China: the rental waiting game continues

28 September 2010

Genie booms rented by Hertz Equipment Rental Co (HERC) working on preparations for the Shanghai Expo

Genie booms rented by Hertz Equipment Rental Co (HERC) working on preparations for the Shanghai Expo, China.

The Chinese rental sector is developing steadily, but don't expect an overnight explosion in demand. Murray Pollok talks to rental companies and manufacturers in Shanghai.

It is just as well that preparations for the Shanghai Expo produced a surge in demand for rental equipment - aerial platforms in particular - because Tomie Chan, Haulotte Group's general manager for North Asia, tells IRN that the local authorities have instituted a ban on construction activity in the city until the Expo finishes in October.

Still, Shanghai Jinheyuan Equipment Rental (Jinheyuan) wasn't complaining, because it supplied around 40 of its "100 plus" aerials fleet to help in the build up to the Expo, which opened in early May.

Jinheyuan, based in Shanghai's Pudong area, is one of a small band of rental companies that are establishing Shanghai as the heartland of rental in China (alongside Hong Kong and Macau).

The company, which is a joint venture between Japanese rental giant Kanamoto, Chinese trading group Miyuan and finance company Orix, is forecasting 20% growth this year mainly as a result of expansion in its aerial platform rental business.

The company's Chinese general manager, Ronghui Huang, tells IRN that beyond the Expo there is increasing demand for lifts from users including shipyards and on construction sites where there is pressure to be more productive. Speaking through a translator, Mr Huang says "labour is cheap, but on some projects there is not much time available and there is a need to build quickly."

The company has more than 100 aerial platforms - a mix of Genie, JLG and Haulotte - and plans to increase the value of its fleet by around 20% this year.

Unlike its main competitors in Shanghai - including Hertz (which has been present in Shanghai for several years now) and the local Caterpillar dealer Lee Shing Hong - Jinheyuan is not renting traditional items such as earthmoving equipment, generators and compressors, choosing instead to rent lifts, portable accommodation, piling rigs and tunnel boring machines.

Mr Huang says that the low cost of earthmoving equipment in China makes it uneconomic to rent them, while portable generators are not so popular because there is easy access to power on many Chinese construction sites.

He says also that Jinheyuan is not being run to provide an outlet for Kanamoto's used fleet, with the rental company preferring to invest in new equipment.

The presence of the heavy piling and tunnel boring equipment gives a clue to Jinheyuan's priorities. Mr Huang says Chinese government investment plans for major railways and subway networks could provide big opportunities in the future. The expansion and diversification of the rental fleet will therefore match closely the investment plans of the government and the specific demands of its customers, who are both private and publicly owned contractors.

Although there are few domestic general rental companies, Mr Huang says Chinese businesses are acting as ‘middlemen' between rental companies and contractors, using their business contacts to source equipment for contractors.

Although run as a separate business from Kanamoto - and the name Kanamoto is not used in the company's literature - there is still a strong influence from the Japanese part-owner. Vice general manager of Jinheyuan is Hatsuhiko Seki, a 23-year Kanamoto veteran from Japan who has been in Shanghai for several years. Mr Huang says Mr Seki's knowledge of equipment was a valuable resource for Jinheyuan.

In addition, a young Kanamoto executive, Tetsuya Abiko, joined Jinheyuan in mid-May as the company's market development department supervisor. One of Mr Abiko's tasks will be to increase links between Jinheyuan and Japanese contractors working in China.

The company is also benefitting from the market presence of a sister company within the Miyuan Group, crane rental company Shanghai Tengfa Engineering Construction. Tengfa, which is a joint venture between Japanese crane rental company Yonehara, Miyuan and Japanese trading company Itochu, is the largest crane rental company in China.

Jinheyuan shares 10 depots with Tengfa in Shanghai, Tianjin (west of Beijing) and Liaoning (in the north east of China), and also benefits from business leads from Tengfa's 40 sales staff. Jinheyuan has 15 of its own salesmen.

