China’s trailer market

After more than a decade of exponential expansion, China's economy has experienced somewhat of a slowdown in 2013 – putting the arm on Beijing to address pressing issues that could slow progress and threaten social stability.

In November, President Xi Jinping therefore called up a four-day Party meeting in Beijing to push the country toward the painful economic reform program needed to maintain economic growth. The result is a long to do list including some 60 different projects, all targeted at finding a way to balance growth by moving away from an economic model in which cheap credit and exports drive growth. Instead, Beijing is now planning to encourage domestic consumption and innovation again.

According to CNN, the new roadmap will also seek to roll back Government control of state-owned enterprises and allow for increased competition with the privately owned opposition. 

The question everyone is now asking is whether the blueprint will actually instigate change. While it is safe to assume the one-party system will avoid a Washington-style gridlock, Xi and the central Government still need to convince the party’s conservative wing that change is a good thing.

Actually putting the plan into action could prove difficult too. “The country's consensus-driven approach to policymaking could make for slow progress in translating the principles adopted at the meeting into real change,” CNN reasoned in November.

As a result, the much-awaited U-turn is still to be executed. So then, what should companies like Schmitz Cargobull, Kögel or Great Dane do, who have invested heavily into the Chinese boom market and expect a viable return going forward? And how will local powerhouse CIMC react?

According to Patrick Chovanec, Chief Strategist at New York’s Silvercrest Asset Management, the first thing is to stop being ‘schizophrenic’ about the Chinese economy. “[Investors] see either the bad news or the good news, and say either everything is going to implode or everything is back on track,” he told Forbes last month – indicating the recent slowdown was less dramatic as presented in mainstream media and more severe than the Chinese Government would like to admit.

Following Chovanec’s argumentation, China is entering an economic ‘grey zone’ many an industrialised nation has already passed through itself. As the Chinese economy is becoming more mature, it is also turning increasingly complex, making a simple ‘good vs. bad’ judgment impossible. On a positive note, there is no reason to be a “total pessimist” about the country’s future anymore, as the New York-based economist has it.

While Chovanec is referring to business psychology first and foremost, step two must be sourcing relevant economic data. Manufacturing, construction and infrastructure development often give a solid indication of where a market is heading.

Domestic manufacturing, for instance, is on the up again. Reportedly, China’s factory output is growing at its fastest pace since 2011 and investment and consumption beat market forecasts as well – increasing confidence that the world’s second-largest economy has halted the slide and is building some momentum again.

Driven by a Government-induced stimulus package, industrial production was up 10.3 per cent year-on-year in October*, while the production of transport equipment grew by 18.2 per cent, making for a January-October average of 13.5 per cent. Meanwhile, China's gross domestic product expanded 7.8 per cent year-on-year in the third quarter of 2013 – its fastest pace since Q4 of 2012.

In line with the trend, total trailer production in the first three quarters of 2013 was up 21 per cent compared to the same period 2012. The specialty trailer market is particularly strong – it had already outpaced the 2012 total in mid-September and is well on course for a record year, possibly due to an increase in construction activity.**

Meanwhile, renowned industry resource, Chinatruck.org, coined the term ‘Golden September and Silver October’ as heavy truck sales increased by 49 per cent – indicating solid growth in the articulated trailer market as well. Given the political development in November, China could return to ‘gold’ status in early 2014.

Keeping Chovanec’s warning in mind, such data may not be enough to call out the end of the slowdown, but it is a good starting point at least – especially considering what Vice Minister Gao Hongfeng said at public lunch during the 6th US-China Transportation Forum in Chicago last month.

“Although we’ve already obtained lots of achievement in China’s transport development, we see increasing demand for an even bigger transport system in China,” he said – indicating additional infrastructure investment until 2018.

According to Gao, the Middle Kingdom will add some 500,000 km of highway and 108,000 km of motorway to its road network in the coming five years and “improve transportation management” with modern information technology – creating what could be a fertile environment for the transport equipment industry.

On top of that, domestic consumption is on the rise again, and it will remain a focus of China’s economic policy over the next half decade. The result may not be outright euphoria, but at least an improvement in overall business sentiment – a situation cynical analysts dread as it may leech some of the momentum out of Beijing’s reform drive.

