CHINA'S construction machinery market may not repeat this year's explosive growth as the government's infrastructure-focused stimulus package fades and policy tightening starts to curb building activities.

However, the sector may still more than double in the next five years on relatively strong fixed-asset investment and as domestic companies seize a bigger share of international markets by enhancing their research capabilities, Shanghai Daily learned at bauma China 2010, a leading construction machinery industry fair that ends today in Shanghai.

The demand for construction machinery, such as excavators, loaders and cranes, during China's 12th Five-Year Plan (2011-2015) is expected to remain strong amid government pledges to improve railways, roads and other infrastructure.

Spending in that sector is expected to grow at an annual rate of about 20 percent, according to Qi Jun, chairman of the China Construction Machinery Association. About 85 percent of the investment will go into urban areas.

Urban fixed-asset investment in China grew 24.4 percent in the first 10 months, slowing slightly from a 24.5 percent rise in the January-September period, according to the National Bureau of Statistics.

Qi, speaking at the trade show, said details of how the new five-year plan will affect the construction machinery sector will be revealed next month. The plan targets annual domestic sales in the industry of 900 billion yuan (US$135 billion) by 2015.

That would be more than double the 400 billion yuan expected this year, according to Qi.

But growth is set to slow.

Sales seen to slow

China in late 2008 unveiled a massive 4 trillion yuan infrastructure-focused stimulus package to deal with the global financial crisis. That fired up the construction machinery industry. Now the government is easing back on stimulus and tightening lending to address inflation and a bubble in the property market. Construction activity is expected to ease off, too.

Zhou Xiqiang, assistant to the president at Xiamen XGMA Machinery Co, China's third-largest loader supplier, said loader sales in the China market may increase only 5 percent next year, though the Shanghai-listed company itself aims to increase sales by 20 percent.

Loader sales in the country in the first nine months surged 60 percent from a year earlier to 167,409 units, while excavator sales jumped 83 percent to 125,630, according to the machinery association.

Kim Dong-chul, head of the Chinese division of South Korea's Doosan Infracore Co, said he agreed that overall market growth will slow but said the deceleration won't be dramatic enough to cause concern.

"We still expect between 15 percent and 20 percent growth in China's excavator market for 2011," he said in an interview.

Doosan ranks No. 2 in terms of excavator sales in China in the first nine months of this year. It aims to sell 22,000 excavators in China in 2010, Kim said.

Some analysts and investors feared a worse turn of events in the second half of this year and into 2011.

In an August report, Goldman Sachs Gao Hua Securities analyst Lu Tian said some investors are expecting up to a 20 percent decline in construction machinery sales in 2011.

"It is too pessimistic to assume a negative growth rate," he wrote then, adding that year-on-year declines in the second half and in 2011 are very unlikely.

Lu cited China's ongoing investment in railways, which calls for huge spending in the second half according to the plan, and continued policy support for other infrastructure spending.

Foreign confidence

"China should continue to spend on infrastructure as many of the projects are based on sensible economic returns," Lu said. "There was a shortfall in infrastructure building prior to the previous economic stimulus."

Sweden's Volvo Construction Equipment also voiced confidence in the China market.

At a media briefing at bauma China 2010, President and CEO Olof Persson pointed to a US$100 million-plus investment program focused on emerging markets. For China alone, the company will build a US$30 million technology center in Jinan, Shandong Province, and invest US$50 million to expand its facility in Linyi, also in the eastern province.

"Volvo is well positioned, both in China and the rest of Asia, to capitalize on the huge market opportunities and growth potential," Persson said, adding that a dual-brand approach in China offers a unique advantage to meet local demand in the country.

In 2007, Volvo acquired Chinese wheel-loader maker Shandong Lingong Construction Machinery Co.

Meanwhile, the association's Qi said China will become a main construction machinery exporter. Exports may reach US$20 billion by 2015, accounting for a 10th of the international market, he said.

Need for more R&D

However, more research work is needed for domestic companies to venture overseas.

"One main problem facing Chinese exporters is that sometimes our products don't meet stricter emission standards in markets such as Europe and North America," Xiamen XGMA's Zhou said.

"Domestic companies need to do more in research and development, and that can be accomplished, in part, by importing foreign technologies and components," Zhou said after the company signed a deal at the trade show with US manufacturer Eaton Corp to buy differentials for its loaders. The devices help improve fuel economy.

China is likely to introduce favorable policies to support innovation and technology advancement to make the construction machinery products more environmentally friendly, the China Construction Machinery Association said.

Robin Mackness, a product strategy manager of Perkins Engines Co, said it's crucial for governments around the world to develop preferential policies to encourage more energy-efficiency products, such as hybrid engines for the construction machinery industry. That cannot necessarily be achieved by placing the burden of increased capital costs for manufacturers and users, he said.

With tighter environmental regulation and enhanced research and development, a new area for competition will emerge in the construction machinery industry, according to Doosan's Kim.

Parker Seeks To Lift China Sales to US$1b in 3-5 Years

Parker Hannifin Corp, a supplier of China's landmark C919 passenger plane, said it's aiming to boost China sales to US$1 billion in the next three to five years.

Steven Ong, China managing director for the US manufacturer of motion and control technologies, said that will account for about 7 percent of Parker's total sales by then. China sales now stand at US$600 million, or about 5 percent.

Parker supplies fuel, hydraulic and flight control systems to C919, a Chinese competitor to Airbus and Boeing planes, and also is involved in China's high-speed railway, wind power and mining equipment markets.

"The market is growing very strongly," Ong said in an interview at bauma China 2010 industry show.

Parker will invest US$100 million in China in the next three to five years to expand manufacturing and engineering capabilities, he said. Another 300 engineers are expected to be employed in China.

Parker's Asia-Pacific head, Yoon "Michael" Chung, said his company has signed a letter of intent with Aviation Industry Corp of China to form a joint venture for the development of hydraulic and fuel systems.

AVIC is a shareholder of COMAC, which makes the C919.