In terms of competition, Jinheyuan is seeing little development of Chinese run rental businesses. Mr Huang thinks that more foreign rental companies will enter the Chinese market, and he also foresees more Chinese contractors attempting to create rental operations from their internal equipment divisions.

He tells IRN that the recent slowdown in Chinese construction - although nothing like the recession experienced in North America and Europe - has already prompted some large local contractors to start renting their equipment to external customers. He said it was "definite' that more Chinese contractors, particularly privately-owned ones, would get more involved in this kind of rental.

It is aerial platform manufacturers who perhaps have most to gain from the development of a lively rental sector in China, because aerials are such a core rental product.

Haulotte's Tomie Chan, who is based at the manufacturer's recently opened Shanghai headquarters and warehouse, agrees that rental is growing, although he points out that much of the running is being made by external companies, whether Hong Kong's Modern (Int' l) Access & Scaffolding, Jinheyuan and Hertz in Shanghai, and renters from Taiwan who are moving into China.

"Some Chinese entrepreneurs are looking at it", he tells IRN, but he says other business sectors are still offering good returns, although he insists that access rental can make money in China.

In addition to Hertz and Jinheyuan, local Shanghai renters include Easy Rental, Chi Shing (a Hong Kong company that has a depot in Shanghai) and Shanghai Universal Equipment (a JLG dealer and rental company run by Paul Beal, the former John Deere executive who operated the manufacturer's Shanghai rental business for five years).

"Rental is growing in general", says Mr Chan, "and the retail sector is also growing." (Haulotte sold around 200 retail units last year and Mr Chan says he will be happy with 50% growth this year.)

For Haulotte, the strategy is to target both retail and rental sales. It has a network of 6 or 7 very active retail dealers and is selling direct to rental companies. For Mr Chan, the opening of Haulotte's Shanghai warehouse earlier this year - with a stock of around 60 machines - and the completion in January of its 3000 m2 assembly facility in Changzhou, west of Shanghai, are key to its strategy of "trying to get close to the customers."

The factory, which is now producing Optimum 6 and 8 scissors and will be making Compact series models by the end of the year, means that Haulotte can invoice in local currency, which Mr Chan says is a big advantage.

"The factory is small", he says, "but the quality is excellent. We are spending a lot of time checking the machines. We are hiring graduate engineers to assemble the scissors." Haulotte is leasing the facility from AMC, a French company which also happens to be one of its sub-suppliers in France. AMC has moved into a new, larger facility in Changzhou, where it is also producing scissor stacks for the Haulotte facility.

Around 50 scissors have so far been produced at the factory, and they are being sold to customers in S E Asia, China, North Asia and Australia.

Of course, Haulotte is not the only foreign aerial platform manufacturer establishing a facility in China. JLG is in the process of doing so; Japan's Aichi is building its own boom facility (having in the past relied on its utility platform joint venture, Hangzhou Aichi); and Terex is in the process of building a facility, also in Changzhou.

XS Koo, vice president and managing director, Terex AWP - Asia Pacific, speaking to IRN at the company's central Shanghai office, says Terex is happy with progress on the factory; "We delayed it a year ago - it was a necessary decision - but it is on track to be open by the end of the year."

The 70000 m2 facility (23000 m2 covered) will be set up in a way that doesn't "lock in" certain product lines. Mr Koo says it is likely the first machines to be built will be Superbooms, above 100 ft. The machines - probably with booms imported to China to start with - will be for the Chinese market, including shipyards, but longer term will be for the wider Asian market. Products such as Z-45s will be produced "when the volume picks up".

For Mr Koo, the new factory is important for Terex's AWP strategy in China and the region. He says the wider Asian market is becoming more price sensitive and customers have more choice; "Everybody is investing in China now - we have to be cost competitive. Also on logistics and lead times, we need to be close to the market."

