will certainly impact CAT, but the extent of that impact will be
lessenedbyhavingmorethantwodealers.

BACKHOELOADER
Market

Thebackhoeloaderisconsideredthe
most popular piece of construction
equipment in India because of its
versatility, cost and relative ease of
use. OffHighway Research, a
consulting firm that specializes in
international construction, estimates that the backhoe alone accounts for 45% of the
construction machinery market in India.41 Additionally, forecasts for the sales of backhoe
loadersarerobust,with43,000unitsprojectedinsalesfor2010andover50,000unitsby2012.

41

OffHighwayResearch.EquipmentAnalysis:India:BackhoeLoaders.Accessedvia:

http://www.offhighway.co.uk/samples/Indian%20Backhoe%20Loaders%20%20March%202008.pdf

41

CAT entered this segment via acquisition of Hindustan Motors. The firm acquired Hindustan
Motors in 2001 and began production in India in 2003. As the firms initial foray into
manufacturing in India, CAT encountered problems with quality and aftersales support.
Productionactuallydecreasedin2004and2005,butreboundedin2006.Thisreboundwasdue
to the introduction of a new and improved backhoe loader. Despite more than doubling its
sales of backhoe loaders from 2006 (251) to 2007 (570), CAT did not gain significant market
shareasitwasessentiallyfollowingthetrendofoverallmarketgrowth.

Competition

Despite significant growth in the backhoe loader market, competition between existing
manufacturers is intense (rivalry) and additional manufacturers (new entrants) are looking to
enter this market. Presently, JCB is the leader in market share with a dominating 73% of the
market. Competitor Terex has 6% of the market share through its joint venture with Vectra,
Terex Vectra Equipment Limited. As of 2008, CAT held only 3% of the market for backhoe
loaders.42

JCB is able to dominate this market because it has the largest manufacturing capabilities and
because it has been in this market since the 1980s. This history and manufacturing capacity,
combinedwithsuccessfulbrandrecognitioncampaigns,hasprovidedJCBastrongholdonthis
segment.Terexenteredthemarketin2003andhasheldasteady9to10%marketsharesince
thattimewithoutmakingfurthergains.43

42

OffHighwayResearch.EquipmentAnalysis:India:BackhoeLoaders.Accessedvia:

http://www.offhighway.co.uk/samples/Indian%20Backhoe%20Loaders%20%20March%202008.pdf
43

OffHighwayResearch.EquipmentAnalysis:India:BackhoeLoaders.Accessedvia:

42

Initiatives

Presently,CATsproductioncapabilities,afterthe2006overhaulandnewproductintroduction,
placethefirmattheforefrontofthebackhoemarketintermsofqualityandtechnology.Itis
estimatedthatthefirmalsohasexcesscapacity.Inevaluatingthemarket,CATscompetitors,
andCATsownoperations,thefollowinginitiativesforthebackhoeloadermarketinclude:

Competitivelypricetoalignfirmmorecloselywithlocalmarket

Improveaftersalesservicebyexpandingdealernetwork

ExpandContractorCollege

Price is considered to be the most important factor for selection of backhoe loader brand in
India.43 CATs backhoe loader has the highest price point of the major competitors in this
market, up to $40,000 per unit. Thus, in order to gain market share, CAT needs to adjust its
pricetobemorecompetitive.Asimple$1,000adjustmentwouldmakeCATmorecompetitive
withinthissegmentwithoutcausingsignificantbranddilution.WhileCATsusualdifferentiation
strategyisbaseduponpremiumquality,technologyandservice,theIndianmarketforbackhoe
loaders is extremely price sensitive. Hence, a more competitive pricing model is necessary to
makeCATmorecompetitive.

