China calls: IRN's Murray Pollok talks to five Chinese equipment manufacturers.

Have you considered buying Chinese construction equipment? Perhaps now is a good time to think about it. Murray Pollok reports from China where he visited five local manufacturers.

The CEO of a Chinese construction equipment manufacturer tells the story of how he was approached two years ago by a European manufacturer asking if he wanted to sell his business; last year the same manufacturer contacted him again, this time wondering if he would consider buying his business.

It may be an apocryphal story, but it certainly illustrates the difference in fortunes between western and Chinese equipment manufacturers over the past 18 months. While European and North American manufacturers have faced a disturbing reversal in sales, Chinese manufacturers have been enjoying record sales levels in their massive domestic market, and even now are buoyed by healthy levels of demand, even if some of the heat has gone out of the market.

One of the consequences of the domestic boom in China - around 270000 units of all construction machines will be sold in 2009, making it the world's largest construction equipment market by volume - has been the growing strength and ambition of the largest Chinese manufacturers.

Mr Qinghua He, chairman, founder and general manager of Hunan Sunward Intelligent Machinery Co, based in Changsha, tells IRN through an interpreter that "the crisis has not changed our strategy [to increase exports]...We see opportunities - we have suffered [in the recession] but we think our competitors suffer more. Sunward has a long term ambition to be an international company."

"We believe that a difficult time is a good time to penetrate [new] markets", says Mr Zhaohua Huang, general manager for overseas business at Guangxi LiuGong Machinery Co, speaking to IRN at LiuGong's Liuzhou head office in southern China. He says LiuGong first started to export almost by chance after it was contacted by trading companies, but for the past six years has been actively pursuing an export strategy.

Both LiuGong and Sunward have been developing compact machines - including skid steer loaders and mini-excavators - which is a tell-tale sign of export ambitions since such machines are still a rarity in China.

Other Chinese manufacturers have been even more aggressive in expanding their international businesses. Hangzhou-based Zhejiang Dingli Machinery Co, for example, started manufacturing pallet trucks and material handling tools in 1997, and the company's young founder - a classic modern Chinese entrepreneur - Mr Xu Shugen, tells IRN that "since the beginning, exporting was the goal." Dingli has since started manufacturing aerial platforms, and in a typical year around 70% of its turnover comes from export sales to Europe and elsewhere.

Meanwhile, Goungzhou-based hoist and tower crane manufacturer, GJJ, is another company targeting export markets, and is already selling its hoists all over the world, including in North America, the Middle East and Australia.

That sample of just four manufacturers - among the five companies visited by IRN in a week during early June - is typical of the export orientation you find among Chinese manufacturers, and it's common to both state-owned and private companies.

That in itself should be no surprise - we accept Chinese toys, computers and clothing, so why not construction equipment? - but what is now interesting is that they are also trying to go beyond the ‘low price/low quality' label that has so far been pinned to Chinese products.

Mr He, the founder of Sunward, is clear about the company's strategy; "There is absolutely no future in competing on price", he says, "This is not our future."

He says Sunward, which has a turnover of RMB 1.4 billion (€146 million) last year of which 20% was exports, now takes pride in developing its own products and investing in research and development - Mr He is a professor at the local technical university and the company sponsors PhD students there - and has genuine long term aims. "We're looking for long term relationships - we grow together, we don't just move in and sell some machines."

In Europe, for example, Sunward has been selling for around three years, particularly in Italy, where around 60% of the 3500 units sold in the region are operating. It now has its own subsidiary in Italy (replacing previous dealer HPM) and it opened a European parts warehouse in Milan last December.

Sunward's export director for Europe, Sharon Peng, says; "We have a dealer in every country in Europe, except the UK. The UK is something we can do in the future. We have one in every country, but we need more." The goal is to build its brand in Europe through dealer operated showrooms.

Key to the export push is having the compact equipment that is so popular in Europe, with a small range of skid steer loaders, mini-excavators from 800 kg to 12.5 t and telehandlers (under development) to add to the larger excavators, hydraulic drilling rigs and pile drivers that the company makes. (The aim is to expand the excavator range up to 200 t within three years, and a 47 t model is now nearing the final stage of development.)

