King of Construction Machinery, How does Caterpillar Achieve Long-lasting Prosperity?

Industrials Author: Yan Huang Aug 07, 2023 11:33 AM (GMT+8)

In 1905, a new-style crawler tractor from the American company Holt was working on a field ridge. A photographer, while taking pictures, observed its slow and undulating movements, which outlined a neat path, and commented that "it really looks like a caterpillar".


Twenty years later, Holt merged with another crawler tractor company, Best, and adopted the photographer's whimsical idea as the new company name - Caterpillar(卡特彼勒). With a history of more than 90 years, Caterpillar has gradually advanced from its initial small workshop and transformed into the "Yellow Giant" to be the world's largest construction machinery production enterprise.

Caterpillar's development began in the era of tractors and, through the early advantage of crawler tractors, grew to become the leader in the bulldozer era. The construction projects during and after the two World Wars provided opportunities for rapid development. However, its development was not without challenges. It has experienced several economic recessions, financial crises, and world wars. Despite facing challenges from competitors, Caterpillar still stands at the pinnacle of the construction machinery industry. In 2022, its revenue reached USD 59.4 billion, ranking first in the market, with a year-on-year growth of 17%.

Currently, Caterpillar's main businesses include construction machinery and mining equipment, diesel and gas engines, industrial gas turbines, diesel generator sets, diesel-electric locomotives, etc. It is also a leading service provider, with financing service companies, remanufacturing service companies, logistics service companies, and Progress Rail service companies under its umbrella. Since 2007, the revenue from its foreign business has consistently accounted for over 50% of its total revenue. In 2022, Caterpillar's foreign revenue was approximately USD 31.4 billion, accounting for 53% of its total revenue.

Caterpillar adopted "cities surrounding rural areas" expansion strategy

In Caterpillar's overseas expansion strategy, the selection of target markets follows a sequence of proximity, and familiarity, expanding in the following order "local market - national market - neighboring overseas markets - developing countries - global market." The entry methods progress from direct exports to establishing overseas sales offices, from setting up joint ventures to establishing overseas production bases, starting with easier approaches and gradually advancing to more challenging ones.


In August 1950, Caterpillar established its first overseas company, Caterpillar Tractor Co., Ltd., in the United Kingdom, marking the first step in its international business expansion by tapping into developed country markets. The main reasons for Caterpillar's internationalization at the time were twofold: first, the company's top management accurately assessed the economic recovery and reconstruction opportunities after World War II, shifting from passive conservatism to proactive strategies; second, the U.S. domestic construction machinery industry faced fierce market competition with companies like John Deere, Terex, and Oshkosh seeking foreign markets for growth.

As Caterpillar's export volume continued to increase, by the early 1960s, export sales accounted for 37% of the company's total sales, reaching 52% by 1970. During the 1960s to the 1980s, as the business expanded and with the rapid economic growth in Europe and Asia, Caterpillar accelerated its entry into European and certain Asian markets, including Japan. In the 1980s and beyond, facing increasingly severe competition in mature markets and witnessing the rise of developing countries with significant infrastructure investment and urbanization needs, Caterpillar started to venture into emerging markets. It began conducting business in countries such as China, Russia, Vietnam, and Brazil.

Caterpillar emerged during a period of rapid economic development in the United States, and after building a strong capital and product foundation domestically, the company responded to changes in the external political and economic environment by opting for internationalization. Compared to many American and global competitors, Caterpillar gained an advantage by proactively establishing its presence in the construction machinery manufacturing sector. Its overseas strategy of "surrounding cities while targeting rural areas" was based on market demands and industrial policies at that time, allowing Caterpillar to accurately seize the rise of each new market and potential business opportunities, expanding its products worldwide.

