Kevin Appleton column: An economic powerhouse
By Kevin Appleton14 November 2014
At least some amongst you will be reading this as you visit Bauma China at the end of November, and it’s fair to say that the emergence of China as an economic powerhouse has been one of the defining global trends of the last thirty years, during which time it has averaged GDP growth rates of over 10% annually.
The construction industry in China (estimated US$375 billion, €295 billion) is approximately twice the size of the UK, and on that basis there should be scope for a domestic rental market of circa US$10 billion (€7.8 billion) even today.
China is also an emerging giant of manufacturing, with a number of western companies investing in Chinese manufacturing capacity over recent years – JLG and Terex-Genie amongst them – whilst local Chinese manufacturers (Dingli and Sinoboom in the aerials market being examples) have significantly ramped up the scale and quality of their operations.
So what are the likely long-term impacts of China both on the rental market and on the manufacture of products for rental markets?
The first thing to say is that the rental market in China today won’t be anything near its theoretical potential of US$10 billion (€7.8 billion) for some years to come (although I’ll be pleased to hear from an expert market analyst who tells me it is).
One contributory factor to this is that a rental supply chain needs to be well established before construction companies are able to place confidence in it to deliver the quantity and quality of equipment that it needs.
Even in parts of Europe we still see some large construction companies holding significant fleets of construction equipment as they are (wrongly, in my view) not yet convinced of the economic and service value of rental.
Rental demand in emerging markets tends to be driven by foreign companies who are used to it or by local, challenger construction companies who don’t have the capital resources to invest heavily themselves.
Another contributory factor is that labour in China is still plentiful and inexpensive. Until labour rates start to become a serious competitive issue for construction or maintenance businesses then performing tasks inefficiently, even hazardously, remains a viable – if unethical – alternative. In such a climate the demand for the right equipment for each worker is lowered and there is therefore less potential value to be added by a strong rental partner.
The rental industry in Europe has been developing over around 70 years to get to its current scale. I see no reason why the path to market maturity in China will be shorter than 35 years. Investing in rental in China is therefore a solid long-term bet, but is likely to require a lot of patience and some unexpected calls for additional capital along the way.
The manufacturing story is a more straightforward one, I think. China is a country full of hard-working and increasingly extremely well-educated people. In the near future wage and raw material costs in China will be below levels attainable in the west and there will be a significant cost advantage for manufacturers who create capacity there (hence the JLG, Genie and others’ investments, I suspect).
So, for global businesses there is the double attraction of short-term cost advantage for export business followed by long-term access to a local rental market that might have a thirty-plus year growth curve.
For the local Chinese manufacturers the reliance will be much more upon the growth of a domestic rental market and I imagine, as in the west, they will play a significant role in fuelling that growth (hopefully a positive one) if their balance sheets allow.
One or two Chinese manufacturers may break through into global status, but it’s hard to see. The current leading brands are so well established that western rental companies would need a huge incentive to create space for a significant new supplier in their fleets.
We are more likely to see the kind of activity we’ve seen in the automotive industry where Asian businesses use their financial firepower to acquire established brands and deal with the perception problem that way.
My, fairly safe, prediction is that within twenty years one of the major western equipment manufacturers will be owned in China. Sadly I can’t predict which one!!
This is an interview from the November/December issue of IRN. For the full feature, including extra images and box stories, please subscribe to the magazine: http://www.khl.com/subscriptions/