Machinery and Plant Engineering in China
Market Development and Demand
Following the rather difficult year of 2012, 2013 proved to be a genuine emendation for the Chinese machinery sector. So despite initial prognoses of a maximum 10% growth (in Chinese sector delineation, incorporating the automotive industry) by the China Machinery Industry Federation (CMIF) the effective increases in almost all sectors rested between 12 and 16%. Therefore the accruement was also significantly higher than that of the GDP with 7.7%. Agriculture and forestry machinery was thereby at the tip of the spear with a growth of 16.3% whereas aforementioned exception in terms of lower increases rests with the textile-, construction and mining industry (between 7 and 8%). According to the China Economic Information Network (CEIN) there has even been a decrease in the number of producers of textile machinery whereas all other sectors recorded new companies entering the market. Despite some slightly negative tendencies the industry in its entirety still entertains a positive expectation with a growth forecast of 10 to 15% (Chinese sector delineation). The German Engineering Association (VDMA) still assumes a growth of 7% (tighter delineation).
Production and Industry Structure
The PR China is by far the largest machine producer in the world and the VDMA approximates the volume of the turnover at 678 billion EUR in 2012. The CMIF expects a production growth of 10 to 15% for 2014, after a value of around 12% in the previous year (Chinese delineation). In the individual purchaser sectors in machinery the development takes a quite diversified and varied form.
The demand situation in the construction area has improved again. The increase of investments in the property sector amounted to 19.8% in 2013. In civil engineering and infrastructure the capital inflow gained a sturdy 21.2%. Furthermore manufacturers in China produced 1.4% more excavators and 6.9% more street rollers compared to the previous year.
Investments in the mining sector rose by 10.9% in 2013 according to the National Bureau of Statistics (NBS). Highly promising in this respect is the area of gas production. Considering crude oil and natural gas production alone there was an increase in investments of 23.7% in 2013 compared to the previous year. According to the National Coal Machinery Association (CMIA) the focus in the coal mining sector revolves more around modernisation of existing facilities than the acquisition of new machinery, which also entails lower investment requirements. The output with regard to coal mining machinery decreased by 6.7% in 2013 whereas the production of extraction technology (17.3%) and crude oil exploration (17.8% (in pieces)) increased over the same period.
The year of 2013 witnessed an increase in turnover recorded in the food sector that was twice as high as the relative GDP growth. Furthermore, suppliers of food machinery particularly benefit from a comprehensive tendency towards stronger processed food and the interrelated necessity for more complicated packaging. Similarly uninfluenced by cyclical fluctuations of the economy is the dynamically rising demand for pharmaceutical products.
In 2013 the motor vehicle sales strengthened considerably with an increase of 13.9% in the world largest automobile market (2011: 2.5%; 2012: 4.3%). The vastly deteriorating air quality in correlation with the subsequent enhancement of restrictions on automobile use prompt lower expectations, with regard to growth rates, again. In spite of this tendency the industry sector further builds up capacities and especially domestic-foreign joint ventures as well as imports benefit from a growing quality and brand awareness as well as the comparatively lower price sensibility on side of the customers.
In agricultural engineering the output of mid-sized tractors grew by 13.9% in 2013 whereas large exemplars (- 1.7%), animal feedstuff processing (- 6.1%) and corn harvesting machinery (+ 0.9%) recorded negative or only slight increases respectively. Just in the previous year all three sectors had grown by a third. The creation of small tractors rose by 4.9%.
China is a highly significant consumer of tools and machine tools. Owing to a comprehensive expansion in China‘s R&D sector its potential in this area has been soaring continuously. A pivotal role is allotted to the tool- and machine tool manufacturing industry, which constitutes the building block for the construction sector, with regard to the development of the national economy in China. Without those means the middle kingdom would be unable to realise its many construction projects. Owing to the rapid economic development the machine tool manufacturing industry has evolved considerably.
In machine tool manufacturing particularly the production of moulding machines decreased by 8.1% and cutting/chipping machine tools recorded a minus of 1.5%. In the machinery sectors solely the creation of cutting/chipping CNC machines (2.2%) and remodelling machine tools (0.1%) increased. Tools for cutting and chipping grew by 9.6%.
The machine tool manufacturing industry is divided in 4 geographic zones:
- North China (Beijing, Tianjin, Hebei, Shandong province) is the centre for heavy industry in the areas of railway, automotive, aero- and astronautics
- East China (Shanghai, Zhejiang and Jiangsu province) is the second largest cluster in the country supporting new companies and firms in the high-tech industries
- South China (Guangzhou, Shenzhen) is the third largest centre which fosters organizations in the light industries
- Central- and West China (Chengdu, Sichuan, Xinjiang, Qinghai province) is the evolving fourth largest cluster in China primarily catering to the mechanical and electrical industries
Apart from the swift development of the Chinese economy there is a distinct enhancement in the power of national imports, which is also perceivable in the large demand of the automotive, astronautics and aeronautics industry as well as the development of new technologies in the energy sector, the expansion of the Chinese railway system, the shipbuilding industry, the electric production and other areas. The entirety of all these rapidly developing industries exerts an undeniable influence on the demand for tools and machine tools and thereby fostered the significant growth of the aforementioned sectors. As a case in point the continuous growth in the automobile industry in China stimulates the development of the machine tool sector by 40%.
