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8/9/2019 China Machine Tools 200402
http://slidepdf.com/reader/full/china-machine-tools-200402 1/38I N D U S T R I A L M A R K E T S
C H I N A M A C H I N ET O O L S M A R K E T
F e b r u a r y 2 0 0 4
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2
© 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International providesno services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved.
8/9/2019 China Machine Tools 200402
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3
Preface
China is firmly on the radar screens of machine tool companies around the world.Not only has China overtaken the US and Germany to become the largest machinetool market in the world, China’s skilled labor force and low cost base also makesit a viable base for sourcing or manufacturing.
Information and insights on this market are difficult to come by however,and the pace of development in China presents companies with a constantlymoving target. As a result we have prepared China Machine Tools Market to provide a better understanding of the market and the issues of concernto industry participants.
In our analysis, KPMG has drawn on a number of public sources of informationand spoken to both local and foreign industry participants in China. We have also
conducted a survey of leading machine equipment industry participants inGermany to shed light on how they are responding to the opportunities in China.Most respondents are already trading or manufacturing in China and providedtheir first hand views on the issues of greatest concern to their business there.
Our analysis shows that there will continue to be a sizable market for importedhigh-end machine tools in China, but that local firms are rapidly closing thetechnology gap and improving quality and performance. Multinational playerswill need to carefully assess how to participate in China effectively in lightof the rapidly changing competitive landscape and market conditions.
Please contact us if you wish to discuss this report or obtain additional copies.Contact information can be found at the end of the report.
Paul BroughPartner-in-chargeFinancial Advisory ServicesKPMG in China and Hong Kong
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© 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International providesno services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved.
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Executive summary
China is now the largest machine tool market in the world, with a consumption of USD 5.7 billionin 2002 (a)
Fuelled by a large influx of foreign investment, China’s machine tool market is expected to continueto grow
Automotive-related manufacturing has accounted for half of machine tool consumption in recent years;aircraft-related manufacturing, in particular the repair and maintenance sector, is likely to becomeanother significant market in China
In line with the upgrading of key sectors in China, demand for numerical controlled (“NC”) machinetools has been increasing
Continued imports of high value numerical controlled (“NC”) machines can help ensure Chinacontinues to be an important export market; imported machine tools account for over half of theChinese market
6
Market
Manufacturing is scattered throughout China; most Chinese machine tool manufacturers are smallin term of revenues when compared to overseas competitors
Competition in China is intensifying as China further integrates with the world economy; Chinesemanufacturers have become increasingly sophisticated in their choice of machine tools, leadingto growth in demand for NC machine tools
Accession to the World Trade Organization (WTO) has accelerated the development of the machinetool industry
The low-end market is crowded with domestic players, which has resulted in significant pressureon prices; foreign equipment still dominates the middle to high-end market with superior technologyand quality
To stay competitive, domestic companies are becoming more active in new product developmentand more willing to use Joint Ventures (JV’s) and cooperative arrangements to acquire new technology
Competition
Note: (a) For metal cutting and forming machines only; does not include machine parts, tools and other consumables
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7
Many foreign companies have decided to move production from higher cost locations to China
Joint venturing with a local manufacturer is a popular form of entry for foreign investors,although wholly foreign-owned investments are permitted
Domestic machine tool companies are interested in finding foreign JV partners but generallyare reluctant to give up majority control
At present, machine tool manufacturers in China serve their customers directly from companyheadquarters through regional sales offices or third party distributors
Outsourcing of some manufacturing activities is becoming more common in China as domesticmachine tool companies take steps to become more nimble
Entering China
Given the fact the Germany is the second largest machine tool consuming country and one of theleading machine tools exporters in the world, KPMG conducted a survey of machine equipmentand machine tools companies in Germany between August and November 2003
A structured questionnaire was distributed to 330 companies; a total of 50 were completedand returned
Out of the 50 respondents, 98 percent are currently doing business with China either throughexport (52 percent), established production facilities (36 percent), or licensed production (15 percent)
Findings confirmed that: – a large majority of survey respondents viewed China as an important end market – most of the respondents in the KPMG survey already in China are likely to expand – intellectual property is seen as the most critical business factor for respondents – over half of respondents indicated that recruitment and the regulatory environment
were two major business issues when doing business in China
Survey in Germany
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Note: (a) Represent metal cutting and metal forming machines only; does not include machine parts,tools and other consumable
Market
The requirements of China’s booming manufacturingsector has made it the largest machine tools marketin the world, with sales of USD 5.7 billion in 2002
