China: Risks and rewards

According to the European Commission, the rapid rise of the Chinese economy brings both challenges and opportunities for China and the rest of the world. With this in mind, the Commission launched a public consultation earlier this year to develop a new strategy for trade and investment relations between the EU and China.

This rapid growth has also affected the construction equipment market. China has gone from nowhere to become the fourth largest construction equipment market in the world, with sales of US$ 10 billion (€ 7,7 billion) in 2005, in just 15 years. CECE predicts it will account for 50% of world production by 2010.

CECE welcomes the new opportunities available to its members in China but has some concerns about the direction of this growth. CECE has responded to the Commission's public consultation document outlining its concerns about the construction equipment market.

Growth in China's construction equipment industry has been driven by massive government investment in infrastructure. This created demand for a wide range of construction equipment and, with the exception of hydraulic excavators, 95% of this demand is met by domestic manufacturers.

Imports and Exports

Locally produced machines are currently characterised by low prices - typically around a third of imported machines - and relatively poor quality. As a result only a very small part of the Chinese market is open to EU manufacturers.

Chinese original equipment manufacturers (OEMs) are now focusing on increasing the quality of their construction machines with a view to exporting them.

This has implications for the component market, because locally manufactured parts such as engines are not reliable enough for markets such as the US and EU and do not comply with emissions regulations. Chinese OEMs have therefore been keen to import components provided they can buy them at a low enough price.

Although there are now lower tariffs for imported equipment and components as a result of China's entry into the World Trade Organisation, they are not properly implemented. The cumbersome and inefficient structure is creating a barrier to increasing EU exports to China.

Until this year only a few Chinese manufactured machines had been shown at EU exhibitions but at Intermat in Paris, France in April, the Chinese pavilion took up 4500 m². In contrast the UK pavilion took up 450 m². The message from the Chinese manufacturers at the exhibition is that they are ready to export, but it has not been confirmed whether all the machines displayed comply with EU legislation.

Opportunities

CECE believes that opportunities will arise because of the size of the Chinese market and its increasing pace of change. The Chinese drive to improve the technology of their products is also likely to produce other opportunities. For the construction equipment market, CECE has identified several areas which have particular potential:

• Outsourcing of manufacturing to China to maintain competitiveness on labour costs.

• Supply of components to Chinese OEMs, in particular engines, transmissions and hydraulics manufactured by EU companies in China.

• Export of niche products, such as attachments and specialised machines.

• Training of machine operators

• Opportunities for distribution, service and support when Chinese manufacturers set up in the EU.

Challenges and Risks

Chinese OEMs have ambitions to export and are expected to become a real force in the future as they raise quality and meet international standards. Their machine prices could be -30% to -50% lower than comparable European-built equipment, and this could lead to Chinese manufacturers gaining up to 20% of the European market within five to ten years. However, if Chinese manufacturers have to meet European standards, the cost differential may not be so great, particularly when transport costs are taken into account.

One of the biggest issues is enforcement of intellectual property rights, in terms of copyright, patents, design rights and trade marks, in China. CECE sees that all of these rights are being abused at present in China where corruption, fraud and piracy are all common.

Although Chinese legislation on intellectual property is in place it is not enforced, which does not give EU businesses the confidence to invest.

The Next Step

The public consultation on the new policy on EU-China trade relations has now been completed and the Commission is currently evaluating the responses. In addition to the public consultation, the External Trade DG commissioned a study to identify the sectors which offer the best opportunities in the Chinese market over the next five years

The study was also designed to look at trade obstacles faced by EU industrial and service operators and the actions required to foster competitiveness and market access in these areas.

The Commission has said that the information from the public consultation and study will be used to publish a Communication on the EU's trade and economic relationship with China during the last quarter of 2006.