Construction and mining equipment maker Caterpillar Inc. (CAT) is trying to expand its sales of lower-priced machinery in developing markets without undermining its reputation as a premium-priced brand.

The durability and reliable performance of Caterpillar's bulldozers, excavators and other earth-moving machinery allows the company to sell at the highest price ranges in the U.S. and Europe.

But Caterpillar's quality proposition hasn't been an instant hit in developing countries, such as China, where many cost-conscious buyers continue to opt for less expensive brands with fewer performance features and enhancements.

To capture these customers, Caterpillar intends to launch alternative brands with no-frills machinery priced below its namesake yellow equipment. It's an unprecedented move for the Peoria, Ill., company as it tries to adjust its position in emerging markets to capture more of the anticipated surge in equipment demand from the increases this year in government-sponsored spending on roads, bridges, railroads and other infrastructure.

Caterpillar is specifically aiming for the midprice equipment market in developing countries. In China, that segment accounts for about half the construction equipment sold annually. Caterpillar executives hope their middle-market lines will distinguish themselves enough to convince customers to move up to Caterpillar-brand equipment, allowing the company to scale back or discontinue the alternative brands.

"The end game is not to compete in the midtier long-term," said Rich Lavin, group president for emerging markets, during a presentation this week to Wall Street analysts. "The end game is still to sell Cat-branded products through Cat dealers. We need the volume and scale associated with a broader midtier line to move the market over time."

The strategy, though, includes significant risks for Caterpillar, the world's largest construction equipment company by sales. It faces a host of tough and growing competitors, especially in China, that specialize in midmarket machinery. Moreover, analysts say there are no guarantees that enough customers will switch to higher-priced Caterpillar models to make the strategy pay off.

"By making machines under different names and lowering their prices, you're cutting your margins to get into the game," said Charles Yengst, president of Yengst Associates Inc., an equipment market forecasting consultant in Connecticut. "You might see a percentage of these customers that buy into that lower level move up, but it will take several years."

Developing markets accounted for nearly 15% of Caterpillar's $51.3 billion in sales and revenue last year, up from 7% in 2005. Lavin predicts that in 10 years, 70% of equipment sales volume worldwide will come from China, India, Russia, Indonesia and other emerging countries, compared with 37% last year.

"If we're going to be the global industry leader 10 years from now, we've got to be the leader in those markets, principally China," he said. China accounted for 27% of global equipment sales volume in 2008.

Caterpillar's sales and revenue from China totaled $2.6 billion in 2008, or 5% of total sales. The company wants annual sales from China to reach $4.2 billion by the end of 2012.

Caterpillar's SEM brand will be a primary platform for the middle-market expansion in China. The company acquired the brand with its purchase of Shandong Engineering Machinery a year and a half ago. Lavin said he's considering other purchases or joint ventures to increase Caterpillar's penetration into the market segment. The company also is expanding production in China of older models of Caterpillar motor graders, wheel loaders and bulldozers. Lavin said that equipment, some of which will likely be sold under other names, will be "aggressively localized" to compete with midprice Chinese brands.

Lavin said China will be the blueprint for the middle-market machinery build-outs that Caterpillar will deploy in other developing countries in the coming years.

"I think Cat will work it out," said Charles Rentschler, an analyst with Wall Street Access. He added that most developing countries' ambitious agendas of construction and mining projects will favor greater use over time of Caterpillar's high-performance equipment. "Those things aren't going to get built by mom-and-pop contractors," he said.

Caterpillar closed Friday at $47.78, up 64 cents, or 1.4%.

-By Bob Tita, Dow Jones Newswires; 312-750-4129; robert.tita@dowjones.com