Chronic problems affect the industry's health

       Earlier this year, the Excavator Branch of the China Construction Machinery Association issued a warning letter on improper market competition in China's excavator industry, stating: "Some leading manufacturers 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 risks of the industry, and affecting the stable, rational, and orderly development of China's excavator industry." Although this was only a warning letter issued by the Excavator Branch alone, it is highly representative of the entire domestic construction machinery market. It reflects, from one aspect, the intensity and disorder of competition in the entire industry market.

       According to authoritative statistics, from January to June this year, 29 excavator manufacturers in China's construction machinery market sold a total of 58,056 crawler excavators and 840 wheeled excavators. Among them, 43,214 hydraulic excavators were sold, down 12.3% compared with the same period in 2013; 14,842 mini excavators were sold, down 3.6% compared with the same period in 2013, a relatively small decline. Analysts believe that the market share of domestic brands in the hydraulic excavator market has declined, from 41.1% in 2013 to 38.6%, while the market share of foreign brands increased from 58.9% in the same period of 2013 to 61.4%; for mini excavators, the market share of foreign brands was 56.7%, and that of domestic brands was 43.2%, basically unchanged from the same period last year.

       In May this year, loader sales were 15,348 units, with a year-on-year decline of 19%, 4 percentage points larger than the 15% decline in April. Sales from January to May were 78,034 units, down 6% year-on-year, the lowest level since February 2013.

       The latest data released for June on loaders and bulldozers added to the gloomy atmosphere in the industry. Loader sales in June were 14,553 units, down 14% year-on-year; May was down 19% year-on-year; the first-half year-on-year decline was 8%, while Goldman Sachs forecasts an 18% decline for the full year of 2014. In June, bulldozer sales fell 31% year-on-year; May was down 25% year-on-year; year-to-date sales are down 12% year-on-year, while Goldman Sachs forecasts a 14% decline for the full year of 2014.

       Affected by the sluggish market, some enterprises have adopted irrational business and sales practices in order to survive, which has brought more shocks to the market and added more resistance to the industry's stabilization and recovery.

It is understood that some enterprises are continuing last year's trend of declining revenue, rising expenses, increasing receivables, difficulties in capital turnover, and declining profits. Some major enterprises, because their operating conditions do not match their scale, have high expenses of various kinds; coupled with continuously increasing costs and expenses, their operating costs and operating revenue have not declined in sync.

       The growth rate of enterprise accounts receivable remains high and is still increasing, indicating that the operating conditions of end users of construction machinery may not have improved, resulting in no improvement in the collection of payments by some dealers. The pressure on the construction machinery industry's exports to continue growing is also relatively great, requiring the government and enterprises to work together and focus on brands and services.

       Emission upgrades may increase pressure on enterprises

       As is well known, the National IV standard for diesel engines will be implemented on January 1 next year, and the National III standard will exit the market. This implementation of the National IV standard mainly applies to road machinery, while it is not mandatory for non-road machinery.

It is understood that China began implementing the National II standard for construction machinery in 2004, and to date, the National III standard has not yet been widely popularized. The emission standard generally implemented for engines in the construction machinery industry is the National II engine emission standard. As all sectors of society gradually attach importance to the atmospheric environment, and with the introduction of high-standard fuels, construction machinery emission standards are bound to be raised as well.

       To achieve energy conservation and emission reduction in construction machinery, the core technology lies in the engine. At present, most construction machinery manufacturers in the market purchase engines from engine manufacturers, and few develop their own. Most of these engine manufacturers are leaders in the engine industry and possess engine technologies that meet higher standards. Since the construction machinery industry is not yet required to upgrade to higher standards at this stage, most enterprises in the industry choose engines that meet current emission requirements as power sources.

       If enterprises switch to engines with higher emission standards, costs will undoubtedly increase, and this investment will be passed on to consumers who purchase the machines. Although environmentally friendly, the price advantage of the machines will be greatly reduced. Especially under the current sluggish industry situation, enterprises are more concerned about survival, and this requirement puts considerable pressure on them.

