CHINA'S CONSTRUCTION OEMS HAVE MADE STRIDES SHOULD WESTERN FIRMS WORRY?

China used to be a lucrative market for Western construction equipment manufacturers but, writes Alan Berger and Robert Droogleever from abcg, the world is changing

China-based OEMs are increasingly looking to overseas markets and are making inroads in developed markets

PHOTO: ADOBE STOCK

Life used to be so simple. China’s economy was booming and there were so many massive construction projects going on that selling foreign-made construction machinery to the Chinese was like shooting fish in a barrel.

For years, China alone has been the largest construction equipment market in the world. And, despite having a well-established construction equipment industry of its own, Chinese products and services were, technically speaking, relatively immature – so couldn’t easily gain share outside of their domestic market.

That was then. This is now. That earlier reliable dichotomy is being comprehensively unpicked. Chinese OEMs are now producing good quality machines and are finding innovative ways to overcome their lack of distribution. This leaves fewer opportunities for Western companies in the (now much smaller) Chinese market, and at the same time opening doors to sales outside of China that were previously firmly locked.

Chinese walls: a history

As mentioned above, Chinese OEMs have long faced challenges in penetrating Western markets. Despite considerable efforts, until recently, they struggled to overcome both the competitive barriers-to-entry and the deeply rooted brand-and-dealer loyalty of the major markets of Europe and North America.

It was a very different story in China, however, where – as the market initially embraced crawler excavators (a product Chinese OEMs tended not to excel at) – foreign OEMs thrived. Thinking the party would never end, many foreign manufacturers made substantial investments in China distribution, manufacturing, and China-specific products. This strategy worked like a charm and, for years, China became the cash cow of many Western manufacturers, such as Volvo CE.

Tides move in both directions

A recent abcg study, using data from industry experts Off-Highway Research (OHR), reveals that the economic tide is starting to change. Non-Chinese OEMs’ share in China has been steadily declining over the past six to eight years, reflecting the improving performance of Chinese-developed products.

This shift comes despite a widespread migration from the once-dominant wheeled loader towards excavators, where foreign OEMs had the early advantage. The high price/high profit party that non-Chinese OEMs once enjoyed is now over.

Chinese products: 2.0

After scant success at their first attempt, Chinese OEMs are now making noticeable inroads into the European and North American construction equipment markets.

Although data suggests a modest increase in market share (to around 5% in Europe), it marks a pivotal movement for Chinese brands in these traditionally hard-to-break-into markets.

Until as recently as 2021, Chinese OEMs were stuck in a ‘Catch-22’ situation: They struggled to attract dealers because the brands were not recognised by customers, and the brands couldn’t become recognised without good dealers.

This situation has now changed, thanks to an alignment of several stars. The prolonged supply chain shortage that Western manufacturers suffered between 2020-2023 created a vacuum that newly export-minded Chinese OEMs were able to fill (Chinese OEMs were also trying to mitigate the effects of a declining home market.)

That’s not the whole story though. The quality and performance of Chinese machinery has also seen considerable improvements – and on many levels is now on a par with its foreign competition.

And, cleverly, Chinese OEMs have been developing high quality rental and access equipment. Why is this clever? Well, since selling to larger rental companies is a direct sales process, the dealership part of the Catch-22 is avoided – giving Chinese OEMs valuable exposure to end customers – and a crucial footin-the-door when it comes to brand building. Finally, the elephant in the room is… an Indian elephant. Who is going to win the battle for the potentially gigantic and rapidly mechanising Indian market? Despite Western brands being established in India for decades – notably JCB – Chinese OEMs are quickly increasingly their share, indicative of the broader acceptance and competitive positioning of Chinese OEMs in emerging markets.

This might be the competitive battleground of the next decade and beyond.

The Chinese are coming

The developments outlined above may coalesce to mean that Chinese OEMs’ time has finally come – both domestically and in export markets. Improved product quality, coupled with strategic market access through rental, could enhance brand recognition, the quality of its dealer network, and market share. One caveat is that we are assuming that no significant trade barriers emerge.

One final point to consider: Given the slow but inevitable march of the construction market towards electrified machines, this will also play to a Chinese strategic OEM strength – cost effective electrified machines. The European car market has seen dramatic growth of Chinese car share due to this same effect, causing significant challenges for the domestic competitors.

Is the construction equipment industry on the cusp of the same disruption? iC