With access to finance also an issue in Asia, rental companies will look to buy when they have the cash flow and when they need it: Mr Koo says the ability to built to order, to be responsive, will be crucial.

"China is a big focus for us, investing to get close to the market. We see the potential, but want to be as flexible as possible", says Mr Koo, "A lot of discussion now is about creating the demand."

Sitting in on the interview in Shanghai is Ken Lousberg, Terex's newly appointed president, China operations and business transformation, who is based at Terex's Beijing head office.

Mr Lousberg points out creating demand isn't straightforward when, for example, buildings in China already manage to go up rather quickly with or without aerial platforms.

He thinks there may be opportunities to leverage Terex's presence in the Chinese crane market, but as with the access sector there is a shortage of really large, national crane renters. Targeting large Chinese contractors is also easier said than done, since many of the major contractors in the country are really a collection of local sub-contractors.

As his Terex colleague XS Koo says; "It's very difficult to have a formula."

Despite the challenges, Ken Lousberg expects a 20 to 30% increase in Terex's business in China this year; "We're putting intensive investment in China in AWPs, cranes and material processing. We expect significant growth.

"And we're investing in China for China. A lot of western companies invest here for export and almost forget about China itself. We're here for China - it's the key market in the world."

Hertz rented these Genie telescopic booms for use on the Shanghai Expo site.

Compact Hero

Chinese compact equipment manufacturer Hero Time plans to expand its product range and target more domestic sales. Murray Pollok visited the company's headquarters south of Shanghai.

It tells you something about the Chinese economy that you can still find construction equipment manufacturers who are increasing their production capacity. Hero Time Machinery, based in the small town of Zhuji, south of Shanghai, is one of them. The company plans to significantly boost its production capacity with a RMB136 million (€16 million) investment in a new 35000 m2 production facility next to its main production plant.

The new plant, to be build between June and October this year, will add 35000 m2 production space and more than double the covered area available. The facility will be used for steel fabrications for the company's skid steer loader and compact articulated loader ranges and it will also be the main production facility for Hero Time's excavators, providing capacity for as many as 500 units a year.

Hero Time, a private Chinese company in joint venture with Hong Kong's Jiayi Group, is best known for its Racoon branded skid steers and wheeled loaders. The firm started manufacturing skid steers in 2002, adding compact wheeled loaders in 2004, and initially focused almost entirely on exports, with distributors in Europe, Australia, Asia and South and North America.

Annie Wang, head of Hero Time's international sales department, says its exports were hit hard by the financial crisis, prompting the company to try to build up sales of excavators and compact equipment in its domestic market. The company claims to have produced as many as 1400 units in its peak year of production in 2008, virtually all exported, with skid steers representing around 60% of sales.

The new production facility will help the company produce more excavators for both the home and export market, with plans to expand the range from the existing 7 t and 23 t models to encompass mini and midi models in 1.5 t, 3.5 t, 5 t and 6 t sizes. These will be conventional design models as zero tail swing excavators are not yet popular in China. Above the 7 t sizes Hero Time will develop 13 t, 18 t and 20 t models, with a 30 t unit likely in the future.

Mr Cheng Guang Jie, an experienced Chinese excavator designer, has joined Hero Time as technical vice-general manager to help develop the new excavators, the first of which - the 6 t model - could be ready next year. Mr Cheng tells IRN that the company already had the designs ready for the new range.

As well as expanding the excavator range, Hero Time plans to introduce backhoe loader models at some time, as well as launching larger skid steers. The current skid steer range encompasses seven models with operating weights from 2.45 t up to 3.51 t. The company's products use Kubota or Perkins engines and Bosch Rexroth and Sauer Danfoss hydraulics.

Mr Cheng says the Chinese market for construction equipment is still strong and has not been severely impacted by the financial crisis. However, he says problems in obtaining hydraulic components were producing a bottleneck on production, with lead times as long as 6 months for some components.

In addition to expanding its sales in China, Annie Wang says Hero Time wants to further expand its export distribution network, with a particular focus on southern European countries. Hero Time has 71 export dealers.