The compact machines are also built with export markets in mind - the excavators, for example, have swivel booms, and it will also make models modified for particular markets; during its visit, IRN saw a 2.5 t canopy version mini-excavator targeted at the French market.

Mr He also confronts the quality question head-on. He says the use of established components - Yanmar, Perkins and Kubota engines - alongside its own structural components, cylinders and cabs makes for a good combination; "I'm quote confident about the quality and performance. We use engines and hydraulic components from renowned suppliers." He says Sunward does not copy western products; "We have our own products, our own outlook."

LiuGong is a bigger and longer established company that Sunward - it celebrated its 50th anniversary last year with sales increasing 25% to US$1.6 billion (€1.14 billion) - and is one of the top two manufacturers of wheeled loaders in China, a fact that also makes it one of the largest manufacturers of wheeled loaders in the world.

Zhaohua Huang, the man in charge of LiuGong's export sales, says he well understands the western preoccupation with quality, having been asked the question so many times during business trips of over the past three years, and most recently at the M&T Expo show in Brazil, where the company announced plans for a Latin American subsidiary.

"There is often a strong bias against Chinese products", he says, "but in recent years people have started to change their perception". He says LiuGong is well able to compete with manufacturers in the west in terms of quality, even if he says it isn't always possible to meet 100% of every customers' expectations in the west.

He says some big contractors are already giving the machines a try, citing Heidelberg Cement, which is using some LiuGong machines in the Ukraine; "They are a really demanding customer." Like Sunward, the strategy is to use well-known components for the export machines - the company has been using ZF transmissions for over a decade through a joint venture manufacturing facility close to LiuGong's headquarters. The company also uses Cummins engines.

Keen pricing will be one part of the export strategy, of course, but there is more to it than that; "We want to be price competitive - maybe 10-20% lower - but we will invest in customer support, we won't rely on price alone", says Mr Huang.

LiuGong's own strategy for expanding its exports has been in place for several years. It starts with trading, which leads to the appointment of local dealers, then the establishment of a local LiuGong subsidiary and ultimately - where appropriate - local assembly of products.

The company is about to start assembly of 3-5 t wheeled loaders at a plant in Indore, India - "It's really a new experience for us", says Mr Huang - and he says it is conceivable that an assembly plant could also be set up in Latin America within a few years. Similarly, a plant to modify machines for the European market is a longer term project.

So far, LiuGong has established subsidiaries in Australia (2004), India (2007), Latin America (now) and in Europe by the end of this year, possibly in Belgium or the Netherlands. However, LiuGong has already had a parts warehouse in Europe for two years, based in Amsterdam, The Netherlands, where it holds around €2 million in parts stock.

Mr Huang says LiuGong's approach is different from some other Chinese manufacturers; "Some Chinese companies just want to make quick sales and are not too interested in after sales service." Also in LiuGong's favour is its international outlook: it likes to employ experienced construction equipment managers from Europe and the US - it has both ex-Case and ex-Kobelco employees on its payroll, and many of its Chinese staff also have international experience; Mr Huang himself is an MBA graduate from Surrey University in the UK.

The company has around 60 international dealers, but the majority of its US$220 million (€157 million) export sales last year were in its more established export markets including Africa, India, the Middle East, Russia and S E Asia."

Product-wise, LiuGong is best known for its wheeled excavators, but over the past decade it has gradually been expanding its product line and now has 16 factories making excavators, bulldozers, backhoe loaders, skid steer loaders, single- and double-drum rollers and compactors, pavers, motor graders and industrial forklifts (a new 8 t model was being shown to Chinese customers during IRN's visit). It is just in the past five years that the company has moved into compact equipment.

In addition, the company acquired a Chinese mobile crane manufacturer last year, with the aim to sell cranes both domestically and for export.

While Sunward and LiuGong see themselves as long term partners with western buyers - including rental companies - they understand that rental companies have particular needs, beyond simple product and price. Finance, for example, is something that they are thinking about, and both are talking to Chinese and other international banks about offering finance to make up for the current finance deficit from European and North American banks.

If exports are a key strategy for Chinese manufacturers, where does the current global recession leave them?

