The warring cranes period16 January 2014
For a long time the Chinese lifting industry appeared to be an unstoppable force, and even a global financial crisis couldn’t halt its progress. However, in the last two years the market has begun to contract forcing many in the crane business to change their approach. The decline of the construction sector has caused problems for crane firms, whilst collapsed JVs, legal disputes and allegations of corruption involving some of China’s major manufacturers have reinforced previous criticisms of the economic environment. Zak Garner-Purkis went to this years BICES in Beijing to discover what’s really happening in the Chinese crane business.
The atmosphere at BICES 2013 in Beiijing was mixed, the show's colourful spectacles tempered by serious statements on balanced growth. Its attendees were positive but at the same time keen to emphasise that China's slowing crane market offered no space for complacency. Intense internal competition has meant that even in a market as large as China's no one takes anything for granted.
Much of the talk at the event was about how Chinese firms could broaden their income streams to protect themselves against any further domestic decreases. Overseas expansion is one method to balance the slowing market and is something the Chinese government is keen to encourage with sales tax cuts on transportation aimed at helping manufacturers to do so. Credit is another solution being explored by crane businesses, with many companies recognising the huge potential in offering Chinese SMEs easier access to credit.
Despite growth levels contracting in the past two years the crane market remains large enough to support new entrants. At BICES there were a noticeable number of new companies, as well as several established equipment manufacturers who had added a crane segment to their business.
The slowdown has not been ubiquitous across all crane segments. The traditionally high truck crane sales may be down, but many manufacturers spoke of booming loader sales and an improvement in all terrains. While the general constuction sector is contracting, fields such as wind energy are experiencing rapid growth.
"In the last two years the Chinese economy has been slowing down. This has affected all the manufacturers, not only the Chinese ones, it's a problem that has been felt across the board" says Liu Gong's president and vice chairman Zeng Guang'an. "It has been problematic for our customers in the last two years, they have had to pursue two strategies: the cutting back of expenses and reduction of their inventory."
Firms from other countries are also feeling the bite. Japanese manufacturer Tadano's sales and marketing director Seiji Ozawa said that they too have seen a slowdown in the last three years: "Between 2010-11 there was a peak in demand, it was about 35% down in 2012 and 30% down since January of 2013."
Jean-Noel Daguin, EVP of Manitowoc Cranes, China, says, "The tower crane market in China is down 10% in China from 2012 levels, but for ourselves we've increased sales over 30% in 2013 compared with the previous year. The small and medium sized models remain the most popular (for example our Potain MC 120) but we are seeing more interest in cranes of over 200tm.
"Our Potain cranes are prominent in their use in landmark high-rise projects in China, both commercial and residential. We are selling some larger capacity tower cranes and these are going to infrastructure projects.
"For mobile cranes, the market has been tough, down around 20% overall in 2013. Sales of our own imported AT and RT cranes are relatively low due to the high import duties and taxes imposed by the government. However we are enjoying success with our Grove GMK6300L, which is popular for its long 80 boom, and also the RT9130E and RT9150E rough-terrain cranes and these two high capacity models are popular with mining companies. For crawler cranes we're looking to large state-owned companies who have power and petrochem projects.
The broader economy
The reasons behind the construction slowdown are linked to the wider economic situation, a point that Zoomlion made at their BICES press conference. The manufacturer said it believed that the construction industry's growth could be linked to GDP and estimated that when GDP grew by 10% construction growth was 20%. However, when GDP growth dropped to less than 7% growth in construction could be flat or negative. Despite this Zoomlion said that due to the rapid expansion of recent years, even without high GDP growth there were still a significant number of sales, albeit not as high as in previous years. The company estimated that growth would dip slightly in 2013, but the forecast for 2014 year in macro economic terms was quite stable.