       At present, transforming the structure and promoting development is also a focus of the industry's healthy development, and upgrading industry emission standards and related technology research, development, and reserves are very important. Currently, few enterprises have conducted matching tests or sold construction machinery equipped with National III, National IV, or even National V emission standard engines on the market. The root cause is that previously, high-emission-standard construction machinery equipment was mostly exported to overseas markets rather than sold in the domestic market.

       If China, like European and American countries, begins to mandatorily implement higher emission standards in construction machinery, it will inevitably bring greater pressure on enterprises currently in difficult circumstances. In this regard, relevant industry enterprises should pay full attention to the supervision and standard-setting of emission requirements in order to take preventive measures.

       A long way to go in the second half

       Su Zimeng, Secretary-General of the China Construction Machinery Association, said that although downward pressure increased in the first half, as the country's policies for pre-adjustment and fine-tuning to stabilize growth begin to be implemented, the operating environment for enterprises will further improve, and industry operations will stabilize and recover. At the end of 2013, the association predicted a target of 8% sales revenue growth for the entire industry in 2014, and it currently maintains this target. Judging from the operating trend in the first half, whether excavating machinery, engineering hoisting machinery, earthmoving and transport machinery, and concrete machinery can achieve the full-year target still needs to be observed; increasing exports further will also be relatively difficult.

       In the second half, shantytown renovation, continued investment in high-speed rail, and the development of the energy-saving and environmental protection industry will all be factors driving the upward development of the construction machinery industry.

       According to the goals proposed in China's published "Opinions of the State Council on Accelerating the Renovation of Shantytowns," China will renovate 10 million households in various types of shantytowns within five years. There is no doubt that construction machinery will be one of the industries to benefit most directly from shantytown renovation projects. Whether it is excavators and loaders needed for shantytown demolition, or the subsequent demand for concrete machinery equipment and hoisting machinery equipment for new housing construction, all will bring the most direct boost to the sales of construction machinery equipment.

       As an important investment direction for stabilizing growth, the market generally believes that railway investment will continue in the second half. Railway investment has jumped from 630 billion yuan to 800 billion yuan; the number of projects started has increased from 44 to 64; newly opened lines have expanded from 6,000 kilometers to 7,000 kilometers. Railway experts, who at the beginning of the year were worried about reduced railway investment and heavier tasks, have now begun to predict the possibility of a record high investment within the year.

       According to the new planning arrangements, during the "12th Five-Year Plan" period, national railway construction investment in the central and western regions will be 1.85 trillion yuan, with 23,000 kilometers of new lines put into operation, accounting for 72% and 77% respectively. In 2014, the proportion of construction investment and new lines put into operation in central and western railway arrangements will further increase, reaching 78% and 86% respectively. This means that in the next two years alone, railway investment in the central and western regions will be at least 700 billion yuan, with 16,000 kilometers of new lines put into operation.

       Energy conservation and environmental protection have received much policy attention in recent years. The State Council executive meeting has twice studied and deployed air pollution prevention and control and the development of the energy-saving and environmental protection industry, and issued related supporting documents respectively. Among them, the "Opinions on Accelerating the Development of the Energy-Saving and Environmental Protection Industry" clearly states for the first time that by 2015, the energy-saving and environmental protection industry will become a "pillar industry" of the national economy, with the total output value of the energy-saving and environmental protection industry reaching 4.5 trillion yuan, and related supporting investment will continue to expand.

       In the first half, the construction machinery industry forged ahead; in the second half, if the industry is to achieve stabilization and recovery, there is still a long way to go. This requires industry enterprises and relevant practitioners to seize favorable factors and actively carry out transformation and upgrading, thereby promoting the sustained, stable, and healthy development of the industry. (This article is from China Industry News)