Aerial platform manufacturer Dingli, based in Hangzhou, 200 km south of Shanghai, normally exports 70% of its products, but founder and managing director Mr Xu Shugen tells IRN that export sales were down 70% in the first four months of the year, which is bad timing for a company that only CE marked its diesel powered booms and scissor lifts in late 2008.

"We can't wait for the European market to recover - we have to meet the demand from the domestic market", he says through an interpreter, which is why the company is investing RMB 20 million (€2.1 million) in a new plant (see box story).

Mr Xu says domestic demand for its access product continues to grow, helped by a massive economic stimulus package, much of which is focused on infrastructure. "The stimulus package will have a two year impact. After that, the Chinese economy will still rely on recovery of the world economy."

At Sunward, Mr He says "The Chinese market has not been affected as much. In some areas, it's even better than before", citing demand for the company's big drilling rigs which are used in infrastructure projects. He says the continuing demand in China means the company can invest in its internal management resources and "build a platform to grow faster when the [international] market recovers."

At LiuGong, Mr Huang has a similar view; "China is affected, but not as seriously as the west. The stimulus package is working - there are huge investments and infrastructure is very strong."

He acknowledges, however, that the Chinese market has slowed down, and that big Chinese contractors working on major projects are more cost conscious than in the past, something that might work in LiuGong's favour. In the past, where contractors may have chosen western projects for projects like the Three Gorges Dam, they are now looking for good quality domestic suppliers; "On new projects they need to control their costs, so local manufacturers are a very good choice for them."

Meanwhile, Mr Wang Hua Long, co-founder, majority owner and chief executive officer of GJJ, the Guangzhou-based construction hoist and tower crane manufacturer, says that Chinese sales have started again after a slowdown from September last year caused by a general lack of confidence following the financial crisis. He credits the Chinese government's stimulation package and continued investment in infrastructure projects.

Mr Wang tells IRN that half of the company's RMB780 million (€81 million) output last year was exported, but that this has now shifted to around 70% domestic sales because of the slowdown in its US, Canadian and Australian exports.

He says GJJ was prepared for this and had already started to focus on other export markets such as India (where it has sold around 60 hoists this year), the Middle East and Africa (Nigeria and Tanzania). Its Middle East dealer, NFT, sells the GJJ hoists under the Orbit brand.

If exports are impacted, domestic demand continues to spur GJJ to invest in production facilities. It has an ambitious three year project to build a new supply chain and manufacturing plant in Tianjin. The new facility is a joint venture between GJJ and six of its key component suppliers.

The companies will together invest RMB800 million (€83 million) - GJJ will fund half of that sum - to develop the 360000 m2 site to manufacture hoists and hoist-related components such as motors, rack and pinions and safety devices.

GJJ's revenues are growing by virtue of its expanded production capacity. Last year is invested RMB200 million (€21 million) in a 50000 m2 hoist and tower crane factory in Xian, central China, which started operation in the middle of last year and is now in full production.

Mr Wang tells IRN that the investment was necessary to provide capacity for domestic demand, as well as the company's longer-term export aims. GJJ already has two production facilities in Guangzhou, a tower crane plant in Changsha, and the new Xian factory.

He says the Xian facility will also be well located to serve the growing market in western China; "The Xian area is a new economic development zone and will grow like Guangzhou did five years ago".

The additional capacity provided by the Xian plant - which will make 150 tower cranes and 400 hoists this year - could increase turnover in 2009 to RMB 1 billion (€104 million). "I think we can do it. The new factory will allow us to sell tower cranes worth RMB 250 million (€26 million) this year, and we could produce 1500 hoists."

The global recession is also presenting Chinese manufacturers with other, more strategic opportunities. David Phillips, managing director of Off-Highway Research, the London-based construction equipment research body, has been saying in recent months that a coming phase of the Chinese export strategy will be the acquisition of western manufacturers, to acquire distribution networks and brands as well as western technology.

China's Zoomlion, for example, acquired Italian concrete pump manufacturer CIFA late last year, and Mr Phillips, speaking at the Intermat show in April, said he knew of several Chinese manufacturers who were currently on the acquisition trail.