8
1998
961
200720062005
Forecast
2004200320022001200019990
500
1000
1500
2000
2500
U S D b i l l i o n
1,005 1,080 1,1591,315 1,420
1,5441,691
1,8532,028
Economic development in ChinaSince the late 1970s China has been implementing various economic and political reformsto restructure its economy and integrate China with the global economy
China’s GDP has grown steadily over the past 10 years and reached around USD 1.4 trillionin 2003; this represents a compound annual growth rate (“CAGR”) of 8.1 percent between1998 and 2003
The economy is expected to continue to grow strongly at 9.3 percent per annum until 2007,giving China a GDP of slightly more than USD 2 trillion
China ’s GDP 1998-2007e
Source: Economist Intelligence Unit, “Country Forecast”, 2004
Global machine tool consumptionChina overtook Germany as the world’s top machine tool market (a) in 2002; total consumptiongrew from USD 4.7 billion in 2001 to USD 5.7 billion in 2002, a year-on-year growthof 20 percent
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0.90.9
1.11.0
1.51.2
1.31.2
3.12.9
0.90.8
6543210
ChinaGermany
JapanUS
ItalySouth Korea
FranceTaiwan
CanadaSpain
USD billion
5.23.3
5.33.4
5.74.8
4.75.7
-7%
-7%
-23%
-5%
-35%
-13%
-8%
-36%
-16%
20%
Changefrom 2001
2001 2002
70%60%50%40%30%20%10%0%
No answer
Important
Neutral
Not important
Very important
34%
8%
0%
58%
0%
9
Note: (a) SARS refers to the highly infectious Severe Acute Respiratory Syndrome which caused hundreds of deathsin China between November 2002 and May 2003
Sources: (1) Chemical Week Associates, “Modern Plastics”, 1 May 2003(2) Financial Times, “Tool companies p lace business health ahead of threat from SARS”, 16 April 2003(3) China Machine Tool Builders’ Associa tion, “China Machine Tool & Tools Ind ustry Yearbook”, edition 2002
Of the top 10 global machine tool markets, China was the only growth market in 2002
– Germany, the world’s largest machine tool market in 2001, suffered a drop of 16 percentin 2002
– Japan and the US, the world’s second and third largest machine tool markets in 2001suffered decreases of 35 percent and 36 percent respectively in 2002
– “China is the only growth market and hence everyone is focusing on it...,” an overseas sales
group manager for JSW(1)
– “Of course, we are worried (about SARS (a)) ...but you have to make contact with the customers(attending the 8th China International Machine Tool show) ...China is the only growth marketfor us at the moment,” participant of the 8th China International Machine Tool Show (2)
Over half of the China market is imported machines (3)
Top 10 machine tool markets 2001-2002
Source: Gardner Publications, “World machine tool output and consumption survey”, 2003
Most of the respondents in the KPMG survey in Germany viewed China as a veryimportant market
– 92 percent of the respondents believe that China is an important end market – this is in line with the fact that China has become the largest machine tool market in the world
Importance of China as an end market
Note: n = 50Source: KPMG survey
China is a “bright spot” for machine tool manufacturers
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1998 200320022001200019990
20
40
60
U S D b i l l i o n
45.540.3 40.7
46.952.7
57.0
Note: (a) SARS refers to the highly infectious Severe Acute Respiratory Syndrome which caused hundreds of deathsin China between November 2002 and May 2003
Sources: (1) United Nations Conference on Trade and Development, “Global FDI decline bottoms out in 2003”,12 January 2004
(2) Central Intelligence Agency, “The World Factbook”, edition 2003
Foreign direct investment ( “ FDI” )Foreign direct investment to China reached USD 57.0 billion (1) in 2003
– with a population of 1.3 billion (2), China has quickly become one of the most importantmanufacturing centers in the world
– foreign companies have focused on China both as a marketplace and to establish a lowcost manufacturing base for export to other markets
– total value of global FDI amounted to USD 653 billion (1) in 2003; China’s sharewas around 9 percent
FDI in China was USD 57.0 billion in 2003 (1), representing 8.2 percent growth from 2002levels, despite the impact of SARS (a)
Foreign direct investment in China 1998-2003
Sources: (1) National Bureau of Statistics, PRC, “China Statistical Yearbook”,editions 2002 and 2003
(2) United Nations Conference on Trade and Development,“Global FDI decline b ottoms out in 20 03”, 12 January 200 4
10
Fuelled by an influx of foreign investment, China ’smachine tool market will see continued growth
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Note: (a) The automotive industry for the purpose of this report includes buses, trucks and sedans, and excludesother vehicles, such as motorcycles
Sources: (1) China Machine Tool and Builders’ Association, “China Machine Tool & Tools Industry Yearbook”, edition 2002(2) Financial Times, “Business Daily Sec tion”, 29 May 2003(3) ING, “Gearb ox: China”, January 2003(4) McKinsey & Co, “China’s Automot ive Market”, 2001
12
0.50.70.41.6
0.70.41.4
0.70.41.5
0.3
1996
0.4
1997
0.5
1998 1999
0.60.80.51.9
0.60.8
0.72.1
0.7
0.8
0.8
2.3
1.1
1.1
1.0
3.2
1.8
1.2
1.1
4.1
2.6
1.3
1.1
5.0
4.2
1.6
1.2
7.0
5.6
2.0
1.3
8.9
20 00 20 01 20 02 20 03 20 05 2010 20151995
Forecast
0123456789
10
M i l l i o n u n
i t sBus
Truck
Sedan
0.70.41.6
Automotive-related manufacturing has accountedfor half of machine tool consumption in recent years
Key market segmentsMajor buyers of machine tools typically include manufacturing companies from theautomotive, aerospace and military (1) sectors, which normally have annual capital investment
budgets, a large portion of which is invested in renewing or purchasing new and advanced machine tools
It was estimated that the automotive industry accounted for nearly 50 percent of the totalconsumption of machine tools in 2001 (1)
Auto makers demand special purpose precision machine tools
– “Auto enterprises not only needed universal-precision machine tools, but also special purpose precision machine tools,” participants of the China International (Beijing)Machine Tool Exhibition (2)
The automotive industryTotal vehicle sales (a) grew from 1.4 million units in 1995 to 3.3 million units in 2002,a compound annual growth rate (“CAGR”) of 12.5 percent (3)
