China still land of opportunity: the Caterpillar story

2015-09-26 10:20Xinhua Editor: Mo Hong'e

Will U.S. heavy equipment giant Caterpillar become a "Chinese company" one day? For Chen Qihua, vice president of Caterpillar Inc. and chairman of Caterpillar China, it's a matter of not ownership but commitment.

"Forty years from now, Caterpillar will no doubt be a great company in China and, probably, a 'Chinese company,'" Chen said in an interview with Xinhua as his company celebrates its 40th anniversary in China this year. "At that time, for a global company committed to development in China, it will no longer be important where the major stakeholder comes from."

Chen said Caterpillar aims to speed up localization in China and make the country a strategic base for its global development.

As much as 65 percent of middle-ranking and senior officials at Caterpillar China were Chinese nationals three years ago, and the goal for this year is 80 percent.

Though a softening economy in China is hurting its sales, the world's largest construction and mining equipment maker has no intentions of retreating.

U.S. firms are feeling the pinch of the Chinese economy and a changing regulatory environment, but for companies like Caterpillar, the country remains a land of opportunity.

Economic re-balancing in China has forced the construction machinery industry to cool down, but has also offered new opportunities for Caterpillar, which has seen growing demand in new business and views China as a strategic base for global expansion, Chen told Xinhua.

Slower revenue and profit growth in 2014 led to the most challenging year in recent history for many U.S. companies in China, according to a survey of member companies by the American Chamber of Commerce in China (AmCham) released earlier this year.

China's regulatory environment has also become a bigger concern, which has worsened in recent years after some U.S. companies, including Microsoft and Qualcomm, were investigated or fined for monopoly in the country.

However, almost 70 percent of AmCham member companies are optimistic on Chinese market growth for the next two years, according to the survey, while 44 percent plan to launch new products or services this year.

China is still a better choice for foreign firms than other economies. The country has overtaken the United States as the top destination for foreign direct investment, according to a U.N. Conference of Trade and Development report released in January.

Though the business climate for foreign firms in China is changing, the changes are not necessarily bad.

In Chen's opinion, the growth rate correction is just transitory and China is still full of opportunities for U.S. firms. Firms that adapt to the new market opportunities and environment will succeed, while those that refuse to catch up with China's changes are likely to fail, he said.


Before negotiating its first order to China in 1975, Caterpillar management met with Chinese officials in Ottawa, Canada to discuss products and services over a three year period. They had to meet in Canada as traveling between China and the United States was difficult before diplomatic ties were established in 1979.

The 3.8-million-U.S.-dollar deal signed back then included the sale of 38 pipelayers. Today, Caterpillar has 29 factories, four R&D centers and 13,000 employees in China.

At Caterpillar's Xuzhou factory, workers and robots churn out the company's most advanced excavators, putting the factory on the way to becoming Caterpillar's biggest excavator production base.

But the upturn has suffered setbacks lately. Caterpillar's sales in the Asia-Pacific region slumped 30 percent year on year in the second quarter of 2015, primarily due to construction industry declines in China and Japan, a company report showed.

However, Chen sees the change as a necessary shift and a precursor to new opportunities.

There were simply too many construction machinery producers in China before, Chen said, the result of double-digit expansion that accompanied a property and export boom in previous decades, and many of them were not efficient or green enough.

As China shifts gear to slower, greener growth driven by domestic consumption, the downward trend in the sector is unlikely to reverse soon, and some small players have already been forced to close.

Chen views the restructuring as a good thing and expects the process to continue in the next three to five years, but insists Caterpillar is still optimistic on China's economy in the long run.

"The restructuring and reforms will inevitably weigh down on growth, but once they are completed, more growth opportunities will come," he said, noting that Caterpillar wants to see sustainable, quality growth even though it's at a slower rate of 6-7 percent. "We hope China sticks to this restructuring and reform process."

Despite an industrial glut, Caterpillar is targeting China's huge need to upgrade infrastructure.

The government's efforts to boost the service sector, such as newly announced measures to support financial leasing, will benefit Caterpillar, as the move reduces the financing costs for Chinese firms that need Caterpillar's products.

The Belt and Road Initiative, China's proposal to build extensive trade and infrastructure networks with other countries, will also be a great boon for Caterpillar's construction equipment sales, Chen said.

Moreover, the company has seen promising growth in energy and transportation as it taps into growing demand from Chinese clients for cleaner, more efficient power generators and engines, Chen told Xinhua.

Sales in that sector recorded average annual growth of 11 percent over the past five years, according to Caterpillar data.

And it's not all about sales within China. Increasingly, the country has become a production and research base for Caterpillar to export globally.

There are plenty of new opportunities in China, Chen said, and the question is just how to grasp them.

"Foreign firms cannot blame the government every time they face difficulties doing business here. Sometimes they should reflect on themselves to see whether they really understand the policies and customers and can keep costs low enough," Chen said.


Having worked at Caterpillar for 21 years, Chen told Xinhua that government support has been a key condition for the company's expansion.

"We're welcomed here, that's the general feeling," he said.h Chen is confident that China will not back off in its support for foreign firms, as they are already a pillar of the economy.

The government halved the number of industries where foreign investment is restricted earlier this year. It also rolled out a draft law on foreign investment that, if passed, will replace the cumbersome case-by-case approval system with a "negative list" system, which will automatically allow investment in sectors not included on the list.

Such measures have already been implemented in the country's newly launched four pilot free trade zones, boosting the number of newly-established foreign firms there.

In the first eight months of this year, over 16,800 foreign-funded enterprises were established in China, up 10.7 percent year on year, and foreign direct investment increased 9.2 percent.

In a latest move to bet on China by U.S. firms, beverage giant Coca Cola announced in August it will invest 4 billion U.S. dollars into its China operations over the next three years, compared with a total investment of 9 billion U.S. dollars between 1979 and 2014.

China has been deepening reforms, Chen said, while also noting that more could be done and it could be done more quickly.

He sees huge benefits in a prospective U.S.-China bilateral investment treaty, which is on the agenda of Chinese President Xi Jinping' s ongoing state visit to the United States.

Chen hopes Xi's visit will boost relations between the two countries, which is in the interests of U.S. firms in China like Caterpillar.

"The U.S. and China have some differences of opinion, but they are mostly about ideology. Their differences have less weight than their cooperation," he said.




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