Additionally, adherence to certain principles throughout its internationalization process contributed to Caterpillar's success: (1) By maintaining control and sales rights in joint ventures, Caterpillar could better conduct business in local markets and retain a dominant position in its operations, ensuring that local decisions aligned with the company's overall strategy while adapting to local market needs and changes. (2) Caterpillar avoided acquiring companies that possessed independently developed products and technologies, thereby preventing redundant investments and resource wastage while ensuring a more coordinated and unified product line in the international market. (3) Caterpillar synchronized its high-end and low-end brands, maintaining CAT's high quality while also considering the lower-end market through brands like SEM. This approach catered to customers' diverse needs at different market levels, expanded market share, and increased sales and revenue.

A global network of distributors & a comprehensive after-sales system

Caterpillar has adopted a dealer system, boasting a globally dispersed and well-established network of dealers. Many of these dealers are family-owned and operated, spanning several generations, and they provide services to customers throughout the entire lifecycle of the products. This includes assisting customers in selecting the appropriate machinery, offering after-sales services such as parts replacements, equipment leasing, and financing services. According to its official Chinese website, as of 2022, Caterpillar has 220 dealers worldwide, covering 193 countries, with 157 dealers located outside of the United States.

When selecting dealers, Caterpillar chooses companies with good reputations, stable relationships, and strong capabilities. This ensures the dealer network remains stable through economic cycles and also creates barriers to prevent competitors from encroaching on market share. Finning International (FTT.TO) is Caterpillar's largest global dealer, with over 13,000 employees, operating in Canada, the UK, Ireland, and South America.

Caterpillar heavily relies on its dealers for product promotion, sales, and after-sales services. Dealers play a vital role in establishing and maintaining Caterpillar's brand reputation. They also provide essential feedback regarding customer preferences, product design, durability, pricing strategies, financial market conditions, and competitor dynamics. Caterpillar supports its dealers by deploying more local representatives, establishing parts centers, and maintaining an ample inventory of spare parts. On the other hand, dealers require technical support and financial assistance from Caterpillar. For instance, during economic downturns, Caterpillar may provide favorable inventory, payment, and credit terms to certain dealers, ensuring their survival and growth.

Amidst the current trend of Direct-to-Consumer (DTC) strategies enabling international expansion, Caterpillar's mature dealer model remains commendable. For products with significant sales volumes like loaders and excavators, the dealer model is an efficient distribution system. Competitors, including Komatsu, also adopt similar systems and gain acceptance from the market and customers. Dealers possess in-depth knowledge of local markets, closer proximity to customers, and greater operational flexibility. This enables them to better withstand the cyclical fluctuations of the construction machinery industry, achieving a win-win situation for both manufacturers and dealers.

From a manufacturer to a service provider, constructing a complete business value chain

Caterpillar has proactively undergone a transformation from being a manufacturer to becoming a service provider, building a complete business value chain. In response to market changes, the company shifted from pure price and service competition to competing throughout the entire value chain. Caterpillar now offers comprehensive solutions with products at the core, including product design, spare parts services, logistics services, manufacturing, supply chain, distribution, financing, and remanufacturing services.

Taking Caterpillar's business development in China as an example, the company entered the Chinese market in 1975 to conduct sales operations. In the 1980s, it transferred technology, provided financial services, and expanded its presence in the market. During the 1990s, sales gradually increased, and Caterpillar sought to establish joint venture factories for component production or complete vehicle assembly. It also opened Caterpillar leasing stores. By the 2000s, with its market influence growing, Caterpillar gradually moved away from joint ventures and established its unique dealer system, paving the way for industrializing remanufacturing services. Today, Caterpillar in China has formed a full value chain service pattern that integrates sales, production, R&D, remanufacturing, and financial services.

In contrast to the traditional linear and open value chain, which starts with raw material suppliers and ends with customers, the full value chain is closed. Equipment that is being phased out or nearing scrap enters the remanufacturing phase through the second-hand equipment market and is then reintroduced to customers. In this process, Caterpillar can not only derive profits from the extended value chain but also explore new customer groups with limited financial capabilities and relatively lower machinery requirements. This approach allows Caterpillar to generate value from various stages of the equipment lifecycle and create a more sustainable and circular business model.

