In 2014, China machine tool industry is performing better after a 2-year downturn, and the output of metal cutting and forming machine tools is beginning to pick up. From the perspective of orders, however, enterprises are still facing severe challenges in the first half of the year. Due to the change in market demand structure, there is a drop in import of high-end machines yet an increase in import of medium-end machines. Therefore, the medium-end market, especially the medium-end CNC machine tool market, is expected to witness fiercer competition.

Industrial trend in Q1

Continuous order shrinkage, heavy losses for enterprises

In the first 2 months in 2014, machine tool sale basically maintained the level in the same period of the previous year. However, metal cutting machine declined on YOY basis and showed no sign of pickup. Since January 2012, orders for metal cutting machine exhibited negative growth for continuously 26 months. Insufficient orders remain the key challenge for enterprises to seek survival.

For domestic exhibitors, transaction volume at CCMT 2014 dropped 40.9% compared with CCMT 2012. Specifically, transaction volume for metal cutting machine and CNC machine tool dropped 45.6% and 41.3% respectively, indicating general trend will not experience substantial improvement in the first half of 2014.

Furthermore, enterprise profit suffered greater decline. In the first 2 months of the year, profit for metal cutting machines dropped by 97% on YOY basis and over 60% of enterprises suffered losses.

Machine tool output begins to pick up

In 2014, metal cutting machine and metal forming machine changed the trend of continuous decline in output in the previous year. In Q1 2014, output of metal cutting machine in China hit 179,000 sets, up 7.8% on YOY basis; in March, its output hit 70,000 sets, up 15.0% on YOY basis, creating the greatest value in the past year. Output of metal forming machine experienced substantial YOY growth and total output in Q1 hit 62,108 sets, up 15.25% on YOY basis.

Growth in medium-end market import

In Q1 2014, based on statistic data from China Customs, total machine tool import dropped 5.2% to 17,843 sets; import value dropped 16.7% to USD 2.24 bn; average import price dropped 12.1% to USD 125,000/set.

In terms of import value, Japan, German and Taiwan are the top three sources for China’s import of metalworking machine tools. In Q1 2014, import form Japan dropped 35.8% on YOY basis to USD 547 million, share in total dropping from 32.4% to 27.5% on YOY basis; import form Germany dropped 35.5% to USD 499 million, share in total dropping from 29.4% to 25.1%; import form Taiwan increased 1.5% to USD 225 million, share in total increasing from 8.4% to 11.3%.

The 17,943 machine tools imported in the first quarter include 5,881 machining centers and 3,153 CNC machine tools. For machining centers, import volume dropped 23.0% and average import price dropped 2.1% to USD 100,000/set in March, representing the lowest point in the past 15 months; for CNC machine tools, import increased 8.3% and average import price began to drop in January month by month and dropped 21.2% to below USD 200,000/set in March, representing the lowest point in the past 15 months.

Import volume went down. The main reason is that due to continuous high-speed growth in the past years, the demand of customer sectors are basically saturated and it takes some time to adapt to high-end products. As estimated, machine tool import will not experience any long-period high-speed growth as it did in the past years. In 2014, metalworking machine tool import volume keeps going up while average import price keeps going down to the lowest point in recent two years. In Particular, the share of Japan and Germany went down while that of Taiwan went up, indicating an increase in medium-end market import. As a result, Chinese machine tool enterprises are expected to face fiercer competition.

Higher average export price for lathes and milling machines

In Q1 2014, metalworking machine tool export from China dropped 0.6% on YOY basis to USD 670 million; export volume dropped by 0.6% to 1,630,000 sets; average export price hit USD 413.4/set, maintaining the same level compared with the previous year. Specifically, lathe export dropped 15.4% to 13,557 sets, but average price rose by 18.3%; milling machine export increased 3.8% to 7,103 sets, and average price rose by 4.8%.

For Chinese metalworking machine tool export, USA, Japan and India are the top three export destinations. In Q1, export to USA dropped 43.6% to 9.5% in total; export to Japan increased 53.7% to 7.4% in total; export to India increased 12.1% to 6.2% in total.

Based on lathe and milling machine export, RMB devaluation fails to pull up export volume, indicating overseas market demand for Chinese machine tools is limited. However, rise in USD-based average export price, increase in lathe export to Japan and increase in milling machine export to Germany, indicate China-made machine tool is witnessing gradual improvement in export competitiveness.

Once again becoming the largest source of orders for Japanese machine tools

In 2014, USA and China became the largest source of orders for Japanese machine tools, China ranking first in January, surpassed by USA in February and ranking first once again in March. In the first quarter, the total amount of Chinese orders hit 72.76 billion Japanese Yen, up 133.5% on YOY basis; that of U.S. orders hit 56.81 billion Japanese Yen, up 4.7% on YOY basis.

In January, Chinese orders for Japanese machine tools hit 17.29 billion Japanese Yen, up 17.6% on YOY basis; in February, this figure increased to 18.04 billion Japanese Yen, up 71.9% on YOY basis; in March, this figure substantially increased to 37.43 billion Japanese Yen, up 194.3% on YOY basis. As indicated by monthly trend, Chinese orders grew month by month accompanied by greater YOY growth rate. However, this growth is largely attributable to normal rebounce based on low reference value in the previous year. With increase in orders, Chinese machine tool import from Japanese will witness substantial growth in 2015.

Existing challenges

Overall decline in market demand

Substantial decline in machine tool import in 2013 indicates an overall shrinkage in fixed asset investment and market demand. Currently, the peak of fixed asset investment for customer sectors is gone and industrial equipment for some sectors is saturated while fixed asset investment is slowing down in growth rate.

Greater supply than demand reflects low-end overcapacity

Triggered by the four trillion investment in the previous years, the machine tool industry experienced great expansion in production scale, leading to current greater supply than demand. In 2013, the number of machine tool enterprises grew by 20.4% and output increased by 137.5% over 2011, indicating substantial overcapacity. Particularly, heavy-duty machine tool reveals low utilization rate of production capacity and operating income for enterprises dropped by 45~50% for continuously two years.

Overcapacity leads to fiercer market competition and homogeneous production further intensifies competition. Therefore, machine tool enterprises should curb the trend of vicious competition.

Fiercer competition in the medium-end market

In the next 3 to 5 years, according to VDMA, the medium-end market is expected to become the largest market segment for China-made machinery, and maintain up to 6% growth.

Currently, transnational corporations are implementing a shift of their strategy in China from high-end to medium-end solutions. The new pattern of competition arising from this means a challenge of survival for medium to low-end machine tool enterprises in China.

In January 2014, machine tool import began a continuous decline in average price. In February, machine tool import began an increase in volume but decline in price for continuously 3 months. This indicates that overseas machine tool manufacturers have intensified the output of medium-end products. To deal with these challenges, Chinese machine tool manufacturers should improve product quality and performance, and provide local services to maintain existing customers and open up new markets.

Future prospect

In the first quarter, downstream sectors such as automobile and shipbuilding are witnessing healthy industrial development. Promoted by Premier Li Keqiang, the locomotive manufacturing sector focused on high-speed rail is experiencing better export prospect while the machinery industry is still entrapped in gloomy downturn. Based on NBS (National Bureau of Statistics) data on fixed asset investment in the industry, however, general machinery, special machinery, electric machinery, automobile and transport equipment witness higher than 10% growth rate in investment in Q1 2014.

Due to shrinking orders, the machine tool market is expected to continue its downturn in the first half of the year. Buoyed by higher fixed asset investment in the downstream sectors, the machine tool industry is expected to turn better in the latter half of the year and maintain the level of 2013 for the whole year.