– most of the growth was recorded in the last four years. Between 1999 and 2002,the number of vehicles sold grew by 21.2 percent per annum
Annual sales are expected to reach 7.0 million units in 2010 and 8.9 million units in 2015,a CAGR of 7.9 percent from 2002 to 2015. The seventh largest market for vehicle salesglobally in 2001, China is expected to be the third largest by 2010 (4)
Annual sales of vehicles by type 1995-2015e
Sources: (1) Credit Suisse First Boston, “China Auto Sector”, January 20 03(2) People’s Daily, “Auto sales to hit 4 mi llion un its in 2003”, Januar y 2003(3) People’s Daily, “China’s 10th 5 Year Plan”, 4 March 20 02(4) KPMG analysis
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13
Sources: (1) Center for Asia Pacific Aviation, “China’s Airline Groups Officially Launched”, November 2002(2) Boeing, “Current Market Outlook”, June 2003(3) People’s Daily, “Airbus joins hands with China’s Aviation ind ustry for business expansion”, June 2002(4) Uniworld, “China Civil Aviation report”, September 2003
594 642 693
1,018
2,198
180142118110550
2002 2020
Forecast
20102005200420030
500
1,000
1,500
2,000
2,500
N u m
b e r o
f a
i r c r a f t
Others
China NationalAirline Group
China EasternAirline Group
China SouthernAirline Group
The aircraft industryDriven by increasing demand for air travel, the number of commercial aircraft in Chinais expected to grow from around 550 units in 2002 to nearly 700 units in 2005, 1,000 unitsin 2010 and 2,200 units in 2020 (1)
The need to provide repair and maintenance, and China’s emerging role as an outsourcingcenter for major aircraft manufacturers, will lead to increased demand for high quality
machine tools
– China is understood to be Boeing’s biggest parts supplier outside the US; an estimated 3,200 Boeing aircraft, a quarter of the total, fly with parts made in China (2)
– to date, Airbus has signed six outsourcing agreements (worth USD 200 million) in China (3)
– leading Chinese aircraft component makers include Chengdu Aerospace and Xi’an Aircraft (4)
Number of commercial aircraft in China 2002-2020e
Sources: (1) Economist Intelligence Unit, “Country Forecast”, 2003(2) Civil Aviation Administration of China (“CAAC”), “The Development
of China’s Civil Aviation Indust ry”, October 20 00(3) KPMG analysis
The aircraft manufacturing sector is likely to becomea significant market for machine tools in the nextfive years
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14
Sources: (1) National Bureau of Statistics, PRC, “China Statistical Yearbook”, editions 2002 and 2003(2) Institute of Scientific and Technical Information o f China, “China CNC Machine Tool Market”, 1998
7,4509,478
6,2237,291 8,142 9,051
7,0879,007
14,053
18,593
1993 1994 1995 1996 1997 1998 1999 2000 2001 200219920
5,000
10,000
15,000
20,000
25,000
30,000
A n n u a
l p r o
d u c t i o n o
f N C
m a c h
i n e
t o o
l ( s e t s )
26,320
In line with the upgrading of key manufacturing sectorsin China, demand for numerical controlled ( “ NC” )machine tools has been increasing
Production of NC machine tools in China
Production of NC machine tools has grown at a CAGR of 13 percent between 1992and 2002 (1). The annual production tripled to 26,320 sets in 2002, from a low base in 1998
NC machines represent a growing share of machine tool production (1); NC productionaccounted for 10 percent of the total machine tool sector in 2002, up from only 3 percent (2)
in 1992
At present, most NC machines produced by domestic machine tool manufacturers are low-end and offer less precision
As competition intensifies, there will be more urgency for domestic machine toolmanufacturers to upgrade their technology and increase the proportion of NC machinesin their product portfolio
Production of NC machine tools, China 1992-2002
Source: National Bureau of Statistics, PRC, “China Statistics Yearbook”,editions 2002 and 2003
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15
Sources: (1) China Machine Tool Builders’ Association, “China Machine Tool & Tools Industry Yearbook”, edition 2002(2) KPMG interviews with a leading Beijing machine tool manufacturer, July 2003
1996 20012000199919981997 Oct-020
20
40
60
80
100
P r i c e
d i f f e r e n c e
( U S D ' 0 0 0 )
63
53
66
44 44
6458
Technological edge for imported NC machine toolsThere is an obvious technology gap between domestic and imported NC machine tools,with imported machine tools being generally more advanced in terms of quality, precision,speed, reliability, and ease of maintenance (1)
Prices reflect this technological gap, with imported NC machine tools costing roughly four times the average price of domestic machines in 2001 (USD 80,000 versus USD 21,000) (1)
– “People are willing to pay for the difference because they know imported machineswill have better quality and reliability” (2)
Average price difference of imported and exported NC machine tools1996-Oct 2002
Note: Price difference = average import price - average export priceSource: China Machine Tool Builders’ Association,
“China Machine Tool & Tools Industry Yearbook”, edit ion 2002
Imported machines have commanded a significantprice premium over domestically produced ones
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2000 2005
Forecast
20042003200220010
1
2
3
4
U S D b i l l i o n
0.3
1.9
0.3
2.4
0.3
3.1
0.6
3.3
0.9
3.5
1.2
4.0
Imports
Exports
Sources: (1) China Machine Tool Builders’ Association, “China Machine Tool & Tools Industry Yearbook”, edition 2002(2) KPMG interviews with a leading domestic machine tool manufacturer in Beijing, July 2003(3) KPMG analysis(4) US Departmen t of Commerce, “China Machine Tools - Market Assessment”
16
The import market
Machine tool imports to China are expected to reach USD 4 billion in 2005, a CAGRof 10 percent from 2002; 60 percent were metal cutting machine tools and 40 percent metalforming machine tools, mainly from Germany, Japan, Italy, Switzerland and Taiwan (1)
Imports will continue to account for around 60 percent of total machine tool consumptionin China through to 2005 (1)
– “I think imports will continue to be large as long as foreigners continue to keep their best technologies in their home country” (2)
Imports are mainly high-end machines not normally available in the domestic market
– 67 percent and 45 percent of imported metal cutting and metal forming machinesrespectively, were NC machines (3)
