In January 2020, the China Construction Machinery Association indicated that truck cranes, truck-mounted cranes, lifting work platforms, aerial work platforms, and zero-growth motor graders would experience growth; yet, in February, only graders increased by 3.7%. It wasn’t until the following month when a rebound was realized, with growth in heavy equipment categories including excavators, truck-mounted cranes, industrial vehicles, lifting work platforms, and aerial work platforms. By the end of March 2020, excavators increased by 11.6%, and lifting work platforms increased by 12.7%. In general, however, broad heavy equipment sales fell by an average of 14.1% year-over-year in this first quarter.
As a result of increasing efforts from the national and local governments to resume production of enterprise and construction projects, the overall situation in the second quarter is much better than the first. Sales in the first half of the year resulted in an initial decline, then a recovery. Domestic demand has relentlessly driven an increase in sales for China, while neutralizing the impact of the pandemic overseas. On the other hand, the export market for excavators is sluggish. Since March, the export of excavators dropped to approximately 5%, as compared to March 2019 when excavator exports reached 11.3%.
With the gradual improvement of the nationwide COVID-19 pandemic coupled with the implementation of a series of policies, regulations and systems issued by the relevant departments of the state and local governments, the majority of enterprises in the construction machinery industry chain are anticipating business stability and growth in the 2nd half of this year. In addition, it is estimated that domestic market demand will further increase in the second half. Industry experts predict China’s construction machinery industry revenue for 2020 to increase slightly as compared to 2019; the growth rate will decline by approximately 5 percentage points based on the original forecast of 7-8%, landing around 2-3% for the year.
The growth for specific segments (e.g., excavators) will be more robust than others. From observations in the market, the momentum of industrial output has sustained in part due to an increase in fiscal expenditures and investments tilted to the infrastructure construction. The growth rate of infrastructure investment is expected to accelerate, signaling opportunities in the last half of the year for excavators and other construction machinery.
DuckerFrontier recommends that Chinese market participants closely monitor industry dynamics and move to capture growth opportunities. This can be achieved through both understanding and reacting to shifts in customer needs/ unmet needs, competitive dynamics, and distribution network optimization. Finally, pricing should be considered as the market rebounds, and businesses should develop a pricing strategy in order to track competitors and ensure quick response.
Major domestic players forecast growth in the second quarter 2020
Chinese domestic OEMs enjoyed remarkable growth in recent years. According to CCMA, in 2019, domestic brands have 60% market share in the excavator market; through May 2020, companies like Sany and XCMG experienced top sales, ranking them first and the second with market shares of 24% and 17% respectively.
Many off-highway equipment OEMs announced price increases from April amidst rebounding domestic demand and the rising cost of imported components; an increase of 5-10%. However, due to the strong buying power and price negotiation during the pandemic, as well as increase sales pressure, many manufacturers have continue to offer preferential discounts to customers despite competitive pricing policy changes. Dealers continue to implement pricing increases; low-price competition leads to a distortion and prevents a sustainable development of the industry. Nevertheless, it’s challenging to carry-through with this philosophy due to the economic slowdown.
Domestic equipment OEMs are also investing in new product R&D to penetrate the mid-to-high end markets. Sany has announced an expanded product portfolio with a new series of models in the ultra-large excavator segment. The release of these models marks a new company milestone in delivering technological breakthroughs, which will further strengthen its market competitiveness and brand reputation in the large size machine product segment. Western brands used to have absolute advantage in this segment, however, are currently tracking the movements of domestic brands in order to develop market strategies accordingly.
Shortage of components provided by western suppliers during the COVID-19 lock-down has significantly impacted the production plan of OEMs in China and accelerated local sourcing. To fill the gap, more domestic parts suppliers are playing an active role in the supply chain, attempting to offer product substitutes to win business. In turn, this appears to have impacted investment within the industry; as of June 2020, more than 2,800 new companies entered the excavator industry, of which 851 were new entrants in April, an increase of 26.3% from March.
Other SOE OEMs, like XCMG, will reform its shareholder structure by attracting more capital from private sector and possibly foreign investment in a mixed ownership. The plan is to raise about CNY 15.7 billion in late June 2020. Should this occur, XCMG will obtain new and competitive resources from the market, and strategic investors will benefit from sustainable business growth. These investors with brand assets, technology, supply chain, and digitalization expertise will enhance the expansion of XCMG; currently the framework of state-owned enterprises restricts the company from further upgrading and optimizing.
International players in the market are recommended to track and understand the nuances of those reforms incurring in domestic OEM giants to be well prepared for current and future competition.
DuckerFrontier’s Heavy Equipment team continues to follow and analyze the key trends and impacting the industry, both during and post Covid-19 disruptions. Visit our Covid-19 Resource Hub for the latest insights and implications for global business, or contact us to connect with a team member.