“Sluggish demand, industry contraction, overcapacity, inventory backlog, increased risks, and intensified competition”—these are the six key words common to the 2013 annual reports of China's A-share listed construction machinery companies.
　　Following the overall decline in performance in 2012, the “face” of China's construction machinery industry in 2013 looked even worse: the top-ranked Zoomlion had revenue of 38.542 billion yuan, down 19.82% year-on-year, and net profit of 3.839 billion yuan, down 47.63%; Sany Heavy Industry followed closely with revenue of 37.328 billion yuan, down 20.29% year-on-year, and net profit of 2.904 billion yuan, down 48.94%.
　　Former “leader” XCMG Machinery has now fallen to third place, with revenue of 26.995 billion yuan, down 16.12% year-on-year, and net profit of 1.508 billion yuan, down 38.11%; companies such as Shantui and Changlin suffered larger losses, and XGMA even reported a huge loss of 589 million yuan.
　　While the market is filled with lamentations, industry competition is intensifying. On April 2, the Excavator Branch of the China Construction Machinery Association unprecedentedly issued a “Warning Letter on Unfair Market Competition in China's Excavation Machinery Industry” (hereinafter referred to as the “Unfair Competition Warning Letter”), stating: “Some leading manufacturing enterprises have adopted sales policies of price cuts, extended warranty periods, and low down payments, showing a tendency toward excessive competition, seriously disrupting market order, increasing the overall operational risk of the industry, and affecting the stable, rational, and orderly development of China's excavation machinery industry.”
　　After passing through the “golden 20 years” of rapid growth, China's construction machinery seems to have entered an era of “cutthroat competition.”
　　Severe overcapacity, yet companies continue to expand production
　　According to statistics from the China Construction Machinery Association, by the end of 2012, the保有量 (ownership) of major construction machinery equipment in China was approximately 5.61 million to 6.08 million units, of which excavators accounted for 1.341 million to 1.453 million units. “Chinese excavator manufacturers have a planned capacity of about 600,000 units, and the current national excavator ownership has exceeded 1.6 million units,” Han Xuesong, honorary president of the association, told China Economic Weekly.
　　Data shows that in 2013, China's total excavator sales were 114,700 units, basically flat with the past two years. From January to April 2014, domestic excavator sales totaled 34,000 units, and full-year sales are expected to be 120,000 units. Industry insiders estimate that if excavator manufacturers do not add new capacity, current production can meet market demand for more than four years.
　　The same is true for concrete machinery. Chen Runyu, honorary president of the Concrete Machinery Branch of the China Construction Machinery Association, publicly warned in early 2013, “If China's concrete machinery industry does not produce new products for three years, it can still meet market demand.”
　　What is “dazzling” is that the production capacity of market leaders continues to surge. In June 2013, Sany Heavy Industry's excavator base in Lingang, Shanghai, was completed with an annual capacity of 40,000 units; in March 2014, Caterpillar, the world's largest construction machinery manufacturer, officially put into production large excavators in Xuzhou, Jiangsu, making it its largest excavator manufacturing center globally. Caterpillar Chairman Douglas Oberhelman told China Economic Weekly, “The company currently has 17 manufacturing bases in China, with another 9 under construction, indicating that we will continue to expand production capacity in China, demonstrating confidence in the Chinese market.”
　　Accounts receivable surge
　　Frequent customer defaults
　　To digest inventory and grab market share, some companies, on the basis of “credit sales” such as bank mortgages, installment payments, and financial leasing, have repeatedly lowered down payment ratios to promote sales.
　　A senior executive of Sunward Intelligent said, “Before 2008, the down payment ratio in the construction machinery industry was generally around 30%. After the emergence of ‘zero down payment’ in 2011, Caterpillar held firm at around 20% for a period, but now even 10% down payment is being offered.”
　　The price war is intensifying. According to China Economic Weekly, in March this year, a construction machinery company in Fujian sold a 22-ton excavator originally priced at over 800,000 yuan for 595,000 yuan. Subsequently, on April 2, the “Unfair Competition Warning Letter” was sent from the Excavator Branch of the China Construction Machinery Association to relevant companies.
　　Along with the above promotional methods, accounts receivable of construction machinery companies remain high. According to China Economic Weekly statistics, in 2013, the total accounts receivable of 14 A-share listed construction machinery companies nationwide was 81.725 billion yuan, accounting for 54.40% of total operating revenue, with companies such as Hebei Xuanhua, Sunward Intelligent, and XCMG Machinery exceeding 70%.
　　Swollen and bloated accounts receivable have brought difficulties to the normal operations of construction machinery companies, even endangering corporate safety. “Since 2012, the average customer default rate in the industry has exceeded 25%,” revealed Qi Jun, president of the China Construction Machinery Association.
　　XGMA stated in its 2013 annual report that the scale of accounts receivable has increased, profitability has declined, and the operating environment continues to deteriorate. Liugong [-0.16% Funds Research Report] frankly admitted in its 2013 annual report that insufficient commencement of construction-related industries, and some customers' declining business income and lack of funds, led to an increase in various default and overdue payments in the industry's credit sales, resulting in related legal proceedings.
　　Jifeng Agricultural Machinery, whose main business was agricultural machinery, entered the construction machinery industry with great fanfare in 2011, but in 2013 suffered a loss of 144 million yuan. The company directly stated that due to end-user defaults, the company assumed the repurchase obligation for construction machinery products, which severely eroded the profits of its main business segment.