– “almost all the world’s f irst tier global companies have brought new products intothe Chinese market. They find that it is almost impossible to enter the Chinese marketwith obsolete or older generation technologies.” US Department of Commerce (4)
Average unit price of imported NC machines was USD 70,000-100,000 from 1996 to theend of October 2002, about 2-5 times the average unit price of exported NC machines
Imports and exports of machine tools (*), China 2000-2005e
Note: (*) Metal cutting and forming machines onlySource: China Machine Tool Builders’ Association, “China Machine Tool & Tools
Indust ry Yearboo k”, edition 2002
Imported machine tools account for well over halfof the Chinese market; NC cutting and metal formingmachines are the main import items
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17
Oct-022001200019991998199719960
10,00020,00030,00040,00050,00060,00070,00080,00090,000
100,000
U S D Average price
of imported NC
Average priceof exported NC
Source: (1) China Machine Tool Builders’ Association, “China Machine Tool & Tools Industry Yearbook”, edition 2002
The export market (1)
China’s machine tool exports were USD 305 million in 2002, about 10 percent of the valueof its imports in the same year
Exports are rising and are expected to reach USD 1.2 billion in 2005, a CAGRof 58 percent from 2002
Major export markets include the US, Hong Kong (mainly for re-export), Germany,Canada, the UK and Southeast Asia; most exports are low-end NC machines
The average unit price of exported NC machines varied between USD 11,489-40,000from 1996 to the end of October 2002
Prices of imported and exported NC machines 1996-Oct 2002
Source: China Machine Tool Builders’ Association, “China Machine Tool & ToolsIndustry Yearbook”, e dition 2002; China Machine Tool Builders’ Association web-site
Exports, mainly low-end NC machines, are one-tenththe value of imports
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Key: USD ‘000
> 400,000
50,000-100,00050,000-100,000
< 50,000
100,000-250,000
250,000-400,000
Heilongjiang
Jilin
Xinjiang
Tibet
Gansu
Qinghai
Yunnan
Inner Mongolia
N i n
g x i a
Shanxi
Sichuan
S h
a n x
i
C h o n
g q i n g
Guizhou
Guangxi
Hainan
Taiwan
Henan
Anhui
ZhejiangJiangxi
Fujian
Hebei
S h a n d o
n g
Hubei
Hunan
G u a n g d o
n g
Hong Kong
Liaoning
Tianjin Beijing
ShanghaiJ i a n g s u
Liaoning and Jiangsu are the largest machine tool production regions in China
Machine tool company revenues by region 2002
Source: National Bureau of Statistics, PRC, “China Markets Yearbook”, 2004
Competition
18
Manufacturing is geographically scatteredthroughout China
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19
There are over 600 machine tools manufacturers in China, however, most are small
– listed below are the top 10 manufacturers for metal cutting and metal formingmachine tools
Metal forming
Note: State-owned: firms owned by different level of governments; collectively owned: firms owned by collectivebodies, e.g. a village, township; joint stock: owned partly by private investor or the government
Source: National Bureau of Statistics, PRC, “China Markets Yearbook”, 2004
Compared to overseas competitors, most Chinese machine tool companies are small in terms of revenue
1. Dalian Machine Tool Group Co Ltd State owned Liaoning USD 228 M
2. Shen Yang Machine Tool (Group) Co Ltd Joint Stock Liaoning USD 140 M
3. Wuxi Kaiyuan Machine Tool Group Co Ltd Limited liability Jiangsu USD 74 M
4. Qin Chuan Machine Tool Group Co Ltd State owned Shanxi USD 62 M
5. Nanjing Machine Tool Group Co Ltd State owned Jiangsu USD 52 M
6. Beijing No. 1 Machine Tool Factory State owned Beijing USD 41 M
7. Shanghai Machine Tool Works Co Ltd State owned Shanghai USD 34 M
8. Henan Xinji Co Ltd Joint Stock Henan USD 33 M
9. Suzhou San Guang Group Company Foreign funded Jiangsu USD 31 M
10. Jinan No. 1 Machine Tool Group Co Ltd State owned Shandong USD 28 M
1. Jinan No. 2 Machine Tool Group Co Ltd State owned Shandong USD 56 M
2. Jiangsu Yangli Forging & PressingMachine Tool Co Ltd Limited liability Jiangsu USD 38 M
3. Nanjing Zhouyu Machine Tool Manufacturing Co Ltd Limited liability Jiangsu USD 20 M
4. Nanjing Juwei Machine Manufacturing Co Ltd Limited liability Jiangsu USD 18 M
5. Zhejiang Shuangli Group Co Ltd Limited liability Zhejiang USD 16 M
6. Jiang Yin Machine-building Inc. Limited liability Jiangsu USD 16 M
7. Zhejiang Forging & Pressing Machine tool Factory Joint stock Zhejiang USD 14 M
8. Guangdong Forging & Pressing MachineTool Factory Co Ltd Limited liability Guangdong USD 13 M
9. Jin Feng (China) Machinery Industry Co Ltd Foreign funded Zhejiang USD 13 M
10. Shandong High Density High Forging Machine Co Ltd Limited liability Shandong USD 12 M
Top 10 Chinese machine tool companies in metal cutting and forming, 2002
Metal cutting Ownership Location 2002 Revenue
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20
Note: For metal cutting and forming machines only; does not include machine parts, tools or other consumablesSource: (1) KPMG interviews with leading domestic machine tool manufacturers in Beijing and Shanghai
After-sales service has become less of a differentiator
Competition in China is increasing as China furtherintegrates with the world economy; Chinesemanufacturers have become increasingly sophisticatedin their choice of machine tools
Increasing demand for high performance machines (1)
“Multipurpose NC machine tools offering better integration, higher speed, more intelligence,greater accuracy and more environmentally friendly features are increasingly requiredby domestic and overseas customers, in particular those from the automotives,aerospace and the military sectors.”
“Performance is one of the most important factors in our customers’ consideration and thatis why customers are willing to pay more for imported components in their machines.”
Performance
Important but becoming ubiquitous (1)
“After-sales service is crucial in our business; we normally guarantee an eight-hour responsetime. If the problem persists, we can provide on-site support within 48 hours in most locationsin China.”
“I don’t think anyone can afford not to provide prompt after-sales service in the current market.Although we are small, we still promise 24 hours on-site support to most of our customers.In some provinces, we work with our distributors to provide after-sales service.”
