As the Chinese government accelerates subway construction, tunnel-engineering equipment manufacturer NHI sees more opportunities.Zhong Nan / China Daily

Foreign engineers at NHI check the products. Zhong Nan / China Daily

High demand for tunneling machinery brightens future for Shenyang company

While on the surface many Chinese heavy machinery makers are facing overcapacity in a saturated domestic market and looking for escape routes, Northern Heavy Industries Group is down below digging its way out of trouble.

As China continues to add and upgrade infrastructure, the tunneling requirements of new transport, energy, water supply projects and the like have come to the rescue of Shenyang-based NHI. It is also exploring new markets overseas.

Many of these opportunities arise from China's 12th Five-Year Plan (2011-2015), which focuses on sustainable urbanization development, a key part of which is improving public transport services to cut pollution and congestion caused by heavy car use.

"Building and enlarging the subway network is a useful way to improve China's urbanization process," says NHI's president, Geng Hongchen. "The government aims to have 60 percent of the population living in cities by 2020. In Europe and the US, it has already exceeded 78 percent."

Geng says there will also be investment in hydropower stations and drinking water projects in rural areas, and in building road and railway tunnels. Using Chinese tunnel-engineering equipment has a price advantage.

"Our company was at a turning point in the market after experiencing a sales slowdown in heavy industrial goods, such as mining, conveying and cement equipment," he says. "We realized we needed to strengthen tunnel-engineering equipment production to remain competitive."

Looking to specialize in tunnel-boring machines, in 2007 NHI acquired a 70 percent stake in France's NFM Technologies, which design manufactured high-tech equipment and systems for major underground construction. In 2011, NHI became the sole shareholder in NFM.

"Companies from Europe, the US and Japan once dominated the Chinese market in supplying tunnel-engineering equipment to subway construction projects before 2005, but 95 percent of these machines often failed to fully meet the needs of Chinese clients, because labor, component and operational costs were too high," says Geng.

The average cost of an NHI slurry tunneling machine is 40 to 50 million yuan ($8.2 million; 6.3 million euros) - half the price of one made in Europe or the US.

NHI's 26 types of tunnel-engineering products accounted for 50 percent of the Chinese market last year. They also sold well in Germany and Russia.

Last year, the Chinese government approved subway construction projects for 23 cities, with a total investment of 840 billion yuan ($134 billion).

And the future looks bright, with the end of the tunneling boom nowhere in sight. By 2020, the extent of China's combined subway systems is expected to stretch to 7,000 kilometers, four times longer than at present.

NHI has supplied 21 tunneling machines to subway projects in nine cities including Chengdu, Beijing, Tianjin and, of course, its hometown Shenyang, where construction of a new 79 kilometer extension to the subway network began recently.

This year, the company also received five orders for tunnel-engineering equipment for railway and hydropower projects, and is continuing overseas expansion supplying machinery for a Bolivian water project, reconstruction of an iron ore mine in Sierra Leone, and tunnel construction in Poland, Turkey and Azerbaijan.

NHI had sales of 14 billion yuan last year, half coming from tunnel-engineering machinery. Exports reached $500 million.

The deputy general manager of NHI, Wang Xuemin, says the company's next move is to develop fracturing equipment required for shale gas exploration.

"The nation has set a production target of 6.5 billion cubic meters of shale gas a year by 2015, up from virtually zero this year," Wang says. "It expects to produce 60 billion cubic meters a year by 2020."

Supported by the Chinese government and scientific research institutes in Shenyang, Beijing and Shanghai, NHI already possesses the technology to produce fracturing equipment that has a longer life cycle and performs better under extreme weather conditions.

"We have seen the need and opportunities for specifically designed fracturing equipment, such as machines that can be applied in mountain areas, because China has quite different shale exploration conditions compared with the US," Wang says.

However, he says, it will be a tough challenge as several US and Canadian companies are trying to make inroads into the huge Chinese market.

"Foreign companies are not only more aggressive with marketing campaigns pushing better quality, but also use attractive benefit and income packages to invite high-level Chinese specialists to work for them through headhunting companies."

To improve its R&D, NHI has set up research centers in Shenyang and at NFM in Lyon. The company plans to establish an institute for fracturing equipment and produce its first prototype machine by the end of this year.

"In the current global economic climate, a certain number of international heavy machinery makers are putting more money and resources into China to seek revenue growth," says Sun Fuquan, a researcher at the Chinese Academy of Science and Technology for Development in Beijing. "As a state-owned enterprise, NHI's strong financing and flexible investment strategies are advantages in competing with its foreign rivals."

Sun says companies like NHI should acquire more high-tech European and US heavy machinery enterprises. With the global recession, some may be short of cash to develop new products and would be keen to combine with Chinese companies to take advantage of the China market, he says.

"To a certain extent, this is a big part of Chinese companies' tactics for gaining high-end technologies to produce competitive products and expand markets at home and abroad," Sun adds.

Contact the writers at zhongnan@chinadaily.com.cn and wuyong@chinadaily.com.cn

( China Daily European Weekly 05/31/2013 page19)