The five companies visited by IRN in June were not giving much away in this respect. Sunward's founder, Mr He, said the company would consider joint ventures and other cooperation on a case-by-case basis, while LiuGong's Mr Huang declined to comment.

Mr Wang at GJJ was more forthcoming; "To be honest, I'm not too interested in acquiring other manufacturers. It could be a big burden for us from a management perspective. Rather than acquisitions, I'd prefer to set up our own overseas assembly factories." Any facilities would likely be in developing markets like the Middle East, India or Russia.

GJJ's Mr Wang is also prepared to talk about the current predicament that many western manufacturers find themselves in. He tells IRN that there was too much investment, too soon, without enough consideration of the risks. He has no wish to be disrespectful or unsympathetic to suppliers in the west, but he does have a matter-of-fact, survival of the fittest attitude; "The world needs new companies. Manufacturers don't necessarily last for ever."

That may sound a little harsh, but it's not surprising - in today's business environment - that it comes from a Chinese manufacturer.

BOX STORY
Rental at the starting blocks

In the past Chinese manufacturers have been accused of copying western products - a reputation that they are now trying hard to shed - but there would be widespread support among western manufacturers if China copied the western equipment rental model. That would be particularly true of the aerial platform industry, where rental plays such an important part in stimulating demand.

What is interesting about the Chinese manufacturers visited by IRN is that nearly all mention the presence of US rental company Hertz as being crucial to the development of rental in the country. Although there are hundreds of small owner-operators in China who make their machines available to local contractors, there is yet to emerge a local rental company that can promote the rental concept.

In that context, Mr Xu Shugen, founder of aerial platform manufacturer Dingli, says he welcomes plans by JLG, Terex AWP and Haulotte to start manufacturing aerial platforms in China, and the Shanghai investment by Hertz. "I'm not scared of [western manufacturers]. It will help improve the quality of the Chinese aerial platform industry. They will help the rental industry to develop."

Mr Xu says the Chinese authorities are against imports of used aerial platforms -and used equipment in general - in order to encourage domestic production. He says it is unlikely that this policy will change, and that used machines were not the way to develop the Chinese market.

Sunward's founder and general manager, Mr Qinghua He, says much the same thing about rental; "It will take time for rental to grow, and Hertz will be the pioneer."

Some manufacturers are tempted to enter the rental market. Dingli's Mr Xu says he has thought about it, but would prefer instead to help other western rental companies enter the market.

Hoist manufacturer GJJ, meanwhile, has already started renting its own hoists, with a fleet of 200 units rented in seven of China's bigger cities, including Shanghai and Beijing. It has plans for the fleet to be boosted to 300 units this year. Already it's a RMB70 million (€7.3 million business).

BOX STORY
Labour intensive

Chinese manufacturing plants are enormous, and it seems they can be built extremely quickly, which makes it easy for manufacturers to increase capacity when demand requires it.

Four of the five suppliers visited by IRN are in the process of expanding their production facilities. Dingli is building a new plant to make self-propelled aerial platforms and scissor lifts (see box story) and GJJ has just completed a factory in Xian and is now planning a massive RMB800 million (€83 million) investment in Tianjin (see main article).

Sunward, meanwhile, is adding an additional factory to its current production capacity, for telehandlers and industrial forklifts, and LiuGong is about to start wheeled loader assembly at a new facility in India (to add to its 16 plants in China).

You would expect Chinese facilities to be labour intensive, and they are: manual welding is still the mainstay, although Sunward, GJJ and LiuGong are all investing in welding robots.

The scale of some of these facilities is awe-inspiring: Sunward's main excavator and skid steer loader production facility is a 20000 m2 building with six, 300 m long production lines. It has the capacity to produce 10000 machines a year, although is currently operating at around 4-5000 a year.

Before the recession, two of these lines were producing skid steers for export markets, but one of these has now switched to producing 8, 9 and 12.5 t excavators for domestic consumption. A separate factory is designated for 15-47 t excavators, and this facility is currently running at 40 units a month, but will increase to 100 /month by the end of this year and the target is 200 machines next year.

The company employs 2000 people in China and 1500 alone at its main Changsha facility. "We employ cooks, cleaners, guards - it's different from Europe", says Sunward's founder Mr Qinghua He.

