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China construction machinery industry to suffer through 2013

  • Staff Reporter
  • 2012-11-11
  • 12:02 (GMT+8)
Vehicles at Sany's factory in Changsha, Hunan. (Photo/Xinhua)

Vehicles at Sany's factory in Changsha, Hunan. (Photo/Xinhua)

The construction machinery industry in China, which has suffered from negative sales and net profit declines throughout 2012, is expected to undergo a stiff environment through Q3 2013. A fundamental recovery, however, is only expected to emerge with a stable real estate market.

Six major construction machinery companies in China, including Sany Group, Zoomlion Heavy Industry Science & Technology Development, LiuGong Machinery, XCMG, Shantui Construction Machinery and Xiamen XGMA Machiner, have posted an average sales drop of 4.8% in Q3 2012 with corresponding margins sharply dropping, according to figures revealed by the Beijing News.

Of different segments in the machinery industry, sales of excavation have posted declines in growth for 15 months straight through Q3 2012. Issues such as excess capacity, saturating demand and bad debt thus have been highlighted.

Among all, only two companies in the field have posted sales growth. For the first three quarters through Q3 2012, the figures show that only one construction machinery company was able to achieve growth in terms of both revenues and margins, the media noted. A higher inventory turnover cycle, extending account receivables cycle and lower cash flow are the three commonly found issues.

Capacity overexpansion and irrational competition among industry players have created a harder business environment in the construction machinery industry, said Zeng Guang An, president of LiuGong Machinery. The high inventory levels among all has made retailers suffer from a longer account receivables cycle. Deep-pocket players such as Sany Group and Zoomlion may overcome the mentioned issues but smaller scale players may be forced to quit the market in three to five years, he noted.

The macroeconomic trend that affects fixed-asset investment is said to be the major cause for the gloom in the construction machinery industry, said the Beijing News. Investment incentive in fixed assets is cooling down. Recalling the growth pattern, investment on a year-on-year basis was once 33% in the summer of 2009. But the rate has dropped to 20.5% for the first quarters of 2012.

The construction machinery industry enjoyed a boom in 2009, thanks to the economic-stimulus plans that have since then been put into effect. The net-profit growth pattern of Sany exactly reflects the initiatives. The company posted both negative profit and negative net profit growth through Q3 2012. In contrast, it posted a year-on-year sales growth of 20%, 106% and 49.5%, respectively, in 2009, 2010 and 2011. Corresponding net profit growth is 59%, 186% and 54%. A Similar pattern is also found among fellow construction companies, such as in the excavation business.

Demand for construction machinery should regain growth momentum in the long run as more rural cities in China plan to advance their infrastructure to town/city standards, according to many investors as cited by the Beijing News. It is expected that construction activity will stay vibrant through 2020. As more construction projects become reliant on machinery, the trend will boost the corresponding equipment demand.

Analysts, however, said a fundamental industry recovery yet has to arrive. A stabilized real-estate market trend is the underlying backbone for a real recovery, the analysts commented. Among the key construction machinery companies, Sany Group expects the industry to resume recovery in Q3 2013 amid urgent demand for highway, airport and wastewater treatment, according to company chairman Xiang Wen Po. It is for sure that more investments in these segments will be essential in the coming two to three decades, he remarked.

References:

Xiang Wen Po 向文波

Zeng Guang An 曾光安

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