CHINA: In China’s evolving economy, forward-looking companies such as Volvo CE are driving change

by Michele Travierso

At the turn of the century, the Chinese economy was humming along, growing at double-digit pace. Thanks to the huge government-led investment in infrastructure – road networks, railways, water systems and mining to fuel it all – Volvo Construction Equipment grew a healthy 30% year-on-year for around a decade. Equipment flew off the shelves, with more than 30,000 Volvo CE units delivered during that period.

In 2011, China alone absorbed close to 40% of the global demand for new excavators, with approximately 178,000 units delivered. Then, in 2012, history’s largest money-spinner came to a grinding halt. Foreign direct investment and exports – two pillars of the Chinese economy – started to stutter and the country began to experience growing pains.

 

Since then, Beijing has been trying to shift the main growth from investment, to consumption of services, using various carrots and sticks to steer the gigantic economic machine. And, at Volvo CE China, they have noticed the difference.

 

First, the commodities bubble burst. “We can’t quite say ‘the age of the big machines is over’, but other products will have better prospects,” says Francis Sum, president of Volvo CE’s sales region China, referring to lower demand for the large excavators and articulated haulers used in mining operations. “The transition, however painful, is inevitable.”

 

“Last year, the overall drop in China’s total market volume was around 70%,” explains Leo Zhao, vice president of used equipment, sales and operations for Volvo CE China. That said, even “in a low, challenging market like this, the country still absorbs 45-50,000 new units a year,” he adds.

 

CHINA / Shanghai / 17/05/2016 Volvo Construction Equipment Headquarter Shanghai / Portrait of Leo Zhao VP Used Equipment Sales & Operation and his team © Daniele Mattioli

From left: Jack Wang, Kelvin Yu, Zenchao Wang, Zhiming Wu, Qingsong Wang, Leo Zhao, Vincent Ma, Dan Zhou, Wenming Li, Michael Xu, Liqun Wang, Shoutuan Yang

DEMAND

In short, both Sum and Zhao agree that these momentous economic shifts are changing two key factors: the size of the equipment being used and the way it is sold – or rented. Sum explains that the first change is happening before their eyes. In 2016, for the first time, “we saw the market for compact machines – those weighing 10 tonnes or less, grow much bigger than that of heavier general-purpose equipment, which traditionally has been much stronger.”

 

Besides using smaller machines, the market is reacting to tighter money supply by buying second-hand or renting. According to industry insiders, the used-equipment market is three to four times larger than that for new units – although there are no official statistics to confirm this. Volvo CE is tackling this virtually untapped market by stepping in and taking control, bringing to the game the values that have made Volvo CE famous: quality, fuel efficiency and durability.

 

Volvo CE has set up a buy-back program to help its dealership network avoid being inundated with requisitioned equipment. “When government investment began to shrink, the banks started to tighten financing, which caused some of our customers to default,” says Zhao. “There was just not enough construction going on to sustain them all.” So when they could not repay their loans, they returned the machines. Dealers are suffering from this, he continues. “Ultimately, with the program, we improve dealers’ cash flow and their profitability.”

 

CHINA / Shanghai / 17/05/2016 Volvo Construction Equipment Headquarter Shanghai / Francis Sum President of Volvo Construction Equipment © Daniele Mattioli

Francis Sum, president of Volvo CE’s sales region China

PRICING

Valuing second-hand equipment of any kind is tricky, let alone machinery of this size. “Pricing used equipment is never easy,” says Kevin Yu, head of used equipment evaluation and operations. “We follow global buy-back metrics, and apply them to the realities of the
Chinese market.”

 

On the evaluation site, Yu and his team carry out simple repairs, such as changing side doors, or parts of the undercarriage most vulnerable to damage. The Shanghai headquarters houses two workshops, one for used equipment and one for remanufacturing components (featured in Spirit issue 52). Both are spotless, by workshop standards. Work benches are covered with every engine component imaginable – some just need cleaning while others will be retooled or replaced. Yu says that reassembly normally takes about one to two days.

 

The difference between China and the rest of the world is still striking. In developed markets, a sizeable percentage of the machinery is sold to rental companies. Of course, renting allows end-users to free up capital for other uses and lowers maintenance costs, since any
major overhauls are usually undertaken by the rental companies.

 

In China, the rental trend is just beginning – it has been hampered by various taxation and accounting rules – but thanks to a series of contingencies, Volvo CE is particularly well suited to exploit this. Traditionally, the Chinese have frowned upon renting. People still associate ownership with wealth and renting with being poor. This mentality has existed in private companies, too.

 

 The Volvo CE Park of escalators outside the headquarters, The machines are refurnished and ready to be sold © Daniele Mattioli

Wenming Li (left) and Zenchao Wang

RENTABILITY

Nevertheless, the rental market is growing. Shanghai Pangyuan Machinery Rental Co. saw its turnover increase in 2014/15, when sales of new machines dipped. With a workforce of approximately 4,000, they have 32 rental centers in the whole of China.

 

By comparison, the world’s largest machinery rental company, United Rentals, boasts 888 rental centers with 12,500 employees located across the United States and Canada. Bridging this gap is a huge business opportunity which Volvo CE wants to be part of. “This is something our dealers will have to do,” explains Zhao. “It takes manpower and you have to be close to the potential buyers, too.” The company is also developing more incentive packages, such as financing support, Volvo Financial Services and special pricing to encourage dealers to be proactive.

 

Volvo CE has one great advantage in the rental market: its equipment has a much better fuel efficiency than that of its competitors. “When you’re renting, you’re more worried about running costs than purchasing costs. When your monthly fuel bill is 10% to 20% cheaper, you start to notice,” explains Zhao.

 

At the moment, second-hand sales still offer the greatest opportunity. But how does someone sell a 10-tonne second-hand machine in China? No sales channel is spared in a country where consumers are able to buy pretty much anything through their smart phones (which currently number more than half a billion in circulation) including, it would appear, second-hand excavators.

 

Via the country’s most popular mobile application, Wechat (or Weixin, as it is known locally), potential customers can connect to Volvo CE’s official account. Users find details and pictures of second-hand machinery, reconditioned by official Volvo CE dealers and, with a simple click, can connect via messaging or call local depots to arrange a visit and a test. In a few cases, used equipment is also sold outside the country, especially to Africa, where large (often state-owned) companies have large infrastructure projects.

 

At the end of the visit, one question remains: is business ever going to be as good as it was before? “We should be better than we were – and we will be, without doubt,” concludes Sum. “The external environment is the same for all of us, the only difference being how quickly and how well we adapt.”

 

CHINA / Shanghai  /  17/05/2016 Volvo Construction Equipment Headquarter Shanghai / The workshop area where the engine is refurnished  © Daniele Mattioli

Pei Zhu