Rental companies in export markets are an obvious target for the company given its compact range. However, sales in China will mainly be to end users because the domestic rental sector remains extremely immature, says Mr Cheng. He argues that the development of pure rental service companies was happening very slowly, with most ‘rental' development limited to a trend for some private contractors to rent out their surplus fleet when they are not busy.

Quality target

Chinese entrepreneur Tony Hoo is targeting rental companies and professional users with its Masterpac brand of light construction equipment. IRN visited the company's headquarters in Hefei.

Tony Hoo takes great pride in his new, beautifully decorated head office and factory. He likes the fact that it looks good, but more to the point, it's a calculated response to a changing China; "People move a lot now, and we are trying to keep a stable team. I want the staff to have a good environment."

The Hefei facility, located a few hours west of Shanghai, is also a response to a big change at the company, since it is the focal point for the new ‘quality, professional' brand of light construction equipment, Masterpac, that Mr Hoo, who is president and founder of the company, has been promoting for the last two years.

Before the launch of Masterpac, Mr Hoo's business focused on manufacturing for western OEMs and for producing an economy range of equipment, branded Masalta. This is sold mainly in Europe and Australia to end users through builders merchants chains.

With Masterpac, the idea is to target professional users, dealers and rental companies with a range that offers what Mr Hoo describes as "the best quality/cost ratio machines, competing with the leading European brands." The Masalta models are still built - at other locations in China - but it is in Masterpac that Mr Hoo sees the long term future of the company.

In support of the strategy Mr Hoo has invested both in China and in Europe. It already has a research and development and service centre in Germany and in China, and has just made some big appointments in Europe, opening a new sales and marketing office in Paris, France, earlier this year. It is run by ex-Dynapac employee Nathalie Nguyen, and another new recruit is ex-Dynapac veteran Pierre Grandsagne, in a European sales role.

For Mr Hoo, the focus now - after a difficult 2009 in which its sales went down 45% from a US$17 million peak in 2007/8 - is to continue to expand the product range. Already available are tampers, plate compactors, tandem rollers and concrete finishing and cutting products.

"Our strength is that we offer a wide range of equipment, and we have already done a lot, but we still have to expand", he says. Ride-one rollers are on the agenda - 1 t, 1.5 t and 2.0 t models - and should be ready by 2011, and it will have hydraulic breakers by the end of this year. These are being built under licence to a European design.

Also on the cards is a 800 kg plate compactor (the heaviest so far has been a 650 kg model), concrete pokers and a new 20 inch, 13 hp concrete floor saw.

"The strategy so far has been to focus on light equipment", says Mr Hoo "Two tonnes could be the maximum size for us."

Masterpac is open to alliances with other OEMs as a way of expanding its product range, but it is also willing to work very closely with rental companies. For example, it is currently discussing a possible arrangement with a significant European rental firm under which the equipment would carry the rental company's brand.

"It's an important step for us, to get their approval", he says, "It means our quality being accepted by a top company"

He says the feedback from the market has been positive, although last year saw fewer orders, "Since the start of the year we have seen more positive signals", he says.

Another part of the strategy is to start looking for business in China. This won't be easy, says Mr Hoo, since the light compaction tools used in China are of a quite different design, and much cheaper - built by dozens of local suppliers.

Masterpac will compete in the 10-20% of the Chinese light equipment market that Mr Hoo estimates is available to foreign products, and has started to appoint some dealers in the country. Mr Hoo says compaction is not always done very well in China, be he thinks that will change as the quality required on projects continues to improve, and as the maintenance needs increase; "We have invested so much in new infrastructure, so there will be a huge maintenance market in the future."

Over the short term, however, it is the export market that will pay the bills. "The good news is that we can start to see a recovery", says Mr Hoo, "We have seen a 20% increase in the first five months of the year." Expect a warm welcome, and a feast for the eyes, if you make the trip to Hefei.

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