How long can the prosperity of China's construction machinery last? This is an issue of concern to both up and down in the current construction machinery industry, and the secondary capital market (stock market) is more sensitive to this. Excavator is a very representative product in construction machinery. This article takes the excavator as an example to discuss this.
1. The prosperity and unprecedented prosperity of the excavator industry
In 2020, the domestic sales volume of excavators in the Chinese market is 293,000 units, which is about six times that of 2015. This is unexpected by the vast majority of people inside and outside the industry, and the excavator sales market is unprecedentedly prosperous.
The stock of excavators has exceeded 2.5 million units (including the second mobile phones imported during the past year), which is about 2.5 times that of ten years ago. Such a huge stock has created a scale of hundreds of billions of aftermarket demand, and the aftermarket for excavators is coming to a prosperous age.
In the past three years, the highest value of China's A-share stock market construction machinery sector index this year is 3.8 times the lowest value in 2018, and the highest value of the stock price of excavator leader Sany Heavy Industry this year is 7.4 times the lowest value in 2018. Obviously, construction machinery is extremely favored by the financial market, and excavator stocks are booming.
The construction machinery industry has developed rapidly in the past ten years, whether it is the front-end sales volume or the after-market stock. Especially in the stock market, construction machinery has been unknown as a traditional industry, and the investment in construction machinery stocks in the past three years has "made a fortune". This is also the industry's rare big luck in the stock market.
With the emergence of the Sino-US trade war and the global epidemic, the construction machinery industry has "unexpectedly benefited". From manufacturing, sales to aftermarket, to the overall prosperity and prosperity of the financial stock market, this is even more unexpected by most people.
2. Anxiety in a prosperous industry
According to the statistics of 26 excavator manufacturers by China Construction Machinery Industry Association:
From January to March 2021, a total of 126,941 excavators were sold, a year-on-year increase of 85%; of which, domestic sales increased by 85.3% year-on-year; exports increased by 81.9% year-on-year.
There is no doubt that the industry's vents continue to increase, and the larger the vents, the more prosperous the industry. At the same time, there are unavoidable questions to the stakeholders at all levels of the industry, especially the tens of millions of practitioners in the aftermarket:
The more prosperous the industry, the easier it is to make money?
Or is it that the more prosperous the industry, the more difficult it is to make money?
The profit rate of the industry is getting lower and lower, is it the prosperity of the industry or the decline of the industry?
To what extent will profits continue to decrease, is the end of the industry’s prosperity?
Is China's construction machinery industry growth-oriented or cyclical first?
Three, several facts about the decline in profits in the excavator industry
1. Decline in the price of the whole machine
The reduction of product prices by enterprises reduces the profit per unit of product and also reduces the total profit margin of the enterprise.
Over the past ten years, the price of excavators has been falling. The price of small excavators has fallen by about 30%-50%, and that of medium and large excavators has fallen by about 20%-30%. Moreover, in the current market competition, the price of excavators will continue to increase. For details, please refer to the article "The Reasonableness of Continuous Falling Prices of Excavators and Changes in Product Quality" by the author, and I won't discuss it here.
2. Decrease in component prices
Components are the most important part of the aftermarket supply chain. In the past ten years, the price of excavator parts has also been falling rapidly, mostly by about 30-80%. The magnitude of the drop is surprising. For the causality, please refer to the article "A Game Between Ants and Elephants" by the author.
3. Decrease in rental prices
In the past two decades, the fuel and labor costs of related excavators have been increasing. Even considering the impact of inflation, the rental price of excavators has not risen but fallen by about 50% (see the author's "Excavator Continued price drop and the rationality of changes in product quality" article).
4. The profit of the second mobile phone circulation declines
Second, the mobile phone circulation field has always been the "fertile land" of profit in the excavator business chain. Usually the intermediary profit is the sales price (2%-5%)/time, but in the past one or two years, its profit is about the sales price (0.05). %-1%)/time, the decrease is more than doubled.
5. Decline in agent profitability
In recent years, the profits of agents have fallen sharply. According to this year’s survey report of Joke Construction Machinery: The average gross profit rate of the agent group is 8.7%, the highest is 16.8%, and the average net profit is 0.7%, the lowest average profit rate. It is -22.2%.
