Machinery companies explore overseas markets

Going overseas is no longer as easy as loading the products on a ship and selling them quickly in the Middle East or Africa.

As tax barriers increase and profit margins get slimmer, Chinese manufacturers have to try other approaches to explore overseas markets, including building "complete knock-down" plants, where machinery is delivered in parts and assembled locally, and procuring materials locally.

Africa has become an increasingly important investment destination for Chinese machinery and auto companies. Liugong Machinery Co has listed Africa as one of its "second home markets", along with Southeast Asia, Russia and Central Asia.

Qin Yong, deputy general manager of international business at Liugong Machinery, says the most popular models in these markets are loading machines and excavators.

South Africa is the "superstar" in the African market. During the first three quarters of this year, the company has sold 830 units in South Africa and gained revenue of 390 million yuan ($62 million), up by 117 percent year-on-year. The company is represented in most African countries with around 30 dealerships.

The unprecedented attention to overseas markets is partly due to the sluggish domestic market of the past two years.

Wang Xiaohua, president of Liugong, says the market has seen a turning point since 2011.

"The past 10 years have been golden years for the Chinese market, but over the next decade, it will slow down and see a modest growth," he says. "I don't think China's machinery market will create another miracle as it did in 2009 and 2010."

Liugong's financial report shows revenue in the third quarter down 27 percent to 2.57 billion yuan from the same time last year.

Truck sales are also stalling sharply in the national market. The major commercial vehicle manufacturer Dongfeng Liuzhou Motor Co estimates its truck sales to drop by 50 percent from 60,000 units last year to 30,000 units this year as a result of shrinking demand.

Huang Ziqiang, deputy general manager of Liuzhou Motor, says the greener pasture is overseas as the national truck market is almost saturated (1 million units). The company has exported trucks to Southeast Asia, Africa and South America.

SGMW, a three-shareholder joint venture of SAIC Motor Corp, Liuzhou Wuling Motors Co and GM China, is also treating Africa as one of its most important overseas markets. A knock-down part factory is already established in Egypt, serving the North African and Middle East markets.

Liugong's efforts to concentrate on overseas markets seem to have paid off. This year, Liugong's export volume is expected to reach 10,000 units. Five years ago, it was only 2,700 units.

Since 2002, the company's export volume has been increasing by 70 percent every year, and the export value has risen from $4 million to $500 million. It aims to make overseas sales one third of overall sales by 2015. Currently, they represent about 24 percent of total export volume.

Qin says Liugong Machinery puts its success in the overseas market down to good distribution networks and after-sales services.

It signed agreements with local distributors to sell products, so the brand can respond quickly to customers' needs.

"Building overseas networks is very expensive and time-consuming. It is made much easier by cooperating with local distributors," Qin says.

In terms of research and development, the company hires 140 local experts as they "have more knowledge of the global market".

Although Liugong has made impressive achievements in overseas markets, it is yet to enter the mature markets such as West Europe.

"To enter these markets, we need to meet the high standards set by these countries, which emphasize noise control and operation comfort."

Qin admits the biggest advantage of Liugong Machinery is still competitive pricing. Compared with renowned brands such as Caterpillar, the loading machine produced by Liugong is a third of the price.

But as more Chinese companies enter the emerging markets, the price competition is getting fierce.

Qin says the company is following the route Japan went through during the 1970s and 1980s, when products were cheap and lacking in strong brands. "But as costs increase, price competitiveness will fade out, and we have to improve the product reliability and build our brand, so we can earn a better profit margin in the future."

Lack of technology to produce key components is another challenge on its way to becoming a world-class company.

Currently, hydraulic parts are purchased from Japan, the power train from Europe and engines from Cummins.

But the situation is changing slowly. Earlier this year, Liugong partnered with Cummins to build an engine company in Liuzhou, in South China's Guangxi Zhuang autonomous region, which will begin operations next year. The total investment amounts to 1.65 billion yuan.

Exporting products is the first step generally and Liugong machinery is seeking cooperation in various forms. In 2009, the company established a complete knock-down company in India, and earlier this year, it acquired Polish bulldozer company HSW to supply the clients in eastern and southern Europe as well as Russia.

The CKD form is just temporary, says Qin. "Liugong machinery eventually needs to operate locally in the target markets," he says.

"Back in the 1990s, the foreign governments welcomed us building CKD plants and assembling machines in their countries, but now they expect much more from us - we have to create jobs and help to build the supply chain for them."

Huang Ziqiang, deputy general manager of Liuzhou Motor, says companies need support from the Chinese government when exploring overseas markets. "The Chinese government is offering duty refunds for export companies, but that's not what companies need the most," he says. "I wish the government could provide more legal services to us, so that we can get around various barriers and settle down in the target markets."

Huang Feifei in Nanning contributed to this story.

Contact the writers at [email protected] and [email protected]

(China Daily 12/21/2012 page16)