'One Belt, One Road' initiatives offer hope to firms like Zoomlion amid stagnant sales in domestic market

Plans by China's leaders to revive ancient intercontinental land routes and develop maritime links are being seen by many makers of heavy machinery as the key to survival in a brutally competitive industry.

The initiatives are formally known as the Silk Road Economic Belt and the 21st Century Maritime Silk Road, often referred to as "One Belt, One Road". These programs offer heavy equipment producers an opportunity to do more business overseas and escape from an unprecedented domestic slump.

Last year was "the worst ever", Zhan Chunxin, chairman of Zoomlion Heavy Industry Science Technology Co Ltd, says in describing what happened as demand dried up amid a plunge in the property market.

"The slump in economic growth caught us totally unprepared. We had no idea how to cope," says Zhan.

The company says in its annual report that net profit slumped 84.53 percent in 2014 to 594 million yuan ($96.64 million).

"With developers curtailing projects as housing prices fell, demand for construction machinery, including concrete machinery and tower cranes, fell significantly last year. Demand for concrete machinery fell by 38.6 percent, while demand for tower cranes fell by 40.52 percent," the company said in its regulatory filings to the Shenzhen Stock Exchange, where the company is listed.

The company's major competitors have been struggling, too. Sany Heavy Industry Co Ltd said in its third-quarter report that net profit slumped 46.5 percent year-on-year.

XCMG Construction Machinery Co Ltd, based in Xuzhou, Jiangsu province, warned in January that net profit probably contracted 65 to 75 percent last year. It cited the "continuous sluggish construction machinery market".

Zhan says he is confident that Zoomlion will make a comeback this year, despite the downbeat economic and property outlook.

"We have taken steps to cut costs, including staff reductions and simplifying procedures within the company," he says.

The company is also emphasizing other industries, especially environmental protection.

"There's too much capacity in this industry. We need to stop relying on this as our sole business and broaden our horizons," he says. It is also important to expand globally to offset risks in the domestic market, he says.

Overseas business now only accounts for about 10 percent of sales. "It would be much healthier if the proportion of overseas business goes up to 35 to 40 percent," he says. Premier Li Keqiang said in his Government Work Report in early March that the nation will encourage domestic enterprises to get involved in infrastructure construction overseas and offer support to those efforts.

Customs figures showed that exports of machinery and transportation equipment went up just 2 percent last year to 6.5 trillion yuan.

Under the "One Belt, One Road" initiatives, the government has offered $40 billion for a Silk Road Fund, aiming to invest in new rail, road and port infrastructure to improve China's ties to Central Asia, Southeast Asia and Africa.

"There will be more opportunities for Chinese construction companies to get business overseas, and that means more opportunities for construction equipment exports," Zhan says.

Zhan says Zoomlion hopes to work closely with contractors to build its marketing and service network. It has already built a presence in markets including India, Southeast Asia, Africa and the Middle East.

It is also important to step up overseas mergers and acquisitions, mostly to get hold of the best technology in the industry, he says.

Zoomlion began its overseas acquisitions in the 1990s when it acquired the construction equipment manufacturer Powermole of the United Kingdom. Since then, "efforts to explore overseas merger and acquisition opportunities have never stopped. We will continue to look to Europe to fill in gaps in our technology portfolio", he says.

The key to success in overseas acquisitions, he says, lies in having the right strategy, knowing the local laws and regulations and making strong localization efforts.

"There must be local staff to ensure that your local business is sustainable," he says.

Experts say that to achieve genuine sustainability overseas, Chinese companies need a sound service network and plenty of interaction with potential clients during the product development process. Li Yizhong, president of the China Federation of Industry Economics and former minister of industry and information technology, says the service network of domestic heavy equipment companies is their weak link.

"They should extend further in their major overseas markets and provide professional after-sales services to buyers during the entire life of their products to gain clients' trust," he told a forum on the globalization of Chinese construction equipment in February.

Companies should also take advice from clients during the product development process to create "a better user experience", he said.

xuwei@chinadaily.com.cn

( China Daily Africa Weekly 04/10/2015 page23)