Construction equipment manufacturing on the rise in China

01 February 2011

Far from worrying about a stimulus hangover, construction equipment manufacturers in China are investing in new factories at an astonishing rate. This will shift the construction equipment industry’s centre of gravity to China in the next two years.

Even by China's standards, the country has enjoyed a remarkable construction boom over the last two years. Driven by the government's US$ 585 billion stimulus package, the economy has continued to motor over the last two years and year-on-year growth in construction output has stayed above the 10% mark.

About US$ 450 billion of the US$ 585 billion package announced in late 2008 was directed towards construction projects. The biggest slice - some US$ 265 billion - went towards road, rail, power and airport infrastructure, while low cost housing projects and reconstruction work following the May 2008 earthquake in Sichuan province completed the total

It was this focus on infrastructure, combined with still robust growth in the building segments, which drove the Chinese construction equipment market to yet another high last year. This in turn has encouraged manufacturers to invest ramp-up their investment in new factories and product lines.

In previous years it was the wheeled loader sector that was the most striking feature of the strong growth in Chinese construction equipment sales. Dominated by a handful of formerly state-owned companies like Liugong, XGMA, Lonking, SDLG and so on, sales rose sharply last decade but over the last three years or so they have levelled out around the 170000 units per year mark.

As high as this number is - about four or five times the wheeled loader market in the rest of the world combined - there does not seem to be much more growth to come. In contrast, the excavator market in China has gone through the roof on the back of the stimulus programme.

According to specialist consultant and forecaster Off-Highway Research, the market has grown from 33600 crawler excavators in 2006 to some 132500 machines last year. That goes up to 161000 units if you add in mini excavator sales - crawler excavators under about 6 tonnes.

Last year was a big one as far as this sea-change from loader to excavator usage was concerned, with sales of crawler excavators a massive 65%, from 80400 units to 2010's 132500 machines. And it seems that the Chinese manufacturers are taking a serious share of the mini and full-sized crawler excavator market.

This boom has coincided with China's domestic manufacturers developing excavator designs of their own and selling them in serious numbers - a big change for a market which had been dominated by international companies from Korea, Japan and the US since the 1990s.

Akihiko Hiraoka, managing director of Japan-based Hitachi's Chinese business, Hitachi Construction Machinery (Shanghai), said the company had forecast that sales of excavators in China by foreign manufacturers would reach 76000 units this year, but that the actual figure was closer to 100000. He forecast that Hitachi's excavator sales would grow by around 15% in 2011.

In other words, the international players have about a 60% share, while the domestic manufacturers can claim about 40%. It's quite a change from the situation five years or so ago, when the handful of Chinese companies making excavators had almost no market share.

But the thing that grabs everyone's attention about the Chinese excavator market is not so much the growth of the last few years, but forecasts for the future. Off-Highway Research sees the market rising to more than 200000 full-sized excavators and close to 45000 minis in 2015, and judging by their expansion plans, most manufacturers are thinking along similar lines.

For example, Mr Hiraoka said Hitachi plans to invest US$ 120 million over the next three years to take its excavator production capacity from 20000 units per year to 30000. Other international manufacturers currently increasing their excavator manufacturing capacities by similar magnitudes include Caterpillar, Kobelco and Komatsu.

Smaller manufacturers are at it too. According to Kensuke Shimizu, the head of Sumitomo's construction equipment business, this year will see capacity at the company's excavator plant in Tangshan, Hebei province increased from 3000 to 5000 machines per year

In addition to the international players, China's own manufacturers are putting serious capacities in place. June saw Liugong announce a new US$ 225 million factory in Jiangsu province's Changzhou, which will see another 10000 machines added to its current capacity of 5000 excavators per year.

Among the other big names, both Sany and XCMG are taking their capacities up to 300000 machines per year, Lonking could take its capacity as far as 25000 machines per year, while XGMA is building a 12000 machine per year plant and Zoomlion is looking at manufacturing 10000 to 20000 excavators per year.

There are also new entrants into the sector. The relatively unknown company Rong An is reported by Off-Highway Research to be building a factory to make anywhere between 10000 to 30000 excavators per year, and Strong is working on a 20000 machine per year facility.

According to Off-Highway Research, these developments and others will take the excavator manufacturing capacity in China to somewhere between 415000 and 450000 units per year by the end of 2012.

Game changer

Add this total to the capacity to build 180000 or so wheeled loaders in China, along with 100000 or so other machines, and in two years you will be looking at a country that can manufacture something in the region of 750000 pieces of construction equipment annually.

That will be more than the rest of the world combined. What's more, that is capacity that did not even exist ten years ago. In 2001 the Chinese construction equipment market was around the 60000 machine mark, and the country's manufacturing capacity reflected that.

Off-Highway Research forecasts that the Chinese market will continue to grow, but by no means will it account for all the machines being built in the country. The forecast is for sales of about 450000 units per year in China in 2012, which implies the country will have the capacity to export around 300000 machines - mostly crawler excavators, wheeled loaders, mobile cranes and compactors.

With global markets in their current depressed state, that soon-to-be-in-place Chinese capacity of 750000 machines would more or less cover the entire world demand for construction equipment.

It is not that simple of course. At the moment most of the machines made in China are for that market or others with similar levels of regulation. There aren't many that meet the requirements of the US and European Union, especially now the Tier 4 Interim and Stage IIIB engine emission laws are in place.

But the technical and regulatory barriers are not as high in other parts of the world, although there are can be other issues such as import tariffs. All the same, expect manufacturers active in China - both domestic and international - to use their increased capacities to target developing markets in Asia and around the world.

Volvo, which is the majority share holder in SDLG (formerly the sate-owned manufacturer Lingong), said as much during November's Bauma China exhibition.

"Volvo is a premium international brand and SDLG is a strong Chinese brand for the mass customer market," said Volvo Construction Equipment president & CEO Olof Persson. "This is not a contradiction. It is a logical way to address a very large market with different customer needs. The dual brand gives us a unique opportunity."

As an example of this, Mr Persson says the company is already selling wheeled loaders made by SDLG in Brazil. "It has worked very well in China and Brazil in attracting new customers. How we do it in other markets will be taken step by step but the important thing for us is that we can do it," he said

At the same, many of China's manufacturers are thinking in terms of localised production in other parts of the world. Liugong was the first to take such a step, with the opening of its wheeled loader factory in Pritampur, India in August 2009. Sany is also currently building factories in other regions of the world.

It all points to China's manufacturers becoming serious global players in the coming years, and the centre of gravity of the global construction equipment industry looks like it has moved to China. Perhaps permanently.

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