Heavy Industry: China's New Level of Competitiveness
Heavy equipment manufacturing is an interesting measure of the maturity of China's economy. Its one thing to build a bulldozer, but its quite another to build a bulldozer that can compete with the best in the business. And right now, China is aspiring to achieve just that. But is it there yet? Not quite.
China's progress in heavy industry exports during the last decade, however, is very impressive. The chart below illustrates just how well China performed in terms of total heavy industry exports in 2010 (y axis), and CAGR from 2000 to 2010 (x axis). It now stands just behind the US, Germany and Japan, but its growing much faster than those.
As the note explains, 'heavy industry' here refers to a bundle of exports of 10 trade items, in all of which China has immensely increased its share of world exports. To illustrate this further, the following chart shows these items individually, and contrasts where China stood in 2000 vs. 2010. Its quite a change, as you can see.
So the statistics illustrate a clear picture of China's emergence in heavy industry. Yet when it comes to actually competing with the best, does China's best efforts measure up? I want to take one example to discuss this: construction equipment. The 'Bulldozers, etc.' and 'Derricks and Cranes' categories in the chart above refer to such construction equipment for which China has registered rapid progress in the last decade. And if China has become competitive it means that its leading construction machinery manufacturers have done so as well.
Its no surprise then to discover that China now has three companies in the top ten of construction equipment manufacturers globally; only six years ago, the highest ranked Chinese company was in 33d place. The ranking I am referring to here, which used sales revenue for the 2010 calendar year, is the Yellow Table published in the magazine International Construction (downloadable with registration), which lists the top 50 global construction manufacturers (Im referring to the April 2011 edition of the magazine).
Its very interesting how the Yellow Table ranking corresponds with the first bubble chart above: the US, Germany and Japan lead, followed by a few other countries and China. In the 2010 Yellow Table, Caterpillar (US) is at the top, followed by Komatsu and Hitachi (Japan), Volvo (Sweden), Liebherr (Germany) and Doosan (S. Korea). Then, in 7th, 9th, and 10th place follows the Chinese competitors Sany, Zoomlion and XCMG. Other Chinese companies in the top 25 are Liugong (20) and Shantui (22).
Being competitive vs. matching the best
But how competitive are the likes of Sany, Zoomlion, XCMG and Sany really? Can they really compete with Caterpillar and Komatsu? The short answer to this question is no, or at least not yet. The longer answer is more complex, and needs to be looked at in terms of the situation in a specific market. I am going to briefly refer to the South African market for this purpose.
Buying a bulldozer or a wheel loader is not just a case of buying a bulldozer or a wheel loader. Construction companies and mines will want to be absolutely sure that the machine they buy will work as long as its supposed to. And they will want to know that if a part is needed, it can be provided without delay. For every hour that the machine does not work on a mine, the mine loses a stack of cash. Reliability and longevity is everything. Price is not unimportant obviously, but quality is more important.
So consider the disadvantage that new Chinese competitors in South Africa face against long established players like Cat and Komatsu. While you will pay more for a Caterpillar machine, you know when you buy it that the after sales services coming with that machine will be top notch. If it breaks, Caterpillar will supply a new part within 24 hours. As new entrants in the South African market, the Chinese competitors cannot yet match this service offering. Their machines cannot yet match the performance of a Caterpillar or a Komatsu, even though they have come a long way in the last few years.
A different future
And thats just the rub: Chinese manufacturers have come this far, its very unlikely that they will not become serious competitors to the best in the business sometime in the future. The Chinese are learning the ropes fast, they know that you need to put down deep roots in a country to be able to supply the kind of after sales services necessary to compete with the best, in addition to building quality machines. They are not quite there yet, but they are getting there.
Some of them even seem poised to step up to another level of competitiveness right now. One example is the Chinese producer Shantui, whose main product is a bulldozer. Shantui hails from China's Shandong province, where Shantui had originally set up a factory based on Japanese technology. Shantui has now been in South Africa for a few years, and just a few weeks ago it launched a whole new facility in Johannesburg, which I attended.
Shantui has run an advertising campaign in South Africa proclaiming itself as the world's #1 bulldozer manufacturer, and seem to have placed great emphasis on the right kind of after sales services. Shantui was also able to present feedback from some of the users of its machines which glowed with appreciation of the quality of the machines, and it also announced that its sales in South Africa in the last few months have gone through the roof.
So time will tell if this is really the beginning of big things for Shantui. But I can picture a time when a Shantui bulldozer or a Sany wheel loader will be among the best brands in their classes. Its happening, but give it some more time.
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