Following decades of its rapid growth, China's construction sector is hitting an unprecedented slowdown. As foreign players struggle in the challenged market, China's homegrown manufacturers are still expanding their business as well as extending more credit to customers. To cope with the issue and maintain a steady growth pattern in China, the industry players need to apply tactful actions and new China market strategies. This document is extracted from a presentation by Pilar Dieter, Solidiance's China Principal during the "CHaINA 2012" conference in Shanghai, November 2012, and provides some foresight on the China Manufacturing and Construction sectors.

1. CHINA’S MANUFACTURING SECTOR
THE END OF A GREAT GROWTH ERA?
CHaINA
November 7, 2012
Shanghai, China
Presented by:

2. ECONOMIC SLOW DOWN
BUT STILL LEADING THE
PACK…
“With China’s interest rate cuts and the reduction in the reserve ratio, as well as the recent announcement of stimulating
infrastructure investment, we are very confident that we’ll see a soft landing in China. The Chinese government is taking
the appropriate steps to drive a rebound in economic growth by the fourth quarter of this year and in 2013”
- Kevin Thieneman, Country Manager of Caterpillar China, India and ASEAN

3. 2010 2011 2012 (Q1) 2012 (Q2)
• The growth rate in Q2 2012 marked the sixth consecutive quarter of decline and was the slowest pace since the
first quarter of 2009
• Earlier this year, China reduced its GDP target for 2012 to 7.5% down from 8% in the face of a persistent slump
in the United States and spreading debt woes in the European Union
• To buy the economy, China has adopted a string of pro-growth measures, including lowering banks’ reserve ratio
to boost lending, subsidizing energy-saving household electrical appliances and speeding up approval for major
construction projects
Source: Solidiance Research

4. … BUT IS THERE
“TOO MUCH
STIMULATION”?

5. AT FIRST: IT WORKED!
• i.e “year of the train”. The Railways Ministry announced that it would spend Rmb700 billion on laying track that year,
creating 6 million jobs. The Beijing-to-Shanghai bullet train line alone would cost $30 billion, making it the single-most
expensive construction project since 1949. By 2011 it had put down 10,000km of high-speed rail, four times more than
Japan
BUT WOULD THE INFRASTRUCTURE EVER BE ABLE TO PAY FOR ITSELF?
• Even the Ministry of Railways admitted that its flagship Beijing-Shanghai line wouldn’t break-even “in the short term”
• Performance: Trains were breaking down or experiencing lengthy delays and of course the terrible crash in Wenzhou last
year
• Corruption: February last year, Liu Zhijun, the Railways Minister, was detained having amassed Rmb1 billion
MOUNTING DEBT
• Ministry of Railways by now has debt of Rmb2 trillion, an unprecedented amount
• But a greater worry are the “Local Government Financing Vehicles”. Setup to borrow from state banks to finance local
infrastructure spend, a classic off-balance sheet exercise
• The central bank concluded that local governments were on the hook for at least Rmb14 trillion of financing vehicle debt
(much more, say others)
Source: Solidiance Research

6. Not only foreign
companies
are feeling the
slowdown

7. Key Performance Indicators (KPI) & Remarks
• Growth at Sany Heavy was extremely rapid up until the end of 2011, with
purchases of Putzmeister bringing sales into Europe.
• Equipment sales forecasts have been slashed in China for 2012.
• Recent IPO planned for the HK stock exchange has been halted
• The workforce at Sany Heavy has been cut in recent months.
• Zoomlion reported an 8.3% increase in sales in Q1 2012 over Q1 2011
• One reason for the increased sales data is that Chinese firms are keeping
revenue buoyant by extending more credit to customers.
• At Zoomlion, accounts receivable rose to more than 200% of sales in the first
quarter, up from 90% in June 2010.
• President Zeng Guang’an warned that a consolidation in the industry was
imminent as production is cut and companies step up efforts to sell more
equipment. “We have too much investment. We need more consumption,”
Zeng said in a recent interview. “In China, we are going to slowly change the
structure of our economy,” he said, alluding to top-down efforts to stimulate
domestic consumption. (WSJ Nov 2012)
• Third quarter net profit falling 85% to US$3.3 million.

9. DOMESTIC PLAYERS SEEM TO BE COPING BETTER – BUT ARE
THEY?
As foreign rivals struggle to achieve sales targets, China’s homegrown manufacturers say their businesses are still
expanding
• One reason is State sponsored spending giving Chinese players an edge to win additional projects. In addition,
Chinese firms started out the year attempting to maintain revenue growth by extending favorable credit terms
to customers
• This move is supported by the Chinese government and that ordered the banks to provide “easier” access to
loans/refinancing options.
• It remains to be seen how Chinese companies are going to deal with rapidly expanding Accounts Receivables
Source: Solidiance Research

10. • Reduce capacity (less shifts, force staff to take holidays)
SHORT TERM • Delay investments
• Export to other country markets as a short term destination, to maintain
FIXES productivity of Chinese factories
• Load distributors with inventory
Source: Solidiance Research

11. Acquisitions Review sales channels
LONG TERM • Introduce a “B” brand • Optimum mix of direct vs indirect
• Remove competition
FIXES…? New markets
Move to solution based sales • Renovation vs new construction
• Increase service offering • Energy efficiency via JV’s with a
• Turn key projects Chinese partner
Source: Solidiance Research

12. SOLIDIANCE IS A MARKET GROWTH
STRATEGY ADVISORY FOCUSED
EXPLICITLY ON ASIA

13. • 85% client repeat rate Solidiance is a B2B marketing and growth strategy
consulting firm with focus on growth in Asia Pacific.
• Wholly-owned presence across all
key markets in Asia since 2007 We are devoted to working side-by-side with our
clients to outpace the competition, close gaps in
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with actionable deliverables profitability.
• No project / research outsourcing Our Asia focus provides our clients with a better
to freelancers understanding of intrinsic regional issues.

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