LiuGong's headquarters and main production plant at Liuzhou, meanwhile, is like a small town on its own, with tree lined avenues stretching between dozens of production buildings. It is easy to see how the company can build 30000 wheeled loaders in a year.

BOX STORY
Dingli builds for
domestic demand

Chinese aerial platform manufacturer Zhejiang Dingli Machinery Co is building a new 46000 m2 facility to produce an extended range of large self propelled aerial platforms, targeted mainly at the Chinese market. The RMB20 million (€2.1 million) investment is part of a strategy to refocus on domestic sales in response to a decline in Dingli's traditional export markets, including Europe.

The assembly facility is scheduled to open in October this year and is very close to Dingli's recently completed main production facility in Hangzhou, 200 km south of Shanghai. It will make rough terrain scissors and the company's current 16 m articulated and telescopic booms. Planned production also includes 26/28 m booms, 30/32 m and 36/38 m telescopic booms.

Mr Xu Shugen, Dingli's founder and chief executive officer, tells IRN that although Dingli remains committed to exporting - for example, Spanish rental company GAM is currently trialing a 16 m articulated boom and 18 m rough terrain scissor - the company needed to pursue opportunities in China until its European and other export markets recover. He says there was growing demand for large booms from Chinese shipyards, utility companies and government bodies.

Dingli's product sales are concentrated on smaller electric scissors, vertical mast platforms and material handling products, such as pallet trucks. Export sales represent two-thirds of its RMB160 million (€16.6 million) sales last year.

BOX STORY
Access on hold

Anyone travelling around China will see the enormous potential for powered access equipment. At present, scaffolding - both steel and wooden - is almost the sole means of access on construction and industrial projects, while smaller vertical mast platforms can be seen at some airports and manufacturing facilities. Larger self-propelled booms are used at shipyards and there are some truck mounted platforms used by power and telecom utility companies.

For a Chinese access equipment manufacturer like Beijing JingCheng Heavy Industry, based in Beijing, however, the modest rate of growth for powered access in China is frustrating, and has even led the company in the last few years to attempt exports and attend international shows like the APEX aerial platform event in the Netherlands last year.

Mr Su Jie, chairman and chief executive officer of JingCheng, tells IRN that he believes the Chinese government will tighten up on health and safety regulations - leading to more demand for powered access - but he doesn't know when. Likewise, he believes that rental will eventually take off, although again he says it will take time, especially in the absence of any aggressive domestic rental players.

Although still a very small part of JingCheng's business - RMB50 million (€5.2 million) last year out of a total turnover of RMB2.5 billion (€260 million) - Mr Su says the company is committed to expanding its access business; "JingCheng will focus on more engineered products - self-propelled booms and scissors." It already makes a wide range of self-propelled telescopic booms, small electric scissors, trailer mounted platforms, a couple of wheeled ‘Spider' type platforms.

Mr Su says exhibiting at APEX last year was a way of promoting the brand in international markets and to learn from western manufacturers.

Meanwhile, the company continues to focus on its other businesses, which comprise joint ventures with Chinese, Japanese and Korean manufacturers. It builds 5.5 - 26 t excavators for Hyundai; truck crane chassis and hydraulic components for Tadano; dump trucks for a Singapore company; and axles and transmissions for Chinese partners.

In addition the company makes its own wheeled harbour cranes and has just started manufacturing a range of low-cost truck mounted cranes for the Chinese market, with an 8 t model now being produced and plans for 12 t, 35 t and 55 t versions later this year.

BOX STORY
Chinese suppliers

Those interested in learning more about Chinese equipment manufacturers you can find a full list inside our recently published The Rental Book. The publication includes details of suppliers of all types of equipment, from heavy lift cranes to excavators, aerial platforms, pumps, compressors and hand tools.

Chinese manufacturers included on the directory include Beijing JingCheng, Changlin, ChengGong, Dingly, Everdigm, GJJ, Lingong, LiuGong, Lonking, Sany, Sunward, XCMG, XGMA and Zoomlion.

To order a copy of The Rental Book, call KHL Group on Tel: +44 (0)1892 784088, or visit www.khl.com/directories