Caterpillar Heavy Equipment Manufacturer Caterpillar

Caterpillar

Heavy equipment manufacturer Caterpillar operates in several sectors, mainly those to which its core technologies are transferable. The company's primary businesses are machines, engines and work tools. They sell to a wide range of industries, but have particular focus on mining, forestry, construction, oil and gas, and marine.

Caterpillar also operates some ancillary businesses such as logistics, finance, insurance and after sales service. They also contract out the manufacture and marketing of an apparel and footwear line. Machinery comprises 63% of revenues, with engines contributing 30.2% and financial services 6.7%. Financial services, at 23%, has by far the best net margin of the three major lines.

Caterpillar's customers are often large firms engaged in the primary activities of each given industry. So for example, the mining division markets to mining companies; the construction division markets to contractors; the forestry division markets to logging companies. Cat markets their products globally, as many of their customers have operations around the world. The company specifically delineates Asia-Pacific, Europe, Africa, the Middle East, Latin America, North America and the CIS as geographic regions. Of these, North America is the largest market, with 43.8% of revenues.

The markets in which Caterpillar operates are large, global and lucrative. As a result, they face many strong competitors, including Komatsu, Volvo Construction Equipment, Hitachi, Doosan, and CNH in heavy equipment. In engines they compete with firms like Cummins, John Deere, MTU, Mitsubishi, Navistar, Rolls-Royce, Kawasaki and several others. In their insurance business they compete with firms such as Citigroup, CTI and GE Capital.

Competition in each of these sectors can be characterized as intense. There are few weak or small competitors in any of these industries. Caterpillar instead is competing with a handful of strong competitors in each of its markets. Exit barriers are high. Most customers are large and have strong buying power. Within each industry, firms are fighting for market share, despite occasionally strong growth in various markets. The industries in which Cat operates are generally cyclical. At present, most North American businesses are in a down cycle except for mining and oil & gas. The cycle in other parts of the world, such as Europe, Asia-Pacific, and Latin America is strong at present.

There are a handful of potential competitors in each industry in which Caterpillar operates. Barriers to entry are high, but potential new entrants in each of these businesses have the means to overcome these barriers. Established competitors such as Komatsu can translate their competitive advantages between different product lines and could easily extend into engines. There is a strong risk of consolidation in the industry, particularly with regards to engine and equipment manufacturers. The finance and insurance segments are threatened by any number of large financial institutions that have the financial capacity to enter the market.

Caterpillar faces a number of operating challenges. The first is the cyclical nature of their businesses. Cat has taken several steps to address this. They have diversified their operations geographically and in terms of product lines. This gives them protection against cyclicality in any given region or industry. They also have developed numerous lines that serve to smooth out their income streams - insurance, services, finance, logistics and apparel among them. This cyclicality can also be affected by another key area of challenge for Caterpillar, the economy. The health of the economy in key markets is a strong determinant of demand. For example, the economic fallout of the subprime crisis in the U.S. has strongly reduced demand in the construction sector.

Competition is another significant challenge, given the strength and breadth of the competition that Cat faces. The competitors in each market are different, but each is strong. It is difficult for Caterpillar to address such a wide range of strong competitors on a global strategic basis. The competition must be addressed on a market-by-market basis, which reduces Caterpillar's ability to leverage its size and strength. Another challenge is market maturity. The cyclical nature of many of Cat's businesses disguises the fact that many of those industries are relatively mature. Customer relationships are established, and market position does not change significantly year-over-year. Caterpillar has addressed this by expanding its brand outwards into ancillary products and services. The company is also invested in developing markets, and exploiting areas of underinvestment in developed markets, where growth may still be achieved.

Caterpillar has several alternatives to guide future strategy. One is to continue to focus on their current path. The company has grown substantially over the past several years in terms of revenues, profits and share price. In 2008, however, the company's share price has declined 45.3% from the beginning of the year. As the economic crisis spread overseas, Caterpillar's policy of geographic diversification is at risk of being insufficient to insulate the firm from global economic catastrophe. Maintaining the current path, however, recognizes the long-term strength of their strategy. Moreover, it allows the company to continue to strengthen some its existing new initiatives, such as its logistics business, railroad subsidiary and its solar turbine business. Caterpillar typically takes a cautious approach to building and integrating new businesses so drastic moves right now may not fit with the company's overall strategy.

Another alternative is to continue to expand into different product lines. Caterpillar has a strong, recognizable brand name. They have successful moved into financial services and apparel using that brand and its associations. Caterpillar could potentially expand into other areas, such as ATVs or light trucks, that utilize many of the same technologies that their current products contain. Cat could use a joint venture or a licensing agreement in order to penetrate these new markets, just as they did with apparel. There would be challenges, however, as Caterpillar would be moving away from their core competencies. Moreover, their other endeavors have not yet contributed significant revenue or profit to the company. The three main lines still account for almost all of Caterpillar's business.

A third alternative would be to expand into new technologies. The company has already increased its investment in technology in recent years in recognition of the fact that technology is a major driver in their existing industries. There are considerable opportunities available to develop cleaner engine technologies, more efficient heavy equipment, or new power technologies. The company already operates in the solar turbine services industry, and has the potential to leverage some of their capabilities in heavy equipment to manufacture the technologies necessary to produce green energy, or to make significant improvements in existing green technologies.

A fourth option for Caterpillar is to pursue growth through acquisitions. Caterpillar is one of the largest players in each of their main industries. Some of these industries are headed towards maturity and consolidation. Therefore, Caterpillar should begin that trend by purchasing some smaller competitors. This will strengthen Cat, and increase their market share. The company has the financial capacity to finance acquisitions with cash, and the current depressed stock prices make some of their competitors unusually affordable. The drawbacks are that the competitors may not have much value beyond market share, for which Caterpillar would likely pay fair market value. Acquisitions at this stage of Caterpillar's life cycle are best conducted for strategic purposes rather than mere market share gains.