　　Against the backdrop of years of global economic slowdown, numerous domestic challenges, and increasing overdue payment defaults in the industry, construction machinery manufacturers have entered an era of “mass debt collection.” “Mainstream end-users or agents basically will not purchase products of the same brand—do you breach your contract or his?” A vice president of a well-known industry company said bluntly about corporate debt collection, “Strike first to gain the upper hand, or suffer later!”
　　Layoffs and production cuts fail to break through, vicious competition continues
　　As the overall risk of the construction machinery industry approaches the brink of losing control, many companies have begun to cut losses and survive.
　　Layoffs are one of the most effective methods. Since 2012, companies including Sany Heavy Industry have been rumored to be significantly cutting salaries or laying off employees through methods such as staff optimization, competitive job placement, waiting for posts, and furloughs. Layoffs are a sensitive matter, and relevant companies remain tight-lipped. Annual reports show that XGMA had 6,257 employees in 2001, but 4,923 in 2013, a decrease of 21.32%; Yuchai Heavy Industry, Zoomlion, XCMG Machinery, and most other companies all showed varying degrees of decline.
　　Some companies chose to suspend production, reduce production, or scale back investment. In August 2010, Sunward Intelligent established a northern R&D and manufacturing base in Tianjin with a total investment of about 4.5 billion yuan. In December 2012, Sunward Intelligent published an announcement denying rumors of production suspension at the Tianjin plant. According to China Economic Weekly, Sunward Intelligent adjusted its investment scale in Tianjin, reducing the originally planned 600 million yuan investment in the first phase to over 400 million yuan. In 2013, Tianjin Sunward achieved operating revenue of 42 million yuan and a net profit of -21 million yuan.
　　Phrases like “strengthening the full line of products against the trend” also appeared in the 2013 financial reports of many listed companies. Although Sany Heavy Industry and Zoomlion occupy more than 75% of the concrete machinery market share, XCMG Machinery, Shantui, XGMA, Foton Heavy Industry, and others have joined the competition in the concrete machinery market; Liugong hopes to cultivate new businesses such as forklifts and bulldozers while stabilizing its advantages in loaders and excavators; XGMA has proposed entering new fields such as forklifts, shield tunneling machines, and road machinery.
　　In an industry trough with no bottom in sight, the past “full industry chain” success models of Zoomlion and Sany Heavy Industry seem to have dragged some companies to the starting line of being small but comprehensive. Yan Wei, an analyst at Guotai Junan, believes, “The overlap among construction machinery companies is already very high, and blind expansion has affected industry safety.”
　　After more than 20 years of global expansion, the Sany Group (controlling shareholder of Sany Heavy Industry), in dealing with the chaotic industry competition, has chosen to reduce costs, control risks, and at the same time break away from dependence on construction machinery and forcefully enter marine machinery. Zoomlion, on the other hand, plans its future industrial landscape into five major sectors: construction machinery, agricultural machinery, heavy trucks, environmental industry, and financial services. Zhan Chunxin, chairman of Zoomlion, said in an interview with China Economic Weekly, “(We) want to become a world-class enterprise in the equipment manufacturing industry, and must transform and upgrade, climb this ‘slope’ to the high end of the global value chain, and overcome this ‘hurdle’ of core technology.”
　　The irrational competition among Chinese construction machinery companies has given international giants an opportunity. At a time when the global economic situation is still uncertain, in April this year, International Construction magazine announced that in 2013, the sales of the world's 50 largest construction equipment manufacturers fell 10% year-on-year, and Caterpillar's global sales also fell 16% year-on-year, but its sales revenue in China increased 24.9% year-on-year.
　　In 2013, the total revenue of China's 14 listed construction machinery companies was 150.2 billion yuan (approximately 24.1 billion USD), roughly equivalent to Caterpillar's construction machinery segment. In 2013, Caterpillar's full-year revenue was 55.66 billion USD, with the construction machinery segment accounting for less than half.
　　Caterpillar Chairman Douglas Oberhelman attributed the excellent performance in China to the success of the team, R&D quality, and distribution model. However, the company's price reduction strategy clearly contributed more to its growth in China. In 2013, Caterpillar launched the new 320D2GC excavator, with an end-market price of less than 1 million yuan, while the traditional 320D hydraulic excavator was basically between 1.1 million and 1.2 million yuan, giving it a significant competitive advantage.
　　Regrettably, whether the industry was developing rapidly or entering a downturn, for decades, a multi-level, complementary strategic alliance linked by relational capital has not formed within the domestic construction machinery industry. There has been no phased cooperation in the value chain in specific fields, specific markets, or in R&D, production, and sales. The vicious competition continues.
　　“On the one hand, it is necessary to achieve balanced development horizontally in the industrial chain, focus on cultivating a group of strong, refined, and specialized small and medium-sized enterprises, increase effective investment in R&D and industrialization of key components, and fill gaps in the industrial chain; on the other hand, we must adhere to the overall idea of co-creating and sharing achievements in large equipment manufacturing, so that common technologies benefit all,” suggested Zhan Chunxin. He proposed using national capital as equity, following market principles, formulating preferential policies, and encouraging and supporting suitable enterprises, research institutes, and universities to form cross-industry key and common technology R&D platforms and alliances, to avoid self-destruction and enhance industry competitiveness.