The sleeping giant stirs

12 September 2005

Two centuries ago Napoleon warned “Let China sleep, for when she awakes let the nations tremble.” Well China is awake, or at least awakening. Stuart Anderson explains the implications

For the first time in more than 20 years, last year saw major inflation in the price of cranes and most other products with a high steel content. The main reason? China gobbled up nearly 40% of the world’s steel and coke. As a result, the cost of steel went through the roof. China’s rocketing demand for concrete, rubber tyres, oil, etc is having a similar impact on the cost of these commodities. And there is no end in sight.

China is booming. Local spending on infrastructure and housing saw total Chinese construction investment grow from an annual rate of 4% in 1999 to 12% in 2003. In China’s 2002-2005 plan, construction investment is planned at $1,058 billion.

Scale of investment distorted

However, the gigantic scale of China’s investment is distorted. First, by the very low cost of labour – translated at between $350 and $1,000 per annum according to occupation. Secondly, by the very low level of investment per worker. And thirdly by the artificially low fixed exchange rate of the Chinese currency (RMB 8.11: $US), which makes the volume of investment appear much less than it should when converted into Dollars, Euro, or Yen.

It also makes Chinese products very cheap in foreign currencies. To a large degree, China is following the Japanese economic model of the 1960s and 1970s when the Bank of Japan held down the value of the Yen to foster export growth.

The most ‘modern’ fully-operational Chinese crane manufacturing plant is the Manitowoc-Potain tower crane plant a couple of hours drive west of Shanghai in the city of Zhangjiagang in Jiangsu Province. Since Potain’s first investment in the plant in 1995, it has been equipped with the original jigs and fixtures for the Topkit MC Series of top-slewing hammerhead tower cranes from 50 to 300tm capacity, and become the sole production source for these cranes.

Since becoming a 100% subsidiary of Potain in 2000 under the leadership of Eric Etchart, further investments have been made, and a brand new plant double the size of the existing one is being opened next year.

Because of investments in quality control, safety, and skills training, etc the cost of these Chinese ZJG Potain cranes is up to 50% higher than most of the other 100-plus Chinese tower crane manufacturers, and most Chinese buyers have little apparent grasp of the benefits of these kinds of investments. They won’t pay the premium, and consequently, the majority of ZJG Potains either go for export or to highly-prestigious domestic projects.

While Potain is building a new plant, Tadano has built one. Constructed in a joint-venture with Beijing Crane Works (BQ), the new plant near Beijing International Airport is being equipped with new machine tools imported from Japan, and has state-of-the-art paint facilities and an administrative building.

Acquired manufacturing rights

This plant will initially produce a mix of Beijing Crane Works truck cranes from 8t to 25t capacity mounted on local Dong Feng or First Auto Works (FAW) carriers plus new Tadano rough terrain and (mainly) truck cranes from 25t to 55t capacity. Since Tadano has recently acquired the manufacturing rights to the Nissan crane carrier designs, it can now, for the first time, manufacture complete truck cranes.

The likelihood is that over the next several years, BQ-Tadano will become the major, if not the sole, source for worldwide production of small-to-mid-size Tadano truck cranes. This has massive implications for the world crane market. Presently, a 50t Chinese telescopic truck crane costs the equivalent of $125-150,000 – less than half the cost of a new truck crane made in Japan or the US. No doubt, like the Chinese Potains, a new BQ-Tadano will carry a cost premium over domestic Chinese products, but nevertheless is likely to sell on world markets at a substantial discount over current Japanese truck cranes.

These moves made by Potain and Tadano have not escaped the attention of their competitors. Liebherr-Werk Biberach is now planning the local manufacture of tower cranes while rumours abound over Terex’s plans, following statements made by CEO Ron DeFeo at Bauma China signaling his company’s broadening interest in China (Terex dump trucks have been produced under a joint-venture in Outer Mongolia for almost 10 years, and production of hydraulic excavators based on the Atlas designs was recently added).

