After a decade of growth and then the stimulus-driven boom of a few years ago, Chinese equipment manufacturers are still getting used to the idea that markets can go down as well as up. Following the huge surge of work that carried the country through the global economic crisis, the inevitable downturn is now in its third year.
According to is chairman of Liugong machinery and president of Liugong Group, Zeng Guang'an, there were some glimmers of hope earlier this year, but the second quarter has seen domestic demand take a turn for the worst. “The Chinese market was not bad in the first quarter, but there was a big drop in April and May. Wheeled loader sales were down about -16% compared to last year. The same for excavators, dozers, rollers, graders.”
He added, “The market will be flat or down for the next year or two as the economy adjusts. But the market for construction equipment in China is still the biggest in the world.”
The Chinese industry grew up a great deal in the boom of the 2000s. It was a period that saw Liugong, along with the likes of Sany, XCMG, Zoomlion and others emerge from obscurity onto the world stage. But as large as these companies are today, the fact remains that Chinese manufacturers still tend to be dependent on the Chinese market.
Many like Liugong have a plan to be global players, but most exports to date have been to developing markets where the requirements from customers are similar to China. Big, developed markets like Europe and the US remain a challenge due to the number of competitors, difficulty in establishing good dealer networks, and technical barriers such as engine emission laws.
But so far export markets have not come to the rescue of the difficulties Chinese manufacturers are seeing at home.
“Chinese manufacturers mostly export to emerging markets, where economies are slowing down and investment is falling. The second problem is the exchange rate. Most emerging market currencies are falling, which increases the cost of their imports. So the demand is going down and the cost is going up. That makes a big difference for the whole industry,” said Mr Zeng.
All this is of course having an impact on the equipment manufacturing landscape in China, as Mr Zeng elaborated. “Since about 2011, demand has been in almost continuous decline. Chinese OEMs have been losing money as well as seeing bad debts, higher inventories, high fixed costs and over capacity. So in the last three years of so we have seen some of the new players in the industry disappear.
“That’s generally good for the industry, as China has too many players.
“But both the Chinese manufacturers and the overseas players in China face the same problem. They all have too much capacity, so there is no incentive to consolidate. The other problem is that these small players don’t really have any value to add, so there is no incentive to buy them. We have seen factories close and new players move into other industries,” he said.
Such big changes in the competitive and market landscape seem to have prompted a change in emphasis for Liugong, particularly when it comes to establishing a more international footprint.
“We are not slowing down, but we are doing these projects more carefully. I think in the past we and other Chinese companies jumped in too fast. We are not slowing down, but we are spending more time on strategic plans and watching the markets carefully,” said Mr Zeng of the company’s internationalisation strategy.
He added, “At this moment we need to find a more reasonable way to be a global company. The Chinese market has dropped a lot and we need to think about how to balance the domestic market and overseas markets. Overseas markets are more important than before. But at the same time, there are fewer competitors now in China.”
Liugong has certainly been one of the frontrunners in the globalisation of the Chinese construction equipment industry. In 2009 it opened the first overseas factory built by a Chinese construction equipment manufacturer, near Indore, in India. This was followed in 2012 with the company’s first overseas acquisition, the purchase of Polish dozer manufacturer, HSW.
More recently, Liugong has established a series of joint ventures in China that are more focussed on its domestic market. Liugong Group has established a partnership with Metso to build and market mobile crushers in China – effectively a new product type for the market.
“The market at the moment is zero. We are creating the market,” said Mr Zeng. “So far, so good. We have built the first prototype and sold it. We have also utilised the Liugong sales force to sell the products.”
More in the mainstream are Liugong’s new joint venture with ZF to make transmission components and a partnership with Cummins to build engines.
The relationship with ZF goes back to 1995, when an agreement was signed that saw Liugong supplied with German-designed axles. However, the more recent development, a further JV signed in September 2012, will see components marketed to other Chinese OEMs as well as being produced for Liugong.
Another subtle, but important twist is that the axles are jointly designed by Liugong and ZF. It is not just a case of a Chinese manufacturer gaining access to western technology, but there is also the element of Liugong helping the world-famous German company produce components tailored to the local market.
There are similar elements in the joint venture with Cummins, which was signed in October 2011 and started manufacturing in March last year. There are two engines being produced, a version of Cummins’ 7 litre QSB7, which is available in power ratings of 120 kW, 134 kW or 160 kW for 20 to 30 tonne excavators, and the 9.3 litre L9.3 for 5 tonne capacity (about 3 m3 buck capacity) wheeled loaders.
Although this latter 162 kW unit is fairly simple, with its mechanical fuel pump and Tier 2 emissions compliance, it is a unique engine designed specifically for this application – you will not find a 9.3 litre engine elsewhere in the Cummins range.
Again the deal is that the joint venture, Guangxi Cummins Industrial Power Company (GCIC), produces engines for use by Liugong as well as for sale to other OEMS through Cummins’ Chinese sales infrastructure.
According to GCIC deputy general manager Hengliang Pan, the specially tailored version of the QDB& being produced is “Very competitive on fuel consumption,” with about a 15% saving on other engines available on the market. He added that noise levels were 50% lower.
The factory passed its milestone of producing its 10,000th engine in June this year, and Mr Pan said he was confident of eventually achieving the target of 50,000 engines per year, although he said it would be a challenge in the current market.
And according to Mr Zeng, both joint ventures are paying dividends, despite them coming on stream at a time when the industry is in a lull.
“They have both been good for us. They have provided a competitive advantage, high quality levels, ‘famous’ components and good delivery times,” he said.