Archive for February 2011

SOE’s construction companies changing thier practice   Leave a comment

China has many SOE’s (State Owned Enterprises) Construction Companies. There are some of the largest construction companies in the world and they work both in China and outside China. Familiar names are China State Engineering, China Road & Bridge (China Communications Construction) Sinohydro, just to name a few.

Being SOE’s they are bureaucratic behemoths, employing thousands of workers and involved in hundreds of projects at anyone time. They are not always run with the most efficient modern management practices as profit is not always the ultimate goal of these companies.

As for construction equipment purchasing and management, they have their own unique set of practices. Usually, with these firms, they buy everything brand new from a dealer. They do not buy anything used (or very little, if they have to).

Often, they use these new machines on projects, which is all well and good. But the problem is that when it comes time to sell the machine, they are hindered by government accounting practices from selling such machines.

Why? Well, the government deems any piece of CE to be property of the state. As such, the selling and disposal of that property must follow very strict guidelines, in order to fend off companies (or individuals within those companies) from selling the machines for a low price (and then receiving a   from the buyer).

For the most part, the general rule is that the SOE is not allowed to sell the machine for less than book value. 99% of the time, the book value is almost always higher than the current market for that machine, making it almost impossible to do a deal. And because most equipment management departments know it is very difficult to sell these machines, they have no incentive to follow a proper maintenance program for the machine.

As an example of the extent of this problem, when I asked one of the major SOE’s how many large CE machines the group had in its inventory, he stated over 30,000 machines. When asked what was the utilization rate of these machines at any given time, he said it was usually less than 40%.

So for 60% of the machines (approx 18,000), they sat idle, earning no money for the SOE. In fact, they were costing the SOE money through depreciating, loss of interest, holding and maintainance costs, marketing and sales cost (if any). These 18,000 could be turned into cash if they sold at current market rates and the SOE could be taking that money and investing it in projects that would make the SOE money. Instead, the value sits in an idle machine that is costing the SOE money.

Even when the book value of the machine is written off (usually after 10 years), the market value of the machine is significantly less. Most likely the machine had been sitting idle for many years so seals and hoses would all need to be replaced. As the machine had no resale value to the SOE, the maintenance of the machine would have been minimal to begin with.  And operator practices in this part of the world are not the most conducive to maintaining a good used machine. In other words, the machine would be very rough and cost a lot of money just to get the machine back up to a marketable and saleable state.

And finally, if you are able to get your hands on a machine from any SOE, whether it be in good condition or not, you will have to pay some backhanders to the sellers.

But here is the whisper of change. SOE’s have realized that this is a very inefficient way to manage their fleets. In recent years, many of  the SOE’s have been turning to leasing and renting machines as a way to better maximize their cash and capital investment. The whisper is that starting in 2012, all SOE construction companies will not buy CE anymore and will be required to lease or rent machines needed for their projects.

This is a much needed change in their procedures and will make them more efficient and competitive. It will also root out chances for corruption both on the purchasing and disposal sides.

Shipping out of China   Leave a comment

Interesting phone conversation with a Chinese based ship forwarder today. We are looking to ship a Caterpillar brand bulldozer from China to Japan. In conversation with the Shanghai forwarder, he says that there have been a lot of Cat brand equipment that has been shipping from Shanghai to Yokohama and that the ship owners charge a hire rate for Cat brand machines than other brand machines because of the volume they are shipping.

Firstly, those Cat machines are made in China. The final destination is not Japan because China built Cat machines would not be acceptable to the Japan market. The machines must be going to Yokohama to be transshipped to other destinations where Cat is selling Cat China built machines  (SE Asia perhaps, as one example)

Secondly, I find it interesting that the ship owners charge more for higher volume. The general idea is that when you ship more volume, you get a lower rate because of the economies of scale. But not in China. If this is indeed true (and I have every reason to believe it is) it is a case of, lets make the foreigner pay more money.

Posted February 23, 2011 by chinacetrader in Caterpillar, Shipping

Tagged with ,

Internet Sales Scam for CE from China   Leave a comment

New broke today of a major fraud case perpetrated by a leading online sales company in China called Alibaba.com.

Chinese vendors could open pages on Alibaba.com where they could advertise their wares to customers from around the world. In order to create trust amongst users, Alibaba had a verification system where a vendor would pay a fee and Alibaba would then do a verification of the customers company, products etc to assert that the vendor was a trusted company.

It appears that many Alibaba salesman were handing out these verifications without actually doing any verifications of the vendors in question. This lead to vendors defrauding clients who believed the were dealing with a trusted company.

