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China’s equipment makers aim to scoop out overseas market share

May. 27th, 2016  06:10 AM     Source: Financial Times

China’s construction equipment makers are ramping up the competition against global leaders such as Caterpillar, Komatsu and Deere and appear set to discount products to build market share, a new study has found.

The Chinese companies — which include Sany, Zoomlion and XCMG — are likely to boost their market share outside China to around 15 per cent by 2025, up from an estimated 7 per cent currently (see chart), according to research by UBS Evidence Lab, which surveyed about 15,000 construction equipment dealerships around the world.

“We think the Chinese are making moves to expand further into the west and we think they have a very good chance to take market share, if they are fully committed to doing so,” said Steven Fisher, UBS analyst.

He said that the biggest competitive advantage of the Chinese companies was a relatively low cost base that allowed them to offer discounts in the region of 15 to 40 per cent to equivalent premium brand equipment.

This will allow them to take market share in Europe and the US, where the presence of Chinese brands in dealerships remains fairly scarce. The biggest operational challenge for the Chinese, Mr Fisher said, lies in providing aftersales support to dealerships, especially by ensuring that spare parts are supplied quickly and in sufficient quantity.

“We don’t generally assume that Chinese products are going head to head with Caterpillar and Deere,” Mr Fisher added. “But our point is that a discount on a base level product can end up applying pressure further up the chain.”

The UBS Evidence Lab found in its survey of the 15,000 dealerships that Chinese manufacturers “have increased interest in expanding more aggressively” and — if they maintain this — may be able to scoop up about 1 per cent in market share outside China per year over the next decade.

The effect of this would be a reduction in the available profit pool for western giants such as Caterpillar, Metso, Komatsu, Sandvik, Volvo, Deere, Terex and others, the UBS research report said.

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However, the challenges before the Chinese companies in terms of market dynamics appear considerable. In the US, for instance, Chinese brands had only a 3.7 per cent presence in the dealerships surveyed (see map), defining a struggle for brand recognition. “Presence” in the survey was measured by the proportion of points of sale for Chinese brands versus other brands sold in dealerships.

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In emerging markets, though, the Chinese firms have made greater inroads, buoyed by infrastructure projects financed through Chinese financial institutions. In Kazakhstan, Chinese construction equipment brands had a presence in 42 per cent of dealerships, an 11 per cent footprint in Brazil, a 24 per cent presence in Russia, and in Iran — where business by European and US corporations has been limited by sanctions — Chinese equipment was on sale in 92 per cent of dealerships.

The lending firepower of China’s two policy banks — the China Development Bank and the Export-Import Bank of China — is likely to enhance the prospect of contracts for Chinese construction equipment makers in coming years. The two banks already lend almost as much as the six western-backed multilateral development institutions put together.

However, the Chinese companies tend to be more heavily mired in debt. Zoomlion is the most egregious, with a total debt to ebitda (earnings before interest, tax, depreciation and amortisation) multiple of 21, while XCMG and Sany have multiples of 15.3 and 8.1 respectively. Caterpillar and Komatsu are considerably lower, while Deere has a multiple of 10.9.

But in spite of the heavy debt loads carried by Chinese companies, their appetite for overseas acquisitions appears to have remained undiminished. Zoomlion made a cash bid for Terex, the US company, earlier this year, though the result of that overture is still uncertain.

LiuGong, a Chinese machinery maker with a debt multiple of 16, has made no secret of its intent to boost overseas revenues to 50 per cent by 2020, up from 35 per cent of total revenues now, UBS said. Sany, for its part, announced this year that it had acquired another US-based dealer for earth movers, calling it part of an “aggressive” expansion of the company’s earth moving dealer network.