How companies respond to the evolving construction equipment market in China is critical, particularly as the contraction comes off the back of many years of increases. Liu Bin, general manager of Sichuan Changjiang engineering crane company (Sinomach) says: "10 years ago the Chinese crane market developed very fast, until 2011 when it began to go down. There is the possibility it could get harder and will take a while before it begins to increase again. More and more companies are producing cranes in China, but the market will develop steadily going forward, this means we need to focus on quality. The company has developed a new series of products with improved quality, we want these to help us increase our domestic market share and to expand abroad."
The markets Chinese manufacturers choose to expand into is more complex than it might first appear. Machines designed for domestic use are often incompatible with regulations in other parts of the world. Engines in particular restrict the countries a Chinese crane can be targeted at. This is compounded by a lack of distribution and service networks in other countries. Chinese firms are well aware of these obstacles and as overseas markets become increasingly important to them, building these networks is becoming a dominant part of their strategy.
Several geographic locations came up time and again when Chinese companies discussed overseas expansion. South East Asia was the most popular region because of its geographical proximity, growth potential and similarity to the Chinese market. Russia was another country frequently mentioned due to a perceived lack of local competition and its vast market potential. Brazil, South Africa, Turkey and the Middle East were also countries that attendees said they were planning on expanding to. One common trend is that these none of these markets have the same level of equipment restrictions compared to Western Europe or the US.
Understanding what machines to target the market with is still critical to any success. "The domestic truck crane market decreased on last year, but the overseas market increased, that's been the major difference. Next year we expect all the product sales to increase in the Russian market as well as South East Asia, particularly in Thailand," says Howard Da, general manager of the international trade department at Shenyang North Traffic. "As we have moved into new countries, we have had to analyse the different end users and strategise what the best approach will be. One difference we have to other Chinese firms is that we lack experience overseas. It's very important for Chinese companies to build their export potential, considering the current state of the domestic market."
Sinomach are also hoping that a close study of the requirements of other countries will help them succeed outside China, Sandbach general manager Liu Bin explains: "We plan to pay more attention to overseas markets such as India, Brazil, Russia and South East Asia. As a major company we look at different cranes and different capacities for different markets. For example in Russia the cranes need to be able to deal with bad weather conditions and require heating devices for the cold weather. The engines also have to meet with the European emission standards. The Russian market is large with a lot of potential, there are many projects being developed. Also the fact there isn't a large number of local manufacturers gives us a chance to develop there."
Credit where credit's due
In 2013 many companies in the lifting industry around the world demonstrated their improved financial situation by announcing details of new credit agreements and an expansion of leasing services. Chinese companies were no different: Zoomlion for instance used BICES to state their intentions relating to the leasing segment of the business. Su Min, vice-general manager of the mobile crane branch, describes the problems that are currently preventing investment: "The local market is fiercely competitive and this drives prices down. The end user is also faced with the problems of heavy competition and a low root price. These supply chain costs are transferred back to the manufacturer."
"We have four types of customers: Firstly there are the industrial clients, big companies and the government. These customers have large demands and no financing problems. Secondly, there are private companies who are largely in a good situation in terms of finance and investment. Then there are middle and small companies, for these businesses financing can be a problem, the end users' price is low and this drives down the amount that they can charge. We have to set up a finance policy with these type of firms in mind. It involves us borrowing from the bank and if we sell we are taking a risk. We must be careful, two years ago we ignored the problems, but in the future we must control the risk and not sell products in the way we have done in the past."
Finding the right partner
Despite the slowdown in construction, the Chinese market still has a huge demand for cranes. Many companies from around the world are attempting to get a share of it. Joint ventures are frequently the method international company's use to gain a foothold within the Chinese market and that is unlikely to change any time soon. It's something that Japanese manufacturer Kobelco believe will help the company to prosper in the market in the long term as Zhang Xiaohang the firm's general affair department manager says: "Without a JV in the country, cranes need to be imported incurring costs. A JV introduces the crane to the Chinese customer and the brand. Kobelco is all about quality, not sacrifice for cheaper prices."
"We established our JV in 2010, in September of 2011 we began work on our factory in China, and we began selling machines in March 2012. The first model produced was the 260t crawler. We have sold 10 units since the production facility was established and we are looking currently to expand the capacity of the factory."