However, Beijing still has to prove it can find the right balance between maintaining sufficient growth to guarantee social stability and reducing the inherent risk associated with headlong growth.

And as the relative size and development of the transport industry correlate more closely with GDP in a maturing market, finding that balance will be vitally important for the future of domestic road transportation. In the worst case, transport businesses and equipment manufacturers alike could be up for a waiting game that will leave them vulnerable to the global competition, which has more than just a foot in the door already.

As a result, many local businesses now explore new, innovative and flexible business models that could help them succeed in the more complex and demanding business environment currently taking shape. According to US research company A.T. Kennedy, “they are adopting new growth strategies, redesigning networks and improving cost structures” to adapt to the new reality. “The result will be more integrated, sophisticated and high quality offerings, including new supply chain synergies and basic services such as just-in-time production logistics (…).”

In the past, most transport businesses in China have focused almost exclusively on growing ‘larger’ with very little focus on growing ‘stronger’, as Kennedy found. “The result in many segments has been costly price wars. As the market evolves, the leaders in this industry will be those that best meet customers’ changing needs; they will find vital first-mover advantages and, eventually, higher margins.”

The future of the transport equipment industry is directly connected to that strategy shift. The focus going forward will be on maximising returns through managing productivity and improving efficiencies – a mission the trailer manufacturing industry can certainly contribute to.

But competition will be fierce. Pricing, tare weight and the flexibility to react to regulatory change will decide on weal and woe of the individual business, much more so than build quality and performance in the field. As a result, the market is likely to see a consolidation movement in the time to come, allowing Chinese businesses to compete with the vast local opposition as well as highly motivated contenders from abroad.

According to consulting firm Alix Partners, local presence – mostly achieved by forming a joint venture (JV) – and local content will be key to winning that race. Every large-scale Western brand currently active in China has chosen the JV approach, closely following Alix’s recommendation to minimise disadvantages from import duties and ensure a shorter lead-time for product orders. “With local production, companies can channelize their production to cater to local demand and produce local variants of their products; these local variants typically cost less and appeal to the low-income consumers that dominate BRIC nations [like China].”

According to Alix, the development of ‘modular’ production processes similar to the automotive industry could help kick start the co-operation process and help align local know-how and global ‘brand power’ by reducing development costs and achieve synergies in material sourcing. In addition, “the standardization of production processes does not stop at the … assembly stage, but should also comprises component manufacturing.”

The main challenge, however, will be setting up a reliable aftersales network. “Sustainable market presence can only be established by establishing an extensive dealership network in high demand/growth regions and segments,” the company said in a recent report. 

On the technology front, China is likely to remain at the status quo for a while –mainly because pricing and infrastructure development do not allow for an evolutionary leap any time soon. Local experts agree that despite growing Western influence, the movement away from the old ‘low cost, low tech’ mantra will be a slow and arduous process.

“The high frequency of toll stations all around the country leads to frequent braking on low quality surfaces, putting a massive strain on brakes and suspension systems, for example,” says Xiaochen Wu of Chinese axle and component specialist, Axlemetal. “In such an environment, simplicity is often the best choice, even if it’s not the most efficient one.”

He adds, “The disc brake market in China is very immature and still very chaotic – there is just no reliable backup service for it. While the drum brake may not be the most sophisticated choice, it is cheap and, most importantly, available nationwide.

“Then there is the issue of deliberate overloading, which is still considered somewhat of a trivial offence. The general consensus is that air suspension systems are just too complex and unable to carry enough weight, and most workshops cannot service them anyway. A mechanical suspension system, meanwhile, is cheap and easy to replace. That’s the reality you have to accept.”

According to axle specialist Wu, the Government has defined 53 “standard types” of trailers for the commercial road transport industry, but only three categories include air suspension technology as a technical prerequisite. “It doesn’t mean such new technology is ruled out, but there is definitely not a strong focus on it right now. I am sure, more and more local businesses will move to it in the future, but the current business environment simply doesn’t allow for it.”

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