A unique aspect of the Indian backhoe market that CAT must also address is the fact that an
estimated 40% of buyers are first time buyers. This is because the backhoe loader is often a
contractorsfirstsignificantequipmentpurchaseasmorecontractors(formerfarmers)enterthe
market.CATalreadyoffersaContractorCollegeinIndiathattrainsbuyersontheproperuse

http://www.offhighway.co.uk/samples/Indian%20Backhoe%20Loaders%20%20March%202008.pdf

43

ofitsmachinetoachievegreaterproductivityandbetterreliability(i.e.avoidingactivitiesthat
candamageorshortenmachinelifeuse).AnexpansionofthisprograminIndiawouldallowthe
firmtoprovidebetterservicetoitsbuyersandworksecondarilyasamarketingcampaign.Thus,
rather than invest in an outright advertising campaign, CAT would work to create brand
awarenessamongbuyers.

The overall strategic changes for CAT to be successful in this market include aligning its price
withitscompetitorsand thendifferentiatingitself bysuperioraftersalesservice. Toimprove
aftersalesservice,CATwillneedtoincreaseitsdealeroutletcoverageinthestateswherethe
largestnumberofunitsarepurchased.Inaddition,ContractorCollegewillhelptotrainbuyers
ontheproperuseofCATequipmentandincreasebrandawareness.

CRAWLERDOZER
Market

Sales

of

crawler

dozers

have

consistently grown since 2002, and

stood at 608 units in 2008, due to
steadygrowthintheminingsector,and
robust allaround construction activity
inthecountry.

Prospectsforthefutureappearpositiveforcrawlerdozers,withsalesexpectedtoreach1,000
unitsby2013.Saleswillbedrivenbythesubstantialdemandfromallpartsoftheinfrastructure
programandthegrowingminingsector.

44

Crawler dozers fit into three categories: small, medium and large. This equipment is used
mainly for earthmoving operations in mining, irrigation or general construction. According to
Off Highway Research, it is a small market but an integral product used in infrastructure and
miningprojects.Thedemandwillnotoutpaceotherconstructionequipment,butisforecasted
togrowoverthecomingyears,especiallyinthemediumsizecategory.

The demand for medium size crawler dozers has increased over the years due in part to an
increase in infrastructure projects, which means the continued growth in infrastructure will
translatetocontinuedgrowthforthemediumcrawlerdozer.CAThadpreviouslymanufactured
alargecrawlerdozerinIndia,butdiscontinueditbecauseitsoverallmarketwasquitesmall.

Competition

The crawler dozer market is dominated by four companies: Beml, Komatsu, CAT and Shantui.
Beml is the only local supplier of the four competitors and controls 50% of the crawler dozer
market.ThoughBemlcontrolshalfofthemarket,thisrepresentsadecreaseinmarketshare;
Bemlpreviouslycontrolled87%in2004.Bemlhasfivebusinessgroupsandeightmanufacturing
units spread over four sites. At these locations Beml fabricates, machines, manufactures and
paints machinery; it can also cast steel components to sell to other firms. The second major
competitorforCATtocontendwithisKomatsu.In2008,Komatsuheld28%ofthetotalmarket
share while CAT possessed just 11%. Of the 70% of the imported crawler dozers from Japan,
Komatsusalesaccountedfor78%ofthesecrawlerdozers,whileCAThadtheremaining22%.44

44

OffHighwayResearch.EquipmentAnalysis:India:CrawlerDozers.(2009).Accessedvia:
www.offhighway.co.uk

45

ThevisibilityofChinesesuppliersinthemarkethasbecomeincreasinglynoticeableinthelast
fewyears,andtheirrapidriseisthreateningtochangethedecadesoldmarketstructure.

Initiative

GivenCATspreviousmanufacturingcapabilityofthelargecrawlerdozerinIndia,theinitiative
hereisforCATtomanufacturecrawlerdozersinthemediumsizerange.Thissizerangehasthe
largestpotentialforgrowthandrepresentsasegmentwhereCATalreadyhasmarketshare.By
producing the medium size crawler dozer locally in India, CAT will be better able to compete
with Beml and Komatsu. The estimated cost for the plant conversion is approximately $15
milliondollars,baseduponBemlsrecentlyreportedfactoryconversions.

