The new norm for Chinese machinery production

In 2014, machinery production in China is forecast to expand 7.4%, according to the quarterly tracker for Chinese Machinery Production from IHS Inc.

08/20/2014


Economic activity in China remained weak, albeit stable, in May despite a strongly improving export environment, highlighting the considerable and persistent drag from the housing market downturn. Although real export growth jumped, real measures of investment and retail sales all showed neutral to negative changes relative to April. Industrial production saw only a meager acceleration, despite a number of signals from leaders for targeted stimulus measures, and a clear easing of financing conditions.

The IHS Q2 study continues to show downward revisions to the 2014 and 2015 forecast for Chinese machinery production. In 2013, many industries in China, China - Real GDP, Industrial Production, Machinery Production. Courtesy: IHS Researchincluding construction machinery, metal cutting, and metal working, were still struggling with over-capacity. IHS believes it will take some time to solve the problem. However, some industries serving domestic consumption grew in 2013; they included agricultural machinery; elevators & escalators; electronics & electronics assembly; oil & gas; medical & scientific; food, beverage & tobacco machinery; and packaging machinery. Because of weak investment in 2013, most heavy industries, including mining machinery and crane & hoists, declined. However, the wind turbine industry rebounded strongly, because of increasing grid-connected power from wind turbines. In contrast, PV manufacturing equipment recovery tended to lag behind the recovery of PV industry.

From now on, China will operate under 'new norms'. What will they be?

  • A new norm for the growth rate - shifting from rapid to moderate growth
  • A new norm for the industrial structure - rebalanced from one led by export and investment to one more driven by domestic consumption
  • A new norm for macroeconomic policy - showing prudence in macroeconomic regulation; and shifting from mass stimulus to targeted mini-stimulus policies

How will this affect Chinese machinery production?

  • Reduction of outdated capacity. As we all know, China produces a wide range of goods, which are sold to many foreign countries. However, the production capacity of some exceeds the demand. Reducing the excess capacity will be a main mid-term trend. For example, China produced 2.4 billion tons of cement in 2013, but the demand is only 2.3 billion tons. China produced 2.5 billion tons of steel in 2013, but the demand is 2.1 billion tons. So the Chinese Government plans to reduce excess capacity. In the meantime, mergers and acquisitions in these industries are quickening.
  • Import substitution. Although China is renowned for its production, key technologies rely heavily on imports. The Chinese leadership realizes the importance of developing these technologies locally. For example, lacking the technology to produce semiconductor machinery, China needs to import most of the chips the world manufactures.
  • Rise of the market for services. With 30 years of high growth, China has entered the post-industrialization period. The main driving factor of China's economy is shifting from manufacturing to services. The same thing is happening with Chinese machinery. For example, because of the long lifetime of machinery, more manufacturers are paying more attention to after-sales services. With the upgrading of manufacturing, there are more customers that want to increase the capability of their software, such as by using ERP, MES and PLM software, applying more automated machinery in their processes.
  • Implementation of the 'smart factory'. Global competition in the manufacturing engineering sector is becoming fiercer and fiercer. More and more Chinese manufacturers are taking measures to promote the smart factory, to meet the goals of the industrial upgrade strategy.

In conclusion, China's leadership is trying to take measures to keep the economy stable, with continual mini-stimulus policies. The new norm for Chinese machinery production means moderate growth in future but continuous structural adjustment. Increasingly, fine-tuning measures directed at specific industries will be implemented, with different effects.



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