China’s Construction Machinery Industry: A Benchmark for the Stimulus Program (Part I)
China’s construction machinery industry is an interesting one to study in some detail because it illustrates many of the trends in China that we have highlighted at various times on MTD and that I identified in my book, Managing the Dragon.
Construction machinery is yet one more industry where China is leading the world in growth and where the country is becoming the largest market in the world. It is also an industry where purely local Chinese companies are improving their quality and technology levels and gaining market share at the expense of their foreign competitors. Not surprisingly, the local companies are able to sell their equipment at discounts of up to 30 percent to products made in China by foreign-invested enterprises. Finally, China is beginning to export construction equipment to other developing nations, demonstrating once again, that if you win in China, you are well positioned to win in the rest of the world.
Products that fall into the construction machinery category include: wheel loaders, excavators, wheel cranes, concrete machinery and forklifts. Apart from the many local companies that compete in this industry, all of the big global players–Caterpillar, Komatsu, Hitachi and Doosan–are already in China. This is why I say that China is the most competitive market in the world for any product. Competition among all of the global players and a host of up and coming local companies is the rule, not the exception.
The 4 trillion yuan ($586 billion) stimulus package that China announced last November is heavy on infrastructure spending and is expected to boost domestic demand for construction machinery this year, potentially offsetting a slowdown in exports and private-sector investment in areas such as mining, industrial and property. Kate Zhu, executive director of research at Morgan Stanley expects the industry to achieve 5 percent growth in 2009. According to Kate, the excavator and wheel crane segments should register above-market growth in demand due to their extensive exposure to railways, highways, and power grids. On the other hand, she expects wheel loaders, concrete machinery, and forklifts to face growth headwinds, given poor demand in mining, property, and export markets.
Of the different types of construction equipment, excavators and wheel cranes are the most widely used infrastructure machinery, so they can serve as a barometer for the impact of new infrastructure spending on China’s economy. Reflecting increased spending levels, Kate expects these two types of equipment to post unit sales growth of 12 percent in 2009.
How are we doing so far?
Jim Owens, chairman and chief executive officer of Caterpillar, offered anecdotal evidence last week, just before the May 1 holiday. His words speak volumes about the speed and effectiveness of China’s stimulus program.
Excavator sales in China for the Peoria-Ill.-based heavy equipment maker had been around 600 per month before the start of the financial crisis last September, Chairman and Chief Executive James W. Owens said. Sales then plummeted and many orders were canceled, he said.
“In January, I think we sold five,” Mr. Owens said, in an appearance at the Chicago Council on Global Affairs.
He said the company’s overall Asian sales were up 42 percent in the third quarter. For the fourth quarter, he said, there was almost a “complete seizure” of sales and heavy cancellations of back orders.
Mr. Owens said excavator sales in China were “back to record levels” in March-April. He declined to say whether the level matched the 600 monthly figure from before the crisis.
The Chinese market had “bounced back faster than anywhere else,” he said.
Mr. Owens credited China’s infrastructure-based stimulus package with the turnaround. He said China continued to have great needs for infrastructure and was able to start work on projects much more quickly than similar work in the U.S.
“It’s something like nine months [in the U.S.] versus nine weeks” in China, he said.
Industry sales figures for the first quarter confirm Caterpillar’s general experience. In March, sales of excavators declined 20.5 percent to 13,314 units, as compared to March 2009, but rebounded by 58 percent over sales in February. During the first three months of the year, sales totaled 24,024 units, down 10.6 percent from the high level of sales experienced in the year earlier period. However, more excavators were sold in China in March than were sold in the first two months of the year–13,314 units in March versus 10,710 in January and February.
Getting back to Caterpillar, the company sold 847 excavators in March, down from last year, but substantially above the five Owens said the company sold in January. Cat’s unit sales of excavators for the first three months of the year totaled 1,412 units. Again, Caterpillar sold substantially more excavators in March (847) than it did in January and February combined (565).
As the year unfolds and China’s infrastructure program begins to take hold, the year on year comparisons should begin to move into positive territory. In the months ahead, we’ll continue to monitor these trends, as well as those in key industries such as autos, and other indicators such as the purchasing manager index, to see how China is faring.