China's machinery production is facing tremendous downward pressure from slowing investment, slower growth in downstream industries and the Sino-US trade war, which will continue into 2019. The active guidance of national policies, the gradual implementation of industrial upgrades and the replacement requirement of installed machinery will all help to offset some of this downward pressure. Although the growth rate of China's machinery production in 2018 has slowed, it does not appear to be in steep decline
World gross domestic product (GDP) is expected to slow down in 2019. Uncertainty and lack of confidence in the market are negatively affecting machinery investment. A global machinery production slowdown is expected in 2019, because of investor uncertainty, automotive sales decline, ambiguity caused by trade tariffs and Brexit and other headwinds. In the context of the global machinery production growth rate slowdown, IHS Markit expects China’s machinery production growth rate to experience a downturn in 2019.
According to the latest “Machinery production Q4 tracker,” the revenue growth rate of China's machinery production fell to 4.7 percent in 2018, compared to a growth rate of 8.3 percent during same period in 2017. The revenue growth rate will reach a low point of 1.4 percent in 2019, but it will slowly recover after 2020. The compound annual growth rate (CAGR) of all machinery production revenues in China will reach 1.9 percent from 2018 to 2022.
In the third quarter of 2018, the effects of macro-environmental changes on China's machinery market began to emerge. In April of 2018, the effect of trade friction between China and the United States spread, although it did not cause a steep decline in the manufacturing purchasing managers index (PMI), which affected the confidence of exports and enterprises in the market to some extent.
Since July, the manufacturing PMI, the new order index and the purchasing managers' confidence index have all trended downward. This situation has significantly dampened the manufacturing environment, and the resulting slowdown in downstream manufacturing will lead to reduced demand for machinery. At the same time, the cumulative investment in fixed assets continued to decline from January through September 2018 and the growth rate of infrastructure accumulated investment in September fell especially sharply to 3.3 percent, according to China’s National Bureau of Statistics. Entering the fourth quarter, the growth rates of cumulative fixed-asset investments and infrastructure fixed assets investment recovered slightly from January through December, according to China’s National Bureau of Statistics. This rise was mainly caused by the Chinese government's policy of promoting investment-related policies.
On July 31, 2018, the Politburo meeting laid the foundation for stable investment. The government continued to implement tax-reduction policies, accelerated the promotion of special loans to support infrastructure projects and proposed infrastructure supplements and other policies to promote the recovery of fixed asset investment. From the fourth quarter of 2018 through the first half of 2019, fixed-asset investment will continue to pick up slowly. Although investment will not reach 2017 levels, it still provides an important impetus to economic stability and provides a basis for machinery production growth.
While some machinery markets, like machine tools has declined, there are still potential development opportunities
As the basis of manufacturing, machine tools are greatly affected by the development of upstream and downstream industries. The downstream industry downturn will also affect machine tools demand. Because the automotive manufacturing industry is a major market for machine tools, declining vehicle sales directly affected machine-tool market demand in 2018.
On the other hand, new technologies adopted by downstream industries require certain machinery equipment upgrades. In the mobile phone industry, for example, the continuous promotion and application of OLED, curved glass, fingerprint recognition and other technologies has changed the mobile phone manufacturing process, which has led to required machine-tool upgrades.
Equipment replacement is also critical to the growth of some machinery production
The peak period for construction machinery sales occurred between 2008 and 2010. The average service life of construction machinery is 10 years, which means the peak replacement period for construction machinery will occur between 2017 and 2020, which could offset the downward pressure from macro economy on construction machinery.
Overseas market demand also provides space for machinery development
“The Belt and Road Initiatives” from the Chinese government continue to be implemented, and the expansion of trade with Southeast Asia, Europe and other countries will provide broader overseas demand for machinery and equipment. Construction machinery is the most direct beneficiary of these initiatives. Overseas demand would be one of the most critical factors in maintaining the stability of machinery construction growth.
Machinery Production Market Tracker
The “Machinery Production Market Tracker” from IHS Markit presents quarterly forecasts of major machinery production in Europe, Asia Pacific and the Americas. The tracker provides marketing and technical executives, financial institutions and investment managers with a current overview of global machinery production, identifying key trends over the next five years. The tracker also presents the value of automation products included in each machine by type.