New Multi-Client-Study02.07.2012

China: Changing the pattern of the global machine tool industry

China is the largest market and production site for machine tools in the world – and the growth prospects are still good, in particular in the high-end segment. Despite the promising outlook, the Chinese machine tool industry is facing some major structural challenges, though. Due to the high importance, the industry enjoys with the Chinese government, as well as promising initiatives on the enterprise level, we expect that the ambitious targets for this industry will be achieved, however. This development will have a deep impact on the global machine tool industry as well as its supplier industries and change it profoundly over the next 10-15 years.

The largest market in the world, continued good growth prospects

The People's Republic of China has become the world's largest market for machine tools since 2003. In 2011, the country accounted for about 37% of global machine tools sales. Furthermore, it was able to conquer the top spot in terms of production output in recent years.

The growth of the domestic machine tool industry over the past decade has been correspondingly: During this period, the Chinese machine tool production grew in average by 25% per year. Focusing on revenue, the largest Chinese machine tool manufacturer, Shenyang Machine Tool Group (SMTCL), rose within nine years from the 36th to the 1st place in the ranking of global machine tool manufacturers – with an export share of only 5% so far!

China’s capacities in the key sales branches for machine tools, such as automotive, aerospace, railway construction, electronics, energy, defense, etc., are supposed to experience a further expansion. Therefore, the demand for machine tools – in particular in the high-end segment – will continue to grow in the foreseeable future.

Challenges for the Chinese machine tool industry:

Big but not strong

Despite the impressive growth rates in the past and the good prospects for future demand, the Chinese machine tool industry faces some serious challenges:

  • Lack of domestic NC-control units and other key components in the mid-to-high segment. According to Chinese industry experts, the share of foreign technology in this field is in the range between 80% and 90%, depending on application.
  • Weak in the area of machining centers, a strong focus on machinery for single processes.
  • Poor product quality due to a high proportion of manual production, resulting in a lack of reliability, durability and reputation problems.
  • Low innovation capacity, mainly due to a weak technology base and a lack of staff able to control complex, interdisciplinary development projects.
  • Highly fragmented market with a strong share of machinery in the low-cost sector, aggressive price wars, low profitability, strong short-term thinking on corporate and employee level with corresponding effects on R&D success.

Accordingly, the share of foreign manufacturers in an overall growing market has been between 29% and 41% in the past few years, depending on the estimate. Since Chinese producers could not satisfy the demand for reliable and accurate machines, the sales of foreign machine tools and key components in the upper price segment kept growing over proportionally.

Ambitious goals of the Chinese government:

Machine tools as a key industry

The difficulties of the domestic machine tool industry mentioned above are accompanied by ambitious goals of the Chinese government. It regards a strong and independent machine tool industry as one of the prerequisites for the country to become the world's leading location for high technology. High-performance machine tools are essential for the development of key manufacturing industries. Furthermore, an independent machine tool industry is the basis for a modern defense industry – an industry, whose modernization has also gained more attention in Beijing in recent years.

For the period of the 12th Five-Year Plan (2011-2016), the Chinese government defined the following goals for its machine tool industry (among others):

  • Annual production of over 250,000 units of NC machine tools (in 2010 <190,000 units).
  • Permanent increase of the market share of domestic machine tools to over 70%.
  • Increase of exports to over 15,7% of total production (compared to 8,9% in 2010).
  • Annual R&D investment of major enterprises >4% of revenue.

Furthermore, there have been the following objectives defined for the next 10 to 15 years:

  • The establishment of a sound industry chain of NC machine tools, including competent supply capacity in local-made control systems and key components. Major products shall achieve advanced technology on par with the world’s best.
  • Locally made medium and high‐end NC machine tools shall dominate the domestic market (especially in the nationally prioritized sectors like aerospace/aviation, shipbuilding, automotive, and power generation equipment industries).
  • Establishing several well-known Chinese machine tool companies with a strong position on the world market.

The development of an efficient domestic machine tool and components industry is defined more clearly than for any other industry, we have analyzed in the past in China. The intentions expressed have to be considered seriously, for this reason.

Generous government support

According to the ambitious goals, the machine tool industry enjoys great importance in a series of supporting programs:

  • Medium and Long-term National Plan for Science and Technology Development (2006-20): Definition of development goals.
  • Included in the 7 Strategic Emerging Industries as "high-end equipment manufacturing industry" (October 2010): Increased subsidies, tax breaks, more favorable financial conditions in cooperation with banks and the capital market.
  • "863 Program": State grant program for research subsidies, in particular the two industry giants SMTCL and DMTG benefited in the past.

Furthermore, the central government submitted a funding program for the "High-end NC Machine Tools and Fundamental Manufacturing Equipment" with a volume of RMB 22.1 bn in early 2010, of which RMB 6.136 bn were distributed in 2010.

In addition to the generous financial support for the local machine tool industry, the Chinese government supports the following measures, with which the gap to the global technology leaders shall be gradually reduced:

Corporate acquisitions, joint ventures and partnerships with global technology leaders

Encouraged by their government, Chinese companies have already taken over several Western machine tool manufacturers during the past 10 years: Traditional German companies like Schiess AG or Waldrich Coburg are now firmly in Chinese hands. Chinese companies keep significant shares in WMH Herion and the EMAG Holding GmbH. To strengthen its technology base, SMTCL announced a cooperation agreement with the German Schaeffler Group as well as the establishment of a joint venture with Deckel Maho Gildemeister and Mori Seiki within the past twelve months. Due to the ongoing euro crisis, we expect the number of acquisition opportunities will increase in the foreseeable future, again. The major Chinese machine tool enterprises are already screening the market.

