Ask yourself this...
If the U.S. housing market is at rock bottom, how can heavy-equipment maker Caterpillar, Inc. grow its sales by 13%?
The answer is simple: emerging markets.
In April, Caterpillar (NYSE:CAT) announced surprisingly strong results and a 13% surge in Q1 profits. Caterpillar's work-around to the U.S. housing crunch is an aggressive push into emerging markets.
Countries such as China, India and Russia contributed to the company's 30% leap in international sales. By contrast, North American sales rose a paltry 4%. Sales and revenues outside North America represented 58% of total sales and revenues in Q1 -- up from 53% of the total a year ago.
Naturally, Caterpillar is increasing its commitment to emerging markets. In addition to China and India, the company is focused on the Commonwealth of Independent States -- or the former Soviet Bloc.
The Commonwealth of Independent States consists of eleven former Soviet Republics: Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Ukraine, and Uzbekistan. Rich in natural resources, these former Soviet paupers are enjoying a rush to riches through the global commodity boom that demands expensive heavy equipment.
Still, Caterpillar's biggest opportunities are in China and India.
Stuart Levenick, Group President of Caterpillar, told Bloomberg in November 2007 that the company stands to benefit mightily from the expansion race between China and India.
"China has probably gotten most of the headlines in the last few years because it's had the most rapid growth, but clearly India is now in that same category. We've got to be part of that."
He said that India plans to raise spending on infrastructure from 5% of total economic output to 9%, which will spur demand for machines made by Caterpillar and its biggest rival, Komatsu.
In fact, Caterpillar's main rival echoed similar sentiments. Shortly after Levenick's remarks, Tokyo-based Komatsu reported that during the first half of 2007 it saw sales in the former Soviet Union and Europe bolt 40% over the previous year, and sales to India, Southeast Asia and Australia increase 28%.
"I've heard a lot of the global mining community refer to what's going on as a supercycle with legs," Levenick told Bloomberg. "You can expect to see continuing investments in both of the other emerging markets in addition to China."
As recently as March 31, 2008, while in Beijing, Caterpillar Chairman Jim Owens said the company plans to boost investments in emerging markets. He revealed that Caterpillar has earmarked $1 billion for capital expenditures in emerging markets over the next three years.
Owens will tell anyone who listens that emerging markets are the place to be. Just about any time he has a public venue, Owens extols the virtues of emerging markets. At a construction equipment show in Las Vegas earlier this year, he told the crowd...
"There are significant new infrastructure growth opportunities in the world's emerging markets and a need for infrastructure reinvestment in North America and Europe. Over the next decade, that should translate into increased sales of Caterpillar machinery, engines and related services. In addition, most emerging-market economies are in good shape, with relatively low inflation and interest rates and strong balance sheets. They have a need to invest in infrastructure, and they have the resources to do it."
The message from Caterpillar is clear: Emerging markets are an absolute must if you want to successfully invest and compete in the 21st century.
There's a saying that goes: "You can be part of the steamroller or you can be part of the road."
I don't know about you, but I want to be part of the steamroller. So does Jim Owens.
--Irwin Greenstein
