More on Construction Equipment

MTD’s article on China’s construction equipment industry attracted interest from a number of quarters, including David Wolf at Silicon Hutong who wrote about it in his post, “The Real Question for China’s Construction Equipment Makers.”

In summary, David raised several questions:

• What happens when China’s construction boom ends? Which of the Chinese companies are best positioned to survive a shakeout?
• When the boom ends, which of the Chinese companies is building the skills necessary to operate in markets where Chinese is not the language of business and where deals are done differently?
• What are Cat, Komatsu, and company doing in anticipation of Chinese competition overseas?

These are, of course, the right questions to be asking, and the answers will come as events unfold. Many Wall Street analysts, including Kate Zhu of Morgan Stanley whose work I follow closely, are trying to pick the winners and losers among the Chinese companies and are following their progress as they expand abroad. Other security analysts in New York, Chicago and Tokyo will be studying the responses by Cat, Komatsu and others to new Chinese competition.

I would add several points to the overall discussion.

First, China’s construction boom is not about to end anytime soon. The United States began developing in the early 1900’s, and one could argue that the country was not “built out” until the 1970s. By comparison, China is only 30 years into its industrialization process. With four times as many people to house, transport, feed and clothe, I would argue that China’s construction boom has a long way to run.

Second, when China’s construction boom ends, the battle in the construction equipment industry will likely move to other developing countries, not necessarily to the developed markets of the world. Of the 6.8 billion people in the world, approximately 1.0 billion live in North America, Western Europe, Japan and Australia; 1.3 billion live in China; and 1.0 billion live in India. That leaves 3.5 billion people living in the less developed economies of Middle East/North Africa, Africa, Southeast Asia, South America and Eastern Europe.

In the less developed markets of the world, the cost perspectives, living and operating conditions and emissions regulations are closer to where they are in China than they are in the United States, Germany or Japan. That is why these markets are, in my opinion, the natural areas for China’s initial expansion abroad.

For reasons of national pride, SANY, Xugong and others will surely establish operations in the United States and Europe, but they are likely to have to have their best prospects for near term success in the developing world.

The abundance of Chinese equipment that I saw at work on my 2009 trip to Kenya and Tanzania provided the anecdotal evidence that convinced me that this is a real—and immediate— opportunity for the Chinese equipment makers.

How should Cat, Komatsu and the other global leaders prepare for Chinese competition overseas? By far, the best way is to compete successfully with them in China. That is why the battle for the construction equipment market in China is so critically important.

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