Machinery makers 'need to retool'

A textile mill in Jimo, Shandong province. The country's machinery industry has excess capacity, which is leading to the slower growth of profits in the sector. Liang Xiaopeng / For China Daily

China's machinery sector has too much capacity, but companies can cope with this situation by upgrading their products and expanding overseas, a senior industry official said on Monday.

The sector expanded 13.8 percent last year, despite the slowing economy, generating total revenue of 20.4 trillion yuan ($3.34 trillion), according to the China Machinery Industry Federation.

"The growth rate was 4 percentage points higher than the previous year," said Cai Weici, vice-president of the federation.

"It was the first time that total revenue of the country's machinery sector exceeded 20 trillion yuan, as China remained a major world manufacturer."

However, he said, the industry faces a trio of problems - rising costs, low product prices and falling demand - which are constraining profit growth.

According to the federation, the industry had aggregate profits of 1.41 trillion yuan last year, up 15.6 percent, but profits from the core business of making machinery grew only 13.8 percent.

Cai said the difference indicates the weak real economy is getting less attention in China than the "virtual" or financial economy.

"It's hard to calculate a capacity utilization rate for the machinery industry because of the large number and wide range of products and production lines, but overcapacity is a reality," said Cai.

Confronted with excess capacity and weak domestic demand, private companies in the sector turned in good financial performances by expanding in foreign markets, either through exports or by investment abroad.

Machinery exports reached $372.5 billion last year, up 6.24 percent. Imports edged up 0.74 percent to $298.8 billion, according to the federation.

"Private companies have played an important role in this stage of industrial restructuring and upgrading," said Cai.

"By generating more than half of the machinery industry's revenue and profit, private companies keep the entire industry stable."

According to the federation, private companies generated revenue of 11.6 trillion yuan from their core businesses, up 15.4 percent, which was 1.6 percentage points more than the industry average.

Private companies made total profits of 758.5 billion yuan last year, accounting for 53.6 percent of the total for the industry. Annual profit growth for the private sector was 14.6 percent.

Thanks to the strong competitiveness of private companies, State-owned machinery producers have been under pressure to improve product quality and production efficiency to survive in the market, said Cai.

"China's machinery industry is more active and robust than other monopolistic industries in the country," he said.

The country's machinery sector began to falter in 2011 after years of approximately 30 percent annual growth, because of excess capacity and a slowing economy.

In 2012, the industry's total profits stood at 1.23 trillion yuan, up 5.18 percent - a sharp drop of 16 percentage points compared with the previous year.

Cai said that starting this year, the industry's growth rate will stabilize. "Let the market decide the allocation of resources. Mergers and acquisitions will happen more quickly, and companies will take bigger risks in the future."

Cai forecast the sector will achieve 12 percent growth in both sales and profits in 2014 and export growth will be about 8 percent.