February 22, 2016      

Concern: Despite a good year in 2015 for the sector, foreign companies are cutting back their expectations. Many small domestic firms might disappear.

China: Negative headlines continue in 2016

2016 did not start well for the People’s Republic of China. The Shanghai Stock Exchange, already under pressure since mid-June, continued to fall in the first weeks of the New Year and sent shockwaves around the world. The Bank for International Settlements (BIS) repeated its concerns about the rising debt levels of Chinese companies since 2008. The outflow of capital from China in 2015 has been unprecedented, according to the Institute of International Finance (IIF). The recent actions by the government in Beijing to counteract these events did not help to win back the trust of investors.

It doesn’t look much better on the underlying levels of the country’s economy. Large parts of manufacturing and construction — the major drivers behind the economic growth of the past three decades — are in a recession. Sales of machine tools, a key indicator for investment in new production capacities, were 25% lower in 2015 than they were in 2011. In construction machines, the situation is even worse, not to say disastrous: The number of excavators sold in 2015 was less than one-third of the volume in 2011.

Factory automation remains strong in China

In the foreground of this situation, factory automation and robots in particular seemed more or less unaffected by the economic malaise, so far. Sales of both foreign and domestic robot manufacturers developed positively in 2015.

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KUKA announced official sales growth in China of about 20% until fall. ABB did not reveal total numbers, but according to people familiar with the matter, it was able to record growth rates of up to 60%, depending on the sales segment. FANUC described its robotics business in China as “active,” while it lowered its expectations for its machine tool-related business twice during the past six months.

Regarding the leading Chinese robotics companies, GSK was able to increase its sales by 45% in 2015. For SIASUN and STEP, we estimate a growth in sales of over 21% in the past year. With only 9%, ESTUN fell somewhat short.

Nevertheless, these results were disappointing. Many Chinese robot manufacturers had expected to double their sales in 2015, also due to the heavy support by the Chinese State. Provincial governments, notably in Guangzhou and Zhejiang, announced they would promote automation with hundreds of billions of RMB over the next few years.

The “Made in China 2025” strategy, published in May 2015, calls for the heavy use of cyber-physical concepts, the Internet of Things and the Internet of Services to catch up with technologically leading industrial nations. Yet, cash-strapped manufacturing companies have become more reluctant to invest in new production technologies while facing increasing economic uncertainty.

High hopes

The great expectations associated with more automation have attracted lots of capital during the past two years. In the wake of the new support policies, new robotics firms have been popping up like mushrooms; most of them system integrators with very limited technical capabilities.

Also, we are seeing intense M&A activity in this field. For example, industrial companies such MESNAC (rubber and tire machines) or SOTEC (printing and packaging machines) have acquired robotics system integrators in the past two years to increase their smart factory capabilities. However, such transactions do not always follow a stringent industrial logic: The purchase of a robotic system integrator has also been a popular means among listed companies to spur growth fantasies and boost their share prices.

However, the capabilities of factory automation are often overestimated. Foreign suppliers of automation technology are telling us — from the widespread expectation among Chinese politicians and businessmen — that most if not all structural problems of the country’s manufacturing sector could be overcome with intelligent, interconnected production processes subsumed under the label “Industry 4.0” — even the lack of high-quality, breakthrough products. These people tend to forget that China foremost needs more innovators instead of reverse engineers. Automation alone won’t be the solution.

On the other hand, the Chinese are quick learners. Foreign companies manufacturing in China report that they were working with degrees of automation that they had not imagined possible five years ago. The same we hear from German suppliers of high-tech production equipment: There are some well-educated customers who demand sophisticated solutions among China’s industrialists; the field is just very unleveled.

Growth still in the double digits, but all is not hunky-dory

For now, automation companies are more careful with their outlook than they were half a year ago. Western industry heavyweights expect an overall sales growth in China of approximately 20% for 2016. FANUC highlights increasing uncertainty about its business environment, in particular due to continuous sluggish demand in China.

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Our expectations for Chinese firms are mixed. For the leading names mentioned above, a growth of 20% should be possible in 2016. This is below the IFR’s expectations from last November, when they forecasted a CAGR of 25.9% for robots sales in China during the period from 2015 to 2018. A considerable number of the small robot companies might not survive the next two years. With fierce competition, their lack of own core technologies is becoming an existential threat to many of them.

The automotive industry, still the major sales market for robots in China, will continue to lose in relative importance. We expect that sales of robots in particular in the fields of 3C and home appliances will grow faster, followed by Food & Beverage and pharmaceutical products.

The 13th Five-Year Plan, which will be published by the central government in Beijing this March, is expected to provide further measures to promote the local robot industry and smart manufacturing solutions. Domestic firms will participate in this growth in particular with system integration services in the near future.

Also, we are seeing some domestic MES vendors successfully evolving as specialized general contractors for smart factory solutions. Finding a way, in which capital will be allocated according to the performance and capabilities of aspiring firms instead of their political connections will be crucial for the successful development of this industry.

Still great opportunities for foreign companies

The automation trend in China still offers great opportunities to foreign vendors of automation and robotics technology. However, a step into the country must be well prepared. The road to success does require significant financial and human resources. Growth, in China in particular, does not necessarily mean to be profitable.

Companies in this market must expect that new local competitors will emerge — partly supported by the Chinese government. Also, companies should always be aware that they operate in a regulatory environment that will put domestic players in favor, if possible.

See related STM report: Eye on China: Robots and Automation in Context

About STM Stieler

STM Stieler Technologie & Marketing Beratung is a boutique consulting firm specializing in B2B market research, strategic management and business development services for companies in the engineering industry. STM combines country-specific competencies for Europe, Northern America, Brazil, Russia and India in our international team. In 2011, we opened a subsidiary in Shanghai to better serve our clients’ needs in China.