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& the Heavy Equipment Industry. Julie Pham Jason Howard Robert Austin. Agenda. Background of Heavy Equipment Industry Market Structure Background of Caterpillar Firm Conduct Market Performance Summary. Background of Heavy Equipment Industry. Expanding global population Farming

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The heavy equipment industry

& the Heavy Equipment Industry

Julie Pham

Jason Howard

Robert Austin


Agenda
Agenda

  • Background of Heavy Equipment Industry

  • Market Structure

  • Background of Caterpillar

  • Firm Conduct

  • Market Performance

  • Summary


Background of heavy equipment industry
Background of Heavy Equipment Industry

  • Expanding global population

    • Farming

    • Canals

    • Roadway systems

    • Railroads

    • Dams

  • 1859 - Suez Canal

    • Ferdinand de Lesseps backed by Napolean III

    • Steam power floating ladder dredge machines

    • 100 million cubic yards of material

  • 1880 – 1914 – Panama Canal

    • France w/ US finishing the job

    • 70 large steam shovels

    • 260 million cubic yards of material


Background of heavy equipment industry cont
Background of Heavy Equipment Industry (cont.)

  • World War I and II

  • Early companies in the industry

    • 1835 International Harvester – Reaper

    • 1837 Deere & Company – Steel Plow

    • 1844 J.I. Case – Thresher

    • 1847 Massey-Harris – Harvesting Equipment

    • 1861 Allis Chalmers - Flour Milling

    • 1903 Clark Equipment Company – Lift Truck

    • 1904 Holt Company – Caterpillar Tractor


Market structure industry concentration
Market Structure – Industry Concentration

  • 723 companies in Heavy Equipment industry. *

  • Herfindahl-Hirschman index of 50 largest companies.

    • 1020.03 *

  • Concentration Ratio *

    • 4 largest 49%

    • 8 largest 59.5%

    • 20 largest 72.6%

    • 50 largest 84.6%

      * 2002 data from the US Census Bureau http://www.census.gov/econ/census02/


Market structure industry concentration cont
Market Structure – Industry Concentration (cont.)

* 2002 data from the US Census Bureau http://www.census.gov/econ/census02/


Market structure product differentiation
Market Structure – Product Differentiation

  • Vertical Differentiation

    • Long bidding process

      • Quality

      • Durability

      • Price

      • Functionality

      • Repair costs

  • Purchases not influenced by style or buying trends (Horizontal product differentiation)

  • Product Mix Table


Market structure barriers to entry
Market Structure – Barriers to Entry

  • Industry barriers

    • Large capital investment

    • Customer loyalty

    • Economies of scale

  • Foreign market barriers

    • Product marking and labeling requirements (India and China)

    • Complicated tax and financial systems (China)

  • Foreign incentives to entry

    • Open General License system – allows 100% foreign direct investment (India)

    • Profits can be repatriated in 3 years (India)

    • 5 year tax break on infrastructure investment projects (India)


Market structure technological change
Market Structure – Technological Change

  • Competitive advantage – remote control trend

  • 15 years - Fleet of remote control machines *

    • Operated by single person

    • Detect problems, inform and provide options

    • Construction digs and mining

  • Remote control excavator and materials handler

    • Hundreds of yards away

    • Allowing operators to handle dangerous materials (radioactive waste, etc)

      * Construction Equipment magazine


Market structure demand growth and decay
Market Structure – Demand Growth and Decay

  • Boom in 1990’s (US Market)

    • New homes

    • Office parks and urban commercial buildings

    • Stadiums / sports arenas

    • Infrastructure projects

      • 1998 Transportation and Safety Act ($219 B, $175 B roads & bridges)

  • Construction Equipment noted on December 1, 1998, "the Highway Act is one reason the U.S. construction market will feel little pain from global financial cooling."


Market structure demand growth and decay cont
Market Structure – Demand Growth and Decay (cont.)

  • Asian financial crisis (late 1990’s)

    • Slowed pace of demand for heavy equipment

      • Housing, roads, offices

  • Russian collapse (late 1990’s)

  • Total Industry shipments fell

    • $24 B in 1998 to $22.5 B in 2000


Quiz question 1
Quiz Question #1

  • How is the Herfindahl-Hirschman Index (HHI) calculated?

    • It is the sum of the squares of the market shares of every firm in the industry.


Background of caterpillar
Background of Caterpillar

  • Formed in 1925 after a merger of 2 CA companies.

  • Both companies pioneered new technology that helped win WWI and WWII.

  • First expansion abroad in 1950.

  • Currently operates in 200+ countries.

  • Network:

    • 220 dealers (63 U.S.)

    • 100 manufacturing plants (42 U.S.)

    • Employs 85,000 worldwide.


Background of caterpillar cont
Background of Caterpillar (cont.)

  • CAT (Caterpillar) is currently the largest producer of construction and mining equipment, turbines and engines.

    • Earthmoving – mining – construction – forestry – waste – paving – powerhouses for boats, trucks and ships

  • 1 of 30 companies tracked by D.J.I.A.

  • Fortune 100 company ranked #1 in the industry.

  • Over $30 B in assets with almost $3 B net revenues.

  • 50/50 split with sales in U.S. and worldwide.

  • Recently began offering financing and insurance.


Firm conduct closer look
Firm Conduct – Closer Look

  • 80 year old company with a history of growth.

  • Mission Statement, Code of Conduct, and economic sustainability form the core of the organization.

  • Uniform conduct worldwide to sustain image and brand.

    • Ensuring free competition – refusal to bribe or extort – maintain honest financial records – internal development – non-hostile workplaces – personal responsibility – community action

  • CAT mission statement.

