Outsourcing Becomes the New Insourcing

Not long ago, shifting manufacturing facilities to China was all about reducing labor and other manufacturing costs for products bound for export.

Today, the trend of American manufacturing companies moving operations into China continues in full stride, but the enticement to do so has changed dramatically. For mining-equipment manufacturers such as Joy Global (Nasdaq: JOYG  ) and Bucyrus (Nasdaq: BUCY  ) , growing operations in China have more to do with positioning themselves nearer to the rising goliath of global industrial demand.

Countless bellwether industrial sectors -- from thermal coal to steel -- weave a common thread: China is the unavoidable keystone to sustainable recovery for the global economy. Accordingly, analyst Charles Brady with BMO Capital Markets recently highlighted a manufacturing presence in China as a primary key to competitiveness for the makers of heavy equipment.

I agree with that perspective, and I've touted Joy Global and Bucyrus as best in class -- not only for their targeted exposure to the mining of coal and other key commodities (sectors on which I'm decidedly bullish over the long-term), but also because they have moved effectively to establish their presence in this formidable emerging market. Bucyrus recently inaugurated a new headquarters in Beijing to support operations there, while Joy Global made a strategic acquisition in China late last year. It's also awaiting the opening of a third manufacturing facility.

As miners such as Peabody Energy (NYSE: BTU  ) and Yanzhou Coal Mining (NYSE: YZC  ) race to prepare themselves for growing long-term demand in China, these well-positioned equipment behemoths are sure to reap the rewards. With an impressive 11 manufacturing facilities in China, I would add Caterpillar (NYSE: CAT  ) to this short list of compelling long-term plays. Although Nucor (NYSE: NUE  ) CEO Daniel DiMicco recently expressed a dismal outlook for U.S. manufacturing, I consider Caterpillar one of those rare exceptions that could benefit from unavoidable infrastructure spending at home, while still participating in China's retooled growth story as well.

Although I am convinced that China will be first out of the gate with respect to economic recovery, I do not expect it to run in a straight line. I continue to consider much of China's restocking of commodities strategic in nature, rather than driven by sustainable demand. While we await confirmation of sustainable demand resumption, however, these China-exposed manufacturers deserve Foolish consideration as healthy long-term prospects.

Further Foolishness:

If you believe that China will be a keystone to recovery for countless companies with exposure there, consider taking the Motley Fool Global Gains newsletter service for a free 30-day test drive. The Global Gains team watches China carefully as part of its search for exciting and Foolish investment opportunities around the globe.

Fool contributor Christopher Barker finds the history of Bucyrus fascinating. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Caterpillar and Peabody Energy. The Motley Fool's disclosure policy was a sandbox excavator before it grew up.


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