Letter From China: Watch Out, They're Coming - Global Perspective
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Letter From China: Watch Out, They're Coming

By Frank Manfredi

Article Date: 10-01-2009
Copyright(C) 2009 Associated Equipment Distributors. All Rights Reserved.


Benefiting from a swifter and more effective stimulus turnaround, Chinese equipment manufactures could lose some momentum in North America thanks to emissions regulations and dealer consolidation.

About every 10 years or so, economic and political pundits predict the demise of the U.S. In the ’70s it was the missile gap. In the ’80s it was thought the U.S. was at risk of “imperial overstretch” and would collapse. The ’90s was the Japanese threat – they might end up owning the whole U.S. including Pebble Beach, Rochefeller Center and maybe even all of California. Because of the current economic crisis there are fresh predictions of the U.S. decline, especially linked to China’s emergence as an economic powerhouse.

What are missing from the debate are facts.

Take a look at a few facts: At $14.3 trillion, the U.S. GDP is three times as much as number two, Japan. Per capita income at $47,000 is the highest of any country. Our military spending at $607 billion is far greater than the next nine countries combined. Of the world’s top 20 universities, all but three are American. The U.S. dollar is the reserve currency for 64 percent of all foreign exchange held by other countries.

I traveled to China recently to find out how much of a threat its construction machinery manufacturers pose to U.S. companies. My conclusion: Watch out, they’re on the way with world class products, but can they find distributors to sell them?

I had the privilege of speaking to the Construction Machinery Association Information Committee Conference of the Chinese Construction Manufacturers Association (CCMA) in Changsha, Hunan Province, China, during the end of August.

Changsha
is the home to three of China’s construction machinery manufacturers: Sunward, SANY and Zoomlion. During the CCMA meeting, attendees were entertained with plant tours of each of the companies. I enjoy plant tours, which might sound strange – for most people it’s a matter of “seen one, seen them all.” But I’ve found that I learn a lot about a company by walking around their manufacturing plants. SANY’s plant resembles an aircraft manufacturing factory – immaculate floor and working surfaces, lots of light and a well-organized concrete pump assembly area.

Sunward, a company founded by a university professor, exudes the latest lean manufacturing techniques. I think the company’s patented static pile driver has a lot of potential applications, particularly in cities here where vibration from conventional pile hammers would damage surrounding structures. The company celebrated its 10th anniversary while I was there. The Sunward product range has grown to include skid-steer loaders (a new product for China where labor is still relatively cheap), as well as compact and mid-range hydraulic excavators and telehandlers.

We also visited Zoomlion, one of the larger Chinese manufacturers, which employs more than 20,000. The company is most famous for its concrete pumps, but also manufactures large quantities of cranes, all kinds, as well as dozers, excavators, compaction equipment, asphalt paving equipment, etc.

A Bit More About China

China
is a complex society that has evolved over the past 5,000 years. The country has an official population of 1.3 billion people. The actual number is probably closer to 1.4 billion, one-fifth of the world’s total. Every year the country adds another 12 million. Although China’s land mass is roughly the same size as the U.S., it has one billion more people. In addition, its population is unevenly distributed, with 94 percent living in the south eastern part of the country. In the U.S., this skewed distribution would translate to nearly one billion people living east of the Mississippi River.

The country doesn’t have a share of the world’s resources that’s proportionate to its population. It only has 7 percent of the world’s arable land and fresh water, 3 percent of its forests and only 2 percent of its oil. And many of the resources the country does possess are located in places where there are no roads or railroads to transport them to processing plants. That’s why China has been importing vast amounts of resources.

The current government will celebrate its 60th anniversary in October. It’s a communist regime that 10 years ago decided to change to a market economy while still maintaining centralized control and planning. So far, the bureaucrats have been making all the right moves. Centralized planning and public ownership of a great deal of land and resources has allowed the government to stimulate its way through the current recession by spending massive amounts of money on high-speed rail links between cities and subways within its cities. The total spend over a 10-year period is supposed to be more than $600 billion.

I saw relative prosperity in most places I visited, yet there is an undercurrent of unrest among the people, with an estimated occurrence of 50,000 civil incidents per year that require police or troop intervention. The Muslim protest in Xinjiang, one of China’s western provinces, is an example. The seizure of land for railroad right-of-ways and to sell to housing developers for apartment construction is another example.

Chinese Construction Machinery

Construction machinery markets have stabilized for the most part. Sales of Chinese equipment dropped dramatically at the end of 2008, due mostly to a decline in exports. Exports have all but dried up and the slack has been taken up by domestic demand, so much so that monthly domestic sales of some equipment categories are almost back to normal. The table below illustrates retail sales for seven months January through July 2009.

The Chinese government recently lifted restrictions on public companies issuing stock. There has been a flurry of companies rushing to tap the public markets on the Hong Kong, Shanghai and Shenzhen stock exchanges. Look for many of these companies to appear in Western markets as they try to make up for the export business they lost in developing country markets.

XCMG, Liugong, Sunward, SANY and Zoomlion are already in the North American market to varying degrees. Look for more companies to enter and try out their products here. Fortunately for U.S. domestic manufacturers, the Tier III and Tier IV engine emission regulations will prevent the Chinese from importing inexpensive machines. By the time Chinese manufacturers add emission compliant engines to their products they will lose most of their price advantage. Furthermore, finding distributors in the U.S. has become very difficult as more and more consolidate or are taken over by the manufacturers they represent or their surrogates.

This is the third wave of Asian manufacturers coming onto the world market. The Japanese and Koreans were the first two. The Japanese benefited from an established network of trading companies and have been successful. The Koreans had to go it alone and have had varying degrees of success. There will undoubtedly be a large number of Chinese manufacturers that try to enter. Some will be more successful than others. It will be interesting to watch.
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