Alberto Pagliarini, Osservatorio Asia SC
During the downturn of 2008-09, China stood out as the bright spot among major economies, contributing to over 50 per cent of global growth in 2009 driven by the RMB 4Trillion stimulus package and by a surge in bank lending (equal to an 87% expansion in M2 money supply since January 2008). As the investments in property, mining and infrastructure got under way, Chinese growth has gradually become less reliant on the contribution of trade while the proportion of the country’s exports destined for the US and the eurozone has declined.
Driven by Fixed Asset Investments (FAI) in property, mining and infrastructure during the past few years, many machinery companies have benefited from the construction machinery sector’s strong growth. Companies like Zoomlion, Sany Heavy, Lonking, Liugong, etc. have grown tremendously over the last decade to become globally recognized names together with the likes of Caterpillar, Komatsu, Case New Holland and Hitachi.
Lately, the acceleration of inflation has driven the Chinese central bank to restrict credit (through a combination of Reserve Requirement Ratios (RRR) and interest rates hikes while, at the same time, most of the projects associated with the RMB 4Trillion stimulus package have passed their early stage (during which equipment procurement is concentrated). The combination of these two factors has created a slow-down in the growth of construction machinery sales in China during 2Q2011 (-31% Q-o-Q growth in sales of excavator, 0% Q-o-Q growth in sales of wheel-loaders; a far cry from the +71% Y-o-Y growth in sales of excavators or the +52% Y-o-Y growth in sales of wheel-loaders in 2010).
The consensus view is that machinery companies have passed the golden investment period due to the slowing growth rate of FAI investment over the long term, but many are nevertheless positive on the above-mentioned Chinese names for the following reasons:
1) Continued FAI growth driven by China’s relatively low urbanization, as its ratio remains below 50% versus that of developed countries at above 80%;
2) Improving mechanization rate due to rising labor cost and safety/environmental requirements;
3) Increasing pricing trend due to better product quality and brand image, and
4) Export growth potential.
On the FAI growth, the 12th 5-year plan actually increases the pace of investment in infrastructure allocating approx. RMB 15.5T to government-led infrastructure investment (65% higher than the RMB 9.4tr allocation of the 11th 5-year plan). The composition of the infrastructure investment though is expected to change: the number of road, bridge, railway and highway projects is expected to decrease while the number of subway, airport and water conservation projects is expected to increase. For example, there are only 10 cities with subways in China currently (Beijing, Tianjin, Shanghai, Guangzhou, Hangzhou, Nanjing, Shenzhen, Chengdu, Wuhan and Shenyang) and, in 2009, Beijing approved subway construction projects for 22 cities with investment of approx. RMB 880B Additionally, the 10 cities with existing subways are improving their networks (Beijing alone is expected to invest approx. RMB 260-280B in the 2011-15 period). The 12th 5-year plan also allocates approximately RMB 400Bn to build new airports (from 166 in 2010 to >230 in 2015) and expand existing ones. Additionally, RMB 4Trillion are expected to be spent for water conservation and irrigation management projects to ensure better flood prevention and drought alleviation to support agricultural development and to improve staple water supply not only for rural use but also for the urban population.
As far as real estate is concerned, the central government has taken the baton from the private sector. In fact, new private housing starts are forecast to decline by 10% YoY for 2011 to about 0.9bn sqm. At the same time, Beijing plans to build 36m units of affordable housing during the 12th 5-year plan period, with new-start targets of 10m units for both 2011 and 2012 (the start rate reached 50% in July, according to government sources).
As far as mechanization is concerned, two main factors are driving it: rising labor cost and safety/environmental requirements.
1.According to the latest survey by the All China Federation of Trade Unions, in 2009 there were 230MM migrant workers in China of which 40MM (17%) worked in construction. Interestingly, though, of the 230MM total migrant workers, 100MM were new generation (born after the ‘80s and above 16 years old): of this group, only 4% worked in construction (as they prefer jobs in manufacturing and services) vs. the 28% of old generation migrant workers who work in construction. This has driven wage increases (RMB12/day in 2000 became RMB120/day in 2010 and is expected to become RMB260/day in 2015)
2.Deadlines of urban maintenance projects have tightened due to rising traffic and concerns over civil disturbances (e.g. since the Beijing Olympics, projects requiring roads to be closed or partially blocked can only be conducted after midnight and for not more than 3 hours): this requires that construction crews work with more and more efficient equipment (from manual shovels to pneumatic hammers to hydraulic shovels/hammers)
3.Investment into mining expected to grow to increase mechanization and improve safety standard
Chinese brands of excavators already achieve higher price-points than Koreans (though they are still lower than Japanese and American) due to better product quality and brand image (though service and financing also come into the equation).
Finally, Chinese brands have just started to tackle the enormous export potential: Sany Heavy has built or is in the process of building plants in Brazil, India, Germany and the United States with the goal of establishing additional manufacturing facilities in Indonesia, Russia and Africa (Sany Heavy is currently in the process of listing its shares in Hong Kong: a portion of the proceeds will probably be dedicated to international expansion). Zoomlion also has a manufacturing presence in Italy (obtained through the 2008 acquisition of CIFA, one of the largest outbound acquisitions by a Chinese firm).
While most of the construction machinery segments in China are dominated by local companies, foreign brands (including Caterpillar, Komatsu, Hitachi, Doosan, Hyundai, etc.) still have a very large share of the excavator market (approx. 70% of sales volume). According to industry sources, Japanese’s high market share is due mainly to better control of technology, quality, and durability, while Korean brands have enjoyed strong market share gains as a result of their pricing and their after-sales service strategy. However, local brands are now becoming more aggressive in terms of sales promotion and the adoption of after-sales service strategies, also leading to recent market share gains (the local brands’ market share rose from 14% in 2005 to 30% in 2010 and is expected to reach 40% by 2012).