Indian tigers, Chinese dragons: driving global CE industry

December 15, 2014 12:51 pm

An in-depth analysis on how India and China are emerging as key players in the global construction equipment industry
 The global construction equipment (CE) industry is linked to several growth factors, i.e., GDP growth, urbanisation, and infrastructure development all of which have a positive outlook going forward. The world economy is projected to grow at a CAGR of about 3.3 per cent between 2013 and 2030. Main drivers for this strong growth are Rest of World with 7.4 per cent, Middle East and Africa with 4.1 per cent and the APAC region with 3.9 per cent. Urbanisation will continue to increase with 33 per cent of the increase in urban population between 2011 and 2050 coming from Africa and another 54 per cent coming from Asia. Both factors, GDP growth and urbanisation, will drive construction and infrastructure investments. By 2030, construction and infrastructure investments will amount to about 19 per cent of global GDP, US$ 11.8 trillion out of a total spend of US$ 18.5 trillion will be spend in emerging countries. On a cumulative basis, US$ 47 trillion are expected to be invested in key infrastructure segments between 2010 and 2030
Infrastructure spending is by no means limited to developing countries. The US is required to spend approx. US$ 2 trillion to rebuild infrastructure including roads, bridges, water lines, sewage treatment plants and dams. A four-year, US$ 302 billion transportation plan was proposed in 2014. The UK announced an US$ 320 billion investment plan till 2015 to improve the country’s energy and transportation systems. These initiatives compare favourably with the US$ 1 trillion that China intends to spend until 2016 to overhaul its national transit, water supply and electricity networks as well as to complete a 10,000-mile high-speed rail network by 2020.
As a consequence of this encouraging environment, the global CE industry will grow at about 4 per cent CAGR till 2017. India is the highest growth market, while China is de facto stagnant as shown in Fig. 2. As a consequence, India’s relative importance is set to increase and by 2017, India should amount to more than 25 per cent of China’s demand.
China: coping with post state-support hangoverChina’s CE market remains in a difficult situation due to economic restructuring, supply glut and slow down in real estate and mining. Policy makers switched economic focus away from investments and exports towards consumption. This has affected the CE market negatively and comes at a time when GDP growth rates have been slowing. Heavy stimulus spending intended to mitigate the 2008 recession led to the build up of dramatic overcapacities, especially, after stimulus reduction resulted in market contraction by about 40 per cent between 2011 and 2013 as shown in Fig. 2. For example, for wheel loaders Chinese capacity amounts to 145 per cent of global demand, for excavators the corresponding number is a still challenging 118 per cent. Tight credit, restrictions on multiple home ownership, and easing of prohibitions on overseas investments – all of which started in early 2014 – have affected the CE market as well.
While the pre-2011 growth rates are unlikely in the near future, the sheer size of the CE market makes China extremely important. China accounts for about 40 per cent of the overall global sales of CE. The spending power of the Chinese government is formidable, current reforms focus on faster investment in railway and shanty town constructions, easing reserve requirements for rural banks and tax breaks for smaller firms which will help drive CE sales. About US$ 100 billion will be spent on building 50 additional airports and extending the National Truck Highway System from 74,100 kms to 83,000 kms by 2015. Also, Chinese players are entering emerging offshore markets including Brazil, India, Russia and Africa with high quality products adapted to local conditions which will drive their volumes.
As a result, China’s CE is expected to steadily grow and reach about 290,000 unit sales by 2017. This amounts to a total market opportunity of about US$ 25 billion
Chinese overcapacity drives dragons to foreign shoresAs the Chinese market has grown, domestic OEMs have increased their share of the global CE market and are serious global contenders. Among the top 11 global CE companies, we find 3 Chinese companies: Sany (2012, #4), Zoomlion (2012, #5) and XCMG (2012, #11). China as a country is globally the third largest producer in value terms behind only Japan and the USA in 2013.
Heavy investments in capacity, large size and a dramatic drop in demand after the end of government stimulus in 2011 have led to chronic over-capacity, high competition and a major drop in profitability of large Chinese OEMs
In such a competitive market, both global OEMs and domestic Chinese players have adopted distinct strategies. Global OEMs focus on their key differentiators such as high equipment productivity and durability; superior product quality and performance; optimised total cost of ownership; and advanced product features and functionality. This positioning is in particular successful in the excavator segment, where Komatsu, Caterpillar and Hitachi account for more than 25 per cent of the overall market. Chinese OEMs have so far focused on low acquisition price; availability and low price of spares; basic product features and functionality; dealer location and network; flexible financing options and growth through M&A. With that they have cornered 57 per cent of the Chinese CE market with up to 80 per cent in the loader and compactor segment.
Over the past few years both domestic and foreign companies have been actively pursuing acquisitions to grow their market position. An overview over some of the M&A activities is shown in Fig. 5. Some of the takeovers were quite visible, such as the buyout of Schwing, a German major producer of concrete pumps, by XCMG and the takeover of Putzmeister, another German leader in concrete pumping, by Sany. For Chinese companies, takeovers and JVs are mostly driven by the desire to create an international brand, to acquire an international sales network and access to technology. International companies often try to access good enough technology and distribution networks via their take over and JV activities in China.
Moreover, CE players (both global and domestic) are expanding their business scope by playing across the entire value chain. Development of the product range to cover the full line of applications, 6S store concepts, loan/lease approaches and insurance, sale of replacement parts and rebuilt parts and remanufacturing are just some of the initiatives that players adopt to drive revenue and shore up bottom line. International players such as Komatsu and Caterpillar are focusing in particular on After Sales, Rental and sale of used equipment.
Despite strong commitment to the Chinese market, global players have not been able to replicate their international success in China. Take Komatsu and Caterpillar as examples. Komatsu’s global market share is 11 per cent vs 9 per cent in China (2012 data). For Caterpillar the situation is even more dire. The China market share is 7 per cent, not even a third of the global market share of 22 per cent. Lower market penetration is a consequence of high import content, premium products in a market that requires good enough functionality, delays in product customisation as well as in capacity enhancements.

Advertising

Your future advertising space? Our media data