There are fears that Chinese equipment sellers could be over-exposed to the continuing slow-down in the domestic construction market, after having taken the risky decision to sell machinery on financing terms attractive to contractors.
The Chinese construction market was a paragon of strength during the global financial crisis, thanks in no small part to a government stimulus programme that pumped $634bn (RMB: 4tn) into large-scale public works since 2008.
But sales of machinery in the Chinese market have been hit hard in 2012 since the domestic construction industry began to slow down late last year.
Since the beginning of the year, domestic PMV companies such as Sany and state-owned Zoomlion have seen sales crumble, and foreign sellers such as Komatsu, Hitachi and Caterpillar have reported sharp drops in sales of excavators and other earth-moving equipment.
According to reports, Sany and Zoomlion are engaged in the risky business of selling machinery to contractors on attractive financing terms, requiring only a deposit of 10-20% upfront.
While financing machinery purchases is a sound decision in a stable or rising market, where the machinery will be utilised and paid off over the first few years of its useful life, when the equipment is not being used, contractors can quickly fall behind on payements.
Some analysts are worried that if the Chinese economy takes a turn for the worse, Sany, Zoomlion and other companies would face the prospect of large numbers of defaulting customers, eating into each companies’ cash reserves.
Already Sany has reported a big drop in Q2 profits, blaming a sharp rise in unpaid bills. The Changsa-based company saw profits drop 28% –Â the biggest quarterly drop since 2008.
Earlier this month the Chinese government announced a $150bn stimulus package in an attempt to provide a soft-landing for the domestic construction industry. Approval was given for 60 major infrastructure projects, which saw construction-linked stocks around the world to leap, including Caterpillar and Sany.
Whether ongoing stimulus will provide a ‘soft-landing’ for equipment sellers, or if they face the prospects of defaulting customers and excess stock and capacity, remains to be seen.
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