Digging in for the long haul in China
Caterpillar is laying down tracks in China in a big way, with one of its most senior executives now based in Hong Kong.
The move to shift group president Richard Lavin to the city makes sense for the company, whose fortunes are increasingly tied to this region. The mainland is now the world's largest market for construction equipment, but Caterpillar is facing stiffer competition from cheaper Chinese rivals.
Lavin is the first group president of the world's largest manufacturer of construction and mining equipment to be based in Asia. The former lawyer turned corporate leader has a long connection with Asia, having been based in Hong Kong for Caterpillar in the 1980s. The United States firm, which is listed on the New York Stock Exchange, has five group presidents reporting to the chief executive.
Lavin is responsible for the company's three global machinery businesses - excavation, earth moving and building construction products.
He is also head of the Japan market, manufacturing in Europe and Latin America, as well as China, India, the Commonwealth of Independent States (CIS, the former Soviet Union), and Indonesia.
Reflecting growth in its Asian markets, Caterpillar's global workforce climbed to 152,983 last year from 126,556 in 2010. The company added 7,717 new workers outside the US last year.
Caterpillar's earnings surged 83 per cent to US$4.93 billion last year, while revenue soared 41 per cent to US$60.14 billion, the firm's largest annual increase in turnover since 1947. Asia-Pacific was its second-fastest growing market last year, with sales rising 45 per cent to US$15 billion, while Europe, the Middle East and Africa formed its fastest-growing market, with sales increasing 47 per cent to US$14.74 billion.
The US giant is however facing stiff competition from Chinese construction machinery makers like Sany Heavy Industry and XCMG.
Sany hopes to raise US$3.3 billion in an initial public offering in Hong Kong later this year, while XCMG also aims to list in Hong Kong this year.
Lavin has a bachelor's degree from Western Illinois University and law degrees from Georgetown University and Creighton University.
He also completed a Brookings Institute management programme.
Tell us about your history with Caterpillar.
I've been with the company for 28 years. I've lived in Asia for 12 years and started working for Caterpillar in Hong Kong in the late 1980s. Then I lived in India, Japan and China. I was Caterpillar's vice-president for Asia-Pacific in Beijing, then moved to the US in 2008. I assumed this group president post in 2008 and moved to Hong Kong in late 2010.
What is the significance of your current posting in Hong Kong?
I am in Hong Kong because Asia, especially China, is such an important market for us. Hong Kong is an excellent location for me. It's a good city to travel out of, with a three-hour flight to Beijing. I have access to every part of the region from Hong Kong. The industries we serve - namely construction, mining and power systems - are growing faster in Asia than any other part of the world.
Describe the China market.
China is the largest construction equipment market in the world, and the construction equipment industry in China is larger than the rest of the world. A quarter of a million excavators and wheel loaders are sold in China each year, which is several multiples of the rest of the world. We're very bullish about China's growth prospects in the next five to 10 years.
Describe the firm's China business.
The industries we serve in China were flat in 2011. After an aggressive first-half, these industries slowed in the second half. A lot had to do with the central government's policies. They were very concerned about inflation, so reserve requirements and interest rates were increased. At the end of 2011, the Chinese government announced relaxed reserve requirement ratios, which added 40 billion yuan (HK$49 billion) of lending, and there is talk of further loosening of credit. From the second quarter, we see improved prospects in China and we expect the industries we serve in China will grow 10 per cent in 2012.
What is your headcount in China and what factories does the company have in the country?
We employ about 10,000 people in China. We have 17 manufacturing facilities and another seven under construction in China. The facilities under construction will be finished in 2013 and 2014. Primarily, we're manufacturing in China for the local market. We have four independent dealers, some Chinese and some foreign, who employ another 10,000 people.
Do you have plans to cut staff or add staff in China?
We're growing in China and we are hiring in China. As we bring the seven factories online in China, we will be hiring more people.
What are the unusual or unique things about the way Caterpillar manages its staff in China?
People have freedom to manage and at the same time are held accountable for results. We manage based on Caterpillar's common principles and a shared commitment. These are principles like integrity, excellence, teamwork and commitment. These are common principles stated in the code of conduct.
(According to Caterpillar's code of conduct, employees have the right and responsibility to report to their managers violations of the company's code of conduct or law. The company promises not to punish employees for doing so.)
What is Caterpillar's business model in China?
What's unique in our business model is the integration of our elements, including financing and distribution. In China, a good number of buyers are first-time buyers. Financing to enable them to buy our products is critical. Caterpillar Financial, our financing subsidiary, serves that role for us. Caterpillar financing is a major part of our business in China. Our dealers also provide us with significant competitive advantages. They invest heavily in service and parts. When our customers experience downtime, our dealers can provide service and parts.
How does Caterpillar manage the cheaper Chinese competition?
We compete against Chinese competitors in the same way as Japanese and European competitors. We sell value to our customers. We enable our customers to be more efficient and productive. By delivering the lowest operating cost in the industry, we enable our customers to make more money with our equipment. Generally, Chinese products are cheaper than our products, but if you look at the cost of owning equipment over its lifetime, our equipment is cheaper.
How do you view Chinese competitors like Sany and XCMG?
Sany and XCMG are investing more and more outside China. More and more, we are competing with these companies outside China. We welcome the competition ... we get better and the market gets better.
China became the world's largest engineering machinery market in 2010 with a value that exceeded this amount in yuan