Caterpillar Switching Production from Japan to China

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The US is not alone in finding manufacturing jobs and production capacity shifting to China. The phenomenon repeats itself across the developed world as this recent series of articles in the Financial Times explains.

Caterpillar made two recent moves which underline the growing importance of China, both as a market and as a manufacturing base. The first involved the relocation of the firm’s emerging markets chief Rich Lavin to Hong Kong. As with HSBC, CEO Michael Geoghegan’s move last year and General Electric’s John Rice who moved this year, the relocation goes beyond the cosmetic. If China served as the sole focus they would have moved to Shanghai or Beijing. Hong Kong represents a midway house and reflects a greater concentration on all emerging markets, not just China.

The other move and one that will seem more familiar to US workers involves Caterpillar’s announcement that they had sought to swap supply contracts that had run for many years in Japan and transfer them to suppliers in China. The company plans to raise the proportion of Chinese-made components used in its factories in China from 55% historically to 60% now and to more than 70% within five years. Chinese manufacturers have lacked the skills, however, to make highly complex parts. Chinese suppliers will need to expand their production beyond basic parts to more complex components. With Caterpillar’s active support, the firm believes the Chinese suppliers will take over a growing proportion of the approximately 40% of the components Caterpillar currently imports from Japanese suppliers.

Although Caterpillar entered China in the 1970s it still only has about 7% of the market. China serves as “home” to 11 of Caterpillar’s 175 manufacturing facilities worldwide and a workforce of 7,400. China represents Caterpillar’s fastest growing market and will likely account for just under a tenth of the company’s annual revenues this year, which could reach $42bn. The logic for greater locally made components appears clear enough; the firm has ambitious expansion plans in the next few years. A new hydraulic excavator factory will start production in Wujiang in 2012, with a new large engine factory opening in Tianjin in 2013. It also has plans to expand its Xuzhou excavator plant by 2014. Although we don’t know whether Beijing put pressure on Caterpillar to raise local content we suspect this could have played a role. Just as Renault-Nissan has found in Russia, the authorities welcome inward investment but once there the expectation increases that the domestic supply base grow to support wider employment and wealth generation. By going public with their plans and setting a five year time-frame, Caterpillar has probably set expectations as to the time table more than breaking new ground with the news.

–Stuart Burns

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