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The impact of Chinese economic on Heavy Construction Equipment Industry

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Four decades ago when economic reforms and trade liberalization were not common in China, the country had a poor and stagnant economy. At that time, the economic condition of the nation was considered inefficient and isolated when compared to the global economy. The situation remained bleak until 1979 when the Chinese government decided to welcome foreign trade and investment. Also, the country initiated free-market reforms to become one of the fastest growing economies in the world.

These reforms proved to be the real game changers. In fact, the country became one of the most prosperous nations in the world doubling its GDP every eight years. It was also termed as “the fastest sustained expansion of a major economy in history” by the World Bank.

Regardless, China is now no longer considered as the front-runner for global GDP growth. In recent times, the nation has become the second largest economy in the world. The primary reason is that the last time China posted a double-digit GDP growth was in 2010. Ever since then, the Chinese economy has not surpassed this growth rate in eight long years. China has been averaging approximately 9.5% growth in real GDP through 2017.

Reasons for slow economy growth

It is believed that a severe downfall of the Chinese real estate sector has been the primary reason for the sluggish economic growth. There has also been a sharp decline in residential investments.

Sources suggest that China ‘overbuilt’ its residential real estate area significantly between 2012 and 2014. At that time, the country spending on residential construction increased and was accountable for 10.4 percent of China’s GDP.

However, things started to take a turn in early 2014 where the real estate sector significantly plunged. This negatively impacted the heavy construction equipment industry until 2017. According to a report prepared by IBIS World, it is believed that the industry got back off the ground last year due to high demand from building construction and infrastructure industries.

The slow growth of the Chinese economy due to real estate sector had an adverse effect overall. This resulted in ‘dampening’ the output and profitability of industrial and state-owned enterprises.

Education, entertainment, healthcare, and technology are deemed as the fastest growing industries of the Chinese economy. Also, these sectors are in the spotlight when it comes to rebalancing China’s economic conditions. The growth slowdown is not favorable for heavy industries such as coal, cement, steel, heavy construction equipment, and more.

As the economy is going through its ups and downs, these sectors are showing low productivity and over capacity.

China’s One Belt One Road (OBOR)

The global initiative taken by China in the form of One Belt One Road is supposed to do favors for the heavy construction equipment industry. The plan is to build ocean and land-related infrastructure that will connect China with countries in Africa, Europe, Middle East, and Central and South Asia.

The Communist Party is not in favor of growth that is driven by exports and investments. Instead, it strives to foster an environment that focuses on development via domestic consumer services and demands. The concept behind this change is to ensure that growth remains at sustainable levels in contrast to the past.

The slowdown in China’s economy is considered as the primary factor to drive the One Belt One Road effort. In 2017, the Chinese government predicted that OBOR will help them achieve a growth target of 6.5 percent.

It goes without saying that China is the largest manufacturer and consumer of construction equipment globally. In the last five years until 2017, the revenue in this specific industry has only declined at an annualized rate of 4.5%.

However, the recent developments indicate that it is just a matter of time the heavy construction equipment industry becomes profitable again.

It is important to note that China isn’t only interested in tech and construction equipment. Chinese farmers recently started using ‘smart’ John Deere farming equipment to make farming more automated and efficient.

 

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