After-sales Service
Brand = Quality; an important factor in winning new customers (1)
“The ability to perform consistently is extremely important in our business. People just cometo us because they know our quality is good.”
“Poor quality won’t get you very far; people will begin to know after a while.”“Some people have tried to imitate our brand because they know our quality is good.”
“People like to purchase from manufacturers because they want to make sure that the machineis genuine.”
Quality
More pressure on pricing in the low-end market (1)
“There is more pressure to cut the price of our manual machines than our NC machines.”
“Customer will expect us to cut the price but there is really a limit to what we can do becauseof the cost of imported components.”
“Most of our machines are aimed at the middle-end market. There is some pressure on price,but in general it is still manageable.”
Price
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Policy support aimed to help domestic companies become more competitive (1)
Continue to provide funding for R&D projects in state-owned enterprises through theState Machinery Bureau
Encourage joint research programs between research institutes and state-owned companies
Tax concessions for companies that have purchased machines from domestic companies(up to 40 percent of the cost can be deducted from taxable income)
Preferential treatment for domestic machine tool companies in government-sponsored projects
Encourage the merger of state-owned companies to form a few large regional machine toolcompanies that have the scale to compete effectively
“The machine tool industry is regarded as the foundation of the manufacturing industryand hence has an important role in China’s ongoing economic development” (2)
The machine tool sector is one of the “encouraged” categories for foreign investment and one withrelatively few restrictions
Metal cutting machines 9.7% - 20% 5% - 12% (*)
Metal forming machines 9.7% - 18% 9.7% - 12% (*)
Tariffs before and after accession to the WTO
Before WTO 2003 onwards
21
Accession to the WTO has accelerated the developmentof the machine tool industry in China
Note: (a) China classifies its industries into 4 categories for foreign investment, i.e. encouraged, permitted, restrictedand prohibited; those classified as encouraged will receive the least amount of restriction from the government
Sources: (1) China Industrial Press, “Tariff on major machine tools in 2003”, 19 June 2003(2) KPMG inter views with China Machine Tool Builders’ Association, July 2003
Lower entry barriers (1)
Further opens the market to foreign competition
– no restriction on foreign ownership – the machine tool industry is defined as an “encouraged” (a) category for foreign investment
State enterprise reform to encourage the private sector to play a bigger role in the industry
As part of its WTO commitments, the Chinese government has reduced most import tariffson machine tools
Notes: (*) final bound tariffsSource: China Industrial Press, “Tariff on major machine tools in 2003”, 19 June 2003
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Privately owned
Foreign invested
Collective-owned
State owned
60%
20%
11%
9%
Privately owned
Foreign invested
Collective-owned
State owned42%
36%
8%14%
22
Source: (1) National Bureau of Statistics, PRC, “China Markets Yearbook,” 2004
The overcrowded low-end market has resultedin significant price-based competition
Small, inefficient producersState-owned and private domestic companies together accounted for 78 percent and 80 percentrespectively of the total number of companies in metal cutting and metal forming sectorsin 2002 (1)
Most of these companies are small and relatively inefficient
– in metal cutting, only 22 out of 411 companies managed to achieve sales of overUSD 12 million in 2002
– in metal forming, the number was only 10 out of 218 companies – most of these companies are products of the former centrally planned economy and hence
are burdened with excessive labor, outdated production facilities and technologies
Ownership of metal cutting machine tool manufacturers 2002
Note: Of 411 companies, only 22 companies had sales over RMB 100m (USD 12m) in 2002Source: National Bureau of Statistics, PRC, “China Markets Yearbook”, 2004
Ownership of metal forming machine tool manufacturers 2002
Note: Of 218 companies, only 10 companies had sales over USD 12m in 2002Source: National Bureau of Statistics, PRC, “China Markets Yearbook”, 2004
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23
Source: (1) KPMG interviews with a domestic machine tool manufacturer in Beijing, July 2003
Increasing competition at the low-endAs China further embraces market competition, many local companies find it increasinglyhard to compete for market share and resources to invest in new technologies. Most areforced to compete in the low-end market with little or no differentiation
– “China’s state-owned machine tool companies mainly produce low to mid-level toolsfor their own market and export to other markets” (1)
Changing market demand is exacerbating competition at the low-end
– China’s manufacturing industries have undergone significant transformation over thelast few years
– increasing demand for new product features and quality are prompting manufacturersto upgrade their tools and equipment
– future demand for machine tools is expected to shift towards middle to high-grade machines
Intense competition and shifting demand are putting pressure on pricing
“There are too many suppliers in the low-end market where demand is shrinking. We have decreased the price of our low-end machines by around 10-15 percentsince last year” (1)
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Source: China Machine Tool Builders’ Association, “China Machine Tool & Tools Industry Yearbook”, 2002
Domestic machine tool companies may acquire technology by purchasing companies overseas
Joint Ventures Cooperative production
Metal cutting machines 6 25
Metal forming machines >3 >7
Total 9 32
Number of joint ventures and cooperative production agreements in 2001
25
Sources: (1) China Machine Tool Builders’ Association, “China Machine Tool & Tools Industry Yearbook”, 2002(2) PR Newswire Association, “Ingersoll International Ann ounces Sale of Ingersoll Production Systems”,
11 October 2002(3) Financial Times, “Tool companies place business h ealth ahead of threat from SARS”, 16 April 2 003(4) KPMG interviews with machine tool manufacturers in Beijing, July 2003
Technology transfer methodsTechnology transfer is still the major approach in acquiring more advanced machine tooltechnologies among Chinese machine tool producers
