Building a lasting foundation amid tough domestic market

Heavy machinery makers from China eye more M&A deals in Europe, reports Lyu Chang.

When Caterpillar Inc acquired Zhengzhou Siwei Mechanical & Electrical Equipment Manufacturing Co Ltd, a Hong Kong-listed mining machinery, it was considered a huge setback for Chinese heavy machinery makers and the industry in general.

But much like the proverbial phoenix emerging from the ashes, Chinese companies have not only weathered the setback, but turned white knights in an otherwise foundering industry.

Though Chinese companies stepping into the overseas mergers and acquisitions trail has been a relatively new phenomenon, heavy machinery makers are using it to circumvent the tough market conditions at home and to move up the global technology ladder through strategic deals in markets like Europe, said industry sources.

Zeng Guang'an, president of Guangxi Liugong Group Co Ltd, said the heavy machinery maker is constantly on the prowl for suitable acquisitions. "Europe appears to be a much better M&A option than the United States.

"Most of the US machinery makers are huge in size and this makes the acquisition process expensive, time-consuming and often complicated. European firms, on the other hand, are easier targets as they are small and strong in manufacturing techniques," Zeng said.

In 2012, the Guangxi-based company bought Polish State-owned manufacturer HSW Corp as well as its distribution subsidiary Dressta, for 335 million yuan ($54.65 million) and that experience has worked well for Liugong.

According to Zeng, Dressta's marketing network covers 100 countries and regions, and the Chinese company obtained the global marketing network along with HSW's production line. This has helped in the speedy expansion of the company' global marketing capacity, he said.

But not all the M&A deals are about gaining a global network. Sometimes the deals are necessitated by the need to enhance technology know-how and innovation capabilities.

The past three years have been rather difficult for Chinese heavy machinery makers and they have realized that having innovative and high-end products is essential for surviving the tough market conditions.

Ethan Yu, vice-president of Liugong Machinery Co Ltd, said: "With global manufacturing capacity stalling, it does not make much sense for Chinese companies to keep buying factories. Rather, what is essential is the access to overseas research and development facilities and technology know-how."

Construction machinery makers in China enjoyed a boom period in 2008 after the government announced a massive 4 trillion yuan stimulus package in response to the global financial crisis, which in turn boosted investment in fixed assets.

In 2010, Liugong posted revenue of about 20 billion yuan. Other key players such as Sany Group Co Ltd and Zoomlion Heavy Industry Science& Technology Co Ltd raked in sales of about 40 billion or 50 billion yuan with a growth rate of more than 50 percent.

But from the second half of 2011, the construction machinery market in China started declining sharply. With no more stimulus policies, companies have been fighting shrinking domestic demand for machines and tools to construct high-rise buildings, roads and other infrastructure projects.