Exclusive: how is China’s construction equipment sector recovering?

KHL Group asked Beijing-based SHI Yang, Director of Research at Off-Highway Research China, to describe how China’s construction equipment market is recovering from the COVID-19 outbreak.

KHL: What is status of manufacturing/production with the major Chinese OEMs?
SHI Yang: As it is the major manufacturers that support their local economies, these companies re-opened their factories in the third week of February. However, because of the problems in the production of components, the still partially blocked transportation system and the absence of many employees, their production was at low levels in the first two weeks. But as a general trend, the manufacturers had restored productions to normal levels by the beginning of March, with strict virus containment measures are still adopted every day, such as wearing masks. A number of excavator factories are working around the clock now to fill the orders and prepare for the expected peak in April.

What is happening with production for OEMs in Hubei province?
There are no major construction equipment OEMs in this province, but there are some important component suppliers, like DongFeng Cummins (DFC), a supplier of engines for earthmoving equipment, road machinery and mobile cranes. Its OEM customers said they had a problem in obtaining engines from DFC in February. However, the engine manufacturer managed to resume production from the end of February, and so far has recovered to not less than 80% of capacity.

More generally, what about the supply of components such as engines and transmissions? Is that now back to normal?
As reflected by the production levels of the major OEMs, their suppliers have now returned to normal production, or at least a high percentage of it. However, with slow payments from the end market, the component suppliers may have to wait longer for payments. The government is now trying to help with this cash flow problem. If the market is to recover vigorously, the payment problems might be eased in the second quarter or the third.

What has been the disruption to dealers in China?
Dealers have been struggling with a lack of cash flow for the last two months. But to cope with the return of the market, in particular the excavator sector, in March a number of excavator dealers have been recruiting additional staff. With the encouraging policies for construction activity, the dealers are more confident and in a better position than businesses in other industries.

What are you seeing in terms of government support or stimulus efforts?
As always, an increase in government investment is now being used as an important tool to make up the gap the economy had suffered since the end of January. Many ambitious new plans have been announced at the local level. However, we see that central government is trying to balance the need to restore growth with the requirement to minimise the exposure to risk, in the context of a highly leveraged economy. While central government has showed resolve to maintain the original goals for 2020, there might have to be some adjustment. This will depend on when and how the entire economic system can be returned to normality. The annual congress of the Parliament, which should have taken place in the first half of March but has been postponed to an unannounced date, should clarify the new strategies for the year and even for the next few years.

How would you summarise the current situation?
As a general view, the construction equipment industry in China has now moved back to normal production. However, while supply is restored, there are still great uncertainties on the market side. Domestic demand is driven by the acceleration in investment from the low levels in the first two months of the year, but this demand is mainly influenced by ongoing projects. It is uncertain if and how the country will see another round of massive investment. The export market is obviously under great pressures and a decline can be expected at least for this year. The market is there, but its almost impossible to reach it without a normal economic system, which are far beyond the control of the industry.

Contact details for SHI Yang
E-mail: shi.yang@offhighwayresearch.com
www.offhighwayresearch.com