China economy

Tough time ahead for foreign capital goods firms, but Japanese firms still in favour

Country to create more national champions at the cost of foreign original equipment manufacturers, the US brokerage firm Jefferies says

PUBLISHED : Monday, 20 March, 2017, 8:16am
UPDATED : Monday, 20 March, 2017, 8:16am

China’s 13th five-year plan is likely to create more national champions in the industrial machinery sector at the expense of foreign firms, according to Jefferies.

The plan, which sounds easy and plain enough on the surface might give a strong clue to the future development of China’s major economic and social sectors, such as oil and financial services, it said.

The first five-year plan was rolled out in the 1950s, and the scheme has been transformed from over-reaching political ambition to measured economic progress over the decades.

“What can we produce? Tables, chairs and tea pots. But we cannot make automobiles, aeroplanes and tanks,” ran the famous line from Chairman Mao Zedong when he set the Soviet-style approach to accelerating infrastructure development during the early years of his time in charge.

Gradually, the focus has shifted to economic development after late leader Deng Xiaoping smoothed the path for the market system to flourish in this country in the 1970s by initiating the “opening up and reform” policy.

While expanding the economy has always been on the central government’s agenda, heavy air pollution and derivational problems due to ever-growing GDP, have also prompted the authorities to take action in recent years.

Drastic cuts in steel and coal capacity and output, and the expanded use of greener energy have emerged as two major themes in the latest plan, which could have further impact on foreign capital goods firms in this country, Peter Reilly, an analyst at Jefferies’ European team wrote in a recent note.

“We conclude there are more threats than opportunities, making the 13th five-year the most negative so far for foreign capital goods companies.”, Reilly said.

Capital goods include companies in construction, aerospace and defence, and electrical equipment among others.

The Chinese authorities have encouraged domestic capital goods firms to boost productivity through innovation encouraging more to joint together to become globally more competitive, while also remaining both efficient and environmentally friendly, according to Chinese State Council’s Made in

China 2025 plan rolled out in 2015.

“We conclude there are more threats than opportunities, making the 13th five-year the most negative so far for foreign capital goods companies

Peter Reilly, Jefferies’ European team

Traditional key industries such as power generation, automobiles, real estate, oil, and shipbuilding are likely to fall down the priority list as China’s de-capacity policies combined with stricter emissions targets redirect investment away from these sectors, wrote Reilly.

In addition to shrinking investment, foreign capital goods firms, especially European ones, will see more markets being closed to them in 2017, as China proliferates market share targets for domestic suppliers, according to Jefferies.

Foreign brands, such as energy management firm Schneider of France, Swedish robotic company ABB, Germany’s Siemens and France’s Legrand, will thus be faced with weakening market share, the note said.

However, Japan would be an exception and maintain its already strong market presence in China this year, because its firms based in China have maintained well-established customer segmentation between the countries’ machinery brands, the quality of Japanese products remains good, as do delivery times, cost-effectiveness, wrote Sho Fukuhara, an analyst with Jefferies.

Japanese Industrial machinery and component suppliers are well positioned in the US brokerage firm’s eyes under the five-year plan for factory automation and infrastructure construction activity.

SMC, Komatsu and Sumitomo Heavy Industries are all given a buy rating by Jefferies.