Caterpillar, Eaton's Fortunes at Whim of Chinese Demand

Continued from Part One.

An article in the FT explores the impact on several US corporations who have invested heavily in Chinese manufacturing capacity, but who are finding domestic Chinese demand slowing much faster than they had expected. This is not a case of nearshoring, of rising Chinese costs undermining the economics of manufacturing in that country; it is a case of the demand for manufacturers’ products being stronger outside of China than within it.

The report focuses most squarely on Caterpillar, which has built 16 manufacturing facilities in the country, with nine more said to be under construction. It employs 11,000 workers in China, and has plans to double its workforce there by 2015.

Caterpillar is at pains to say its long-term commitment and confidence in China remains as resolute as ever, but for the time being the firm is seeing demand falling, to the extent it is having to export earth-moving and construction equipment made in China to overseas markets as demand has collapsed.

Fortunately demand is rising strongly in the US and Latin America, with decent growth in the Middle East and Russia. And Caterpillar is not alone: Eaton, another household name as a manufacturer of industrial equipment, is raising its demand expectations in the US from 6 percent to 9 percent, while downgrading those elsewhere from 4 percent to 2 percent.

DuPont, the chemicals giant, said sales rose by 30 percent in the Middle East and 23 percent in Latin America from last year, while revenues fell 2 percent in Asia. United Technologies, also exposed to the construction sector in China, said Chinese orders fell by 15 percent in the first quarter, with demand at its Otis elevator unit dropping by 21 percent, but orders rose by one-fifth in Brazil, India and Russia.

The shift may prove temporary, but Beijing is working hard to realign the economy away from relying on exports and fixed investment for growth and more towards internal consumption.

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