Amidst numerous crises, how did Caterpillar break through difficulties?

Since the 1970s, the growth rate of the U.S. economy has been declining, facing pressures of structural differentiation. The traditional manufacturing industry has weakened in competitiveness due to excessive regulation, environmental pressures, and foreign competition, which have dealt a severe blow to American manufacturing companies. In the early 1980s, Caterpillar found itself deeply troubled, experiencing consecutive losses from 1982 onwards for three years. Furthermore, it faced challenges from both competitors and internal management issues.

Ambition from Komatsu in Japan to "Eat the CAT" Strategy: In the 1980s, the Japanese manufacturing industry rose as a new force, launching a comprehensive attack on the U.S. market. Komatsu gained access to the most advanced hydraulic technology of that time through collaborative research and development, licensing, and technology acquisitions, allowing them to surpass European and American technologies comprehensively. Additionally, due to the devaluation of the Japanese yen, Komatsu offered competitive cost-effectiveness, capturing market share from Caterpillar rapidly. In 1986, Caterpillar's market share in the U.S. dropped by 7% compared to the previous year, while Komatsu's share rose rapidly.

Successive management decision-making mistakes: In 1965, Caterpillar blindly acquired Towmotor, but even after more than ten years of integration, the results were unsatisfactory, leading to serious internal conflicts. To offset the losses from the acquisition, the company reduced its research and development expenditure, significantly deviating from its consistent product core strategy. Furthermore, Caterpillar adopted a hierarchical and functional company structure, with a highly centralized management center, rigid hierarchy, but distant from the market and slow to respond. At the same time, factory managers found it difficult to assess whether a newly introduced product would be profitable due to the lack of internal transfer pricing mechanisms. Most managers had to make business decisions based on scattered information. Product diversification also slowed notably, especially in the development of hydraulic excavator varieties, where Caterpillar lagged far behind its competitor Komatsu.

In the face of these challenges, Caterpillar needed to rethink its strategies and management approaches to overcome the crisis and remain competitive in the rapidly changing market landscape.


Caterpillar timely adjusted its policies and strategies by first collaborating with West Germany's Eder and Japan's Mitsubishi while pursuing independent research and development to catch up with Komatsu and master core hydraulic technology. Additionally, Caterpillar recognized the shortcomings of its internal management system and actively reformed its organizational structure, transitioning from a centralized cost center to a profit center model led by general managers. Through these reforms, employees gained a clearer understanding of the company's strategic planning and greater decision-making authority. There were significant reforms in employee salaries, product development cycles, marketing systems, and more. By the mid-1990s, Caterpillar's business performance improved, with an average annual revenue growth rate of 12.9% from 1993 to 1998. The gross profit margin surpassed 20% and exceeded that of Komatsu, while the net profit margin reached 5.6% in 1993.

The initial signs of decline in large enterprises often stem from internal issues, especially when a company has been in a comfortable position for an extended period, it may overlook the natural development law of "profits may lead to losses, fullness may lead to overflow." Caterpillar also experienced a sense of complacency when it repeatedly ranked as the global leader. It held a conceited attitude towards enterprise and personnel management and neglected to reflect on and improve its external advantages and other growth curves that were once considered crucial. Even without the competition from Komatsu, other competitors would have emerged to vie for the top position in the market.

At that time, issues like a rigid management system became the first step towards internal disintegration. It required top management to maintain keen insight and strong determination to actively reverse the situation. The rules of the market dictate that there are no eternal winners, and the key lies in continuously adjusting one's positioning and strategy through innovation and change. Fortunately, Caterpillar learned from its mistakes and, in 2004, initiated a strategic plan to withstand cyclical risks in the industry. The most notable aspect was the transformation from fixed costs to variable costs, weakening the bullwhip effect to protect the interests of dealers, customers, and suppliers, as well as implementing emergency measures to cope with an 80% decrease in sales.