In addition, Japan’s Furukawa-Unic signed a joint-venture manufacturing agreement with China’s fourth-ranked truck crane maker Dongyue-Taian Hoisting Machinery Works during
2003 for the local manufacture of the
1t to 6t capacity Unic truck-mounted telescopic boom truck-loader cranes, while South Korea’s Kanglim signed a similar deal with truck crane maker Jinzhou Heavy Machinery.

Hottest topic in the crane business

Meanwhile on the lattice boom crane front, Hitachi-Sumitomo is entering the Chinese crane manufacturing industry, initially with its new 30t wagon crane, but no doubt the company will soon follow this with its crawler cranes.

However, the hottest topic in the crane business today concerns the future of China’s largest construction machinery manufacturer – XCMG – whose business dominates the eastern city of Xuzhou in Jiangsu Province.

XCMG is a state-owned company that has joint ventures with Caterpillar for hydraulic excavators and Liebherr for concrete mixer trucks. It is also China’s largest manufacturer of truck cranes, having produced about 4,500 units in 2004 – more than twice as many as its nearest rival, worldwide. XCMG got a lot of people, including some from Liebherr’s Ehingen plant, very excited with its crane display at the Bauma China last Autumn.

Several visitors, including those of an Australian delegation, at first mistook the XCMG cranes for Liebherrs. And they certainly can be excused for this.

It is true that back in 1995, XCMG and Liebherr-Werk Ehingen signed a license allowing XCMG to manufacture three models of Liebherr all terrain cranes including the original six-axle LTM 1160 160t AT, then 10-year old technology. That technology-transfer deal between the companies was years before Liebherr developed its current ‘Ovaloid’ rounded boom and ‘Telematic’ boom telescoping system.

But it was precisely that rounded boom design – or at least something very reminiscent of it – that greeted visitors to the XCMG crane display.

Government negotiations to sell

Speculation surrounding the future of XCMG emanates from the Chinese Government’s on-going negotiations to sell all or part of its largest construction machinery manufacturer, which achieved 2004 sales of RMB 17 billion (approximately US$2 billion). In these negotiations, the Chinese are being advised by JP Morgan Chase, and the likelihood is that a majority stake of XCMG will be sold to either the US private equity investment companies the Carlyle Group or Warburg Pincus, or to Caterpillar Inc.

The original field of six bidders has been narrowed down to these three, and the final deal could be valued at about $400 million with a decision expected within a couple of months. Caterpillar knows XCMG intimately, having enjoyed a joint-venture relationship with the firm since 1995, and presently jointly operates a 170,000 sq m excavator plant in Xuzhou.

Obviously, there is speculation that this could lead to the long-rumoured entry of Cat into the crane business. Although this will give the crane gossips of the world their most entertainment for years, and certainly cannot be ruled out, at this stage it appears that one of the private equity investment groups is more likely to be favoured. But, we shall see.

Recognises inward investment need

China recognises the need for inward investment and expertise and, for the most part, is very proactive in encouraging foreign ownership. In the area of truck cranes, this is somewhat more complicated than, say, for hydraulic excavators, wheel loaders or tower cranes. The reason is that the Chinese Government has long followed the post-World War II Japanese business model in restricting the number of manufacturers licensed to produce specialised over-the-road and off-road vehicles that share technology with vehicles capable of military application.

As a consequence, only a restricted number of China’s crane makers are licensed to produce their own crane carrier chassis – just like Tadano and Kato had to purchase Mitsubishi and Nissan carriers over all these years.

Like XCMG, China’s second largest maker of truck cranes, Puyuan (which was acquired by Zoomlion in 2003, but remains state-owned), is thus licensed.

As a consequence these two Government-owned companies are able to dominate the truck crane sector because they control the design and manufacture of the entire crane, and are able to build much larger size cranes than the smaller crane makers who are reliant upon the (state-owned) automotive/truck industry for their crane carriers.

