Digging deeper for growth

Foreign, domestic companies step it up to boost market share in China amid growth opportunities

After riding the export growth wave for the past few years, construction machinery makers are gearing up to take advantage of the huge opportunities coming up in China's domestic market.

Much of these opportunities come from the 12th Five-Year Plan (2011-2015) released late last year, which focuses on sustainable development strategies for urbanization, industrialization and informatics sectors.

According to industry estimates, construction machinery sales in China are expected to reach 900 billion yuan ($142 billion, 103 billion euros) by 2015 compared with 400 billion yuan in 2010. Demand for construction equipment is expected to grow by 17 percent every year between 2011 and 2015, according to estimates from the China Machinery Industry Federation.

With such huge growth opportunities, there is no doubt that competition for market share would intensify among leading players.

Foreign players have been consolidating their presence further by diversifying their localization strategies and sewing up more alliances and acquisitions in China.

At the same time, big Chinese companies in the construction machinery sector have been expanding their overseas footprint and tying up more M&A deals. Chinese companies like XCMG, Zoomlion Heavy Industry Science and Technology Co Ltd and Sany Group have all been aggressive in their market strides and have proved to be worthy competition for big players like Caterpillar and Komatsu in China.

US-based Caterpillar Inc, the world's largest construction machinery maker, has stepped up cooperation with its five major dealerships in China to expand its market presence.

"We will invest $1 billion in China over the next few years and the funds will be spent on adding more local dealerships, research, distribution, used equipment sales, manufacturing and leasing activities," says Phillip Pollock, marketing manager for Asia Pacific at Caterpillar's global construction and infrastructure department.

According to Pollock, Caterpillar has received encouraging responses for its moves from dealers and consumers. The US firm will spare no efforts to utilize all its resources to have a significant market share in what is undoubtedly the largest market in the world for construction machinery, he says.

Lei Shing Hong Machinery Group, one of Caterpillar's five major dealers in China expects the new moves to help improve product distribution system and technical support services through a network covering Shanghai and other six provinces.

"Though foreign companies have a technological edge over their Chinese rivals, they still need strong dealerships for product delivery and after-sales service," says Lawrence Poh, chief executive officer of the group. "Dealerships are also essential for market segmentation, logistics and winning new customers in regional markets."

Poh feels that dealerships help the parent company reduce its expenses to creat a transport and after-sales network, apart from stiff advertisement expenses. "Dealership helps companies reduce the risks in making huge investments in an unknown regional market."

The world's second-largest manufacturer of construction equipment, Japan's Komatsu Ltd, has also been coming up with a slew of strategies to retain and grow its marketshare in China.

The Japanese company plans to win more customers by introducing a range of hybrid power, energy-saving products and the Japanese service mode to the Chinese market.

Kunio Noji, president and chief executive officer of Komatsu, says construction machinery makers from developed nations need to focus more closely on market demand and localization strategies in markets like China. Komatsu has continually invested in a program of training dealership specialists at a Chinese institute for seven years.

"We have trained more than 1,300 young trainees at the Jinan-based Shandong Jiaotong University, all of whom have been assigned to different locations throughout China. Our unique approach is to offer high-grade service personnel locally in the China market," he says.

In contrast to Caterpillar, whose China market sales are being assisted and partly managed by five large regional dealers with over 300 outlets in different cities, Komatsu has set up 33 provincial level dealerships in China for sales and other services, which in turn are supported by 205 Chinese and 64 Japanese product suppliers.

Noji believes China will continue to play a significant role in the construction machinery business as it is already "the world's fastest and biggest growing market with huge untapped profit potential."

Even as some international companies are stepping up activities with more dealers and new products, others like Volvo Construction Equipment (Volvo CE), a subsidiary of the Volvo Group from Sweden, is looking to build long-term and lasting relationships with customers.

"Soft publicity of product and service offerings are helpful in improving sales, and can better meet customer needs," says Luo Dong, president of Volvo CE's Chinese division.

The Swedish company has set up direct-service platforms for its clients and sends them updated information about the products, while specialists from its 33 China dealerships offer fuel-saving, machine maintenance and component replacement techniques to clients over a wide range of platforms.

"Chinese clients like value-added services and we are hoping to bring the entire gamut of products to core customers. This will not only add customers, but also attract more companies and rich individuals to our brand," he says.

In terms of design and manufacturing, Volvo's investments in China include the creation of a $30 million Volvo Technology Center in Jinan. This comes on top of the $30 million investments made in the Volvo excavator facility in Shanghai since 2003.

The company has concentrated on selling excavators for the high-end market in China for many years, as this type of machinery is an integral part of the construction machinery boom.

During the second half of 2011, particularly in the third quarter, the excavator market has seen a slowdown due to the reining in policies of the government.

"The slowdown was affected by the government policy, which was designed to tame inflation and readjust the nation's economic structure. The growing need for excavators will remain high in the future when the timing is right," Luo says.

Thanks to the nation's continued investment on urbanization and infrastructure projects, total sales for Chinese companies surged by 52 percent year-on-year to 400 billion yuan in 2010, with exports totaling $10.3 billion, according to the China Construction Machinery Association (CCMA).

"Today, major Chinese companies are keen to acquire European and US construction machinery enterprises in different sizes, because this is a big part of their tactics for gaining high-end technologies to produce core components and expand the markets both at home and abroad," says Su Zimeng, secretary-general of the CCMA.

With Europe and the US still struggling with financial problems, Su says well-known international companies are putting more money and resources in China to continue their revenue growth.

Yuan Yue, vice-president of Sany Heavy Industry Co Ltd, one of China's three largest construction machinery producers, says even though more than 80 percent of the domestic market share is held by Chinese companies, foreign companies have already entered the nation's lower-tier markets through diversified and affordable product categories, hard-working dealerships and international standard after-sales services.

"China's construction machinery producers are gradually losing their low-cost labor advantage and do not have the best technologies to lead the industry on a global scale. Chinese companies must act quickly to ensure their domestic marketing status with concrete measures," Yuan says.

Rather than waiting for the government policy to stimulate the market, foreign companies like Caterpillar have already made the push to increase production capacity in China. Most of Caterpillar's 16 China plants have started to expand production, while nine new manufacturing facilities are under construction and expected to be operational by the end of 2012.