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February 25, 2017

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Demand grows for construction behemoths

CHINA’S heavy machinery industry continues to rebound on the back of increased investment on infrastructure like railways, bridges and airports.

Last year, profits in the industry rose 5.54 percent from a year earlier to 1.68 trillion yuan (US$244 billion), reversing a five-year slump, according to the China Machinery Industry Federation. At the same time, government infrastructure spending jumped 17.4 percent to 11.9 trillion yuan.

Sales volume of excavators alone surged 54 percent in January, the China Construction Machinery Association said.

“We have had to accelerate production of excavators and loaders to meet demand,” said Yang Yong, assistant general manager at Lonking Precision Hydraulic Components Co. “China is creating many opportunities for the use of mechanical behemoths.”

China’s heavy machinery manufacturers fell into a slump triggered by global financial crises of 2008, when the government’s 4 trillion yuan economic stimulus package created severe oversupply of machinery equipment, said Qu Wei, an analyst at Shenwan Hongyuan Securities.

“The industry has had to rebalance supply and demand,” he said.

Consolidation in the industry helped the supply side. The excavator market, for example, has been pared from 100 major players five years ago to just 30 today. Inefficient manufacturers have been forced out of business or into mergers.

It’s all good news for investors. Shares in Shenzhen-listed XCMG Construction Machinery Co jumped to one-year high of 4.04 yuan yesterday, and Shanghai-listed Sany Heavy Industry Co rose to an 18-month high of 7.41 yuan.

The outlook for the industry, according to analysts, depends on the government’s continuing commitment to infrastructure spending.

Underpinning growth

Nearly 60 percent of the industry’s orders are related to such projects, compared with just over half in 2013, according to Guangfa Securities.

China will invest at least 40 trillion yuan on infrastructure this year, according to plans from 23 provinces. That’s up from 30 trillion yuan last year, according to Liang Hong, chief economist at China International Capital Corp.

China is relying on infrastructure spending to underpin expected economic growth of 6.5 percent this year, according to Huatai Securities.

“The real estate market, the other main driver of the heavy machinery industry, has slowed as the government applied firmer brakes on mortgage lending to curb speculation,” Huatai said.

Of course, what governments say they will spend on infrastructure and what they actually spend may not be one and the same. Actual invested capital is hard to calculate because officials aren’t always specific about how much money is spent on what projects.

Ping’an Securities has estimated that three to five percent of planned expenditures by local governments between 2013 and 2015 may not have been materialized.

Because of those uncertainties, Ding Wei, marketing director of Shanghai Jintai Engineering Machinery Co, said his company won’t be expanding despite a more optimistic outlook. He said Jintai will wait until promises begin to turn into orders.

Other manufacturers are not so cautious. Lonking has “doubled its production plans this year,” Yang said, after a twofold increase in sales of excavators since December.

Some heavy machinery manufacturers actually resumed production before the weeklong Spring Festival Holiday ended, earlier than most industries.

“Heavy machinery producers have to prepare in advance because these machines take months to manufacture,” Yang said. “Increasing production only after orders arrive will hinder the ability to take advantage of market opportunities.”

The type of machinery also affects manufacturing strategy. Excavators and heavy trucks, for example, are needed in the early phases of construction, followed by cranes and concrete machinery, according to Shenwan Hongyuan’s Qu.

Lonking reimbursed traveling expenses for staff to return to work from hometowns during Spring Festival or gave 2,000 yuan to those stayed at the factory. Jintai said it is considering providing dormitories to help retain good workers.

Looking further afield

Apart from domestic infrastructure spending, China’s “One Belt, One Road” initiative has lifted the export of heavy manufacturing equipment. That initiative seeks to form a new Silk Road through Asia and Africa and into eastern Europe.

Jintai said it received orders to help build high-speed railways in Indonesia last month, and 10 percent of Lonking’s hydraulic components are sold abroad.

Last year, the “One Belt, One Road” initiative resulted in US$401.3 billion of projects and deals across the Belt and Road region, driven by the transport and power sectors, according to a report by PricewaterhouseCoopers China.

Lonking, a Fujian-based machinery manufacturer that made its first fortune from excavators, began investing heavily to expand into hydraulic components in 2008, elbowing into a realm dominated by German and Japan producers such as Bosch Rexroth and Komatsu.

Yang said Lonking’s machinery may not be as advanced as that of Bosch Rexroth and Komatsu, but the company has succeeded in reducing the price of hydraulic components by 45 percent in China. Improving technology is the key to future success, industry insiders said. Companies can no longer rely just on domestic government orders for their revenue and fail to keep up with the times, according to Guan Xiyou, chairman of Shenyang Machine Tool Co.

“They have to be willing to compete globally,” said Chen Chen, deputy director of the China Machinery Industry Information Research Institute. “Chinese heavy machinery has become popular in Southeast Asia and Africa as quality improves and prices drop.”

For now, industry insiders remain optimistic that the brighter prospects of today won’t suddenly disappear tomorrow.

“Existing producers will do better than those in the past,” Chen said.


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