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China's Manufacturing Sector - the End of a Great Growth Era? www.solidiance.com

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Following decades of its rapid growth, China's construction sector is hitting an unprecedented slowdown. As foreign players struggle in the challenged market, China's homegrown manufacturers are still …

Following decades of its rapid growth, China's construction sector is hitting an unprecedented slowdown. As foreign players struggle in the challenged market, China's homegrown manufacturers are still expanding their business as well as extending more credit to customers.
To cope with the issue and maintain a steady growth pattern in China, the industry players need to apply tactful actions and new China market strategies. This document is extracted from a presentation by Pilar Dieter, Solidiance's China Principal during the "CHaINA 2012" conference in Shanghai, November 2012, and provides some foresight on the China Manufacturing and Construction sectors.

Published in News & Politics
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  • 1. CHINA’S MANUFACTURING SECTOR THE END OF A GREAT GROWTH ERA? CHaINA November 7, 2012 Shanghai, ChinaPresented by:
  • 2. ECONOMIC SLOW DOWN BUT STILL LEADING THE PACK…“With China’s interest rate cuts and the reduction in the reserve ratio, as well as the recent announcement of stimulatinginfrastructure investment, we are very confident that we’ll see a soft landing in China. The Chinese government is takingthe appropriate steps to drive a rebound in economic growth by the fourth quarter of this year and in 2013”- Kevin Thieneman, Country Manager of Caterpillar China, India and ASEAN
  • 3. 2010 2011 2012 (Q1) 2012 (Q2)• The growth rate in Q2 2012 marked the sixth consecutive quarter of decline and was the slowest pace since the first quarter of 2009• Earlier this year, China reduced its GDP target for 2012 to 7.5% down from 8% in the face of a persistent slump in the United States and spreading debt woes in the European Union• To buy the economy, China has adopted a string of pro-growth measures, including lowering banks’ reserve ratio to boost lending, subsidizing energy-saving household electrical appliances and speeding up approval for major construction projects Source: Solidiance Research
  • 4. … BUT IS THERE“TOO MUCHSTIMULATION”?
  • 5. AT FIRST: IT WORKED!• i.e “year of the train”. The Railways Ministry announced that it would spend Rmb700 billion on laying track that year, creating 6 million jobs. The Beijing-to-Shanghai bullet train line alone would cost $30 billion, making it the single-most expensive construction project since 1949. By 2011 it had put down 10,000km of high-speed rail, four times more than JapanBUT WOULD THE INFRASTRUCTURE EVER BE ABLE TO PAY FOR ITSELF?• Even the Ministry of Railways admitted that its flagship Beijing-Shanghai line wouldn’t break-even “in the short term”• Performance: Trains were breaking down or experiencing lengthy delays and of course the terrible crash in Wenzhou last year• Corruption: February last year, Liu Zhijun, the Railways Minister, was detained having amassed Rmb1 billionMOUNTING DEBT• Ministry of Railways by now has debt of Rmb2 trillion, an unprecedented amount• But a greater worry are the “Local Government Financing Vehicles”. Setup to borrow from state banks to finance local infrastructure spend, a classic off-balance sheet exercise• The central bank concluded that local governments were on the hook for at least Rmb14 trillion of financing vehicle debt (much more, say others) Source: Solidiance Research
  • 6. Not only foreigncompaniesare feeling theslowdown
  • 7. Key Performance Indicators (KPI) & Remarks• Growth at Sany Heavy was extremely rapid up until the end of 2011, with purchases of Putzmeister bringing sales into Europe.• Equipment sales forecasts have been slashed in China for 2012.• Recent IPO planned for the HK stock exchange has been halted• The workforce at Sany Heavy has been cut in recent months.• Zoomlion reported an 8.3% increase in sales in Q1 2012 over Q1 2011• One reason for the increased sales data is that Chinese firms are keeping revenue buoyant by extending more credit to customers.• At Zoomlion, accounts receivable rose to more than 200% of sales in the first quarter, up from 90% in June 2010.• President Zeng Guang’an warned that a consolidation in the industry was imminent as production is cut and companies step up efforts to sell more equipment. “We have too much investment. We need more consumption,” Zeng said in a recent interview. “In China, we are going to slowly change the structure of our economy,” he said, alluding to top-down efforts to stimulate domestic consumption. (WSJ Nov 2012)• Third quarter net profit falling 85% to US$3.3 million.
  • 8. DOMESTIC PLAYERS SEEM TO BE COPING BETTER – BUT ARETHEY? As foreign rivals struggle to achieve sales targets, China’s homegrown manufacturers say their businesses are still expanding • One reason is State sponsored spending giving Chinese players an edge to win additional projects. In addition, Chinese firms started out the year attempting to maintain revenue growth by extending favorable credit terms to customers • This move is supported by the Chinese government and that ordered the banks to provide “easier” access to loans/refinancing options. • It remains to be seen how Chinese companies are going to deal with rapidly expanding Accounts Receivables Source: Solidiance Research
  • 9. • Reduce capacity (less shifts, force staff to take holidays)SHORT TERM • Delay investments • Export to other country markets as a short term destination, to maintainFIXES productivity of Chinese factories • Load distributors with inventory Source: Solidiance Research
  • 10. Acquisitions Review sales channelsLONG TERM • Introduce a “B” brand • Optimum mix of direct vs indirect • Remove competitionFIXES…? New markets Move to solution based sales • Renovation vs new construction • Increase service offering • Energy efficiency via JV’s with a • Turn key projects Chinese partner Source: Solidiance Research
  • 11. SOLIDIANCE IS A MARKET GROWTHSTRATEGY ADVISORY FOCUSEDEXPLICITLY ON ASIA
  • 12. • 85% client repeat rate Solidiance is a B2B marketing and growth strategy consulting firm with focus on growth in Asia Pacific.• Wholly-owned presence across all key markets in Asia since 2007 We are devoted to working side-by-side with our clients to outpace the competition, close gaps in• Facts-based strategy consulting growth and deliver breakthroughs in performance and with actionable deliverables profitability.• No project / research outsourcing Our Asia focus provides our clients with a better to freelancers understanding of intrinsic regional issues.
  • 13. Singapore Indonesia IndiaSuite 07-05 Suite 6A, 15/F A-9, Third AvenueHigh Street Centre Menara Palma Bandh Road1 North Bridge Road Jl Rasuna Said Block X-2 Kav 6 New DelhiSingapore 179094 Jakarta 12950 Phone: +91 9999988859Phone: + 65 31520301 Phone: +62 2157957465 MyanmarThailand Vietnam 33B, Thiri Mingalar LaneInterchange Tower 21 Suite 704, Satra Dong Khoi Building Maynagone - 7 Miles#2109 - 21F 58 Dong Khoi street Yangon399 Sukhumvit Road District 1, Ho Chi Minh City Phone: +95 943154745North Klongtoey, Wattana Phone: +84 835218639Bangkok 10110Phone: +66 26112664 Malaysia Level 8, Suite 832, Pavillion KLChina 169 Jalan Bukit BintangSuite 516, Fuxing Plaza Kuala Lumpur 55100109 Yan Dang Road Phone: +60 392058429Shanghai 200020 OURPhone: +86 2153019980 Pilar Dieter Principal – Greater China OFFICES HP: +86 136 7170 9952 www.solidiance.com / info@solidiance.com