"When we build and develop these machines we insist on Japanese standards for quality and the environment. Chinese parts are used in the crane but at the moment there is currently a higher percentage of parts from Japan."
"It's a hard time for the whole construction industry in China. We are a new firm in the market, but our strategy is not to sell as many models as possible whatever the cost. We are looking to establish ourselves in the market and build the firm's reputation, making us stronger and stronger. There is not going to be a big increase in sales but we expect a steady year in 2014. We believe that the quality of our products will change people's preferences "
It's not just a choice of brand that Kobelco need to influence in the Chinese customer. It's also about convincing customers of the usability of its crawlers. Zhang Xiaohang says, "In China many years ago crawlers were rarely used in construction products. Gradually, however they are gaining acceptance. It can take a while to convince customers that it is better to use a crawler."
Not all international JV's have been as successful. In 2013, the Chinese government was slow to decide whether to approve a Manitowoc Shantui joint venture, which led to the Chinese manufacturer pulling out of the deal. The agreement would have seen the two companies building mobile cranes together and made Shantui the exclusive dealer of Grove all terrains and rough terrains sold in the country. Manitowoc explained that Shantui had said China's economic restructuring and the sharp decline in the construction machinery market had adversely impacted the Chinese firm, leading to them cancelling the arrangement. These problems also led to delays in obtaining the necessary governmental approvals for the joint venture.
War without bloodshed?
China has undergone huge economic changes over the last ten years. Despite this the economic environment is still a complex and sometimes difficult place to do business, for local businesses as much as for international firms. In the past year there have been numerous controversies involving construction equipment manufacturers that have attracted global media attention. Most recently was the case of Chen Yongzhou, an employee of the Guangdong-based New Express newspaper, who was arrested for making defamatory claims against Zoomlion. The newspaper took to its front page to demand his release, but following a televised confession in which Yongzhou admitted to writing "unverified and untrue stories" provided by a third party, the New Express used its front page again to issue an apology.
Zoomlion and Sany have been engaged in a variety of allegations and disputes stretching back to 2009. In July 2013 Zoomlion made an announcement to the Hong Kong stock market in reaction to the publication of two articles "by various on-line media in November 2012" described specifically as "Sany leaves Changsha, Liang Wen Geng's confession" and "The story behind Sany's move, commercial spy triggers the move of the headquarters."
The document refers to a number of different allegations which Zoomlion said had been levelled by Sany against them. They include the "2009 Spy Incident" regarding bribes along with the "2011 Spy incident" and "2012 Spy Incident" that concern hacked trade secrets. The announcement also refers to the 2010 "Kidnapping Incident" and the 2012 "Custom detention incident" that relate to the alleged attempted kidnapping and detention of Liang Zai Zhong, son of Liang Wen Geng (the chairman of Sany Heavy Industry).
Zoomlion's stock exchange announcement quotes an independent investigation which, it says, cleared the company of all involvement in the allegations against it. Sany was approached by email about the allegations prior to publication of this article, but has so far declined to comment.
One crane segment which is gaining serious traction in China is loader cranes. The potential in this sector was evident when one of the world's largest loader crane manufacturers Cargotec announced that it is had established a JV in China, starting the Sinotruk (Shandong) Hiab Equipment Company with the China National Heavy Duty Truck Company (CNHTC). At the JV's launch the Finnish manufacturer revealed that it was expecting double-digit growth in the total market for load handling equipment in China over the next years, driven by robust demand for new equipment and replacements, as well as greater efficiency in the infrastructure, industrial and property sectors. Cargotec estimated that existing market for truck-mounted cranes in China to be around 10,000 units, dominated by local manufacturers. Around 35,000 units were sold at the peak of the market in 2011.
