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Caterpillar sees China stimulus helping in 2013

September 8, 2012

VLADIVOSTOK: Caterpillar, the world’s largest maker of construction equipment, expects a US$157 billion Chinese infrastructure spending drive to feed through to its sales next year, boosting its operations both locally and in North America.

China has given the go-ahead to 60 infrastructure projects as it seeks to export weakness resulting from Europe’s debt crisis and a slow US recovery that have dragged its economic growth to a three-year low.

President Hu Jintao pitched the stimulus plan in a keynote speech today to business leaders attending an Asia-Pacific summit, drawing an enthusiastic response from Caterpillar’s top regional executive.

“It’s very good news,” Richard Lavin, who oversees Caterpillar’s China business, told Reuters during the Asia-Pacific Economic Cooperation (Apec) summit in Russia’s eastern port of Vladivostok.

“To have President Hu… talking about infrastructure and the role it plays in ongoing stable economic development… I thought that was really exciting.”

Highlighting increasing downward risks to global growth, Hu said in his speech that China would “leverage the role of infrastructure in boosting domestic demand, creating jobs and improving people’s livelihood”.

Hu reeled off a list of areas where China needed to upgrade its infrastructure – in agriculture, energy, water conservation and information technology.

He also called for a buildout of transport networks, listing railways, highways, waterways, airports and pipelines.

Lavin said he expected details of the infrastructure spending plan to become clearer in the next few days or weeks, but Hu’s comments suggested “it’s going to be very broad in its application”.

“He talked about roads, bridges, airports, sewage systems, energy – all of these are areas that we play in, it’s the core of our business,” said Lavin, who is Caterpillar’s group president and chairman and is based in Hong Kong.

“I think we can expect a fairly broad and significant impact across our business.”

China overcapacity

Caterpillar, based in Peoria, Illinois, posted record earnings in the second quarter, and forecasts 2012 revenues of US$68-US$70 billion this year and earnings per share of US$9.60 – which would
also be records.

The company has, however, suffered a slide in China as the far larger stimulus package – put into effect in response to the global financial crisis of 2008 – created a raft of bad debts that weighed on the construction sector.

Chinese economic growth slowed to 7.6% in the second quarter of the year and, in his speech, Hu cautioned that growth was facing “notable downward pressure”.

Chinese sales as a share of Caterpillar’s overall business slipped to 3%-3.5% last year from 6% in 2010, and should roughly hold pace with overall sales this year, Lavin said. He predicted a positive impact from the stimulus in 2013.

The company, which has 18 plants in China and nine under construction, has suffered from overcapacity and has started temporarily exporting machinery made there to the Middle East and Africa, but expects its bet on the long-term China growth story to work out.

“I would fully expect that the heavy focus on earth moving-type work – roads, airports, bridges – that it’ll have a very positive effect on our China manufacturing,” said Lavin.

“We don’t serve China 100% from China – we import machines for construction, also for mining, from outside of China, principally from North America. We expect to see a boost from North America, as well as in China.”

– Reuters


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