Why Chinese OEMs are winning in off-highway (and how to compete)

“It’s just subsidies” (hint: it isn’t and that’s lazy thinking)

Many times, when talking about the progress of Chinese off-highway OEMs, industry insiders are quick to say, “ah, but they’re only successful because they are subsidized. It’s really unfair.” But is this a legitimate criticism and does it downplay everything else Chinese OEMs have done to be successful?

With regard to subsidies, it’s clear the Chinese government has pumped billions of RMB into domestic industries to support growth and build scale. According to a recent report from the OECD, “firms based in China continued to receive considerably larger amounts of subsidies relative to their revenue than firms based elsewhere.” So, it probably is fair to say that Chinese companies have benefitted unfairly from subsidies.

But subsidies only get you so far. A product might end up being cheaper, but does that guarantee success in a market like off-highway, where reliability, trust, and performance are arguably more important? Chinese off-highway OEMs have followed a playbook – by design or luck – that can be characterized by the following elements:

Buying Western technology and brands

For many years, Chinese off-highway OEMs have been acquiring and investing in overseas brands to gain access to new markets and advanced technologies. There are too many examples to list them all here; however, examples include Weichai Group’s acquisitions (Aradex, Kion and Linde, and Baudouin), Liugong’s acquisition of HSW (the Dressta dozer brand), and SANY acquiring German concrete pump manufacturing Putzmeister. Strategically, these investments have positioned Chinese OEMs at the heart of many European markets and allowed them to fill gaps in their product offerings.

Marketing

In recent years, Chinese OEMs have developed much more sophisticated marketing activities to highlight their brands and position themselves as market leaders.

Social media channels now see a growing number of construction or AG influencers promoting Chinese brands to their followers. It’s not uncommon to see videos highlighting the sophistication of Chinese production facilities or how Chinese brands provide support in different regions. The construction market is driven by trusted relationships, so the use of influencers should be viewed as an effective way of shortcutting the time taken to convince users of the merits of a brand.

Exporting deflation

China has been gripped by persistent deflation due to weak domestic demand and significant overcapacity. One approach – across a range of industries – has been to focus on exports as a way of utilizing factory capacity and expanding the business. The off-highway market is no exception and Chinese companies have aggressively pursued export opportunities by supplying cheaper products (that get relatively cheaper) than their overseas competition.

Low margin tolerance

Chinese manufacturers typically work on lower margins than European or US manufacturers for equivalent products. This is partly through subsidization and partly a cultural acceptance that lower margins allow them to build market share. A willingness to accept lower margins is a key strategic advantage over manufacturers from other countries, and it’s a long-term play, with margin growth available at some future point when market share and brand acceptance is high enough to accept it.

Dealer networks

Key to success in any off-highway market is a strong dealer and service network. For new brands, particularly Chinese brands where there is a perceived quality issue, it is essential to building trust and brand loyalty. Chinese OEMs have aggressively pursued dealer acquisition and the rollout of service centers in core markets around the globe. Recent examples include SANY’s alliance with Crowland Cranes, Liugong in Finland and the UK, or Sunward in the UK. Once an OEM can get product into a market ​ – and support it to minimize downtime – it is much ‘stickier’ and harder to displace as operators get more familiar with it.

Industrial design and localization

Chinese OEMs have invested (and continue to invest) in industrial design and localization of machines to increase the value and appeal of machines in export markets. Strong industrial design helps to define a brand, with common design features representing a ‘language’ across models to make them more instantly associated with a brand (think about the color OEMs choose). It can also convince users that machines are “more premium” because more attention has been paid to the engineering. Sany worked with Studio Porsche in 2011 for cab design and Liugong ​ has won awards for its design work both this year and previously.

Chinese OEMs are also looking to ‘localize’ machines for specific markets to improve user adoption. This could include more comfort and convenience features in the cab (air conditioning, premium seating, larger screens) or ‘premium’ engine and hydraulic components to reinforce the message of reliability.

Electrification and autonomy

Chinese OEMs have focused on developing market authority in electrification and autonomy. For electrification, China dominates almost the entire value chain – from raw materials through to finished products – and is successfully exporting that capability around the world, notably in the passenger car market. It is, for the most part, very hard for non-Chinese companies to compete on price and product in electrification. This is becoming a major advantage in the off-highway market, where the scale of the electrified equipment market in China is enabling Chinese OEMs to bring much more competitively-priced machines to market in Europe and elsewhere.

