Top: A Sany Heavy Industry Co worker at the company's factory in Changsha. Forbes Conrad / Bloomberg Above: Sany's construction equipment is exported to Brazil. Construction machinery exports from Changsha hit 54 billion yuan last year. Provided to China Daily

He Qinghua(left), chairman of Sunward, says the firm is looking for possible overseas M&As; Zoomlion president Zhan Chunxin says it invests 5 percent of annual revenue in R&D. Provided to China Daily

Changsha's heavy equipment manufacturers brace themselves for new economic challenges

The ground for doing business is moving for the construction machinery industry centered in Changsha in Central China. Robert Veit, executive vice-president of Daimler Truck China, has noticed it. Every couple of months, he spends a few days in the Hunan provincial capital meeting people from the Zoomlion Heavy Industry Science & Technology Development Co, the second largest construction machinery maker in the world and one of the most important customers and a close partner of Mercedes-Benz trucks in China.

"We have very good cooperation with some major Changsha-based construction machinery manufacturers such as Zoomlion. Over the years, our cooperation has grown far beyond pure customer-supplier relationship to a closer partnership where we jointly develop products suiting their specific requirements, which values the technology innovation," Veit says.

Improving the standard of their products is one way the construction machinery companies hope will help them expand. And they are doing it by merging with established specialized manufacturers in other countries, and through research and development.

These changes in strategy come as a result of a slowing down of the Chinese economy and new opportunities in international markets.

After enjoying average annual sales increases of 30 percent in recent years, sales of construction machinery fell in the first quarter of this year, according to the China Construction Machinery Association. There was a 40.6 percent year-on-year decrease in the sale of excavators and a 48.4 percent drop in the demand for rollers.

Two-thirds of such machines in China are made in Changsha, home to three of the biggest movers in the industry - Sany, Zoomlion and Sunward. Each continues to expand and develop internationally and domestically.

Zoomlion formed a joint venture with Powermole International Ltd of Britain back in 2001. In 2008, it teamed up with Compagnia Italiana Forme Acciaio, which has a 20 percent market share in Western Europe and ranks third in the global concrete machinery sector.

Sany Heavy Industry paid 360 million euros ($475 million) this January for German concrete-pump maker Putzmeister Holding to add technology and expand overseas.

As a measure of how far the Chinese arm of the industry has extended, there was an increase in the number of European buyers for the Changsha manufacturers' products at the INTERMAT expo, one of the world's main exhibitions for the construction industries, held in Paris in April.

"The expo revealed that Chinese-made machinery is becoming more competitive in overseas markets, as an increasing number of European clients are showing a preference for our products," says Zhan Chunxin, president of Zoomlion.

The company showcased 15 products from its latest concrete and hoist machinery range, including a flat-top tower crane that Zhan says was designed after it purchased the technology from Germany's Jost Cranes last year.

"This is a typical case, which demonstrates that through mergers and acquisitions, we will be able to gain advanced technology for making construction machinery," Zhan says.

He Qinghua, founder and chairman of Sunward Equipment Group, says he also has been talking to European companies about possible merger and acquisition opportunities to grow his company's R&D and sales network.

"There are some deals under discussion," says He, declining to reveal any details.

Sunward has developed more than 100 specifications of high performance, high quality products such as excavators, skid steer loaders, rotary drill machines, pilling machinery and forklifts, which have been exported to more than 60 countries and regions across the world.

He says Sunward's annual sales are expected to reach 20 billion yuan by 2015, and 15 to 20 percent will come from the overseas market. Currently, the emerging market of Brazil accounts for most of its overseas sales.

Zhao Yuesi, director of the Changsha Commission of Industry and Information Technology, says the established markets in Europe and the United States accounted for 10 percent of Changsha's 54 billion yuan of construction equipment exports last year, and there was still a lot of potential to tap.

"As more and more companies in Changsha make a mark in the high-end European or US market, the figure will definitely rise very quickly," Zhao says.

However, the business, which is highly sensitive to macro-economic environment, especially regarding the building of infrastructure, has felt the chill from a slowdown in the Chinese economy.

This is simply a matter of the well running dry, believes Li Xunlei, vice-president and chief economist with Haitong Securities.

"China's construction machinery industry hugely benefited from the government's fiscal stimulus of 4 trillion yuan in 2008 and the infrastructure construction spree over the past several years. But now as the fiscal stimulus is exhausted, many large-scale construction projects and sales for the nation's construction machinery will have to slow to a crawl," Li says.

According to Changsha's industry and information technology commission, in the first quarter of this year, sales by the city's construction machinery manufacturers increased by 10.9 percent compared with the same period last year. Last year's output recorded a 78 percent year-on-year increase.

Commission director Zhao says the decline in sales growth is certain to reshape the entire industry in Changsha. With domestic orders dwindling, many companies have realized that going high-end is the only way out.

"In the past few years, Chinese construction machinery manufacturers were busy producing and delivering products, but didn't pay enough attention to improving our key competitive strengths, such as management skills, technologies and innovations. It is time for us to improve these aspects now," says He with Sunward.

He, the 66-year-old company president and a professor of Central South University in Changsha, says to increase profits this year, Sunward intends to develop more high-end products.

"We used to mainly produce middle-end products. Now, as rising labor costs and stricter environment protection criteria have reduced the competitive edge of our products, we want to sell more high-end products. The profit margins are higher, but we need to spend more on branding and promotion," he says.

Sunward is confident that it is strong enough in research and development to make the change successful.

Among its 3,000 employees, more than a half are college graduates, according to Zhang Yunlong, deputy general manager of Sunward, and the company has registered 160 patents and intellectual property rights.

Most of the construction machinery makers in Changsha are striving to develop more high-end products by investing more in R&D.

Guo Xuehong, vice-president of Zoomlion, who has been in the construction machinery business for more than 20 years, says rising costs of labor and land have further reduced the profit margin for construction machinery makers.

"The low-end construction machinery market in China has been saturated. We will make full use of this period to adjust our product mix and gain a greater market share in the future," he says.

Since the founding of the company in 1992, Zoomlion has always made R&D its top priority. According to company president Zhan Chunxin, Zoomlion invests 5 percent of its revenue on design and R&D every year.

To date, it has applied nationally for more than 3,000 patents and internationally for more than 200. It also has 100 non-patented innovative technologies and has registered more than 30 computer software programs.

At the same time, Changsha construction machinery makers have been expanding their overseas footprint through diversified and affordable product categories, hard-working dealerships and international standard after-sales services.

"To gain more market share, we have been diversifying our product mix, for instance, producing more earth moving equipment," says Guo with Zoomlion.

Zoomlion began to build its new industrial park in Weinan, Shaanxi province last year. The new park mainly focuses on producing earth moving equipment.

"We will be able to gain 7 billion yuan annually in that base, a new profit growth engine for us," says Guo.

He with Sunward says his company plans to win more customers by introducing a range of hybrid power, energy-saving products to the overseas market.

"The overseas market, especially the developed market such as Europe, has a great potential in some energy-saving products," He says.

Zoomlion also says it is backing up its standards and promoting its reputation by developing strong dealerships for product delivery and after-sales service. It has 100 dealerships worldwide.

"Dealership helps companies reduce the risks in making huge investments in an unknown overseas market and they are also essential for market segmentation, logistics and winning new customers in the overseas markets," says Zhan with Zoomlion.

Contact the writers at huhaiyan@chinadaily.com.cn and fengzhiwei@chinadaily.com.cn

(China Daily 06/08/2012 page16)