When Caterpillar, the world’s principal manufacturer of earth-moving equipment, opened its first joint undertaking in China in 1994, that country was among the poorest in the world, and bicycles, not cars, ruled the streets of Beijing and Shanghai. Now that China has become the world’s biggest market for machinery, it brings in about 9 per cent of Caterpillar’s revenue.

While many other international brands have had mixed results in China’s consumer division, Caterpillar has been quite successful in maintaining its hold on China’s high-end machinery market. A run of recent prestigious pullbacks by multinationals include Mattel’s closure of its Shanghai Barbie store and shut-downs by Best Buy and Home Depot.

Unlike the consumer world, the heavy machinery sector has meant profit for foreign companies – like Caterpillar and Japanese rival Komatsu – which offer better, if more expensive, quality than their domestic competitors.

Caterpillar now has about a 7 per cent market share in China, as recently it has become more attentive to the Asian giant, even moving group president Richard Lavin to Hong Kong last winter. Caterpillar further took the extraordinary step of issuing renminbi-denominated bonds in Hong Kong last year, to help gather funds for its leasing business.

“Our strategy is very straightforward, in support of the corporate strategy. We have got to win in China,” Mr Lavin revealed to a recent industry conference.

There is strong competition, however, from local rivals, who have lately increased sales through forceful marketing, better financing and improving technology. In the desirable and rapidly growing excavator market, Caterpillar’s share has fallen from 10 to 7 per cent over five years, based on figures from research company Off-Highway Research.

Chinese heavy machinery makers – such as Sany Heavy, Zoonlion, Xugong and Shantui – have wooed new customers through forceful promotion by dealerships, reports Shi Yang at Off-Highway Research. Some dealerships give buyers raffle tickets for a Mercedes or a BMW; others offer financing lures like zero down payment. Further, the technology gap between Chinese outfits and their foreign competitors is also tightening.

Chinese machinery makers will soon be put to the test, as the need for construction equipment in China is undercut by a shrinking real estate market. Experts predict a period of consolidation that will eventually produce only a few clear leaders among local equipment producers.

Conversely, a few larger Chinese groups are already competing for world dominance through determined expansion overseas. Major bulldozer manufacturer Shantui recently launched a new Dubai subsidiary as entry point to the Middle East and North Africa, while excavator and concrete pump maker Sany Heavy will soon complete its US headquarters and factory in Peachtree, Georgia.

“I wouldn’t be surprised to see Chinese companies acquire overseas companies and build up manufacturing overseas,” predicted UBS analyst Edmond Huang. “They are already doing things in Brazil, America and Germany that have made them closer to the market.”

Caterpillar believes greater challenges include finding managerial talent, along with growing its supply chain in China, as company production capacity have recently lagged behind growing demand.

Despite difficulties, Caterpillar is doing better in China than many other foreign multinationals. In high-speed rail for example, Germany’s Siemens and Japan’s Kawasaki Heavy Industries have seen their technology assimilated by Chinese train companies, while many foreign technology firms have been cramped by regulatory barriers.

Caterpillar believes part of its success is due to customers willing to pay a premium for more reliable products. “In our industry, thankfully, the most important thing to customers when they buy a product is what that product earns them over its lifetime,” said investor relations director Mike DeWalt, noting Caterpillar’s equipment support as a key advantage. “There were probably some product categories where the Chinese and the Koreans today can be more successful. And that’s probably in areas of the market that don’t require as much service support.”