In the CE world, many of the used equipment traders in China (particularly in Shanghai) use the internet to attract customers. Alibaba is one among many sites these guys use to attract customers. It is well known on this side that a large majority of these sites were fraudster sites. The game was to list your company and machines on a website. A overseas customer would say they were interested to buy a one of the machines listed. The Chinese vendor would then require a deposit (perhaps 10%) of the purchase price to be paid in advance. After the vendor shipped the machine, the buyer would have to pay the remaining balance.

Well the trick here was to get the down payment and then shut down the site and break off all communications and never ship the machine requested. For an used construction equipment that might cost USD100 or more, the deposit could be in the range of USD5000 to USD20000.

Not bad money for doing nothing but listing a fictitious website and waiting for a sucker to send you money.

How many of these  UE brokers used Alibaba and were trusted members I have no way of knowing. But what I do know is that this scam was (is) rampant with CE brokers in China trying to export used equipment to buyers outside of China.

I also know that about a year ago, machinerytrader.com, the largest construction equipment website in North America stopped listing any and all listings from China. My guess is that they received many complaints from thier clients about the fraud going on in China and decided as a firm to block all listing from Chinese clients.

In my recent trip to Shanghai, I have started to hear complaint from these brokers that “times are tough” and “its hard to find customers”. Well the truth is that these scams have become all to well known and customers are just avoiding China altogether.

I am sure there are many of you out there saying “these guys had it coming, never send a deposit without inspecting the machine or visiting the broker first”. I can tell you that guys who did exactly this were also scammed.

So my suggestion is to never buy construction equipment on-line from China. Never send a deposit (only use LC’s) and only work with international trading firms you can trust. You must visit China to meet the vendor and inspect the machine. You should also be there to witness loading if you can. Some of these guys have even made fraudulent documents and submitted them to the bank the negotiate the LC without every shipping anything.

The best piece of advise I learned when I first came to China is to always judge your decisions as follows “If I would not do this deal in New York (or London, or Sydney, or wherever your home country is) don’t do it in China.” The Chinese have a way of convincing you that “China is different” and that you need to do things differently here. That is a red flag for danger. If it does not make sense and is something you wouldn’t do back home, don’t do it in China.

Anyone here experience this kind of problem in China (or anywhere else)?

Posted February 22, 2011 by chinacetrader in Shanghai

Tagged with ,

China MFY’s, meet the world   Leave a comment

The large domestic manufacturers have experienced incredible growth over the last decade. Their rise has come on the large demand for CE in the domestic Chinese market. Today, companies like Zoomlion, Sany and others rely predominantly on domestic sales. For both MFY’s mentioned above, less than 10% of corporate  sales come from international sales outside of China.

As they see the China market becoming saturated, China MFY’s will be looking for international sales to spur growth. Both Zoomlion and Sany have recently stated that they would like to see international sales make up 50% of their  corporate sales within 5 years. Many other Chinese MFY’s are also making the similar growth targets.

While it is good to have lofty goals, it is very hard to imagine these companies hitting their targets. When asked where that growth will come, they all say it will come in the developing markets (and not in North America or Europe). There could be some credibility to this claim as these markets are much more price sensitive than in developed markets (China products cost less than products MFY’s from Europe and North America). They could easily eat into NA and European MFY’s market shares in places like Africa and South America as they continue to improve in quality, yet remain in the sweet spot on price.

Are the NA and European MFY’s responding? Well you could say yes. Last year, Caterpillar introduced the Cat 140K motor grader. In the past, Cat normally had global model strategy where in all models of a machine category sold around the world were the same model and series. When they introduced the motor grader (MGR) into China in the early part of the decade they introduced the Cat 140H, which was the current global model for that size of MGR sold all over the world.  However, in order to compete with the low prices in China, Cat had to make a “stripped down” version of the 140H. Cat normally sells a Cat 140H with all the bells and whistles in other markets in the range of USD250K plus a unit. In China, the competition was selling this similar class of MGR for $90K to USD100K.  Cat made the stripped down version and priced it at around USD140K each.

In order to prevent Chinese customers purchasing these units and immediately selling them overseas, Cat makes their customers, by contract, agree that in the 1st year of usage, or 1000H of operation, the customer must give the Cat dealer the first right of refusal to purchase the machine back. After 1 year of ownership or 1000h of usage, the customer was free to do what they wanted with the machine.

Still the 140H was priced nearly 50% higher than similar machines from the domestic competitions. Cat dealers in China were motivated (pressured) to introduce the 140H to Chinese customers, but the dealers salesmen were having a tough time selling a machine that costs 50% more than local machines.