The rise of new forces in the construction machinery industry

Apart from macro factors such as the global economic downturn in the post-pandemic era and cyclical adjustments in commodities, Caterpillar also needs to face competition from traditional old players like Komatsu from Japan, Volvo from Sweden, and John Deere from the United States. Additionally, it faces a challenge from a group of Chinese machinery manufacturers, including Sany Heavy Industry(三一重工), Zoomlion Heavy Industry(中联重科), and XCMG(徐工机械), who have entered the competition queue and are vying for global market share.


In June 2022, KHL's International Construction released the Yellow Table 2022, which ranked the world's top 50 construction machinery manufacturers. The total sales revenue of these top 50 companies reached USD 232.839 billion. Among the top 10 global construction machinery manufacturers, Caterpillar, Komatsu, XCMG, Sany Heavy Industry, John Deere, Volvo, Zoomlion Heavy Industry, Liebherr, Hitachi Construction Machinery, and Sandvik were listed. Notably, Chinese machinery manufacturers XCMG, Sany Heavy Industry, and Zoomlion Heavy Industry made it into the top 10 list, collectively holding a market share of 19.3%, nearly one-fifth of the global market. It was reported that in 2022, China's engineering machinery export exceeded USD 44.302 billion, a YoY growth of 30.2%.

As more and more Chinese machinery equipment manufacturers expand internationally and engage in fierce competition with global leaders like Caterpillar, their competitive advantage lies in offering competitive pricing to seize market share. From the demand perspective, countries like Asia generally have weak manufacturing foundations, and in the process of industrial urbanization, Chinese machinery enterprises showcase their cost-effectiveness and service advantages. Particularly, in recent years, as urbanization accelerates in developing countries like India and Indonesia, and mining demand increases, driven by the Belt and Road initiative, Chinese engineering machinery has a natural advantage. Manufacturers like Sany and XCMG have taken the lead in various segments such as excavators and cranes in most countries and regions along the Belt and Road, gradually surpassing international giants like Caterpillar and Komatsu in influence. A study by UBS shows that by 2025, Chinese equipment manufacturers' overseas market share may double to around 15%, compared to the current share. In Caterpillar's most glorious year of 2012, Chinese manufacturers' overseas share was less than 2%. China's manufacturers have a significant advantage in competition: relatively lower costs, offering prices 15% to 40% lower than high-end brands in Western markets.

Currently, the market environment and policy background favor China's engineering machinery industry, resembling the scenes of Caterpillar's high-speed development leveraging post-war economic recovery and the Marshall Plan in the 1960s and 1970s. Represented by XCMG, Sany Heavy Industry, and Zoomlion Heavy Industry, Chinese companies rely on China's strong supply chain and manufacturing capabilities, leveraging the advantages of the "Belt and Road" policy to actively utilize their cost-effectiveness in meeting the infrastructure demands of emerging countries in Africa, Asia, and elsewhere. This presents a rare historical opportunity for China's engineering machinery manufacturing industry. As for Caterpillar, facing fierce competitors, whether it can overcome the cyclic downturn, maintain its position as the international market leader, and defeat competitors like Komatsu in times of crisis through its accumulated technical and management experience remains to be seen. Time will provide the answer.

Throughout Caterpillar's over nine-decade corporate development history, its strength lies not only in its scale and size but also in its exemplary practices in corporate governance, capital operations, technological innovation, safety production, product marketing, corporate culture, and a robust dealer system, setting industry standards. During its internationalization process, Caterpillar demonstrated remarkable market sensitivity and forward-thinking. Between the 1950s and 1980s, it achieved rapid development by capitalizing on strong domestic market demand combined with expanding overseas exports. Over the past century of changing times, Caterpillar always seized opportunities in technological transformations. The company's success initially came from crawler tractors and almost fell apart due to hydraulic excavators, demonstrating that independent research and development and product innovation are crucial factors for a company's lasting vitality. Today, Caterpillar's heyday has passed, but it continues to maintain its industry leader status, navigating through industry cycles with steadfast determination during low points and soaring with momentum during favorable periods. These experiences are worth learning for Chinese enterprises.

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