Instead of outright technology purchases, JVs or cooperative production have becomemore popular. Some even went as far as acquiring overseas companies
– in 2001, at least nine JVs and 32 cooperative production agreements were signed (1)
– in 2003, Dalian Machine Tool Group company purchased Ingersoll International(a US company), in order to acquire better technology and management know-how (2)
– “Chinese machine tool makers have progressed 50 years in the last 10... some gainedat the expense of foreign intellectual property rights but more through joint venturesand cooperative agreements with US, Japanese or European companies,” exhibitorsat the China International Machine Tool Show 2003 (3)
Leading Chinese machine tool manufacturers have begun to gain market share in the middlegrade machine segment which was traditionally dominated by imports from Taiwan and Korea
– “Our machines now compete head to head with those produced by Taiwanesemanufacturers. The price gap between a Taiwanese machine and ours used to be around20 percent, but now it is no more than 10 percent,” a domestic machine tool manufacturerin Beijing (4)
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Sources: (1) KPMG interviews with China Machine Tool Builder Association, July 2003(2) KPMG survey in Germany
Domestic machine tool component technology developmentChinese machine tool companies have traditionally put more emphasis on in-housemanufacturing and less on outsourcing
The lack of specialization has limited the development of dedicated machine tool componentmanufacturers and hence constrained the development of key machine tool componenttechnologies locally
Since the opening of its economy in the mid-1980s, China has been aggressive in acquiringforeign technology
China is already able to produce a range of key machine tool components domestically but still relies on foreign imports for more advanced technologies
– “... China still has a long way to go to catch up with the developed world in
terms of speed and intelligence of CNC machine tools, as well as in the areaof ‘green’ manufacturing” (1)
Respondents in our survey indicated that the significance of competition from localcompanies is similar to that from foreign companies (2)
Foreign companies have dominated the middle tohigh-end market with superior technology and quality
Note: MTBF stands for machine time before failureSource: China Machine Tool Builders’ Association, “China Machine Tool & Tools Industry Yearbook”, edition 2003
Electric spindle Torque: <100 Nm Torque: <300 NmSpeed: <15,000 r/min Speed: <75,000 r/min
Lubrication: oil/grease Lubrication: atomized oilPrecision ball screws Precision: 0.004 / 300mm Precision: 0.002 / 300mm
Speed: 45 m/min Speed: 80-160 m/minSurface hardness: Surface hardness:lack of uniformity high uniformityHigh noise Low noise
Linear guide ways Precision: 0.005 / 1,000mm Precision: 0.003 / 1,000mmSpeed: 100 m/min Speed: 200 m/minHigh noise Low noise
NC systems MTBF: 10,000 hours MTBF: 30,000 hours
Robotic arm tool change Tool change time: 3-4s Tool change time: <1.5s
High speed cover Breadth: 2,000-4,000mm Breadth: 4,000-5,000mmSpeed: 15 m/min Speed: 30-40 m/min
Major Machine Tool Components Technology Comparison
Standard in China Overseas standard
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Entering China
Market entry for foreign companiesA total of 77 foreign-invested metal cutting and metal forming companies have been set upsince China opened its door to foreign investment in the mid-1980s, with around 46 since 1998
The rise in the number of foreign-invested companies reflects:
– a desire to move production onshore to serve customers in China
– a response to increasing competition from leading domestic companies as well as foreigncompetitors already in China
28
More foreign companies have decided to moveproduction into China to be able to provide productto customers in China at competitive prices
Sources: (1) China Machine Tool Builders’ Association, “China Machine Tool & Tools Industry Yearbook”, 2002(2) National Bureau of Statistics, PRC, “China Markets Yearbook”, 2004
1998 2002
Metal cutting machine tool companies 32 57
Metal forming machine tool companies 14 20
Total 46 77
Number of foreign invested machine tool companies in China - 1998 and 2002
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Sources: (1) KPMG interviews with machine tool manufacturers, July 2003(2) Chemical Week Associates, ”Modern Plast ics”, 1 May 2003(3) Business Weekly, ”DMG Enters China’s Machine Tool Market”, 2 November 2 003
35%30%25%20%15%10%5%0%
No answer
Important
Neutral
Not important
Very important
28%
24%
18%
30%
0%
Results of the KPMG survey in Germany confirm that China is a key production base
– 58 percent of respondents indicated that China is important as a production base – this is roughly the same as the percentage (54 percent) of respondents which already
have some sort of production in China
Importance of China as a base for production
Note: n = 50Source: KPMG survey in Germany
Moving production to China has a clear impact on the cost base
– cost reduction stems from China’s more favorable input costs such as labor, land,and utilities
– investment in machine tool manufacturing falls into the “most favored” investmentcategory and is potentially eligible for favorable tax treatment and other incentivessuch as exemption of import duty on production machinery (1)
– “local production has enabled us to sell at a price 20 percent lower than equivalent ones produced in Japan,” a leading Japanese machine tool manufacturer (2)
Manufacturing locally brings the company closer to its customers in China,which is increasingly an important attribute in today’s purchasing considerations
– “localization of our products will reduce costs and ensure more ‘competitiveand personalized’ products and services for Chinese customers,” a European machinetool manufacturer (3)
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NO (48%)
100%80%60%40%20%0%
Already havenew products in
pipeline forChinese market
Expandgeographically
within ChinaYES (52%)
NO (41%)YES (59%)
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Our KPMG survey in Germany revealed that most of the foreign manufacturers alreadyin China are positive about their China businesses
– 59 percent of respondents indicated that they had new products already in the pipeline,and 52 percent will expand geographically
– most hold a positive view about the future and expect to continue to expand – of the three respondents yet to develop a presence in China, all indicated they plan
to either export to or produce in China
For those already with a presence in China, what is your plan for futuredevelopment in China?
