China's Construction-Equipment Firms Battle Slump

SHANGHAI—China's largest construction-equipment makers still face massive overcapacity and pressure to consolidate despite signs of improvement from this year's industrywide sales slump, a top executive said.

Guangxi Liugong Machinery Co. President Zeng Guang'an said industry inventories appear to be coming down as manufacturers cut production and renew efforts to sell more equipment. Still, he warned that a consolidation of the industry is imminent.

"We have too much investment. We need more consumption," he said in a recent interview. "In China, we are going to slowly change the structure of our economy."

The industry has taken a hit as China's growth has slowed to its lowest level since the onset of the global financial crisis. Liugong's third-quarter net profit declined 85% to 20.9 million yuan ($3.3 million), as revenue fell 27% to 2.57 billion yuan. Rivals such as Sany Heavy Industry Co. and Zoomlion Heavy Industry Science & Technology Co. also have reported tough conditions, as have foreign competitors such as Komatsu Ltd.  of Japan and Caterpillar Inc. of the U.S.

Mr. Zeng cited overcapacity, high inventories, bad debts and a glut of secondhand machines due to rising repossessions.

"The big companies like Sany and Zoomlion are very strong and I think they can overcome all their problems," he said. "But many of the small manufacturers in the near future—three to five years—they will close their business."

He added, "of the 200 or so equipment makers, we need only around 10%."

Shi Yang, chief representative of construction-management consulting firm Off-Highway Research, said China's size should enable larger competitors to survive. But he added, "it is quite hard to tell how many big names may still survive, as some local manufacturers are able to absorb support from different sources, even though they are not viable in terms of financial health."

Barclays China machinery analyst Victoria Li expects only a moderate recovery in China's construction-equipment market beginning in the second quarter of 2013. "As demand comes back, the industry's risk levels will definitely reduce," Ms. Li said.

Longer term, equipment makers are watching early efforts by Beijing to reduce the economy's dependence on big-ticket construction projects and nurture the role of the consumer in the economy. Mr. Zeng said Liugong hopes that will result in more car sales—increasing demand for roads—while improved consumer demand for housing is likely to boost equipment sales.

Liugong has made progress in reducing inventories and accounts receivables, he said. It had a positive cash flow of 1.3 billion yuan at the end of the third quarter and a network of about 100 dealers for its core construction equipment late last month, Mr. Zeng said.

"In the first half of 2013, [industry conditions] will improve as more companies produce less and sell more. That's the only way," he said.

Like other Chinese construction-equipment companies, Liugong is looking to overseas markets to alleviate the pain at home. In February, it paid 335 million yuan for the machinery unit of Polish steel and manufacturing company Huta Stalowa Wola. In September, Liugong expanded its relationship with ZF Friedrichshafen AG of Germany by establishing a joint venture to produce axles in China for use in construction machinery. Mr. Zeng said he foresaw more cooperation with the automotive supplier.

Yet success in the U.S.—a crucial global market for construction-equipment machinery—remains elusive. He said the company had 20 dealers in about 20 states, mainly in the country's Northeast and South, but added that potential dealers aren't willing to make the required level of investment to run and promote dealerships properly because the market is "not so strong."

"In the U.S., we are still not moving so fast," he said. "We have some problems with dealers. It takes time for our people to get big business."

Liugong also has an overseas plant in India and is considering building one in the Americas, but has no specific plans, he said. Sany has a plant in Peachtree City, Ga.