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Caterpillar Inc. (CAT - Analyst Report) is yet again on an expansion drive in China. This time around, it is the manufacturing facility in Xuzhou, China, which would augment hydraulic excavator production at Caterpillar Xuzhou Limited (“CXL”) by a substantial 80%.

The capacity expansion project is subject to certain government agreements and approvals and is slated for completion in 2016. However, the first wheel excavator in Xuzhou is expected earlier in the first quarter of 2014.

Production of wheeled excavators at CXL, from 2014, would be a boost to its products offering in China and other growth markets. Currently, wheeled excavators are manufactured in Caterpillar’s Grenoble, France facility. Production in Grenoble will continue and the wheeled excavators produced in China will help Caterpillar compete in that part of the world.

Caterpillar has been producing excavators in China for the past two decades. In recent years, the company and its independent dealers have made considerable investments to expand the range of products and components produced in China, increase and improve customer support services, and expand and enhance dealer coverage in every province.

Caterpillar has 17 facilities in China and another 9 are currently under construction. All these in order to meet the increasing demand for Caterpillar products in this country.

The focused expansion efforts are in line with Caterpillar’s long-term vision of building an industry-leading range of products and support services for its growing base of customers in China. This also supports Caterpillar’s rising exports from the United States to China. In the last seven years Caterpillar’s exports from the United States to China have more than doubled.

The company is doggedly adding production capacity for many of its products. Caterpillar’s recent string of investments includes expansion in Tosno, Russia for off-highway trucks, new mining truck facility in Indonesia and expansion of existing facility, capacity expansion of mining trucks produced in Illinois, expansion of mining truck capacity and a new small engine facility in India, and a new small excavator and tractor facility in Georgia.

A new parts distribution center in California and expansion of an R&D center in Wuxi, China are also in the pipeline. Caterpillar is also expanding its Sumter, South Carolina facility to produce small and large hydraulic cylinders that are used in Caterpillar products in North and South America. 

However, rumors of an economic slowdown in China are causes for concern. Earlier this month, China cut its 2012 growth target to an eight-year low of 7.5%. A slowing Chinese economy would have a negative impact on infrastructure and construction spending.

On a positive note, despite lurking fears of an economic slowdown in China, Caterpillar’s sales in that country were higher in the fourth quarter of 2011 compared with the fourth quarter of 2010, as dealer deliveries to end users, albeit at low levels, were better than the industry overall.

Furthermore, machine production was sufficient to allow dealers to build inventory for the upcoming 2012 selling season. Caterpillar and its dealers have purposely built additional new machine inventory in China to bolster its competitive position during the critical selling season that typically follows the Chinese New Year.

Despite the lingering doubts overhanging the economy at large we believe the top line would continue to grow on the back of continuing demand for construction and mining equipment, in the long term, triggered by industrialization and urbanization. The shares of Caterpillar presently retain a Zacks #2 Rank (short-term Buy recommendation).

Peoria, Illinois-based Caterpillar Inc. is the manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company is one of the few leading U.S. companies in an industry that competes globally from a principally domestic manufacturing base. Caterpillar operates two divisions – Machinery and Power Systems (M&PS) and Financial Products. Caterpillar competes with the likes of CNH Global NV , Komatsu Ltd. (KMTUY) and Volvo AB (VOLVY).

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