Many investors are concerned about whether Zoomlion will be able to collect all of its receivables after selling its construction equipment while also sweetening deals by allowing buyers to postpone the first payment. Property development and construction industries in China are facing increasing business difficulties under hard-hitting measures the government is using to crack down on real estate speculation. Many large-scale infrastructure projects have been suspended due to government policy adjustments as well.
Plans by Sany and Zoomlion to boost sales resemble programs that many publicly owned U.S. manufacturers used in the 1960s and 1970s to improve sales reports and share price. It was easy to boost sales and revenues if you count shipments as sales and book the profits as well. Tenneco Corporation, which owned J.I. Case in that time frame, was notorious for pumping up sales at the end of quarter and year end. Security-and-Exchange-Commission regulations and active shareholder groups put an end to the practices here.
China, which represented 50% of the global market for construction machinery in 2011, may not be able to hold up world machinery markets in 2012. With domestic demand soft, inventory could begin to show up in other markets. Latin America will likely see a surge of Chinese-built machines. Interestingly, during the M&T show in Sao Paulo, Brazil, in June, there was a strong rumor that Caterpillar was shipping 2,000 of its Chinese-built excavators to Latin America. Most Latin American countries require emission controls equivalent to the U.S. EPA's Tier 2 and Tier 3. Caterpillar’s Chinese plants are turning out machines equipped to satisfy Tier 2 and Tier 3. There is little threat, however, that we’ll see a flood of Chinese machines in North America or Europe because of the markets' stricter emission regulations.
Equipment demand in the euro-zone is looking increasingly fragile as countries there sort out banking problems. Even the German economy, which has been a source of strength during the past year, started to wobble a little at mid-year.
That leaves the U.S., Canada and Latin America to drive growth for the balance of 2012. U.S. gross domestic product (GDP) has been limping along at just under 2% in both the first and second quarters. Housing starts have finally started to turn around and the U.S. Congress managed to pass a highway bill that should provide a flow of large road projects over the next couple of years. Canada’s economy is very robust driven by its resource industries. Latin America is strong also driven by mineral and oil industry demand.
Overall, our outlook for the U.S. equipment market is unchanged from our prediction earlier this year. We believe retail equipment sales will grow at slightly less than 10% in 2012 compared with 2011.