Fourth, the continued decline in the profit rate of the industry is a symbol of the continued prosperity of the industry
1. The more prosperous the industry, the lower the profit. Adam Smith, the father of economics, clearly stated in The Wealth of Nations that reduced profits are not the result of business recession, on the contrary, it is the inevitable result of business prosperity.
"The most important labor operations are adjusted and directed in accordance with investors' plans and calculations. The purpose of all these plans and operations of investors is profit. However, the rate of profit is not like rent and wages, which rise with the prosperity of society. , Declines with the decline of society. On the contrary, the profit rate is naturally low in rich countries, high in poor countries, and highest in the countries that are the fastest to decline.” (The Wealth of Nations Vol. 2, pp. 163-165)
Marx's theory of the law of decreasing average profit rate in political economy believes that the increase in the organic composition of social capital brought about by the continuous advancement of social production technology will lead to a downward trend in the level of social profit rate. The technological advancement of the replacement of labor by machines will increase the organic composition of capital and increase labor productivity, and the average profit rate will decline when the rate of surplus value remains unchanged. However, an increase in labor productivity will make the means of production cheaper (Capital Volume III).
2. At the beginning of the domestic excavator industry, there was not enough competition, and there was a very high profit period (windfall profit), which was much higher than the average profit of the construction machinery industry, and also higher than the average profit of the traditional industries in Chinese society.
3. Such high profits will inevitably attract capital investment from all parties. With the rise of China's manufacturing industry, the entry of capital has led to an increase in labor productivity and large-scale industrial production. A production capacity of 600,000 excavators has been formed in China (the sales volume in 2020 includes 320,000 exports).
4. The excavator industry chain is profitable, and its supply chain is also profitable. More and more people enter this industry. From manufacturers, marketing and financial services, aftermarket industry chains, excavator operators, including intermediary services for second mobile phones, from tens of thousands of people a dozen years ago to millions of people today. The unprecedented prosperity of the excavator market (as shown in the figure below, see the author "The Game of Ants and Elephants" for details), almost every participant in the excavator industry has once made huge profits.
5. There are more and more capital, new technologies, and excellent talents at all levels entering this industry, related products are getting more and more advanced, and the industry's all-round operation efficiency is getting higher and higher. The more prosperous the market, the more intense the competition. The emergence of price wars and the decline of profits are inevitable objective laws. The partial high profits of the excavator industry will inevitably decline to the average profit rate of the industry, and the average profit rate of the industry will inevitably decline to the average profit rate of the Chinese machinery manufacturing industry. The money earned by all people in the excavator industry will be infinitely close to the average level of society.
5. The influx of capital, talents, production capacity, and the industrial Internet accelerates the dilution of profits
1. The "temptation" of industry prosperity to capital
Due to the impact of the epidemic, all countries in the world are printing money. The Sino-US trade war, the One Belt One Road and domestic infrastructure such as transportation, energy, and water conservancy are the way out for these huge amounts of money.
The construction machinery market has annual sales of more than 700 billion (2020) of new machines, with a post-market scale of several trillions, and the scale of the industry is getting bigger and bigger. Even if the profit rate of the industry declines, the business model and profit expectations of financial capital are still attractive and profitable. The penetration of capital into the excavator industry extends from manufacturer manufacturing and marketing methods to the aftermarket.
2. Capital promotes technological progress and greater prosperity in the industry
Whether it is a foreign brand of excavator elephant or a domestic brand of elephant, there is financial capital or state capital behind it. This is the cornerstone of technological progress and mass production in the industry and promotes the prosperity of the industry. Under the macro background that there is no shortage of money, there is the power of capital:
The manufacturing industry can greatly increase production capacity and win with scale.
Manufacturers have sufficient funds to drive technological innovation and reduce manufacturing chain costs.
The domestic excavator brand must be a strategy to go global.
Industry supply chain, marketing and aftermarket business model innovation.
3. The magic of capital: further reduction in industry profits
The reduction in profits is the result of the prosperity of the industry. More capital investment promotes further prosperity of the industry, which means more competition. It penetrates into every link of the industry, which means that the profit of each link is reduced. .