Eventually (actually pretty quickly) Cat salesman in China realized the price difference between the 140H sold in China and that sold in the rest of the world.  They found that the best way to induce a Cat customer in China to purchase one of these 140H’s was to educate them about the global pricing variance and their pitch was to convince the Chinese customer that this was an investment in a commodity that would be worth more after a holding period of 12 months and sold into the international market.

This was not exactly how Mother Cat wanted it to go. They were hoping their salesman would overcome the price difference in the China market by explaining to the Chinese customers that Cats quality was superior to locally made machines and that the customer could make money on these machines buy the Cat 140H’s superior operating performance.

So, in the end, the salesman went with the easier sell. “Buy this machines for USD140K today, and in 12 months you will be able to sell it to overseas customers for USD200K. And this is  what many Chinese customers did. They purchased the machines, held them for 1 year and either did not use them (some even got superior payment terms which reduced their risk), or rented them out for one year to put some hours on them (and get some rental income).

Once the owners were free to sell them (after one year of ownership or 1000h of operating the machines) they would promote the sale of them through the internet or other medium. Potential customer in other markets would see an unused or low hour Cat with an asking price of USD180K to USD200+ K and think, “I could save a lot of money if I purchased these late model low hour Cats than to purchase a new one for USD250K”. Believing that Cat would make the same 140H standards all over the world, they did not realize this was a stripped down version.

So over the last 5 to 10 years, many many 140H’s 160H’s and 12H’s followed this pattern and were sold to customers all over the world (especially the Middle East, Africa, South East Asia, etc) from China. Cat did not like this at all. Cat still works in an old world mentality where the world is split up into many isolated markets. They have not caught up yet to today’s reality where information and products are now a global business and customers all over the world can access the same information and products. These stripped down units being sold outside of China caused Cat a lot of headaches. Their customers who were expecting the standard 140H’s were confused and let down when they found out the version of the 140H they purchased was stripped down for the China market. Cat’s dealers were angry because they had much higher priced Cat 140H’s in their inventory but could not sell them because their customers were purchasing these cheaper versions from China.

So in response to this situation, Cat decided to create two models when they upgraded to the next model series.  For the developed markets, they have introduced the Cat 140M MGR which has all the bells and whistles one would expect from a high performance Cat machine. But for developing markets, they have developed the Cat 140K. The K series will be only for developing markets and will be made in China. A new 140M will go for USD300+ while a new Cat 140K in China and other developing markets will sell for USD180K. As far as I am aware, this is the first time Cat is offering two series of the same machine at the same time (K Series and M Series).

Cat is hoping that it can offer a cheaper version of its machine line to developing markets, while also offering high end high performance machines for the developed economies. It is hoping that a customer from developed economies will be put off by the “strange” model 140K which is not marketed in their regions and will not what to buy them.

Cat only introduced the 140K about 1 year ago. Most buyers in China are still in the “hold” period of their purchase contracts, but I know many of them think they will have an opportunity to leverage world markets like they did with the 140H. In my opinion, they will have little hope for that. So from one part of Cat strategy, it looks like they might have been successful, but will they be able to fend off competition from the Chinese MFY’s who they will be competing against in the developing markets in the future. Will the 140K be more popular than the Chinese equivalent offered by Sany, Zoomlion et al? That is still yet to be resolved.

Your thoughts?

Welcome   Leave a comment

I got the idea to start this blog after a trip to Hefei and Shanghai this week. I have been working in China for the last 7 years and have seen it all (well maybe not all, cause nothing new surprises me anymore, but I have seen a lot).

On this particular trip, I met with a couple of Pakistani Traders who have been living and working in China for more than 10 years. They both speak fluent Chinese and they have been working to export used machines out of China to ME and South Asia.

They are not related, nor do they work with each other. Each runs his own business and affairs. With both of these guys, we got into all the scams and tricks that these Used Equipment export brokers (mostly based in Shanghai) run on unsuspecting foreign clients who try to buy UE from them.

I had heard many of the stories before, but they both told me of some new ones these guys have run. It is simply amazing what these guys will do.

So I thought, as one of the few westerners living and actively working in the construction machinery industry in China, I should set up my own blog to discuss the various aspects of the trade in China. Some will  be good, some will be bad, but I will try to give an honest view, at least from my perspective.

So this is my first post and hope to follow up with many more posts in the future. Please feel free to add you comments or ask questions and I will try my best to give you some answers.

Posted February 18, 2011 by chinacetrader in Uncategorized

Tagged with ,