Ongoing domestic consolidation

With increasing competition and a trend towards more top-end machinery, inefficient companies are increasingly forced out of the market. Furthermore, the central government actively promotes M&A activity. A recent example is the machine tool manufacturer Wuzhong, which was merged in the autumn of 2011 with the weapon and defense group coropration Norinco. This company aims to ascend to the world's No. 3 top seller. Sales are expected to increase from RMB 1.6 bn in 2009 to RMB 8 bn in 2015.

Innovation alliances

Leading Chinese companies have founded a “Technology Innovation Alliance for High-Speed & High-Efficiency Processing and Equipment” in 2011. Other comparable initiatives were established on national and regional levels. However, their effectiveness has yet to be proven.

Promising initiatives on enterprise level

Along with the far-reaching support from the government, we detected following developments at the enterprise level, which will give the Chinese machine tool industry a boost:

Financially sound and entrepreneurial experienced investors from other industries are attacking in the machine tool segment

Sany (construction machines), Ningbo Haitian (plastics machines) and Wanxiang (automotive supplier) have already successfully proven in other industries that they are able to fight their way to the top within a short amount of time. The electronics giant Foxconn has produced 4,000 machining centers in cooperation with a Swiss partner last year, which are only used in its own factories, so far.

Furthermore, there are some leading Chinese machine tool manufacturers about to implement some far-reaching measures to change their organizational culture. This will be trend-setting for the whole Chinese machine tool industry. These policies include the following aspects:

Profound changes in product structure

SMTCL will not produce middle-to-low-end general machine tools anymore. The “Five New types of products”, which have been primarily developed in Germany, will become the profit and growth drivers. All non-CNC machine tools are supposed to disappear from the product program until 2015.

Automation and process optimization

In order to cope with the rising labor costs in China, SMTCL and DMTG want to focus their human labor force more on R&D, marketing and services. At SMTCL, the proportion of employees working in the production line shall decrease from 70% to 50%, while having an increase in total employees. DMTG plans to reduce the number of employees employed in its production line from 3,000 to 500 employees, and to increase the output by two to three times at the same time.

Stronger sales and service organizations

SMTCL plans to open 50-70 sales offices in China by 2015, of which each is supposed to make 200-300 million RMB revenue per year.

Sustainable personnel policy

In close cooperation with the relevant authorities, SMTCL identifies Chinese engineers abroad and invites them to job interviews. The company pays outstandingly good salaries, spends attention to create a good working atmosphere and attracts job candidates with the opportunity to take responsibility. These measures reduce employee fluctuation. The growing share of internationally experienced staff is changing the corporate culture towards greater efficiency.

Strengthening the financial power via IPOs

At least eight of the enterprises interviewed by us are planning an IPO over the next three years.

Good growth prospects for the mid-to high-end sector

Independent from the development of the current crisis in the Eurozone, the Chinese government expects a decline of general economic growth over the next few years and thus a relative slow-down of the demand for simple machine tools.

Through the sustained buildup of capacities in the branches that count for the biggest shares of sales of high-end machine tools, those industries shall grow faster than the Chinese GDP, however; most significantly the Aero-Space industry with over 40% growth per year. The great number of official statements, the existing support programs and many published documents underline the determination of the central government to push those industries forward.

The growth expectations and capacity expansion plans of the companies that we interviewed are corresponding: Depending on machine type, they expect average annual growth rates between 15% and 49% until 2016.

Changing the pattern of the machine tool Industry

With its growing importance for the high-tech engineering sector, China will increasingly define the standard for the worldwide machine tool industry. Chinese manufacturers in the automotive, railway, aerospace, construction machinery industry, etc. will more and more shape how parts and components are designed, manufactured and purchased.

In the short-to mid-term perspective, Chinese manufacturers want to be able to cover 90% instead of 75% of all possible applications for machine tools. SMTCL calls this approach SMART: Simple, maintenance friendly, affordable, reliable and timely available machines. Facing this new choice, Chinese machine tool customers might decide to rely on these good-enough machines instead of higher-end types, making it increasingly difficult for Western technology leaders to justify their high prices – an approach which has proved to be successful before.

In the field of concrete pumps, for example, the two German companies Putzmeister and Schwing held over two thirds of the Chinese concrete pump market in the late 1990s – at that time by far the largest consumer of concrete in the world. Only five years later, their combined market share had decreased below 5%. Already back then, Chinese managers predicted the loss of the world leadership for both companies. During less than a decade, their prophecy had become true. Both companies have been acquired by Chinese competitors in the meantime.

Great chances and new competitors

For international manufacturers of high-tech machine tools, China will be the most important growth and sales market in the world in the foreseeable future. However, it will also be the most competitive – and the domestic competitors will become stronger. Examples like the mentioned Sino-Western takeovers in concrete pumps show that a company which loses the world's most important market, will sooner or later also lose its leading position in the world market. One of the most crucial tasks for the management of foreign machine-tool manufacturers is therefore to foster the hunger for success to and sustain a high power of innovation on all levels within their organizations.

Depending on the individual situation and if prepared diligently, co-operations with Chinese firms can be quite favorable.

The same applies for component suppliers. In particular when it comes to preciseness and reliability, foreign manufacturers still have a competitive edge compared to their Chinese counterparts. As described earlier, the Chinese government wants to change this during the next decade, though. Foreign component suppliers should therefore watch their international, but also their still-to-emerge Chinese counterparts, carefully.

Major lines of development and detailed corporate information

STM's new market study "Machine tools in China" describes both the major trends as well as all relevant companies in this industry. 

There have been 212 domestic and international manufacturers of machine tools identified, which justify further attention. During the past six months, these companies were analyzed on the basis of secondary information and company interviews, regarding the following aspects: Product program, employee situation, revenues, volumes, production locations, M&A activity, R&D highlights, capacity expansion plans, future expectations, etc.

More Information

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