ASPHALTFINISHERS
Market

The market for asphalt finishers is

directly linked to the level of
investmentmadebythegovernmentin
creating and maintaining the road
network. Despite being an important
driver of the growth, improvements in
the road sector made a late entry into
the governments list of investment priorities. It has witnessed rapid growth during the last
decade which is clearly reflected in the large increase in demand for asphalt finishers. Sales
have grown from a modest level of 156 units in 1998 to reach over 1,000 units in 2008.

46

Prospectsforthefutureappearpositiveforasphaltfinishers,withsalesexpectedtoreachover
2,100unitsby2013.45

TheasphaltfinisherisanimportanttoolfordevelopingIndiasnetworkofroadsandhighways.
Theasphaltfinisherplaysanintegralroleinlayingthebaseandtrafficlayerandsealingtheroad
surfaceasitisapplied.Therearetwomaintypesofasphaltfinishers:wheeledandcrawler.As
India allocates funds for developing its transportation infrastructure, the demand for this
product will increase. Over the past five years, the demand for this piece of equipment has
beensignificantasseeninthefollowingtable.

SalesofAsphaltFinishers

2003

2004

2005

2006

2007

Wheeled

330

294

449

661

851

Crawler

40

24

76

103

Total

370

303

473

737

954

TheIndiangovernmentseffortstodeveloptheroadandhighwaynetworkhaveincreasedthe
demandfortwomaintypesofasphaltfinishers:thelessthan5.5meterpaverandthe9to10
meter paver. The aforementioned machine can pave an area up to 5.5 meters wide and the
latter can pave an area between 9 and 10 meters wide. The 5.5 meter machine is generally
wheeledandusedonsmallerprojectsorasthemeansoflayingthebaselayeronamultilane
project. The 9 to 10 meter machine is used for applying the base layer and finish layer on
multilaneprojectsandgenerallyusesthecrawlerconfiguration.
45

OffHighwayResearch.EquipmentAnalysis:India:AsphaltFinishers.(2008).Accessedvia:
www.offhighway.co.uk

47

Asthetableindicates,thesmallermachineisinthehighestdemand.Additionally,accordingto
Off Highway Research, the locally manufactured wheeled finishers have about 90% of the
market;importedwheeledfinishershavenotpenetratedthemarketbecauseoftheirhighprice
andlongdeliverytime.46

Competitors

GujaratApollocurrentlyhas76%ofthesmaller,underwheeledasphaltfinishermarketwiththe
remainderofthemarketsatisfiedbynolessthannineothersuppliers.47GujaratApollonotonly
offerstheconstructionequipmentbut alsotheequipmentusedforbatching,suchaswet mix
plants,drummixplantsandwetmixmacadammixplants.Intheperiod2003to2007,Gujarat
Apollo had no less than 68% total local market share (2004) and as much as 76% total local
marketshare(2007).46Additionally,sistercompaniesmanufactureproductscomplimentaryto
theasphaltfinisherssuchas:bitumensprayers,curbingequipmentandroadmarkingmachines.

Asof2007,CATsmachinesrepresentedlessthan6%oftheimportedmachinesandlessthan
1%ofthetotalmarket.46TheCATequipmentwasimportedthroughItaly.Themostsignificant
portionofimportscomesfromVogeleoutofGermany.

Initiatives

AsCATisalreadycommittedtoincreasingproductioninIndia,theasphaltfinisheristhesecond
areawhereitcanaugmentitslocalproductioncapabilities.Therationalforthisitemisbased
upon the governments current and future investment in roads. Because the smaller asphalt

46

OffHighwayResearch.EquipmentAnalysis:India:AsphaltFinishers.(2008).Accessedvia:
www.offhighway.co.uk
47

EquipmentAnalysis:IndiaAsphaltFinishers,July2008

48

finisher has the higher growth potential and more applicability, this will be the product CAT
manufactures.Sincepurchasersoftheasphaltfinisherpreferalocalproductthatisreasonably
priced with a shorter delivery time, production in India will allow the firm to achieve more
marketshare.