Another example is the railway network in China, where four horizontal and four vertical railway lines traverse the country and thereby contribute to the demand in the machine tool sector by 30%. The nation’s capital Beijing constitutes a third and last example which provides 600 billion US$ to support and foster the newly developed industries.
In line with hitherto examined sectors are the other segments which also do not convey a coherent picture: Production development in the packaging machinery area proceeded brilliantly. Their overall output increased by 14.2% in 2013. With regard to vents (4.1%) and compressors (11.8%) the situation is to be evaluated moderate to excellent. Still residing in a state of crisis is the sector for print machinery (-16.9%). Likewise in a state of negative growth were air separation and gas liquidation facilities (-4.0%) as well as pumps (-0.4%) and demisters (0.01%).
According to Chinese customs statistics the machinery imports (after delimitation in the table below) decreased by 9.6% to about 44.6 billion US$ in 2013. The most severe incursions occurred in the sector for machine tools in metal processing (-26.1%) and wood treatment machinery (-19.2%). Solely pumps and compressors (+9.4%) as well as comestible goods and packaging machinery (+5.6%) were aggrandisedly purchased abroad. According to the VDMA the PR China is Germanys largest worldwide export market for plant and machinery. Referring to a recent Chinese customs statistic German machinery imports hold a total share of 27.2% of all influx in that sector. Simultaneously China has moulted into an international heavyweight with regard to machinery export. Pursuant to the VDMA China ranked third after Germany and the US. In more but a few third markets German companies are now increasingly confronted with Chinese competition. While this tendency is currently subject to particular geographic restrictions, mainly encompassing South-East Asia, India and Latin America, an increasingly holistic Chinese export strategy primarily focusing on Europe and the US is more than just highly probable.
In general an inclination towards automation is perceivable, which is induced by an increasing lack of available hands (regressing figures with regard to itinerant labour) and the continuously increasing wage cost. Furthermore the demand increasingly shifts toward energy efficient machinery, enabling women to operate them as well (amplifies the work force reservoir and utilises the wage difference between men and women). This inclination results in an enhanced demand for CNC-machinery.
German machine manufacturers operating production facilities in the PR China anticipate a constant or even slightly increasing number of incoming orders. Generically it is perceived pivotal to adapt to the innate market particularities. Those include the fulfilment or satisfaction of high expectations towards German quality on side of the Chinese customers while simultaneously considering the vastly prevailing low motivation towards preventive maintenance. Companies aspiring to grow in pace with the market should thereby not exclusively focus on the high-end segment. On the contrary orientation towards the middle is the predominant motto.
This directly translates to relinquishing supersized technical solutions, which the customer most often neither needs nor wants to invest money in. Handling this particular problem statement is quite differentiated. While some companies increasingly tend to proffering entry-level-models others apply a two-market strategy acquiring established domestic companies. Furthermore also in-situ procurement aimed at decreasing cost and increasing flexibility remains an issue. Additionally cooperation with customers in product and application development constitutes a crucial factor. Future prognosis point to a focal shift towards the parts, updates and complementary services business, which has continuously grown in significance.
Altogether the competitive pressure has intensified considerably, leading to comprehensive decreases in margins and prices. This inclination primarily affects stagnating or regressing segments such as the paper and print machinery industry but also various other fields are confronted with pecuniary adversities. Simultaneously, the growing numbers of local providers gain ground through their increasing velocity, flexibility, their comparatively low prices as well as increasingly enhanced quality. Prior massive efforts to soar from low to high-tech sectors come to fruition. Adding to the intensifying domestic rivalry is a ubiquitous international competition, where especially Japanese machine manufacturers benefit from a recent depreciation of the Yen.
Notwithstanding these adversities Chinese customers prevail to appreciate the high quality standards innate to German technology as well as the stable accuracy of products manufactured with German machinery. Distinctly more intricate is the situation in segments where implemented machines do not have a direct influence on product quality. Not considering prestige purchases, the principal decision point is focused on the relative length of the amortisation time frame.
Market entry in China for the machine tool sector:
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Engineering and Plant Construction
The prospects for the machinery and plant engineering industry in the PR China are positive for 2014. Despite the strengthening Chinese competition German companies hold their ground admirably well. Deliveries in specific sectors could even be enhanced despite an overall regressive tendency in machine imports. Highly conducive is thereby the continuing trend toward automation. Beyond that and increasing engagement in the mid-range price segment presents itself as an almost imperative measure for sustainable success in the future.