China’s construction sector strives to rebalance itself to achieve sustainable growth

This report provides detailed market analysis, information and insights into the Chinese construction industry including industry's growth prospects by market.

The Chinese construction sector has contributed significantly to the country’s GDP. Though dominated mostly by state-owned enterprises that account for the bulk of construction activities, western companies have helped develop the sector and introduce new technologies. Rising labor costs, a burgeoning middle class and growing concerns over the environment have prompted innovation in products and services, as well as creation of opportunities for EU SMEs to introduce vital know-how in the market. However, as China re-balances towards itself for sustainable and consumption-driven growth, the FAI (fixed asset investment) is set to slow significantly and result in a sharp drop in the fortunes of less-competitive construction companies. This sharp drop is expected to lead to rapid consolidation in the sector.

This report, Construction in China and Key Trends and Opportunities to 2018, provides a detailed market analysis of the Chinese construction industry. It also provides critical insight into the impact of industry trends and issues, and the risks and opportunities they present to participants in the industry.

Weakened investments in the sector set stages for consolidation

China’s large population, especially the swelling middle class, and growth in investments have contributed significantly to the country’s GDP for all but two years since 1991 (1997 and 2007). This resulted in lifting of the share of investments in China’s GDP to 48.1% in 2012 and progress towards rebalancing of the Chinese economy and moving it away from investment towards consumption is yet to be seen. During the same period, investments contributed 4.1% of the 7.6% GDP growth in the first quarter of 2013 as against 3.4% from consumption. This means if the investments continue to grow faster than GDP, it would soon cross domestic savings (50.8% of GDP in 2012) which makes the market unsustainable. Deceleration in investment growth is inevitable, but the pace in the Chinese construction industry is slow.

Only when the investment decelerates, revenue and orders are expected to drop across all construction and associated sectors and lower utilization rate of these industries. Lower utilization depresses margins and increases working capital requirements across industries wherein marginal players might become unprofitable and even financially vulnerable, setting the stage for consolidation. However, key state-owned enterprises are always better positioned than industry consolidators, as they are supported by industry leadership and government support, which includes improved access to funding.

Meanwhile, some of the acquirers are likely to switch part of their expansion capital expenditure to fund transactions at time of weak demand. When acquisitions costs are lower, this would mean that they would be expanding without adding any extra capacity to the market. Companies with high positive working cycles, like the construction machinery manufacturers, will also benefit from releasing cash trapped in working capital. However, this slowdown in the Chinese construction sector is expected to accelerate the key players’ overseas expansion, particularly in other emerging economies like India, Brazil and Indonesia.

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SOURCE: Researchonchina.com

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