Capital Goods Industry

Topics: Developed country, Investment, Developing country Pages: 7 (1931 words) Published: November 3, 2012
Industry Analysis: Capital Goods Industry
Executive Summary
Capital goods is a mature industry with a unique opportunity for expansion and growth in the developing markets. While large, diversified conglomerates - the major industry players - have saturated developed markets, population and city growth in developing markets have increased demand for food, natural resources, and infrastructure, thereby growing the demand for capital goods, with over 8.1% growth per year projected over the next 5 years. Companies currently outside the industry face high barriers to entry, making it unattractive for new entrants, and creating a strong competitive environment for the relatively small number of large and current industry players. Individual companies dominate specific sectors of the capital goods market. Rivalry is high, as there is relatively little product diversity within the sector, and firms’ primary opportunity for differentiation is on technological expertise and value-add offerings such as warranties and service. Given these challenges, acquisition is the best growth strategy. With over 250 mergers and acquisitions over the past 3 years, the capital goods markets is rapidly consolidating as large players gain more market share. In addition, acquisitions allow these large conglomerates to enter emerging markets where the long-term future growth exists. In conclusion, capital goods is a moderately attractive industry because of these opportunities for growth.  

The capital goods industry is extremely broad and comprises two major categories: engines and global machinery, which includes agricultural, construction, and mining machinery (Exhibit 1). The global machinery industry is valued at $182.4 billion , while engines adds another $12.8 billion , representing a total capital goods value of $195.2 billion. Within the global machinery market, construction and industrial equipment comprise the largest share, with 46.3% of market revenues ($84.5b). The construction segment includes earthmoving, road, and concrete equipment. Agricultural equipment makes up 30.8% ($56.1b) of market revenues, with products such as compact tractors, hay balers and combine harvesters. Mining is the smallest part of the global machinery segment; equipment such as crushing, pulverizing and screening machinery, portable drilling rigs and parts, and plants and drills make up 22.9% of the market. Engines (stationary, non-utility power generators) comprise a much smaller part of capital goods, at 6.6% of the total capital goods market revenue. The total 2010 market revenue stands at $12.8 billion. Capital goods is a mature industry in a high-capital business that is subject to the ebb and flow of the agricultural, construction, and mining business cycles. Subsequently, the major players are large, well-established conglomerates that have diversified across a number of capital goods industries to mitigate the risks associated with this cycle (Exhibit 2). Many of these companies also have expanded into financing to provide additional services to customers. The capital goods industry is also, not surprisingly, positively correlated with the overall market economy (Exhibit 3), and the recent recession has affected overall profit margins. (Exhibit 4) The largest players in global capital goods (and their specific GCG components) are Caterpillar (construction and mining equipment, engines), Deere & Company (agricultural equipment, construction), Hyundai Heavy Industries (engines and machinery, construction equipment), and Volvo (construction equipment, engines). Additionally, other smaller, less diversified players also contribute to the global capital goods market, but they do not have the industry dominance of the companies above (Exhibit 5). While capital goods companies are in most countries around the world , a few large conglomerates and thousands of smaller players characterize most developed markets, and much of the growth takes...
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