    • “Customers First”


Firm conduct swot analysis
Firm Conduct – SWOT Analysis

  • Strengths

    • Changing culture in management

  • Weaknesses

    • CAT becomes less nimble the bigger they get.

  • Opportunities

    • Emerging markets abroad (see weakness)

  • Threats

    • Negative public image for industry


Firm conduct products pricing
Firm Conduct – Products & Pricing

  • Economies of Scale from wide range of similar products.

  • Production costs are lower than competitors now…

    • Early 80’s union troubles

  • Additional overhead to improve image.

  • Premium included in price charged to consumer.

    • Tractor $30K example

  • CAT equipment is considered premium equipment.

    • Better name

    • Better construction and repair facilities



Firm conduct products pricing cont1
Firm Conduct – Products & Pricing (cont.)

  • Market Competitors depend on business segment studied.

    • Engines – Cummins and Volvo

    • Mining & Construction – Komatsu and John Deere

    • Mitsubishi at one time, but no more.

  • Komatsu

    • Sold engines to Japanese military

    • Entered U.S. market in 1967 to challenge CAT

    • World’s largest bulldozer

    • Silicon chips and electrical switching equipment


Firm conduct selling advertising
Firm Conduct – Selling & Advertising

  • Ring Power distribution chain

    • Rental machinery

    • Repair facility

    • New orders are usually custom

  • Most CAT advertising money goes to image

    • In 2005, $3.2 B, over 10% of company revenues

  • CAT sale of D9 and D10 tractors to IDF

  • NASCAR sponsorship to connect with rural America.


Firm conduct research development
Firm Conduct – Research & Development

  • Sustainability drive is central to R & D

    • In 2005, $1.1 B in R & D expenses

    • Fuel-efficient engines and technologies

    • ACERT diesel engine

    • Turbines powered from plant fumes

    • Solar turbines

  • 6 Sigma investment in management

    • Thus far each 6 Sigma investment has been an individual cost center, creating revenue.


Firm conduct cat in the news
Firm Conduct – CAT in the news

  • CAT acquisition in Progress Rail Services in May

    • Synergy with engine rebuilding section

    • Future engine sales

  • “Caterpillar Posts 38% Profit Rise, Raises Outlook on Strong Demand”

    • WSJ July 2006

    • Raised yearly outlook for the second time

    • From $40 B in sales to $42 B

    • Plans to break $50 B by 2010


Quiz questions 2
Quiz Questions #2

  • Pick two major competitors of CAT.

    Komatsu

    Tonka

    John Deere

    Mitsubishi


Market performance
Market Performance

  • Market Efficiency

    • US construction spending (private and public) $1.1 trillion

    • Orders for construction machinery up 19% in 2005

    • 2005 SAFE Transportation ACT

      • $286.4 billion for building highways in US

    • Project Management

      • Most firms are implementing new software and technology to improve efficiency

    • Steady demand growth


Market performance cont
Market Performance (cont.)

  • Factors affecting growing demand

    • Reconstruction Efforts from Natural Disasters

    • Population growth

    • GDP growth

    • Government Regulations- ie. SAFE Act.


Market performance cont1
Market Performance (cont.)

  • Areas lacking efficiency

    • Construction Equipment takes months to manufacture and sell.

    • Purchase approval for heavy equipment goes through many layers of management before the decision to buy because they cost between $50K to $200K.

    • Heavy Equipment depreciates quickly.

    • Project Management

      • “The average construction project suffers 150% overruns and completes more than 175% late.”


Market performance cont2
Market Performance (cont.)

  • What consumers look for

    • Reasonable Price

    • Productivity of the Equipment

    • Life Cycle Operating Costs

    • In-Service Performance

    • Aftermarket Service


Market performance cont3
Market Performance (cont.)

  • Progressive

    • Mergers and Acquisitions

    • Provide purchasing options for consumers

      • Equipment Rentals

      • Financing Options

      • Maintenance Services for equipment

    • 6 Sigma - Process Improvement


Market performance cont4
Market Performance (cont.)

  • Progressive (cont.)

    • Customer Focus-

      • Making equipment easier to use with latest technology

      • Reducing parts to equipment

    • E-Business

      • Consumers can view market info, company info, and details on equipment for purchase.

      • Build equipment and make purchases online

    • Facilities all around the world


Market performance cont5
Market Performance (cont.)

  • Employment

    • In the next 10 years, 58.4% of US jobs created will be construction related. (Bureau of Labor Statistics)

    • Construction industry employs over 6.9 million people each year.

    • Engineers and operators of heavy equipment make up over 400,000 jobs in the U.S.


Summary
Summary

  • Heavy Equipment industry is an oligopoly

  • Industry continues a trend of consolidation

  • CAT leads with 26% of the market share, is among the Fortune 100.

  • CAT has an expanded product line produced and sold in over 200 countries in the world.

  • Overall, construction equipment industry growth is steady.

  • Construction spending is projected to increase 3-4% annually.


Quiz question 3
Quiz Question #3

  • The inception of the SAFE Transportation ACT (Safe, Accountable, Flexible, Efficient) by the gov’t provided $286.4 billion for US highway construction industry. What does this do to the heavy equipment demand curve?

    • Moves curve up

    • Moves curve down

    • Moves curve to the right

    • Turns curve over


Quiz question 4
Quiz Question #4

  • What is an example of CAT innovation and sustainable environmental policies?

    • ACERT technology

    • Posting on MySpace

    • Dodgers winning the NL West

    • Remote control bulldozers


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