The recent housing measures have halted many major construction projects. [Provided to China Daily]

Innovation, new management skills pursued by companies

The government's recent housing measures have not only taken a toll on annual home sales, they are putting a crimp in the construction machinery industry.

According to an October report by the China Construction Machinery Association (CCMA), sales of construction equipment for the second and third quarter this year slid almost 20 percent from the same period last year.

It is one of the many effects that have risen out of the central government's recent tightening measures on the housing market that include higher mortgage rates, a ban on third-home mortgage loans and purchase restrictions.

In the aftermath of the new policies, nearly 1,000 real estate agency outlets in Beijing have closed their doors permanently this year. Only 12,760 homes were sold in October, down 40 percent from a year ago, in the capital alone.

The decline in sales in the construction machinery industry is a major departure from sales figures of the past few years, when annual sales rose 30 percent, according to the CCMA. In 2010, total sales in the industry surged 52 percent to 400 billion yuan ($63 billion, 46.5 bilion euros) from 2009, with exports totaling $10.3 billion (7.5 billion euros).

"The decrease in sales is largely because of reductions in infrastructure construction investments, adjustments in macroeconomic policies and the tightening of the monetary policies, which made the financing of some infrastructure construction projects impossible," says Zeng Guangan, president of Guangxi Liugong Group, a machinery company.

One other major reason for the downturn, says Su Zimeng, secretary-general with CCMA, is simply a matter of the well running dry. Once the government's fiscal stimulus plan of 4 trillion yuan was exhausted, many large-scale construction projects as well as sales for the nation's construction machinery slowed to a crawl.

Another reason was the central government's recent monetary and credit-tightening policies.

"The policies make the related parties, such as the Ministry of Railways or local governments, face pressure to clear debt and resume halted projects. And it is also hard for the construction machinery makers to raise money from the banks to carry on the projects," says Xia Bin, a member of the monetary policy committee of the People's Bank of China.

He warns that under the current macroeconomic landscape, it is very important for machinery manufacturers to maintain their cash flows to protect against financial risks.

"The construction machinery industry has a characteristic that the manufacturers have to deliver the goods much earlier, usually several months to the buyers. This exerts much burden on the machinery makers' cash flow. The days of a high volume of orders and cash have gone and manufacturers have to prepare for a weak market and avoid financial risks," Xia says.

Su blames the construction machinery industry's lack of innovation and the then attitude of trying to meet orders as quickly as possible for the industry's current malaise, a sentiment shared by Wang Min, chairman of Xuzhou Construction Machinery Group Inc.

"In the past few years, Chinese construction machinery manufacturers were busy producing and delivering products, but didn't pay enough attention to enhance our key competitive strength, such as improving management skills and technologies, innovations. It is time for us to improve these aspects now," Wang says. "The low end construction machinery market in China has been saturated. Chinese companies can make full use of this period to adjust their product mix and gain more market shares in the future."

Analysts say all is not lost and that the slowdown in growth provides opportunities for the industry to recreate itself. They say that overseas markets are one of many approaches to cope with the downturn.

"Chinese construction equipments are good in quality and cost. But because of lack of brand recognition, it is rare to see Chinese equipment in some overseas market especially in developed economies," Wang says.

He says amid the bleak outlook for the global economy, globalization is another important strategy to ensure that Chinese machinery manufacturers develop. Wang says prices for acquiring overseas machinery companies or introducing advanced technologies and talents into the industry may be much cheaper than before.

"Through these means, Chinese competitors can enhance both the brand image and their competitive edge," he says.

The country's rapid urbanization will also help the industry, according to analysts. Lu Jinyong, director of the China Research Center for Foreign Investment at the University of International Business and Economics, says that since China is still in the path of urbanization, construction and infrastructure development will continue to get top priority.

"The market for real estate and infrastructure construction industries remains bullish for the next 30 years, but with a slower growth rate," Lu says.

Su with the CCMA agrees.

"The output value of China's construction machinery industry is expected to have an average annual growth rate of 17 percent in the next five years, and will hit 900 billion yuan at the end of the 2015," Su says.