Note: n = 44Source: KPMG survey
Overseas companies that have already moved into Chinawill have the advantage of a lower cost base and better
market information
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A JV is a common form of entry for foreign investorsin this sector
Despite their drawbacks, JVs are likely to remainas the most viable entry option; it is crucial that any partnership be based on a shared set of objectives
Technology Transfer
One-off licensingdeal, with limitedscope for furthercooperation
Whole producttechnology willbe transferred
The technologytransferor will receivea one-off payment aswell as a continuousstream of royaltiesfrom the useof its technologyDeclining inpopularity
– only earlygenerations oftechnology areavailable totransfer
– problems obtainingcontinued supportfrom transferor
– transferor maylose control ofthe technologytransferred
– transferor mayend up competingwith its owntechnology
Cooperative Production
More direct involvementwith the local partnerthan technology transfer
Work together to fulfilspecific orders fromcustomers, e.g. respondto bid request fromkey customers
Ownership to keytechnology canbe retained
Foreign partner typicallyprovides the technologyand utilizes the localpartner’s manufacturingfacilities for production
Generally of limitedduration; may or may notcontinue after the orderis fulfilled
Allows foreign companiesto take part in keydevelopment projectswithout heavy investmentin plants and equipment
Allows domesticcompanies to shopfor needed technologieswithout loss of control
Popular in mid-1990sbut gradually givingway to other formsof domestic/foreigncooperation
Joint Venture
More permanentworking relationshipbetween involvedcompanies
Foreign companiestypically provide bothfunding and technologywhile domesticpartners provide land,facilities and labor
Transfer of moreadvanced technologyand continued supportfrom foreign partnersAble to utilize thedomestic partner’slocal knowledge,relationship withcustomers andgovernment officials,and existing sales anddistribution network
May be difficult forforeign companiesto exert control, evenin majority-owned JVs
Potential to enjoy
preferential taxtreatment and otherbenefits if locatedin high-tech zones
Steadily gainingpopularity inrecent years
Wholly foreign-owned company
More permanentway of doingbusiness in China
Start with a“clean slate”and avoid potentialpartner issues
Large investment innew facilities, needto develop salesand distributionfrom scratch
Possibility of bettermanagement controlover operations
Potential to enjoypreferential taxtreatment and otherbenefits if locatedin high-tech zones
Retain full controlof intellectualproperty and keytechnologies
Likely to becomemore commonafter foreigncompanies becomemore experiencedin China
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Increasing Risks and Return
Source: KPMG analysis of discussion with industry participants, July 2003
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There is tremendous pressure on domestic machine tool companies to find foreign JV partners
– all of the f ive companies we interviewed in Beijing indicated that there had beenongoing foreign JV discussions in the company
– all agreed that f inding a foreign partner would be a positive development fortheir companies
Apart from their more advanced technology and access to capital, foreign partners are expected to instill better management, more rigorous process control and stronger product developmentcapabilities in the JV
For some state-owned companies, the process of forming a JV may also bring much-needed clarity and streamlining of the ownership structure
– in state-owned enterprises, management rights are scattered (e.g. multiple levelsof ministries and government bureaus)
– making decisions is complicated, which has often led to delays and missed opportunitiesin the market
– outside investment will help dilute the ownership of the government and put companyexecutives in the driver’s seat
Executives from domestic machine tool companies are in general reluctant to give majoritycontrol to foreign companies
– ownership issues have become major obstacles in many foreign JV discussions – intervention from the relevant government bureaus is often needed for the deal
to move ahead
The government is expected to welcome foreign/domestic JVs that make domestic companies,in particular state-owned companies, more competitive
In most state-owned companies, it is the relevant government bureau rather than the company executives
that makes the final decision in JV discussions
Domestic machine tool companies are interestedin finding foreign JV partners but some are reluctantto give up majority control
“We have talked to a number of foreign machine tool companies about forming joint venturesbut most did not go too far. One of the key issues was that our management wishes to retainmajority control. ..”
“We are a state-owned enterprise and have recently been selected by the government as one of the104 companies to be privatized. The buyer can be anyone and it is largely up to our managementbureau to decide.”
“When we announced that we are interested in finding a foreign partner, many companies haveknocked on our door... there are still other foreign companies which might be interested to workwith us, but we will be more selective and give more consideration to the JV we just formed.”
Local Companies ’ Views on Joint Ventures
Source: KPMG interviews with domestic machine tool manufacturers in China
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Sources: (1) KPMG interviews with leading machine tool manufacturers in Beijing and Shanghai, July 2003(2) KPMG analysis
Major customer groupsLarge industrial companies in the automotive, shipping, aerospace, military and heavyequipment sectors
– require more attention – prefer to deal directly with company headquarters – increasingly looking for turnkey solutions and specialized machines – stringent requirement on service and quality (e.g. 12-hour response time and 24-hour
on-site service from suppliers) (1)
– bidding may be required for high value orders
Small and medium sized manufacturing companies, processing factories and machine shops
– served by machine tool company sales representatives in regional offices or throughnon-exclusive third party distributors
– need less specialized machines and can be price-sensitive – less sophisticated and require frequent support (usually provided by local distributors)
Sales channelA three-tiered sales channel has evolved over time with
– sales representatives at headquarters serving large industrial customers nationwide – directly owned regional offices in major cities serving small to medium customers – third party distributors in cities not covered by the company serving small
to medium customers
Repair and maintenanceRepair and maintenance are usually provided directly by the machine tool manufacturerdue to the complexity of machine tool technology
Service quality has increased rapidly and 12-48-hour service response time has becomethe industry standard (2)
Providing good quality service nationally is a huge challenge, in particular to new entrants
After-sales service is an important issue for customers;manufacturers have several options
