Caterpillar Inc. (CAT) (CAT), Komatsu Ltd. (6301) and other construction-equipment makers have built enough capacity in China to satisfy global demand twice over while sales in the country are falling, according to a research company.
Manufacturing capacity in China is almost 600,000 excavators a year while the worldwide market is about 300,000, according to London-based Off-Highway Research. Inventories of crawler excavators in China are about 100,000, almost equal to projected 2012 domestic sales, the research firm’s Managing Director David C.A. Phillips said.
The supply glut is a blow to Peoria, Illinois-based Caterpillar and its competitors who built factories and bought local companies to grab a share of the biggest construction equipment market. Now, with government property controls slowing construction, those companies are cutting output and trying to export unsold equipment.
“It’s all very scary,” Phillips, who visited China in November, said in an Dec. 12 interview.
Demand growth in China was as high as 25 percent for some types of equipment in the decade through mid-2011, according to Phillips. That also spurred investment from Sweden’s Volvo AB (VOLVB) and domestic manufacturers such as Sany Heavy Industry Co. (600031) and XCMG Construction Machinery Co. (000425)
The industry assumed that pace would persist and kept assembly lines going even after the slowdown began last year, said Karen Ubelhart, a Bloomberg Industries analyst in New York. Phillips sees annual demand growth in China slowing to as little as 5 percent for the next 3 to 5 years.
Chinese excavator unit sales fell 25 percent in November, a 19th straight monthly drop, according to China Construction Machinery Business Online. As competition intensifies, Chinese companies are offering customers “wildly crazy, very attractive financing,” said Phillips, who has been with Off-Highway for more than 30 years.
The industry “is in a very difficult period,” Chinese manufacturer Zoomlion Heavy Industry Science & Technology Co. said in an e-mailed statement. It will take another year to stabilize, Zeng Guang’An, vice chairman and president of China’s Guangxi LiuGong Machinery Co. Ltd. (000528) said last month, according to a Nov. 29 JPMorgan Chase & Co. report. Calls to XCMG went unanswered.
China’s new leaders have vowed to target “sustained and healthy development” and focus on urbanization. Despite that, even accelerating economic growth in 2013 might not be enough to help the machinery makers. If they proceed with their planned expansions in China, total capacity would exceed demand by 175,000 units, even with 15 percent growth through 2022, according to Off-Highway.
Still, the worst may be over. Komatsu’s sales “hit the bottom” in September,’’ the Japanese company’s Chief Executive Officer Kunio Noji said. Komatsu, the second-largest construction equipment maker, may boost its operating rate in China to 70 percent from February through April, from 30 percent currently, he told reporters Dec. 18.
Komatsu slipped 0.9 percent to 2,076 yen in Tokyo, trimming its gain for the year to 15 percent. Caterpillar fell 1.8 percent to $87.90 in New York.
While orders are still lower from a year ago, sequential sales in October and November were up and the “best scenario” for Chinese demand may be for an increase of 20 percent in the year starting April 1, Noji said.
Sany, China’s biggest machinery maker by market value, is seeing sales that are better than the industry average, it said an e-mailed statement.
“China is showing some signs of life,” Caterpillar Chairman and CEO Doug Oberhelman said in a Bloomberg Television interview on Dec. 6. “I’m convinced we are going to see positive changes in the next few months.”
Caterpillar and its dealers in China have cut inventory this year and the manufacturer has implemented temporary shutdowns and shorter work weeks to lower production, Jim Dugan, a company spokesman, said yesterday.
“The current slowdown in our industry in China has not changed our strategy or long-term view of the China market,” Dugan said in an e-mail. The company is investing in the country with a time horizon of 30 to 40 years, he said.
Struggling manufacturers in China may fail or be bought by larger domestic competitors, Phillips and Zoomlion said. Pat Olney, head of Volvo AB (VOLVB)’s construction-equipment unit, said last month that the Chinese market is “ripe” for consolidation and his company will monitor the situation “in an opportunistic fashion.”
“There’s going to have to be a number of mergers and acquisitions, or very probably a number are going to have to exit the industry,” Phillips said.
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