CHINA'S construction equipment market, hit hard by the economic slowdown, is expected to show some improvement next year, industry leaders said, though the explosive growth rates of 2009 and 2010 are unlikely to be repeated.

In dealing with increased competition, some Chinese firms will focus on technology upgrading and product quality rather than on chasing higher manufacturing scales, according to participants at Bauma China 2012, the international trade fair for construction equipment, which ends today in Shanghai.

"We will avoid simple expansion in growth of scale," said Wang Xiaohua, chairman of LiuGong Group Corp, a major wheel-loader maker based in Guangxi. "We have to work hard on upgrading technology, improving quality and building up our brand."

In August, LiuGong's listed arm, Guangxi Liugong Machinery Co, became a partner of the China Polar Research Center, the first in the machinery equipment industry to supply that field of China's scientific research and also test its products in extreme weather conditions.

Wang said many smaller players in the industry will be forced out of the market in the next three to five years.

"We have around 200 manufacturers in the domestic industry, but, in fact, we only need 10 percent of them," he said.

Guangxi Liugong posted an 85 percent drop in third-quarter profit, joining peers in reporting dismal results in a highly cyclical industry.

China began approving major new infrastructure projects in the third quarter in an attempt to revive growth after seven consecutive quarters of slowdown. The nation registered 7.4 percent annual growth for the third quarter.

More recent data in October beat expectations, with fixed-asset investment, industrial output and retail sales pointing to signs of recovery.

But it may take time for construction machinery makers to bounce back in an industry beset by oversupply, high inventories and unpaid bills.

US-based Caterpillar Inc, the world's largest maker of construction and mining machinery, expects to start seeing the impact of China's policy changes late this year or early next, Ed Rapp, group president and chief financial officer, said at the trade show.

"Yes, China has slowed down," he said. "But it's slowed from a very, very fast pace. Even though we've heard a lot about industry contraction in China over the past 12 months, it's still by far the largest construction equipment opportunity in the world. We think that opportunity is going to continue to grow over the next five to 10 years."

Caterpillar rented more than 12,000 square meters at Bauma China 2012, the largest trade show display ever for the company. Among its exhibits was a unique Cat excavator built for the latest James Bond film "Skyfall."

Other global leaders also see great potential for their China business, despite challenges facing the industry.

Volvo Construction Equipment President Pat Olney said the firm has invested over 1 billion Swedish krona (US$149.1 million) in expanding capacity and product offerings in China. He said Volvo is set to build on its leading market position in China's excavator and wheel-loader segments by raising the bar even higher.

"Our successes over the last decade have surpassed even our most optimistic targets, but we remain just as ambitious today as ever before," Olney said.

Profit at major construction machinery makers in China fell 28.4 percent in January-September, while sales inched up 0.02 percent, according to the China Construction Machinery Association.

Sales this year could end up a bit higher than in 2011, and they may rise 13 percent next year, according to Qi Jun, chairman of the association.

LiuGong's Wang said the industry is at a turning point. "The next 10 years are going to see a period of relatively low growth and a market that's more mature," he said.

Qi said Chinese companies have been making progress toward higher technology products as they intensify R&D spending to catch up with global rivals in both domestic and overseas markets. Sales of high-end equipment accounted for about 40 percent of the domestic industry's total as of October, he said.

Some Chinese companies are also banking on foreign partnerships to tap the global market. Shandong Lingong Construction Machinery Co, 70 percent owned by Volvo Construction Equipment, will start making excavators in Brazil next year, Volvo's Olney said.

Foton Lovol sets US$3.7b overseas sales target

Foton Lovol International Heavy Industry Co said it expects its construction machinery unit to generate US$3.7 billion of annual sales from overseas by 2020, as the Chinese company eyes the global market.

That scale would make the Weifang, Shandong Province-based company a world-class player, but achieving the target won't be easy, Foton Lovol Chairman Wang Guimin said at the Bauma show.

Combined overseas sales of the company, which also makes agriculture equipment and vehicles, surged 214 percent to nearly 25,000 units in the January-July period this year despite a global slowdown. Overseas sales value totaled US$167 million during the period. Major orders completed this year included 60 excavators exported to Myanmar and 8,000 tractors sold to Mongolia.

Wang said Foton Lovol is eyeing the mid-market segment in its global expansion and will keep investing in more localized research and distribution networks in overseas markets. It opened R&D centers in Europe and Japan last year.

Metso establishes joint venture with LiuGong Group

Finnish engineering group Metso Corp is boosting its presence in China by establishing a joint venture with LiuGong Group Corp.

The 50-50 joint venture will develop track-mounted crushing and screening equipment, the companies announced at Bauma. The venture will combine Metso's know-how with LiuGong's extensive distribution resources and manufacturing capabilities in China.

Metso also said it will acquire a 75 percent stake in Shaoguan, Guangdong Province-based Shaorui Heavy Industries Ltd, a mid-market crushing and screening equipment maker.

The value of the investments was not disclosed.

"In the longer term, both of these investments will naturally expand the installed base of Metso crushers in China, providing future service potential," said Andrew Benko, president for mining and construction of Metso.

Parker Hannifin still bullish on China prospects

Parker Hannifin Corp, a provider of motion and control technology to the machinery industry, said it is confident about its business prospects, although an increasing number of Chinese machinery manufacturers have started to extend their own industrial chains.

One example is Xuzhou Construction Machinery Group's acquisition last year of two European hydraulic valve and system manufacturers that were formerly Xuzhou's suppliers.

"We respect and understand large firms becoming larger and more sophisticated through vertical integration," Steven Ong, managing director of Parker Hannifin's China sector, said on the sidelines of Bauma. "We also understand the integration will happen for some parts with economics of scale, but not all parts.

"China customers still need Parker as a system solution provider and specialized, multi-product supplier," he added. "Actually, we are helping our customers to improve their productivity and profitability."

Caterpillar Inc is a major player in terms of vertical integration and also is one of Parker's biggest customers.