In the marketing competition of excavators, financial leasing sales contributed to the price war and “fueled” the vicious competition. Profits in the circulation link were rapidly reduced, and the power of capital was one of the “culprits”.
The same is true in the aftermarket area, and aerial work platform leasing is a good example. In 2020, financial capital will invest several billion yuan in the leasing industry, which is more than 60% of the overall industry's purchasing power. Although the aerial work platform leasing market has quickly prospered, it has also quickly led to a rapid and substantial decline in the profit rate of the entire industry. (For details, please refer to the article "How far is the road from industry pioneer to pioneer?-Risks of AWP leasing scale operation").
4. Industrial Internet's "snatching and robbing" of industry profits
The construction machinery industry is a relatively backward industry in the modern industry. The current market scale of trillions and the "disorder and disorder" of the industry are the preferences and advantages of the Industrial Internet, which provides a good opportunity for investment in the Industrial Internet. .
The goal of the Industrial Internet is to focus on the operating costs and transaction efficiency of the industry's vertical industrial chain. It is necessary to "remove and eliminate" all redundant transaction links in the original industry chain through the establishment of a digital industrial supply chain. This process will also further reduce or dilute industry profits.
6. The continued prosperity of the industry and the uncertainty of the economic cycle
1. The generality of the business cycle and the particularity of the Chinese market
So far, many world-renowned related construction machinery industry researches believe that 2021-2023 is the downward cycle of China's construction machinery market decline. Obviously, this is the result of research based on the general laws of global industry cyclicality. Over the years, the development of China's construction machinery has shown its particularity and won with particularity, which is not completely consistent with the generality of the world's construction machinery development law. In other words, no matter whether the global construction machinery industry market is up or down, China's construction machinery market is likely to thrive. The growth cycle is greater than the economic cycle, and it will continue to prosper for three or four years!
2. The uncertainty of the industry environment
In 2020, the global excavator market demand is less than 700,000 units, and the sales of the Chinese market accounted for nearly half (including 320,000 units exported). China's excavator production capacity is already as much as 600,000 units, and the production capacity is still increasing. So, for Chinese excavators to go to the world, in terms of production capacity balance, they need to "eat" almost all of the global market share. Obviously, this is not just a simple industry competition, it is bound to be related to the Sino-US trade war, the Belt and Road project, and the world. Changes in the world's political and economic patterns such as infrastructure, domestic infrastructure, including the global epidemic. Global political and economic changes have brought uncertainty to the Chinese construction machinery market.
There is no suspense about the competition between Chinese excavator brands and world brands in the Chinese market, and going overseas is bound to face the challenges of peers from all over the world. The large and small overseas construction machinery counterparts have long been eyeing up and are waiting strictly to keep their original cakes as much as possible. More fierce competition will surely occur in overseas markets. There is no doubt that this has a direct impact on the continued prosperity of China's construction machinery industry.
3. Uncertainty in the "attitude" of financial capital
According to a research report on the financial leasing industry, from 2018 to 2020, the total financial leasing business in the country will be about 6.5 billion-6600 billion per year, of which 7%-10% is for construction machinery and equipment, and hundreds of billions of funds are invested in construction machinery every year. market. However, from 2020 to 2021 Q1, the amount of financing has not increased but has been declining. Obviously, financing capital has already endured the debt risk caused by financing lease sales. The change of their "attitude" or "other new friends" will definitely directly affect the marketing scale of the construction machinery market. For all types of financial capital in the manufacturing industry, especially in the stock market, once the market fluctuates, whether they have been "loyal" to the construction machinery industry and whether they continue to increase investment directly affects the continued prosperity of the industry.
7. One of the possibilities for the industry to continue to prosper: Prosperity concentrated on low-end and low-end profits
1. Cruel internal rollover dilutes industry profits
In 2011, China's loaders sold about 260,000 units, occupying more than 2/3 of the global loaders market, an unprecedented prosperity. But in the past ten years, brutal price wars and involution have made the whole industry a top-down profit. Even if the sales scale of loaders has increased, it is still a "prosperity with meager profits." Will the excavator industry fall into this way of prosperity in the future?
