Excavators have long been known as the crown jewel of construction machinery and a barometer of the industry. Within the construction machinery sector, excavator sales account for nearly a quarter of the total market share, and China's excavator market sales account for 60% of global excavator sales. The construction machinery industry continues to decline, and the industry development in 2013 and 2014 has not been satisfactory. How will the market develop in 2014? The excavator market may be a key area for enterprises to compete for the industry's high ground in the future.

Slow Recovery: Excavator Market Expected to Halt Decline and Rebound in 2014

Orders Stabilizing and Rebounding

After the international financial crisis in 2008, the domestic economy began to become active in 2013, and signs of industry recovery began to become increasingly clear.

Taking Sany Heavy Machinery, a leading domestic excavator manufacturer, as an example, sales experienced their first decline in 10 years in May 2011. After 24 months, positive growth was achieved starting in April 2013, and by the fourth quarter of last year, Sany Heavy Machinery achieved a year-on-year growth of 20%. Inquiry volume increased by 5% in the second quarter of last year, by 10% in the third quarter, and reached explosive growth of 40% in the fourth quarter. The operating rate also reached its highest value in nearly three years, with the excavator operating rate reaching 166 hours in December 2013.

According to statistics, in November 2013, sales of domestic brand excavators were significantly higher than those of foreign brands. In addition, in 2013, sales of major construction machinery products in the Chinese market showed a gradually narrowing decline compared with the same period in 2012, and by October 2013, cumulative sales had achieved positive growth. By industry, from January to October 2013, loader sales grew by 1.18%, industrial vehicle sales grew by 10.96%, and road roller sales grew by 17.3%. Excavators, graders, and construction cranes also showed a narrowing trend in decline. Sales of eight mainframe products grew by 3.6% from January to October 2013. The construction machinery industry began to recover overall.

In 2014, around the Western Development strategy, the National Development and Reform Commission stated that it will accelerate the promotion of key infrastructure construction such as transportation and water conservancy, tilt national key infrastructure construction toward the western region, accelerate the improvement of railway and highway skeleton networks, promote the construction of major water conservancy projects, and focus on solving the two "shortcomings" of transportation and water conservancy in the western region. Undoubtedly, this is another piece of good news for the construction machinery industry.

Some industry insiders predict the industry outlook for 2014, stating that the excavator industry will slowly recover in 2014, with an expected year-on-year growth of 6%. The sales peak season in the first half of the year may exceed expectations, and the entire industry is expected to halt the decline and rebound in 2014.

Large but Not Strong Industry

Since the first quarter of 2010, the market share of domestic excavator brands has been rising continuously. After surpassing Korean brands in the second quarter of 2010, they surpassed Japanese brands in the first quarter of 2011, reaching a peak of 54% in the fourth quarter of 2012, but continued to decline in 2013.

Specifically, from January to September 2013, in the Chinese excavator market, Japanese brands achieved sales of 23,552 units, up 2.6% from the same period in 2012, with a market share of 26.7%; Korean brands achieved sales of 12,833 units in the first nine months of 2013, down 1.3% from the same period in 2012, with a market share of 14.5%; European and American brands achieved sales of 13,090 units from January to September 2013, up 1.6% year-on-year, with a market share of 14.8%; domestic brands achieved sales of 38,888 units in the first nine months of 2013, down 2.9% year-on-year, with a market share of 44.0%.

Judging solely from market share, China's excavator products still hold a significant advantage.

However, the overall level of China's excavator industry is still relatively at a market disadvantage, and there is still a certain gap with foreign brands. What is more prominent is that the premium capability of domestic brands is far behind that of foreign brands, with gross profit levels only 50%~60% of Japanese and American brands, capital turnover at most 80% of foreign brands, and production efficiency at most 50% of Japanese enterprises. Dealers are also a weak point restricting the development of China's excavator industry. Foreign brands have accumulated and mastered most of the excellent dealers over the years, and weak dealers have become a bottleneck and risk source for the development of local enterprises. At present, there are thousands of construction machinery dealers in China, but they are generally small in scale, basically one dealer operating multiple brands, and very few dealers operating a single brand. The problems currently troubling China's construction machinery dealers are mainly manifested in employee quality, management of subordinate institutions, vicious market competition, and fund recovery. These problems also exist to varying degrees among excavator industry dealers in China.

Expected to Halt Decline and Rebound in 2014

2013 was a year of stabilization for the construction machinery industry. The successive introduction of national policies and regulations played a positive role in promoting the healthy development of the industry. The promotion of remanufacturing, the rollout of National IV standards, and the popularity of no-reserve auctions were also focuses of industry attention. Although operations were sluggish, the industry was not quiet.

Last year, China's engineering construction and the excavator market conditions were closely related to national policies. At the beginning of last year, excavator sales were not large. Starting in March, with the convening of the Chinese Two Sessions and the commencement of various projects, excavator sales rose for a time, and then entered a relatively off-season. By November, excavator sales climbed again with the introduction of relevant favorable national policies. In addition, in 2013, there was a significant change in the sales of various types of excavators: sales of small excavators suitable for urban interior and rural construction increased significantly. Relevant industry experts stated that at the end of 2013, the construction machinery industry had a negative growth of about 3%, but the monthly data in the second half of 2013 showed that the industry had begun to show positive growth, and the entire industry is expected to halt the decline and rebound in 2014.