By Aaron Stone
A recovery (of sorts) has materialised in the construction equipment market in recent times, though don’t start popping the expensive champagne bottles just yet. Before the market crash in 2008, the worldwide industry value of new construction equipment sales was an imposing USD 100 billion. Fast forward a couple of years and the market had plummetted to USD 55 billion, with some regions crashing in the vicinity of 80-85%. This year, sales are forecast to reach USD 80 billion, rising to USD 90 billion by 2021.
David Phillips, managing director of Off Highway Research in the UK and a 36-year veteran of the industry, warns that despite the recent rebound it is still a very indefinite world we live in — and businesses are not fond of uncertainty. “Are people going to invest in highly priced machinery if they are not sure what is going to happen with the political and regional economic situation?” he surmises. Speaking at the 10th China Off-Highway Vehicle Summit in Shanghai, China, in October 2017, Phillips outlined the latest trends, issues and prospects facing the global construction equipment market, a market he concedes is difficult to predict. The amalgamation of so many variables such as politics, economics, oil prices, currency fluctuations and Brexit all play a pivotal role in the future fortunes of this industry.
The construction equipment highs of 2007 were stimulated by “easy and stupid” credit facilities available to anybody in Europe and North America who sought to purchase equipment, says Phillips. Admittedly, this easy money was not unique to the construction sector. Equally, the industry was not immune from the ensuing financial meltdown.
While the total construction equipment market value actually increased to USD 102 billion in 2011, owing to a financial stimulus in the Chinese market of such magnitude that the country seized approximately 40% of global demand (by value), this statistic merely masked the international crisis unfolding. China’s fiscal stimulation was shadowed by an inevitable reduction in government investment and considerable retraction in construction equipment sales.
Individual regions throughout the world are now at variable stages of recovery. North America’s production output is twice what it was five years ago. China is displaying promising signs of growth in the first nine months of 2017, while Europe remains a difficult operating environment. During his presentation, Phillips analyzed both the movements and outlook of key locations in the construction equipment market.
Unlike anywhere else in the world, politics in China heavily influences growth, almost on a monthly basis. If the government decides to increase liquidity it can spark a dramatic shift in the economy.
In 2002, China accounted for only 10% of the global construction equipment market in unit terms. The Chinese government’s stimulation of infrastructure development propelled spectacular, yet unsustainable, increases in demand and acquired 50% market share of global unit sales.
Buoyant companies purchased construction equipment on the presumption of ongoing contractual work. However, by 2011 the government had cut down a lot of projects. The resultant slowdown left contractors out of pocket, equipment they couldn’t afford to pay for, and a rising second-hand equipment market.
Last year, China accounted for 17% of global demand, the first time in 10 years the market was smaller than in Europe. Phillips predicts a slight increase to a sustainable 20%. However, the country “will never get back to the golden days of 2007 to 2009,” he submits.
China’s economy is poised for its first year-on-year acceleration in growth since 2010. Beijing has reported GDP of 6.8% in the third quarter of 2017, ahead of the full year target, and housing prices and construction starts have rebounded from the 2014-2015 slump. China’s residential property market is arguably the world’s most important asset market — boosting overall business investment and driving demand for output from China’s huge manufacturing sector. Though the surge in housing investment has many pundits fearing a housing ‘bubble’ or bemoaning an economy ‘kidnapped by property.’
Growth in China’s construction equipment sales was unexpected 18 months ago. Demand for wheel loaders continues to be high, though a move to more productive machines, such as crawler excavators, has helped fuel demand. A trend towards compact equipment — including mini excavators, small wheel loaders and small telescopic handles — is a movement that is likely to continue. Equipment under 100 horsepower accounts for more than 60% of sales in North America and Europe, yet only 19% of current sales in China.
Contractors that have survived the tough times are now more profitable, though a number of challenges still resist growth in the domestic market. Excess capacity of up to 50% is of concern — particularly for earthmovers, wheel loaders and excavators. Ironically, availability of stock and quality issues are also apparent — as too many companies offer the same products and distribution networks. Coupled with a 100% upfront payment requirement — the region is experiencing significant supply chain issues.
Despite these impediments to growth, substantial opportunities exist for Chinese manufacturers. Exports have reached 20% of production (driven by a weaker domestic market) and Phillips believes some businesses will export 40% of production within five years, availing of higher margins, and an increased likelihood of getting paid.
Approximately 50% of Western OEMs’ profitability comes from the aftermarket — the sale of spare parts, customer support, and refurbishment. In China, the aftermarket accounts for less than 5%. Diversification away from selling product is long overdue, says Phillips. The importance of the rental industry should not be discounted moving forward.
India, home to 1.324 billion inhabitants, is becoming a real powerhouse in the Asian region. Off Highway Research forecasts India’s production “at least doubling” over the next five years due to domestic demand and its transition to an export hub for the Middle East, East Africa, Southeast Asia and increasing supply to China. India has enjoyed significant investment during the last few years from leading construction brands such as JCB and Caterpillar.
“Out of all the developing markets, India will show the strongest growth in the future because many of the obstacles to growth have now been overcome,” foretells Phillips.
Traditionally, backhoe loaders have been the cornerstone of the Indian market. These machines are increasingly being replaced by crawler excavators more appropriate for heavy lifting, heavy grading and earth moving. Crawler excavators allow greater product specialization with 8-14, 22 and 30+ tonnes options. Backhoe loaders’ unit volumes will continue to increase in the future, says Phillips, although they will increasingly be used in more rural locations and their proportion of the total market will decline.
A report by global analytics company Crisil predicts the July 1, 2017, introduction of a goods and services tax (GST) in India will drive demand for large and heavy commercial vehicles, with tonnage growth forecast at 10% over the next two to three years, more than double the growth foreseen for their lighter counterparts. The report suggests, post GST, that companies are shifting towards “larger warehouses with their location driven by logistical efficiencies rather than tax concerns.”
The United Kingdom, France, Germany and Italy are the four major construction equipment markets in Europe, supplying 80% of the region’s demand. Europe continues to be a very difficult market for many companies, says Phillips. Alongside the financial turmoil of 2007 onwards came a total cut off in financing, responsible for about 80% of equipment sales.
While the region has appreciated a restrained recovery, only small increases in demand are expected in Europe moving forward, concentrated in the northern parts of Europe. From 2007-2016 all equipment types were affected, affirms Phillips, though he highlights recent strong growth in excavators and crawlers as likely to continue.
Exports account for 30% of Europe’s production. Clearly, there is merit in analyzing foreign market trends, such as the diversification of products and within products for companies actively involved in the China market.
Phillips cautions that we shouldn’t discount the seriousness of the political situation in North America and its impact on investment. Although, in seemingly the same breath, he highlights a strong recovery in the North American market despite unease around the stability of the current administration. A lot of business confidence has returned, coupled with low interest and inflation rates and the United States economy remains very powerful.
The North American construction equipment market relies heavily on the rental industry to drive the market, advises Phillips. An abundance of modern equipment in rental fleets provides a cost-effective approach for businesses with lower maintenance costs and ease of replacement. While the rental industry has gained huge prominence in North America and across the globe, and was valued at USD 34 billion in 2014 by Grand View Research, in emerging economies such as Asia, the rental market is still very much in the nascent stage.