Chinese construction and mining machinery producers are exceptionally reliant on the local market with sales in China accounting for around 90% of revenue. In the last five years, Chinese manufacturers have been riding high on a booming domestic construction industry and managed to hold onto a fair part of the market from foreign production. To sustain its historic production value growth at an impressive 30% CAGR, sales to developed countries and the slowing Chinese construction industry will have to be, at least partly, replaced by sales to other developing countries.
Domestically produced machinery replaces imports
In 2012, Chinese construction and mining machinery production value stood at US$159 billion and was almost five times higher compared to the US, the former world leader in the industry. China’s urbanisation as well as infrastructure investments accelerated the demand for heavy machinery. This demand boost was completely satisfied by local production. Moreover, Chinese producers were able to significantly reduce foreign production penetration in the market, with imports accounting for less than 5% in 2012, down from 20% in 2003.
Weak spot: Exports
Exports’ share of Chinese machinery revenue is rather moderate; in 2012, exports accounted for just 10% of total product output, compared to 52% in the US and 59% in Germany. Current major export markets for Chinese production are the US, Russia and Japan. High saturation in the US and Japanese markets offers dim growth opportunities, while Russia has announced the development of the machinery industry as a strategic goal for modernisation of the country, which will lead to the promotion of local production. Therefore, in order to sustain growth, export channels have to be redirected towards developing countries in South East Asia, and Africa and the Middle East.
Where can high dependence on the construction industry lead?
The Chinese construction industry saw a growth slowdown from around 20% CAGR during 2007-2009 to around 10% CAGR in 2010-2012. As the industry is slowing, demand for machinery will also shrink. Already, in 2012, companies had to slow their production output. For instance, Caterpillar, the world’s largest producer of construction and mining equipment, has slowed production at its main Chinese excavator factory, including a 2-week shutdown in July 2012. Achieving similar to historic growth will demand a comprehensive rethink of the current sales strategies and diversification of the customer base. With such a strong domestic orientation, any economic issues in the internal market, especially in the construction industry, may cause drastic cutbacks for Chinese producers of construction and mining machinery.