China Automation Market Levelled Off

Summary

While the numbers are still not great overall, preliminary ARC research indicates that the ongoing decline in China automation market levelled off gradually from first through third quarters of 2016, then moved into positive growth territory in Q4 2016.  This followed significant declines in orders throughout 2015, with the worst performance seen in Q4 2015.

In Q4 2016, China’s automation market showed unexpectedly strong year-over-year growth, wiping out the losses accumulated in the first three quarters of 2016. This resulted in essentially flat growth for the automation market for full-year 2016 vs. 2015.  This came as a surprise for many industry observers, but reflects the wildly fluctuating nature of China’s automation market in recent years.

In recent weeks, ARC spoke with a number of large automation suppliers in China.  Most reported that their business had grown by approximately 10 to 15 percent in Q4 2016, with some product lines growing at 20 percent, 30 percent, or even more.  For 2017, most of these suppliers are adjusting their previous market forecasts from conservative to relatively positive.

Driving Forces

So, why did the market begin to recover in 2016, and what caused the strong rebound in Q4 2016?  ARC believes there are several main factors:

• Perhaps the biggest factor for the strong apparent rebound in Q4 2016 was the very bad market performance in Q4 2015.  As a result, just by equaling the market size in Q4 2014, Q4 2016 represented significant year-over-year growth over Q4 2015.
• Based on the main macroeconomic indicators, China’s economy is turning around.  In Q4 2016, China’s GDP was 6.8 percent, the highest point in 2016.  Year-over-year, electric consumption grew by 2.3 percent in the first three quarters; increased to 5.0 percent in October, 6.0 percent in November, and 7.4 percent in December.  The PMI Indexes for November and December were the highest in 2016.

• The government is making huge investments in infrastructure, especially for rail transit, high-speed rail, airports, and highways.  It appears that, since 2016, China’s government has refocused on investing in infrastructure to help stabilize economic development. These investments brought lots of direct opportunities for automation suppliers, while driving the boom in downstream industries such as cement, iron and steel, and construction machinery.
• Under its “Made in China 2025” strategy, the government has been providing subsidies to encourage domestic manufacturers to invest in smart manufacturing projects. In 2016 alone, the central government funded $750 million in smart manufacturing projects, providing a boost to the country’s automation market.

How Long Can It Last?

No one knows for sure how long this recovery can last.  Certainly, all the automation suppliers that we’ve spoken with recently hope this encouraging environment will last as long as possible.

While it’s always difficult to forecast the future, the highly fluctuating market trends in China, combined with the dynamic nature of government regulations and stimulus policies, make it particularly challenging to make a forecast for China.  To do so, we need to consider several points.

Many experts believe that business cycles in today’s China last for about seven years. If this and our observation is correct that, in 2016, China’s economy finished the shift from depression to recovery, it’s likely that this recovery phase should last for at least through the beginning of 2017, if not longer.

Secondly, unless government policies should change dramatically in the future, we anticipate that the huge investments in infrastructure at both the central and regional government levels will continue. 

In addition, government strategies such as the domestic Smart Manufacturing strategy and the regional “One Belt, One Road” Strategy (also referred to as the “Silk Road” strategy) should help drive China’s automation market.

Finally, in autumn of 2017, the Communist Party of China will hold its 19th National Congress.  As this is perhaps the most important recurring political event in China, it’s likely that the government will make every effort to ensure economic prosperity and stability prior to the event.

However, a potential headwind to continued growth looms in the background.  Should the market contract again, it’s likely that competitive pricing pressures will force suppliers to reduce their prices, which would further shrink overall market value.

Conclusion

As mentioned, ARC remains cautiously optimistic as we attempt to forecast China’s automation market for 2017.  While, overall, we anticipate modest growth for the total automation market, there could be large differences based on both products and served industries. Automation suppliers will need to develop their own smart strategies to remain successful.

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Keywords: China, Process Automation, Discrete Automation, PLC, CNC, DCS, ARC Advisory Group.