AnadditionalbenefittoincreasingproductioninIndiaisthatCATwillfinditeasiertorefurbish
existingmachinesduetocurrentstockofpartsandthenecessarytechnologyforremachining,
castingorrebuildingpartsnecessarytoservicethesecondhandmachine.

Forpromotingthenewproductlines(mediumsizecrawlerdozerandwheeledasphaltpaver),
CAT will utilize its existing and expanding network of outlets managed by its two existing
primarydealersanditstwonew dealers.Aswith the backhoe loader,CAT willalsoofferend
usertrainingaspartofitsContractorsCollege.

PROJECTEDOUTCOMES
TOTALPROJECT48
Intotal,thethreeinitiativesinvolvedinCATsexpansionofitsIndianoperationsareexpectedto
provide positive financial results. The payback results are based upon a ten year horizon and
uponmultipleassumptionsthatareprovidedinAppendixF:FinancialProjectionAssumptions.

48

SeeAppendicesGJ:ExpansioninIndia10YearPlanSummary,P&LDetailandNBVWorkingCapfor
Caterpillar,BackhoeLoaders,CrawlerDozersandAsphaltFinishersforfurtherfinancialdetails

49


CapitalInvestment
AdditionalRevenues

TotalProject
$160,000,000

Backhoe
Loaders
CrawlerDozers
$115,000,000
$15,000,000

Asphalt
Finishers
$30,000,000

$7,601,745,649

$6,415,443,938

$429,396,151

$756,905,559

AdditionalNetIncome

$570,130,923

$481,158,295

$32,204,712

$56,767,917

NetPresentValue

$138,392,183

$130,226,243

$3,282,199

$4,883,739

27.20%

31.10%

15.00%

14.00%

6.36

5.89

8.63

8.85

55.63%

58.91%

43.17%

42.56%

InternalRateofReturn
PaybackinYears
10YearAverageROCC

ENTERPRISE&REGIONALIMPACTS
Intenyearstime,CATsexpansionofitsIndianoperationsisprojectedtocontribute3%tothe
enterprisesrevenuesor7%totheAsiaPacificregionsrevenues.Whilethesepercentageyields
mayseemminor,theyrepresentnearly$1.1billioninrevenues.Therearefewcompaniesthat
areabletoobtainmorethan$1billioninrevenuesinonly10yearstime;CATisoneofthose
companies.Theseprojectionsfurtherdemonstratethesignificantopportunitythatexistsinthe
Indian market. CATs strong brand, reputation, business model and trends coupled with the
aggressive expansion plan previously detailed will ensure CAT remains a leading multinational
corporation.

50

CAT Revenue Projections - Total Company

in millions

Baseline

India Exp

Total Sales

296

32,296

Year 1
% of
Total

33,000

Year 5
% of
Total

36,016
98%

2%

100%

Year 10
% of
Total

41,753

1,090

42,843

97%

3%

100%

99%

1%
800

CAT Operating Earnings Projections - Total Company

in millions
Year 1

100%

% of Total

36,816

Year 5
% of Total
Year 10
% of Total

Baseline

India Exp

in millions

APR Sales

Year 1
% of
Total

8,486

296

8,783

Year 1

97%

3%

100%

% of Total

Year 5
% of
Total

10,315

800

11,115

93%

7%

100%

13,165

Year 10
% of
Total

92%

1,090
8%

3,960
99%
4,322
97%
5,010
97%

India Exp
44
1%
120
3%
164
3%

Total OE
4,004
100%
4,442
100%
5,174
100%

CAT Operating Earnings Projections - Asia Pacific

Region

CAT Revenue Projections - Asia Pacific Region

in millions

Baseline

Year 5
% of Total

14,255

Year 10

100%

% of Total

51

Baseline

India Exp

APR OE

1,018

44

1,062

96%

4%

100%

1,238

120

1,358

91%

9%

100%

1,580
91%

164
9%

1,744
100%