Machine tools: China disrupts 'old world' order

Chinese market explodes with 15 percent growth rate at expense of leading world markets, while growing sophistication of domestic manufacturers could threaten overseas players.

The face of the global machine tool manufacturing market is changing beyond recognition with all of the established key markets losing market share at a rapid rate.

The sector is simply the latest in a long line of industrial sectors undergoing such change thanks to the 'China factor', according to the latest report, "China Machine Tools Market' from industrial professionals at KPMG, the global network of professional services firms.

China's total machine tool consumption is expected to hit US$7 billion by 2005 - representing a compound annual growth rate of 15 percent between 1998 and 2005.

The scale of that increase means that the growth in the 2003-05 period alone will be equivalent to the size of the entire South Korean market.

While this presents clear opportunities for investment in the Far East, KPMG also notes the threat to Western companies as Chinese domestic players look to break out of the low-grade, bottom end of the machine tool market.

John Guy, Head of Industrial Products at KPMG in the UK, commented: "Recent research showed China overtaking Germany as the world's top machine tool market in 2002 with consumption hitting US$5.7 billion - an increase of 20 percent during a year in which all other leading markets declined.

Germany declined by 16 percent while Japan and the US declined by 35 percent and 36 percent respectively.

While opportunities for overseas manufacturers undoubtedly exist, people may not be quite so aware of how leading Chinese machine tool manufacturers have already begun to gain market share in the middle grade machine segment - an area traditionally dominated by imports from Taiwan and Korea." "Making such inroads is indicative of the domestic manufacturers' determination to break out of the saturated low-grade end of the market.

While spiralling demand should ensure there is plenty of work to go round, companies exporting to the Chinese market may become increasingly concerned if Chinese competitors are able to force their way into the higher value end of the market." Two key factors lie behind the market's rapid growth rate.

Domestic manufacturers see higher-spec machine tools as a means to improve their product quality as they look to compete on a global basis.

Additionally, foreign companies - rapidly shifting their production to China - are keen to maintain the same quality levels in China as elsewhere.

John Guy continued: "We have already seen sectors like automotive and aerospace benefiting from the China factor with overseas manufacturers scrambling to establish a presence.

Naturally, they will want and need the best tools available but the domestic manufacturers are not always able to fully meet those needs at the moment as they still have some way to go to catch up with the quality standards set by their overseas counterparts." "There are two ways of looking at the Chinese manufacturers - as a threat or as an opportunity.

Although the sector is dominated by small, inefficient companies, it is inevitable that foreign technology and investment will push many of them up the quality ladder, to the point whereby they constitute a significant competitive threat as the Koreans and Taiwanese are finding.

However, at this early stage, many are desperately looking for that initial foreign investment." "Having interviewed a number of domestic manufacturers, we found that there had been ongoing joint venture (JV) discussions in every company, with all of them agreeing that finding a foreign partner would be a positive development for the company.

While it may be difficult for foreign companies to exert control, even in majority owned JVs, being able to utilize the domestic partner's local knowledge, customer and government relationships and existing sales and distribution networks remains a major attraction.

Although ownership issues have recently featured as a major barrier to several JVs, potential partners should take heart from how investment in this sector falls into the government's 'most favoured' investment category and is eligible for tax breaks and other incentives.

Quite simply, the opportunities are there for companies prepared to make the most of this shift in the sector's old world order.".

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