‘China Speed’

‘China speed’ is a phrase that has been coined to describe the pace at which Chinese companies – particularly in automotive – bring new products to market. The design and testing cycle is often much quicker than is typical in European or American companies. Chinese companies’ ethos is to focus strongly on solving customer problems, use short decision-making chains, rely on software simulations, and get product to market quickly for validation and then iteration. This approach can shorten typical design cycles by months and even years. In many ways, this is one of the most significant challenges to ‘Western’ OEMs. Beyond all the advantages of price, speed to innovate and address customer requirements is a key differentiator that will be hard to match without change.

Overseas production

Chinese OEMs have expanded production outside of China to be closer to core growth markets and avoid tariffs. Chinese OEMs manufacturer in Mexico, Brazil, South Africa and India (and more beyond). Often these facilities are more modern than local competitors – giving an efficiency advantage – and the closeness to growing markets is both a signal of confidence to end users (there is trust that the brand will be around in 10 years) and, practically, it can avoid tariffs and reduce the cost and complexity of shipping.

Strategies to compete

After reading this far, it might feel that it is hopeless trying to fight against the tide. But there are several behaviors and activities that can be undertaken to tackle the challenge.

Accept lower margins

We contend that OEMs and suppliers in Europe or the US need to get comfortable with lower margins for certain products for an extended period of time. This is likely to be an unpopular opinion, but it’s grounded in realism. If Chinese OEMs are going to continue to offer compelling products at a lower price, it may be the only realistic option to maintain market share. The important thing to remember is that machines and parts in market drive aftermarket revenue. Fewer machines in market equals lower revenues overall.

Focus on rapid product development

It cannot be the norm to take three or even five years to bring a new product line to market. When your chief competitive threat is taking no more than two, you have to move faster. To do so will require a change in culture; a greater acceptance of “good enough versus perfection”, more simulation, and less bureaucratic decision making. Without more urgency, your products will look less compelling, and no amount of brand loyalty or captured service revenue will save you in the long run.

Use service business models to lock customers in (while trying something new)

To date, Chinese OEMs have followed a reasonably ‘traditional’ business model i.e. selling machines into independent owner-operators or rental fleet sales, but with limited focus on service as a revenue and profitability driver. This gives incumbent OEMs an opportunity to drive harder into ‘service’ models that guarantee uptime. Performance and re-builds and can be extended to five or seven years, locking out new machine sales from competitors. While preserving their existing business, OEMs can look at new business models or commercial activities that drive market share retention.

Develop Differentiated Product Offerings

By really (really) focusing on customer problems, there are opportunities to create machines and tools that are highly valuable and cannot easily be replicated. We’ve spoken before about the JCB Pothole Pro as one example, but the CASE Minotaur, NEXAT agricultural platform or Malwa’s 560C Combi “harwarder” are also examples. Typically, these machines combine functions from different machines – reducing the capital outlay for end users – or redefine a segment, creating a new application type. There should also be a focus on deploying new technologies as standard into machines (safety, connectivity, efficiency solutions) to make machines highly compelling to fleets and end users.

Be in China

For several years, the prevailing sentiment has been that the Chinese market is essentially ‘too hard’ for overseas brands to compete effectively in, and there’s a lot of truth in this. However, there is an argument from a number of suppliers and OEMs that it’s essential for them to be in China for one core reason: to develop better products. China is, arguably, one of the most competitive markets globally and is clearly the most advanced when it comes to electrification. If you’re an overseas OEM or supplier and want to make better products, what better crucible to strengthen your offering than China. If you can make it there, you can make it anywhere.

Takeaways

There is no escaping the fact that Chinese OEMs are expanding rapidly in multiple product segments and countries. Incumbent OEMs are going to feel the pressure of increasing competition if they aren’t already. Perhaps the winners from all of this will be end users, who might see more affordable and better products all round.

For OEMs, we have outlined ways to face up to the challenge, develop better products, and maintain customer loyalty. For suppliers, there are opportunities to work with Chinese OEMs to help them localize machines. However, there is also a risk that Chinese OEMs will bring their supplier-partners with them when they establish overseas factories. Perhaps the most important action right now is to confront the problem and develop strategies to mitigate the risk.

To find out more about the latest Interact Analysis Off Highway Vehicles Report, contact Alastair Hayfield.