2. The price war is the root cause of the excavator industry's internal volume
For the analysis of the price war, please refer to the author's series of articles ("Continuous Price Falling of Excavators and the Reasonableness of Changes in Product Quality", "Who Will Be the Outcome of Competition in the Excavator Market in 2021?", "Caterpillar GX Digging The impact and far-reaching influence of the machine on the market", "The Secret Behind the Price War of Construction Machinery", "Who are the winners and losers of the small digging competition in 2020?"), etc., no more discussion here.
Price wars have reduced the profitability of the industry, which will inevitably force the involution of every aspect of the industry, that is, "mutual killing". Even within each brand elephant, it is as far as possible to "kill" all redundant links with the end customers, including the "squeeze" of agents and the "mutation" of policies. The whole industry is top-down, and continues to the all-round involution of parts, after-sales service, and personnel salaries.
3. Internal volume "brainwashing" changes the value orientation of the industry's mid-stream and end customers
Long-term price wars and repeated involutions will make the industry's mid-stream and end customers "degenerate" value judgments, weakening value judgments, but the habitual thinking of "price judgments" has become more and more firm. Even if the market size is still not small, not only the low-end and mid-end products are the mainstream of the market, but also the value-based end users are greatly reduced, and the proportion of users for mid- and low-end products is rapidly expanding, leading to the industry's "middle and low end prosperity". Loaders in China are in this industry ecology at the moment. Will the excavator be so fate?
8. Who will be the waver of the next decade in the industry?
1. Limitations of traditional industry thinking
Whether the Chinese construction machinery industry is growth-oriented or cyclical-first, there are different opinions, most of which are the judgments of the industry's traditional thinking and logic. From the perspective of the traditional logic of the industry, the global construction machinery giants have gone through several cycles of the global industry and become the world leader. But despite this, in the world's largest market competition in China, the global industry leader, Caterpillar, has tried his best to "do all his best" and fail to become the leader of China. It is falling to the fourth and fifth. Japan’s Komatsu, the second largest player in the global industry, seems to have become a “forgotten corner of love” in the Chinese market, and its market share plays a marginalized role. If you follow the industry's traditional thinking logic, these are impossible to happen. Obviously, there are limitations in judging the future of the Chinese market with the traditional thinking logic of the industry.
2. New things under the industrial Internet
At present, China’s social development has entered the second half of the Internet-the industrial Internet era. Both foreign and domestic brand elephants are borrowing the power of capital, gathering excellent Internet talents, and investing in the industrial Internet, including other social capital. Business opportunities through the digital process of the construction machinery industry.
The advanced nature of China’s industrial Internet has made social capital and various types of talents and new technologies more involved, especially the combination of manufacturing and big data, the combination of capital and the Internet of Things, and the transfer of manufacturing to the service industry. In all sectors of China's construction machinery industry, there will be unicorns of socialized enterprises, and there will be more subversive behaviors. The further prosperity of construction machinery, including the excavator industry, is inseparable from the emergence of these new things.
Nine, conclusion
Adam Smith’s economic theories and Marx’s political economy. These economic theories hundreds of years ago are used to explain whether the current social and economic phenomena are still scientific, and political and economic experts, scholars and leaders around the world often debate endlessly.
The author is only a practitioner in the construction machinery industry, discussing knowledge and ability to learn, and is not qualified to comment on the merits of these theories. I just want to borrow the theories of the masters, observe from different perspectives, propose and explain some phenomena that have occurred in the industry.
The purpose of the author is not to pursue right or wrong, nor to pursue thoroughness and rigor. It is just an attempt to raise and analyze problems from different angles, hoping to provide some reference value for industry stakeholders.
Now that the Belt and Road Initiative is advancing layer by layer, China's manufacturing industry must strive to go global. However, the global epidemic is pervasive, and the Sino-US trade war continues. In such a world full of uncertainty, small probability events also happen from time to time, and things are impermanent. The theory of Adam Smith and Marx may be outdated and useless. The prosperity of China's construction machinery industry has crossed the world economic development cycle, and the unicorn of the industrial Internet has emerged in the industry. I hope that the occurrence of these events is certain. This It will be the greatest blessing of China's construction machinery industry.