As might be appreciated, in a state-run economy, the smaller crane makers do not always get what they want, when they want it from the truck producers.

In May 2004, the Chinese Government took drastic steps to avoid an over-heating of the economy – applying the brakes very hard to certain sectors of the domestic construction industry. Many building projects were brought to a standstill as supplies of concrete and steel were blocked by the government. Crane operators and other workers went to work every day, and still drew their pay, but no work was done. Although several sectors of the construction machinery business suffered a decline, demand for most types of crane continued to grow, albeit at a moderated rate.

Overall demand for all major varieties of locally-produced mobile crane increased 24.3% from 10,883 in 2003 to 13,521 units in 2004. However, growth was very strong in the first half year, and subsided quite dramatically in the second half. Overall, the strongest growth was in the lattice boom crawler crane sector with sales of new Chinese-made cranes increasing 73.2% from 123 units in 2003 to 213 units in 2004.

Imported crawler sales increased

Sales of imported crawler cranes (mainly used Japanese) increased 65.7% from 245 units in 2003 to 406 units in 2004. While the old-established Fushun Excavator Works remained the clear crawler crane market leader, competition intensified. XCMG, with its financial muscle and broad distribution, is benefiting from the ‘acquisition’ of a senior Fushun crane designer, while China’s leading privately held manufacturer of construction machinery – Sany – launched its first crawler cranes and drilling machines.

The second fastest growing sector of the Chinese crane market in 2004 was the rubber-tyred lattice boom port or wagon crane sector where sales increased 69% from 113 units in 2003 to 191 units in 2004. This is the sector addressed by Beijing Crane Works which, in the past, has produced a 25t (27.5 USt) 4x4 wheel drive lattice boom wagon crane to its own-design as well as a similar model based on licensed IHI designs.

However, these are now being joined by a new and much more modern 30t wagon crane introduced at Bauma China by Hitachi-Sumitomo, which has enjoyed great success in the past, selling its Japanese-produced lattice boom wagon cranes to China’s ports.

Demand for small telescopic truck-mounted cranes (i.e. small Japanese-style boom trucks mainly of 2t to 6t capacity) is still in its infancy, but nevertheless increased 43.9% from 1,070 in 2003 to 1,540 in 2004. Meanwhile, demand for full-size truck cranes increased 20.9% year-on-year reaching a record 11,577 units versus 9,578 in 2003.

However, demand in the second half of 2004 softened dramatically as government controls introduced in May began to have an impact.

As can be seen from Table 1, which charts monthly sales of truck cranes, demand during the first half of 2004 was running at an annualised rate of 15,300 units. For the second half demand had skidded to a rate of 7,850 i.e. almost by half.

Demand for larger-sized (50t and larger) truck cranes increased at a very robust rate of 59.5%, while demand for smaller truck cranes increased at only 18.9%. The 65 and 100-tonners from XCMG and Puyuan were new on the market, and it can be confidently predicted that demand for these classes will show even stronger growth in 2005. In this regard, for once, Puyuan is the market leader over XCMG.

Puyuan now makes China’s largest telescopic truck crane, of 300t capacity, but its extraordinarily high GVW and very short three-section main boom severely restrict its marketability. XCMG’s plunge into the all terrain sector certainly sent a shot across the bows of Europe’s AT producers, but may be a step too soon.

Service support in infancy

Certainly, China’s service support infrastructure and culture is in its infancy and, in most cases, more sales than service oriented. In such an environment, simple and reliable products are best. All terrain cranes, although appealing, do not fit this bill.

China’s crane makers are looking, albeit tentatively, at export markets. XCMG and Zoomlion-Puyuan exhibited at Bauma 2004 in Munich, and were back at ConExpo in Las Vegas earlier this year. XCMG has exported its first modern truck cranes to Australia – the Aussies are always alive to what appears to be a bargain.

It will be interesting to see how they stand up. But make no mistake, Chinese cranes will have a significant place in the markets of the world, sooner or later.

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