China’s Construction Machinery Industry: Locals Gain Ground (Part II)
Last month, I suggested that because equipment such as excavators and wheel loaders are used in infrastructure projects, China’s construction machinery industry might be used to monitor the progress of China’s stimulus program. In China’s Construction Machinery Industry:A Benchmark For the Stimulus Program (Part I), I provided a brief industry overview and discussed some of its key players.
The April numbers are now out, and while year to year comparisons remain negative, the industry is gaining strength. Courtesy of Kate Zhu, executive director of research at Morgan Stanley, we learned that wheel loader sales of 14,832 units in April were off about 38 percent compared to the same month in 2008. For the first four months of the year, sales of 46,207 units were down by approximately the same percentage. Excavator sales tell a similar story. Sales of 10,742 and 34,769 excavators for April and the first four months of the year, respectively, are off roughly 10 percent from 2008 levels in both cases.
When analyzing the current sales numbers, however, the fact that March and April of 2008 were record months for wheel loader and excavator sales must be taken into account. In March and April of 2008, sales of wheel loaders were 31,717 and 24,078, respectively, while sales of excavators totaled 16,750 units in March and 11,900 units in April. The next highest month for wheel loader sales in 2008 was about 15,000 units in May. For excavators, May was also the next highest month in 2008 when about 8,000 units were sold.
As far as using the construction machinery industry as a benchmark for China’s stimulus program, it has to be said that the data so far is inconclusive. The record numbers of units sold in March and April of 2008 make it difficult to draw any meaningful conclusions. It should be noted, though, that April sales of 14,832 wheel loaders are just below the 15,000 units sold in May 2008, while April sales of 10,742 excavators are already above the 8,000 units sold last May. Presumably, with more infrastructure projects coming on stream each month, May sales for both types of equipment should be even stronger. We’ll have to wait and see.
Apart from using it as a benchmark for China’s stimulus program, the point I want to make about China’s construction machinery industry is that the local companies continue to gain ground. The top five wheel loader companies in China are all Chinese: Liugong; Longong; Xiagong; Lingong and Xugong. With respect to excavators, Doosan, Komatsu, Hitachi and Caterpillar still dominate the market, but Sany, Sunward, Liugang and Lonking are gaining share fast.
For the first four months of the year, the four foreign companies as a group sold 17,184 excavators, down almost 20 percent from last year. By way of contrast, the four biggest local companies sold 4,890 excavators through April, up 37 percent from last year. In 2008, the four largest local excavator companies accounted for 9.1 percent of the market. Today, their collective market share has increased to 14 percent. Local players as a whole added 4.4 percentage points to their collective market share, reaching 25.2 percent for the first four months of the year.
Moreover, this is the continuation of a trend that has been playing out for several years now. Since 2004, Doosan has seen its market share in China drop from 22.8 percent to 16 percent; Hitachi, 16.6 percent to 11.5 percent; and Caterpillar 9.1 percent to 6.4 percent. Only Komatsu has gained ground. In 2004, the Japanese giant had 12.8 percent of the China market for excavators. Today, it has 15.6 percent.
In my book, Managing the Dragon, and on this blog, I speak repeatedly about how China’s different and lower cost perspective and the affordability factor combine to create two markets in the country: a high price/high technology market and a low price/low technology market. It’s my contention that foreign companies must learn to compete in the local market because their Chinese competitors are improving every day in terms of quality and technology, and are doing so at much lower price points. If they continue unchecked, they will gain market share and begin to dominate every market in China. Once that happens, the next stop is the global market and global domination.
Like the market for wheel loaders, the truck, bus and diesel engine business is already an almost entirely local affair in China. Like excavators, foreign-invested companies currently dominate the passenger car market. They make approximately 70 percent of China’s cars, while the local companies make the other 30 percent. In 10 years, I believe the percentages will be flipped. I see China’s construction machinery industry going the same way.