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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

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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- Despite such a diversified portfolio, revenue sources are sion plan. Also, it is the fi rst Chinese construction machinery

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XCMG, Sany, Zoomlion Revenue Mix Comparison (%, H1 and enter the top fi ve global construction machinery compa- 2010) nies. For its part, Sany plans to scale up rapidly to achieve Mechanical Concrete Excavators these numbers as soon as 2012. To accomplish this, Sany is Machinery Scrapers building plants in overseas markets with great potential such Environmental Crane Machinery Compaction as Indonesia, North African countries and South Africa, a stra- Machinery tegic step that will open new channels to market its prod- Road and Piling ucts. Zoomlion is following similar tactics and expanding Machinery Others quickly to acquire brands, technology and distribution 100 7% 6% 9% channels, with a keen focus on emerging markets. Similarly, 4% XCMG recently announced the acquisition of two European 12% 20% 3% suppliers, marking its fi rst international acquisitions aimed 80 3% 12% at boosting its value chain and extending its technological 10% capabilities in key component production. 60 12% 37% China’s three leading construction machinery manufacturers seem well placed to achieve these goals, yet each of them still 40 have much potential to improve their technology. To be sure, 69% to enhance their competitive position, Chinese machinery manufacturers are constantly upgrading their technological 20 52% 44% capabilities and focusing on technical innovation, but they still have some ground to cover before they start taking on the world leaders. That said, these fi rms have demonstrated 0 a remarkable ability to incorporate technology and quickly XCMG Sany Zoomlion Source: CCMA; Bloomberg adapt. As a case in point, Sany invented the fi rst 66-metre truck-mounted concrete pump in the world. player to set up factories in India and the US, where it recently opened a USD 60 million assembly plant which in August Chinese construction machinery manufacturers are set to 2011 started assembling trucks mounted with concrete- become some of the largest benefi ciaries of the infrastruc- pumping equipment. XCMG, China's largest construction ture boom in emerging markets where competitive prices are machinery maker, has opted to cooperate with foreign capital key, and with improving technology and evolving interna- and foster close partnerships with overseas dealers. The tional expansion plans, the likes of XCMG, Sany and Zoomlion group has already established close cooperation with nearly are gearing up for bigger challenges. 100 dealers who help sell its products all over the world, but most notably in emerging markets such as Indonesia, Brazil Ankit Khaitan, Consultant and Russia. [email protected]

Among these key differences, there is one commonality that exists in the internationalisation strategy of all three of China’s major machinery manufacturers - they have been aggressively marketing their product overseas though new distributing channels with a core focus on emerging markets, namely Brazil, Russia, India and Africa. Emerging markets are sweet spots for these companies because it is diffi cult to access developed US and European markets where dominant and established players, such as Caterpillar, emphasise their value-added after sales services. Emerging markets, on the other hand, are more price sensitive, and prices of machinery equipment from Chinese manufactures are typically 15-20% below foreign competitors, providing buyers in emerging markets with a considerable overall cost saving. Another important reason is that, like China, these countries are experiencing a similar urbanisation process and are conse- quently investing a lot towards infrastructure improvement, providing Chinese enterprises a potential market to tap into.

Reaching higher: The years ahead

XCMG, Zoomlion and Sany have revealed their sales targets for the 12th Five Year Plan period (2011-15). XCMG and Zoomlion aim to achieve USD 20 billion each in sales by 2015

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