Sany also see the opportunities that lie within the Chinese loader crane market and said that they would actively using JV partner Palfinger's experience in the sector to its advantage as vice general manager (Sany Cranes) Mr Tang explains: "We have two JV's relating to truck mounted cranes, one in China and another in Austria. The joint venture is Sany's first and gives us a chance to practice and learn from operating alongside foreign companies. The truck mounted crane sector is booming in China currently, with the sales of truck cranes down. Although we don't believe that these cranes are replacing the truck cranes, users are definitely seeing the advantage of having truck mounted cranes in their fleet. The truck-mounted crane provides certain benefits in terms of transportation. The cranes can lift and move at the same time, which a truck cannot, although we are talking about lower capacities than for truck cranes."
XCMG are another major Chinese company that is looking to capitalise on the loader crane market. Export manager Michael Chang says: "We have brought our newly developed 40t loader crane to BICES. The crane features a boom with eight sections. It is designed for both inside applications such as factory work, as well as outside tasks where maneuverability is essential. Currently it is only available on the Chinese market and is the largest truck mounted crane the company has produced. The sales in this product sector are booming in the Chinese market at the moment. A major reason for this is because in the last two years many logistics companies have seen the benefits of using loader cranes."
"When the time is right we will take the crane to other countries. A new division has been set up for selling truck mounted cranes, it is responsible for getting dealers in the South East Asia region as well as South Africa, Russia and Brazil".
The sector is also attracting business from new companies too. At BICES, new loader crane manufacturer Sunhunk were keen to take advantage of the trend. Anchuan Wang, assistant to the general manager explained the products at Sunhunk's stand: "We have brought two new products to BICES, our 12t and 6.3t loader cranes. We believe that these cranes can be used for almost every industry that involves transportation. The loader crane market is growing fast at this time in China, this type of machine is popular because larger machines sometimes have limited applications and the economy is not so good. Many factories also prefer to use smaller machinery, which is a trend we expect to continue."
Alongside Sunhunk were several other new crane manufacturers, all looking to secure a piece of China's crane market. Despite the established brands warnings of a slowdown, there is still enthusiasm amongst construction equipment manufacturers for crane products.
An interesting new player in the market is the CSR China South Locomotive group. The wholly state owned enterprise is the primary train locomotive industry manufacturer in the country and has now entered the crane market with a range of models. CSR's business representative overseas department Meg Qiuni, explained who they are targeting their cranes at: "Our company is looking to provide cranes for many sectors from the emergency sector to construction. The two machines we have brought to the show are designed to be used on large projects, construction as well as high speed bridges and so on. We have sold crawler cranes to Russia, but we mainly operate in the Chinese market".
"Our new models have been created from new research carried out this year. In China we have our own sales network. We have a separate sales agent overseas. Currently our position is stronger domestically than abroad. We have sold a lot in China because of the quality of the product, the sales have been well spread across a number of different Chinese cities where we have many salesmen and service people."
Another firm moving into the crane market is Beijing Jiuhong Heavy Industry Machinery. Their foreign trading manager Aries Li explained that offering cranes was about completing the range of products they offer: "Cranes are new to the company, we already make a range of industrial equipment and we were looking to complete the product range. We are looking at the construction industry with our new range of products. Our focus is the Chinese market primarily but we also are looking abroad."
Some new firms made their entry into the sector when it was considerably healthier. Manufacturer Sunward for example believe that there is a large enough market for them to continue offering the product. International sales company regional manager Middle East Allen Lai explains: "We have only been making cranes for around three years so we're relatively new to the market. We know there is a large demand for cranes and we hope to tap into that. The Chinese market has had a large demand for cranes, this year there was a change and the market was down. We believe next year will be better."
Where the Chinese lifting industry is headed is difficult to speculate. The market for cranes is undeniably massive and is attracting new business even when its major players say that it is contracting. The next few years will definitely be key in defining what direction the it will take. Overseas business may be one method to encourage growth, as might an expansion of financial services. The intense competition will need to be managed wisely as allegations and legal disputes do little to improve Chinese companies' global reputations. One thing is certain; the prominence that the Chinese market has gained in the last ten years is unlikely to be reversed.