Chinese Automation Suppliers Looking at Global Market

Summary

With the rapid growth of China’s economy in recent decades, the country’s automation market has grown to become the second largest in the world, just behind the US. Previously, many Chinese automation suppliers took advantage of this opportunity to increase their respective market shares in the country, often at the expense of their much larger multinational competitors.

Along the way, China’s automation suppliers have improved their technical offerings and business acumen and many have begun to look overseas for incremental business while continuing to develop the domestic market. A handful of pioneers have had some degree of success with their overseas business in areas such as valves, DCS, and AC drives; with more suppliers now entering the international market.

For these companies, establishing a global footprint is a long-term goal with many challenges to overcome.  These include the need to customize products to meet the specific requirements of different geographic regions and comply with a wide variety of regulatory requirements. But, as is obvious from the many Chinese automation suppliers that now exhibit at large industry trade shows (Hanover Fair, SPS IPC Drives, etc.), Chinese automation suppliers are now taking bold strategic steps to execute their global market expansion plans.

Driving Forces

It’s important to first understand what motivates these companies from China to boldly venture into foreign territory previously dominated by well-established global or regional automation suppliers.  Here’s what ARC has learned following in-depth discussions with a number of automation suppliers in China:

• Business growth is a fundamental driving force for the enterprises. Although China’s market is large, the global market is undoubtedly much larger.
• Regions like the Middle East, South Asia, Southeast Asia, Africa, and South America offer tremendous business potential.  Many Chinese suppliers are already familiar with the user requirements and purchasing habits in these regions because they don’t differ all that much from those in China.
• By expanding their businesses overseas, Chinese suppliers can mitigate the risk of relying solely on the domestic market for growth, which has declined in the last several years due to a variety of reasons.
• A handful of China’s automation suppliers and several non-automation suppliers (Huawei, ZTE, Gree Electric Appliance, etc.) have performed well in the overseas market, setting a good example for other Chinese suppliers to follow.   
• China’s government encourages domestic companies to go outside China to seek opportunities with policies such as the “Belt and Road Initiative.” This is a key policy to connect trading partners along the ancient Silk Road. Overseas project contracts and investments provide abundant opportunities for China’s automation suppliers to expand their global footprint.  
• China’s automation suppliers also see overseas business development as a good opportunity to better understand customer needs and improve their products.

Business Strategies

China’s automation suppliers can enter the overseas markets using several different business strategies:

Partner with China EPCs or Equipment Suppliers

Since many Chinese EPCs and equipment suppliers have already made the investments to increase their global capabilities and raise their respective profiles globally, China’s automation suppliers can enter overseas markets by working directly with the engineering procurement firms or embedding their automation components in China’s machinery or other equipment.

Build a Distribution Channel

The second strategy available to automation suppliers to expand their businesses outside of China is to establish a distribution channel. The downside to this strategy is that the supplier can become heavily dependent on its distributors and it can be challenging to identify and recruit qualified channel partners.

Establish an Office, Branch, or Joint Venture

The third strategy is to set up an office, branch, or joint venture in an attempt to effectively manage channels; participate in sales, engineering, and aftermarket service; and maintain frequent communication with end users. This strategy requires a big investment at the early stage, but can help China’s automation suppliers gain a better understanding of market demands and dynamics. It also helps ensure a good connection between suppliers and end users.

Direct Sales

The last strategy is direct sales, in which the Chinese suppliers do business directly with overseas customers.   

Theoretically, suppliers could adopt different strategies based on stage, products, or target markets.  Currently, most Chinese automation suppliers have shown a preference for the first strategy discussed; partnering with an established EPC or equipment supplier.  However, some companies have either developed a distribution channel or established overseas offices or joint ventures.  To date, China’s automation suppliers have only attempted the direct sales route for very specific customers or projects.

Regional Strategies

China’s suppliers target common destinations and markets; sometimes the choice may differ depending on the product portfolio. Southeast Asia and South Asia are the most important markets for them. Almost all the Chinese suppliers count these two areas as the main overseas target markets, due to close geographical location, similar culture, big market potential as well as similar customer needs.

Quite a few suppliers from China, especially process automation suppliers, are interested in the Middle East and Africa markets, where there are many upcoming energy and infrastructure projects.

Many AC drives suppliers pay close attention to South America and Eastern Europe.  Motion control, industrial PC and network equipment providers focus more on the Europe market. China’s industrial PC suppliers like EVOC, SBS and NORCO have set up branches in Germany or The Netherlands.

Business Status

The majority of China’s automation suppliers kicked off their overseas expansion strategies in 2005 and 2006, but with mixed results. Some suppliers have realized major achievements in the overseas market as they are familiar with the business operation and have established qualified distribution channels. Those with cost-effective products have been well-accepted by their target customers.

ARC estimates that several large automation suppliers from China that have developed and implemented clear export strategies now earn 5 percent or more of their revenues (excluding on-off valves) from overseas customers, indicating that these suppliers have successfully taken the first step.

Most of China’s automation suppliers are still at a preliminary stage in exploring the overseas market. Some companies initially formulated aggressive business plans, but the results didn’t meet their expectations. In some price-sensitive regional markets, these suppliers sometimes earn even less margin for their products than in the fiercely price-competitive domestic market.

Moreover, fluctuations in the global economy impact the overseas market more so than in the domestic market; resulting in instability of their overseas orders.  Political volatility in some markets also creates steep shifts in business there.

Success Stories

The automation suppliers from China mentioned below have had the best performance in overseas markets to date. All have solid overseas expansion strategies, experienced business operation teams, and are accumulating knowledge of how to do business in targeted regions. They have shown good business performance in recent years and it appears that they have the potential to maintain this growth trend in the coming years.

Haimo is one of the world’s largest suppliers of multiphase metering solutions.  It earned an estimated $30 million in revenue from its multiphase metering solutions business in 2015; 80 percent generated from overseas customers, mainly in the Middle East.

HollySys is a Nasdaq-listed Chinese automation supplier whose main businesses are process automation and railway automation. The company has a strong overseas expansion strategy.  It acquired two international companies, Concord and Bond, in 2011 and 2013, and has operated these successfully so far. HollySys also markets its products internationally through HollySys Singapore, which has made good progress in Southeast Asia and India.

INVT, one of the biggest Chinese AC drives suppliers, also provides motion control, UPS and other solutions. In 2015, total revenue from overseas market exceeded $40 million, about one-fourth of its total business. The company has good coverage in Southeast Asia, India, and Eastern Europe.

Neway, a main Chinese industrial valve supplier with over $300 million in revenue in 2015, has very good presence in North America, Europe, and Asia Pacific.  Approximately 65 percent of its revenue came from these regions in 2015, mainly serving customers in the oil & gas industry.

Supcon, China’s largest DCS supplier, currently has the leading DCS market share in China.  The company’s overseas business has seen stable growth in recent years, reaching about $20 million in 2015, mainly from the Middle East, Southeast Asia, and South Asia.

 

Keywords: China, Automation Suppliers, AC Drives, DCS, PLC, Valves, ARC Advisory Group.

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