As Chinese demand has slowed down for earth moving and construction equipment following their slowdown of industry, Caterpillar Inc. has struggled against this and the local commodities slump. Now, Komatsu is putting extra pressure on Caterpillar because the Japanese yen has plunged, allowing it to be more competitively priced.
The yen dropped over 20% in 2015 which, according to Caterpillar vice president Mike DeWalt, meant that Komatsu could have placed themselves in a more cost-competitive position in the market.
Komatsu is taking every advantage of this situation, with Caterpillar reporting that Komatsu are being ‘aggressive’ in their dealing and bidding. It is clear that Komatsu does benefit from decreased yen value; however, they say their success is attributed to their strict policy of slightly increasing prices every year regardless of currency movements.
This policy means that Komatsu will have increased margin in their product. In order to compete with Komatsu, Caterpillar would have to decrease margin. Decreasing prices in an economic environment where currency is already worth 20% more than in Japan means that this would put enormous strain on Caterpillar.
Caterpillar does also realise benefits of the Japanese yen being down, as it does have operations in Japan. Its Japan operations offer net export products. ‘We aren’t perfectly balanced but we are balanced enough that it doesn’t drive big volatility in our bottom line’ DeWalt said. He also said that Caterpillar does little to hedge currency fluctuations.
Chief Executive Officer and Chairman, Doug Oberhelman, said they are working on a ‘strong dollar policy’.
‘That led us to basically go to a simple strategy: That is, produce where we sell,” Oberhelman said. “If we were solely an exporter, we’d be a lot more exposed,’ he said.