The large domestic manufacturers have experienced incredible growth over the last decade. Their rise has come on the large demand for CE in the domestic Chinese market. Today, companies like Zoomlion, Sany and others rely predominantly on domestic sales. For both MFY’s mentioned above, less than 10% of corporate  sales come from international sales outside of China.

As they see the China market becoming saturated, China MFY’s will be looking for international sales to spur growth. Both Zoomlion and Sany have recently stated that they would like to see international sales make up 50% of their  corporate sales within 5 years. Many other Chinese MFY’s are also making the similar growth targets.

While it is good to have lofty goals, it is very hard to imagine these companies hitting their targets. When asked where that growth will come, they all say it will come in the developing markets (and not in North America or Europe). There could be some credibility to this claim as these markets are much more price sensitive than in developed markets (China products cost less than products MFY’s from Europe and North America). They could easily eat into NA and European MFY’s market shares in places like Africa and South America as they continue to improve in quality, yet remain in the sweet spot on price.

Are the NA and European MFY’s responding? Well you could say yes. Last year, Caterpillar introduced the Cat 140K motor grader. In the past, Cat normally had global model strategy where in all models of a machine category sold around the world were the same model and series. When they introduced the motor grader (MGR) into China in the early part of the decade they introduced the Cat 140H, which was the current global model for that size of MGR sold all over the world.  However, in order to compete with the low prices in China, Cat had to make a “stripped down” version of the 140H. Cat normally sells a Cat 140H with all the bells and whistles in other markets in the range of USD250K plus a unit. In China, the competition was selling this similar class of MGR for $90K to USD100K.  Cat made the stripped down version and priced it at around USD140K each.

In order to prevent Chinese customers purchasing these units and immediately selling them overseas, Cat makes their customers, by contract, agree that in the 1st year of usage, or 1000H of operation, the customer must give the Cat dealer the first right of refusal to purchase the machine back. After 1 year of ownership or 1000h of usage, the customer was free to do what they wanted with the machine.

Still the 140H was priced nearly 50% higher than similar machines from the domestic competitions. Cat dealers in China were motivated (pressured) to introduce the 140H to Chinese customers, but the dealers salesmen were having a tough time selling a machine that costs 50% more than local machines.

Eventually (actually pretty quickly) Cat salesman in China realized the price difference between the 140H sold in China and that sold in the rest of the world.  They found that the best way to induce a Cat customer in China to purchase one of these 140H’s was to educate them about the global pricing variance and their pitch was to convince the Chinese customer that this was an investment in a commodity that would be worth more after a holding period of 12 months and sold into the international market.

This was not exactly how Mother Cat wanted it to go. They were hoping their salesman would overcome the price difference in the China market by explaining to the Chinese customers that Cats quality was superior to locally made machines and that the customer could make money on these machines buy the Cat 140H’s superior operating performance.

So, in the end, the salesman went with the easier sell. “Buy this machines for USD140K today, and in 12 months you will be able to sell it to overseas customers for USD200K. And this is  what many Chinese customers did. They purchased the machines, held them for 1 year and either did not use them (some even got superior payment terms which reduced their risk), or rented them out for one year to put some hours on them (and get some rental income).

Once the owners were free to sell them (after one year of ownership or 1000h of operating the machines) they would promote the sale of them through the internet or other medium. Potential customer in other markets would see an unused or low hour Cat with an asking price of USD180K to USD200+ K and think, “I could save a lot of money if I purchased these late model low hour Cats than to purchase a new one for USD250K”. Believing that Cat would make the same 140H standards all over the world, they did not realize this was a stripped down version.

So over the last 5 to 10 years, many many 140H’s 160H’s and 12H’s followed this pattern and were sold to customers all over the world (especially the Middle East, Africa, South East Asia, etc) from China. Cat did not like this at all. Cat still works in an old world mentality where the world is split up into many isolated markets. They have not caught up yet to today’s reality where information and products are now a global business and customers all over the world can access the same information and products. These stripped down units being sold outside of China caused Cat a lot of headaches. Their customers who were expecting the standard 140H’s were confused and let down when they found out the version of the 140H they purchased was stripped down for the China market. Cat’s dealers were angry because they had much higher priced Cat 140H’s in their inventory but could not sell them because their customers were purchasing these cheaper versions from China.

So in response to this situation, Cat decided to create two models when they upgraded to the next model series.  For the developed markets, they have introduced the Cat 140M MGR which has all the bells and whistles one would expect from a high performance Cat machine. But for developing markets, they have developed the Cat 140K. The K series will be only for developing markets and will be made in China. A new 140M will go for USD300+ while a new Cat 140K in China and other developing markets will sell for USD180K. As far as I am aware, this is the first time Cat is offering two series of the same machine at the same time (K Series and M Series).

Cat is hoping that it can offer a cheaper version of its machine line to developing markets, while also offering high end high performance machines for the developed economies. It is hoping that a customer from developed economies will be put off by the “strange” model 140K which is not marketed in their regions and will not what to buy them.

Cat only introduced the 140K about 1 year ago. Most buyers in China are still in the “hold” period of their purchase contracts, but I know many of them think they will have an opportunity to leverage world markets like they did with the 140H. In my opinion, they will have little hope for that. So from one part of Cat strategy, it looks like they might have been successful, but will they be able to fend off competition from the Chinese MFY’s who they will be competing against in the developing markets in the future. Will the 140K be more popular than the Chinese equivalent offered by Sany, Zoomlion et al? That is still yet to be resolved.

Your thoughts?