The curious story of Sany and China’s booming inner provinces | FT Alphaville

The curious story of Sany and China’s booming inner provinces

Sany is China’s biggest machinery company, and it’s confirmed today that it will be cutting jobs from its local workforce. We’re not sure exactly how many, yet — but even a small figure would seem a bit of a blow to one of the key bullish narratives out of China this year.

In January, Sany made waves by buying Putzmeister, a German “Mittelstand” company that makes concrete pumps, for an enterprise value of €525m. It was one of the biggest Chinese purchases of this sort of German manufacturer.

Sany’s chairman is mainland China’s richest man, according to this Xinhua report. Just a couple of days ago the company was cited as an example of success in this curious (and slightly wry, we suspect) Bloomberg story* about how its home town, the interior city of Changsha in Hunan province, is “Not Held Back by China’s Slowdown”:

With the central cities leading the nation’s recovery, local machinery makers Sany and Zoomlion Heavy Industry Science & Technology Co. (1157), also based in Changsha, are set to benefit, said Zhang Wenxian, a Hong Kong-based analyst with Haitong International Research Ltd., an arm of Haitong Securities.

Hunan is one of the provinces in China’s central region where growth has been extremely rapid of late — a fact highlighted by China bulls.

There are more curious lines in this Bloomberg report, even without the news of Sany cutting jobs.

For example, it talks about young career-minded Chinese relocating to Changsha for its better lifestyle and lower cost of living. But it also describes another way that buyers are being found for the city’s rapidly-appearing new apartments: simply knocking down old dwellings, whether the residents like it or not: employees and owners of a hotel are described as staging a sit-in among the rubble of the half-destroyed building.

Which is all helpful for those in real estate sales:

The razing of residential blocks is helping 45-year-old property speculator Peng Canhui weather the national real-estate downturn. He’s sold 15 units so far in 2012 at an average of about 6,000 yuan per square meter.

“Most of the buyers are in urgent need of a new home as their old one is being destroyed,” he said, sipping green tea at his friend’s real estate office.

And then there’s the air conditioning company that says it plans to complete the world’s tallest building by January 2013:

“I don’t believe it,” said farmer Chen Jinliang, 50, tending his cows on the site. “They’ve been talking about building a new road near the village for years. How can the world’s tallest building be built so quickly?”

Just a few days before that, Sany’s president, Tang Xiuguo, said he wanted to use the Putzmeister acquisition to double the company’s proportion of revenue from customers outside China to 20 per cent within five years.

And no wonder. Around the same time, China’s Global Times (citing Reuters) reported that the company’s planned Hong Kong IPO may be delayed if poor market conditions continue. The same story also says Sany had reportedly cut back the scale of the IPO from $3.3bn to $2bn.

Back to Changsha and Hunan: another well-known local company is Zoomlion, which makes construction machinery. The FT’s Paul J Davies last month wrote about concerns around Zoomlion’s reliance on vendor financing for sales. Zoomlion pointed out that vendor financing is common in the sector, including US company Caterpillar, and that it had risk control systems and transparency around its financing.

The FT story continues:

However, some fear that buyers of its concrete mixing machines are doubling up on their debt by using new machines as collateral for further loans. The concrete mixing companies are then selling their ready mixed concrete on credit to cash-strapped property developers.

Analysts at Jefferies in Hong Kong, who went to Jiangsu province to study the concrete market in April, say that more than half of the concrete machines sold in the first quarter by Zoomlion had not even been switched on. Customers were putting the machines in storage and only wanted them to generate cash that they need to pay salaries, electricity bills and buy raw materials.

Update: The report on Sany’s job cuts is now published and worth a read. Particularly this part which suggests the concerns about financing are not limited to Zoomlion:

Sales of construction machines in China in 2011 accounted for more than a third of the world market for such products of $110bn, according to Off-Highway Research, a London consultancy.

David Phillips, managing director of Off-Highway, said a particular problem for companies such as Sany had been their policies on selling machines on generous credit terms, as a result of which the machinery makers have been building up large debts.

And this:

“Lay-offs [in China’s machinery industry] have never happened in the last 10 years, even during the downcycles in 2005 and 2008” said Victoria Li, analyst at Barclays. “Definitely this downcycle is much more tougher than before.”

This could be a big moment in the China growth trajectory.

*Big hat tip to reader Kris.

Related links:
Concrete at the core of China bubble fears – FT
Check out the blistering growth of China’s inner provinces – Business Insider
Mao College Town Booms Signaling Offset to Slowdown in China – Bloomberg