Caterpillar powers up for Asia drive

[momopi]

Caterpillar powers up for Asia drive
By Hal Weitzman in Chicago

Published: November 29 2010 22:35 | Last updated: November 30 2010 04:14 Financial Times

Rich Lavin, Caterpillar’s head of emerging markets, is getting ready for his big move: in January he will take up residence in Hong Kong, becoming the company’s first senior executive based in Asia.

His relocation follows similar moves by senior leaders at General Electric and HSBC, which are designed to demonstrate that China is not merely a “foreign market� but an essential part of each company’s future.

“It’s a fairly strong indication of our company’s commitment to that part of the world,� says Mr Lavin. “It sends a message that Caterpillar sees this as a critical market, a market of ever-growing importance for us.�

As Caterpillar expands its presence in emerging markets, it faces a number of challenges, just like other multinationals, says Mr Lavin, 58.

“The single biggest challenge we have in China is developing our supply chain to support a much more aggressive total manufacturing plan,� he says.

“We’ve got a very aggressive manufacturing capacity plan for China for the next four to five years and we have got to bring our supply base along with us.�

The company plans to raise the proportion of Chinese-made components used in its factories in China from 55 per cent to 60 per cent now to more than 70 per cent within five years.

This shift involves Chinese suppliers expanding their production beyond basic parts to more complex components.

These are currently imported from Japan, which has traditionally been one of the company’s key design and manufacture bases for excavators.

Mr Lavin says the company’s suppliers in China have made big improvements and are at the cusp of being able to make sophisticated parts. He warns, however, that the process will take years rather than months.

“Obviously, there is going to be a validation period once we think the Chinese supplier has reached the level where he can replace the Japanese supplier, and then it’s a question of validating that component in a machine operating in the field,� he says.

Another challenge is finding young Chinese people who will become Caterpillar senior executives of the future and will lead its expansion in China.

In the US, manufacturers struggle to find good engineers, while managerial talent is more widely available. In China and India, Mr Lavin says, the situation is reversed: engineers are “relatively plentiful� but finding good future managers is tricky.

“It’s a challenge – and no question, it becomes more of a challenge as we grow,� Mr Lavin says. “There is intense competition for talent in every one of the growth markets.�

He says the increasing competition comes both from other big foreign investors expanding within China as well as from the emerging domestic manufacturing sector.

“We’re all competing for the same type of people,� says Mr Lavin.

“As some of the domestic manufacturers really take their business model outside of China – as they begin to compete in Europe, in Australia, in North America – they are really looking to up their game in terms of talent. They are looking for global leaders and managers, just as we are.�

He sees the financial arm as the key to the challenge of growing Caterpillar’s relatively modest customer base in China from about 7 per cent today.

Caterpillar issued Rmb1bn ($150m) of two-year notes in Hong Kong last week, which it will use to fund loans to customers in China at attractive rates.

“We’re very satisfied with our Hong Kong offering in how it is going to position us from a funding standpoint inside China. It’s going to be an important part of our overall strategy,� says Mr Lavin.

“At the same time, we’re very interested in where the Chinese government is going with the debt market inside China,� he adds. “My sense is that they will develop a bond market inside China that we will be able to tap.�

From his new Hong Kong offices, Mr Lavin should get a much better sense of what is happening in Caterpillar’s fastest-growing market.