Machine Tool Sales and Distribution and Repair and Maintenance Service Map
ABCMachine
ToolCompany
Larger industrialcustomers
Regional Representative offices
In key markets only
In other large cities where the companydoes not have a direct presence
Small to mediumcustomers
Third party distributors Small to mediumcustomers
On site responsewithin 12 hours
On site responsewithin 24-48 hours
Source: KPMG interviews with leading machine tool manufacturers in Beijing and Shanghai, July 2003
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34
Source: (1) KPMG interviews with a domestic machine tool manufacturer in Beijing, July 2003
China ’s machine tool manufacturingChinese companies were historically organized on the basis of self-sufficiency and mostcompanies sought to produce everything in-house. A typical Chinese machine tool companywould have a relatively large manufacturing operation producing most of the parts required
by its products (1)
The over-emphasis on self-sufficiency has prevented Chinese companies from specializationand capturing the economic benefits from volume production
Large in-house production has also tied up substantial working capital and prevented manycompanies from responding to fast-changing customer needs
Focus on flexibility and restructuringFollowing state enterprise reform in the late 1990s, many domestic companies began to realizethe need to change and become more flexible
Many machine tool manufacturers have identified a greater need for outsourcing and concentrated on value-added activities, such as R&D, product design, sales and services
A great deal of restructuring and downsizing has resulted
– “We will continue to look for opportunities to outsource. We have already outsourced a lotof machine tool parts to third party processing factories. We have reduced our headcount fromover 4,000 to around 800 two years ago” (1)
– “Some of the Taiwanese companies in China are simply assembly factories. They buy nearlyeverything from outside and hence they are extremely flexible. There are only around20 people in the company” (1)
Smaller or “virtual” companies are emerging as more flexible competitors
A traditional machine tool manufacturer
A flexible machine tool manufacturer
In the past, machine tool companies were“ self-sufficient ” and highly vertically integrated
R&D Product
DesignSourcing Sales ServiceManufacturing
& Assembly
R&D ProductDesign Sourcing Sales ServiceAssembly
& Processing
Mainly raw materials andcertain key components
Most parts, componentsand sub-assemblies
Some raw materials, most arecomponents and sub-assemblies
Limited manufacturing, mainlyinvolved in assembly and processing
Source: KPMG interviews with leading machine tool manufacturers in Beijing and Shanghai, July 2003
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35
Sources: (1) Company literature(2) KPMG interviews with industry participants, July 2003(3) KPMG research
Understanding the local industry participants isimportant when assessing potential partners in China
Large, highly integrated company
One of China’s state-owned computer numerical control (“CNC”) machine tool manufacturers
Currently 2,000 employees after a significant headcount reduction in the last two years
Engaged in both export and import businesses. Sales in 2002 exceeded USD 50 million
Background
Snapshot One
Is vertically integrated and manufactures its own components, in contrast to other companieswhich outsource some or all component product activities
Recently formed a JV with an Asian machine tool manufacturer, commenced operations in 2003,with a planned capacity of over 1,000 CNC machine centers annually
Business plan
Specializes in heavy types of milling machines, such as plano milling and boring machines
Have captured a significant share of the non-CNC milling machines market in China
Core customers are molds and auto-related manufacturers
The CNC plano milling machine tool market dominates the market with a majority share
A heavy machine tool is 30-40 percent less expensive than equivalent imported units
Market / product
Promotes its products mainly through exhibitions and advertisements in trade magazines
Employs sales representatives in major cities
Engages third party distributors for areas not covered by sales representatives
Handles repairs and maintenance work on its own
Sales and distribution
Two snapshots of relatively large Chinese firms to illustrate their operations, scaleand development issues
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Sources: (1) Company literature(2) KPMG interviews with industry participants, July 2003(3) KPMG research
A medium-sized state-owned enterprise
Currently 800 employees after massive downsizing since 2000
Engaged mainly in assembly process, with component parts outsourcedIncluded in a recent privatization scheme by a municipal government
Background
In four to five years, the company aims to become a small to medium scale grinding machinetool company
Aims at diversifying its product lines
Wishes to develop its own R&D capability
Business plan
Specialized in grinder manufacturing, such as cylindrical grinders and CNC cylindricalgrinding machines
Has a significant share of the market in small to medium sized grinding machine tools
Over one third of production is for automotive-related manufacturers
Normally takes 6-8 months to produce a CNC machine tool
Has recently cut prices
Market / product
Find it difficult to sell directly to the market
Engage third party distributors to cover most provinces, except Tibet, Hong Kong, and Macau
Prefers non-exclusive agencies for distribution
Sales and distribution
Snapshot Two
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China machine tools marketKPMG International, as a Swiss cooperative, is a network of independent member firms. KPMG International providesno audit or other client services. Such services are provided solely by member firms in their respective geographic areas.
KPMG in China
Paul BroughPartnerHead of Financial Advisory Services27th Floor, Alexandra House16-20 Chater RoadCentralHong KongTel: (852) 3121 9800Fax: (852) 2973 6616E-mail: [email protected]
Thomas StanleyDirectorStrategic & Commercial Intelligence27th Floor, Alexandra House16-20 Chater RoadCentralHong KongTel: (852) 3121 9812Fax: (852) 2973 6616E-mail: [email protected]
Warren PhillipsPartner
Head of Transaction Services8/F, Office Tower E2Oriental Plaza1 East Chang An AvenueBeijing 100738ChinaTel: (86) 10 8518 9225Fax: (86) 10 8518 5111E-mail: [email protected]
Honson ToPartnerTransaction Services50th Floor, Plaza 661266 Nanjing West RoadShanghai 200040ChinaTel: (86) 21 5359 4666 Ext 2708Fax: (86) 21 6288 1889E-mail: [email protected]
Please contact KPMG for further information:
KPMG in Germany
Richard MarkusPartnerHead of Industrial Markets-Corporate FinanceKurf ü rstendamm 207-20810719 BerlinGermanyTel: (49) 30 2068 4126Fax: (49) 30 2068 5 4126E-mail: [email protected]
Thorsten AmannChina Desk GermanyHessbr ü hlstrasse 2170565 StuttgartGermanyTel: (49) 711 9060 1741Fax: (49) 711 9060 2 1741E-mail: [email protected]
Global Industrial &Automotive Products
Oliver GrossGlobal ExecutiveIndustrial & Automotive ProductsKurf ü rstendamm 207-20810719 BerlinGermanyTel: (49) 30 2068 4254Fax: (49) 30 2068 5 1630E-mail: [email protected]