Caterpillar Inc (CAT), based in Illinois, United States is the leading manufacturer of construction and mining equipment globally with sales across 192 countries. Apart from these, the company also offers a large range of equipment for various industries including diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company has a large and global network of independent dealerships of which 45 were located in the United States and 116 outside the United States as of 2020. A significant portion of the company’s revenue is generated in the United States.
Caterpillar is an innovative company and its focus on innovation, product quality and productivity have led to higher growth and the industry leading position it enjoys today. In 2020, the company employed 97,300 people and there were 4 million Caterpillar products operational across the globe. Till date, the company has built more than 20 million engines. There are a large number of competitors of Caterpillar Inc globally, chief among them being John Deere and Komatsu.
North America is the largest geographical market of Caterpillar products followed by Asia Pacific. In 2002, North America accounted for around 44% of the company’ net sales. To achieve higher sales growth, the company has increased its focus on innovation.
Caterpillar’s net revenues in 2020 reached $41.7 billion. Like a large number of other big companies, the business of Caterpillar was also severely impacted by the pandemic. Its revenue fell by 22% in 2020 compared to the previous year.
Read more about Caterpillar Inc in this swot analysis highlighting the strengths, weaknesses, opportunities and threats before the company.
|Construction and mining equipment maker
|Deerfield, Illinois, U.S.
|D. James Umpleby III
|Year-end 2020 Sales & Revenues:
|Competitors (Construction Industry)
|CASE (part of CNH Industrial N.V.), Deere Construction & Forestry (part of Deere & Company),Doosan Infracore Co., Ltd., Hitachi Construction Machinery Co., Ltd., Hyundai Construction Equipment Co., Ltd., J.C. Bamford Excavators Ltd., Kobelco Construction Machinery (part of Kobe Steel, Ltd), Komatsu Ltd.,Kubota Farm & Industrial Machinery (part of Kubota Corporation), and Volvo Construction Equipment (part of the Volvo Group).
|Competitors (Energy & Transportation)
|Cummins Inc., Deutz AG, INNIO, Rolls-Royce Power Systems and Wärtsilä Corp
Strengths of Caterpillar Inc:
leading brand of construction and mining equipment:
Caterpillar has established itself as the leading brand of construction and mining equipment globally. Its growth is mainly based on the company’s focus on innovation and product quality. For a vast number of companies, it is the leading supplier of construction and mining equipment as well as engines. Established in the post-world war I era, the company is a pioneer in its industry sector. Its industry-leading position is a major source of competitive advantage for the brand. Over time, the company managed to gain an edge over its rivals through continuous expansion of its product portfolio and by bringing innovative technologies and products.
Large product and services portfolio:
The company has vastly expanded its product portfolio. It has organized its business into mainly two categories. The first category is machine, energy, and transportation and the second category is of the financial services offered by the company. Caterpillar has further divided its company operations for the first category into three segments based on the industries for which it makes machinery and equipment. These industries are construction, resources and energy and transportation industries. From reciprocating engines to turbines and locomotive engines as well as a vast range of equipment, the company makes a very large range of products that cater to the needs of customers in the above-mentioned three industries. As of 2020, the total number of Caterpillar products in use globally was 4 million. It has also made more than 20 million engines till now.
Caterpillar has maintained a strong brand image as a leading manufacturer of heavy equipment. The company has found strong growth globally. A large number of customers from various industries globally rely on the brand for heavy equipment since it has established itself as one of the most reliable names in this industry sector. Caterpillar has maintained the image of an innovative brand that offers higher quality products. A large number of customers do not mind the higher prices charged by the company since its products are guaranteed to be superior in terms of productivity and quality.
Global dealer network:
Caterpillar has a large and strong distributor network that includes mainly independent dealers selling Caterpillar products globally. The company has 161 independent dealers in 2020. 46 of these independent dealers were located inside the United States whereas rest of them were located outside the US.
In Japan, the company also runs its own privately owned dealership that covers almost 80% of the Japanese market. Its subsidiaries also have their own dealer networks through which they sell their products globally. For example, Perkins Engines Company Limited, a subsidiary of Caterpillar sells its reciprocating engines through a network of 67 dealers across 178 countries.
