The China Analyst Features 专题 Rising Stars: China’s Emerging Construction Machinery Manufacturers Buoyed by increasing demand, especially in emerging markets, China's construction machinery players have been actively enhancing their international reach and catching up with their foreign counterparts. China’s three leading companies in this sector are XCMG, Sany, and Zoomlion, and this article outlines the diff erent strategies adopted by these rising stars and their global expansion plans. By Ankit Khaitan tarting from a mere USD 1 billion worth of sales in 1999, Global Market Share of Construction Machinery Industry in China’s construction machinery industry saw a decade Terms of Sales Volume (2002 vs. 2009) of high growth with sales reaching USD 60 billion in North S China America Europe Japan Others 2010. This phenomenal growth in demand was fuelled by rapid growth in both the developed coastal areas of China 100 and more recently, inland areas. In developed areas, the 16% genesis of growth was local governments’ expansion of small 29% cities, while in inland China it was a growing market for infra- 80 10% structure and housing. Currently, for every 1% increase in the urbanisation rate, 13 million people move from rural areas to 4% cities, but this number still lags far behind that of developed 13% countries and the global average. The Chinese government 60 28% has set a clear target of achieving an urbanisation rate of 60% by 2020, indicating that China still has a long way to go in 22% this regard. 40 28% Another key demand driver for construction machinery is the strong growth in fi xed asset investments spurred mostly 20 by downstream segments, including infrastructure and 32% property investments. For instance, social housing, though 18% comparatively smaller investments, is signifi cant in construc- 0 tion project volume and substantially increases the need for 2002 2009 equipment. Additionally, demand from foreign markets has Source: CCMA; Off -Highway Research also grown, allowing China’s construction machinery exports to experience rapid growth in recent years. Together, these comprehensive production lines. In contrast, Zoomlion factors have bolstered the development of the construction is China’s second-largest, and the world’s tenth-largest, machinery industry in China, making it the world’s fastest- construction machinery manufacturer. It emerged out growing and third-largest market and catapulting the three of Changsha Construction Machinery Research Institute, largest players onto the world stage. a leading state-owned research institution focusing on construction machinery, effectively affording it a strong Beginnings competitive advantage. According to a report by Off -Highway Research (a consul- Consolidation and government support tancy specialising in the research and analysis of interna- tional construction), China’s share of the global construc- Though the industry in China is highly fragmented with over tion machinery market jumped from 18% in 2002 to 32% 900 companies vying for market share, a majority of them in 2009 in terms of sales volume (see chart above, right). only manufacture components or engage in sub-assembly China’s three leading pioneers in this regard are Sany Heavy due to the hefty upfront financial investments that are Industry, Zoomlion and XCMG, which have emerged as the required. In addition, intense competition between both three dominant manufacturers that together account for domestic and foreign participants as well as rising demand about 30% of the market in China, larger than the top three for improved and advanced technology have forced small foreign companies active in China (see chart on next page). operators to either be acquired by more established players Indeed, these three are now ranked in the top ten in terms of or simply exit the game. sales revenue globally. In fact, the large in-house companies have supplemented Out of these, Sany and XCMG only started operating in the organic growth and scaled up rapidly through consolida- early 1990s but quickly transformed themselves from being tion. In the past decade, Sany has acquired assets from its single product machinery companies to ones that boast parent company to expand its capabilities while Zoomlion 14 The Beijing Axis FeaturesFeatures 专题 The China Analyst Approximate Market Share of China's Construction balanced between its two largest segments, concrete and Machinery Industry (2010) crane machinery, contributing 43% and 34% to total revenue, Caterpillar Volvo XCMG Zoomlion respectively, in 2010 (see chart on next page). Komatsu Hitachi XGMA Other Chinese Sany leads the local market for truck mounted concrete Kobelco Sany Heavy Other Foreign pumps and full hydraulic rollers; its production of pump trucks is one of the best in the world. Compared to Zoomlion, it is less diverse and its most important segment, concrete, 10% 9% alone contributes more than 60% of its total sales revenue. 7% Nonetheless, after Sany acquired the excavator and truck 5% crane businesses from its parent, its level of business diver- 4% sification started closing in on Zoomlion’s, with product 32% 1% categories expanding to include concrete machinery, road 11% construction machinery, excavator, pile driving machinery, hoisting machinery and port machinery. 8% 3% XCMG is the world’s largest manufacturer of truck cranes, 11% Source: CCMA which account for most of its total revenue. The comprehen- sive line of products it off ers includes construction mobile has targeted third parties to scale up its product off erings. cranes, crawler cranes, wheel loaders, concrete boom pumps, For example, Zoomlion acquired Hunan Puyuan Construction piling rigs, aerial fi re trucks, asphalt pavers and cold milling Machinery's truck crane business and Zhongbiao’s environ- machines. mental and sanitation machinery business in 2003. Over the years, Chinese companies in various industries have This consolidation is being further encouraged by the successfully moved up the value chain by off ering a wide government, who is actively promoting consolidation in range of products and the construction machinery industry the industry to avoid disorderly competition among local is no diff erent. Foreign companies have historically served manufacturers. Furthermore, equipment manufacturing is the Chinese excavator market by leveraging their strong one of the seven strategic emerging industries identifi ed in expertise and precision quality. Yet according to CCMA data, the 12th Five Year Plan that the government will focus on so Chinese companies now control one-third of the global exca- as to foster the development of a sound market environment; vator market, up from 22% in 2006. Such strategic moves hence consolidation will be an ongoing trend in the industry have undeniably boosted their overall competitiveness and going forward. Chinese construction machinery manufac- allowed them to capture market share from their foreign turers are also aff orded tax breaks and other incentives from competitors in China and in other emerging markets. local Chinese governments, enabling them to take a long term view of the market rather than just focusing on short Going global – M&A and partnership term profi ts. The global presence of US-based Caterpillar and Japan's It is worth noting that foreign enterprises have had little Komatsu has been strong for decades as they began opportunity to compete against local competitors in this expanding abroad early on when growth in their domestic consolidation drive due to regulatory restrictions, and have markets slowed with urbanisation reaching a saturation been unable to acquire majority stakes in joint ventures with point. Following a similar strategy, Zoomlion, Sany and domestic fi rms. This has allowed local rivals to gather market XCMG have been encouraged to expand into foreign markets share from foreign companies and at the same time narrow because of their solid positions in the Chinese market, world- the capability and quality gap by integrating independent class products, sustainable low cost advantage and China’s enterprises’ abilities via strategic acquisitions. Moreover, expansive infrastructure projects. Sany in particular has led foreign enterprises have simply not been able to increase domestic equipment manufacturers in overseas expansion. production fast enough to meet rising demand, diluting their market shares. However, the three diff er in their overseas expansion strat- egies. Zoomlion focuses on a direct M&A route to expand, Diff erent specialisations integrating its costs and scaling its position in China while leveraging its target’s distribution network and technical The product portfolios of China’s three largest industry players capacities. CIFA, a global manufacturer based in Italy, was a mostly overlap, yet there is diversity in their product off erings very strategic acquisition for Zoomlion that strengthened the and this unique characteristic defi nes some of the dynamics latter's R&D capabilities and helped increase its global market in the industry. Zoomlion has the world's most diverse range share. In contrast, Sany has preferred to expand by building of products including concrete machinery, tower cranes, its own plants in foreign countries. For instance, Sany recently road and earthmoving machinery, environmental sanitation built research and development centres in Brazil (2010) and machinery, and bulk material transportation equipment. Germany (2009) as part of an ambitious international expan-