Focus on innovation:
The focus of the Caterpillar company has remained on innovation for growing sales and market share. The company has continued to invest in research and development to keep its competitive edge and industry position secure. In 2020, its research and development expenses were lower than the previous year due to the pandemic. The company spent $1.4 billion on research and development in 2020 compared to $1.7 billion in 2019. However, its focus on innovation is critical to retain the competitive edge the company has achieved in the market.
Large supplier base:
The supplier base of a company is one of its leading sources of competitive advantage. Managing supplier relationships smartly helps reduce operating expenses. Caterpillar’s suppliers have always played a key role in the company’s commitment to excellence. The company has set high standards for specifications, delivery and price. Its supplier base includes around 27,000 suppliers located in various corners of the world.
Weaknesses of Caterpillar Inc:
Declining revenues and profits:
The company has been experiencing a decline in revenue and profits over the past three years. Lower end user demand and changes in dealer inventories affected the change in sales and revenue during 2020. Its net revenue declined by 22%. However, sales fell in North America and Latin America by 29% and 27% respectively according to the company’s annual report.
Dependent on the US market:
While Caterpillar is the dominant brand of large equipment including construction and mining equipment as well as engines, the company achieves a large part of its sales and revenue from the United States. The North American market including the US and Canada accounted for more than 40% of the company’s net revenue in 2020. In order to reduce its dependence on the North American market, the company must increase its focus on the other markets.
The emerging markets are experiencing higher urbanization and increased investment in infrastructure. Apart from that, a rise in population, migration to cities and growth in disposable income are also driving the growth of the construction equipment market in Asia and other regions. The emerging economies are at the core of most of the new growth opportunities before Caterpillar Inc.
With higher competition in the industry, the focus on innovation has grown. Investing more in technological innovation will help the company capture a larger market share and bring new equipment and technologies that help cater to the needs of the diverse customer segments better. Apart from that, technological innovation also helps the company differentiate its products and brand from the rivals and find faster growth.
Backward integration can help Caterpillar bring the prices of raw materials under control and reduce its operating expenses. It will also reduce the company’s dependence on external suppliers and overcome the heavy competitive pressure. The company sources raw materials from a very large number of suppliers globally. However, the prices of raw materials have kept surging backward integration will help the company reduce its expenses.
The company can further cement its position in the industry through acquisitions. It has made several acquisitions in its history. However, since 2013, it made its first acquisition in 2020 of Marble Robot Inc. This acquisition was a part of its automation and autonomy strategy. Marble Robot Inc is a California based robot and autonomy technology solutions company. Making more such acquisitions could help the company strengthen its market position in global markets. Apart from that, the company can find faster market growth through business expansion.
The competitive pressure in the heavy equipment industry has kept intensifying. There are several major rivals of the company in the global markets. The leading competitors of Caterpillar include Komatsu, Hitachi, Deere & Co and Volvo. With intensifying competition, the company has to invest more in research and development as well as marketing and sales. While higher competition on the one hand grows the operating expenses of the company, it also limits sales opportunities and drives expansion-related pressures higher.
Large companies throughout the world are facing higher government oversight and legal scrutiny. Not just in the United States, but in the other parts of the world too including China and Europe, companies are facing higher regulation. Worldwide there are several laws that companies need to comply with to operate successfully. Noncompliance in most cases results in hefty fines. In several parts of the world, the legal framework is more complex compared to the United States. From labor to taxation and product quality-related laws as well as the environment, businesses like Caterpillar are required to remain compliant in all areas to succeed. Noncompliance causes financial losses and also hurts the company’s reputation. Overall, regulatory pressures in a large number of markets can be a major impediment to growth for businesses.
The pandemic has caused a heavy drop in sales and revenue for the heavy equipment manufacturer. The company experienced a 22% drop in sales and revenue in 2020 compared to 2019. Apart from disrupting supply chains, the pandemic also caused industrial work to be halted around the world in key economies, reducing end-user demand for heavy industrial equipment and in turn leading to reduced sales and revenue for Caterpillar. However, the effect of the pandemic is not over yet and the company may continue to experience its negative impact well in 2021. The Covid-19 pandemic has brought some changes whose negative impact including the economic decline across several markets could continue to cloud the future of the heavy equipment industry over the entire 2021.