Compressed Growth in the China Market
A large domestic market and a smaller export market are both features of the Stationary Air Compressor (SAC) market in China. The best prospects are for screw SACs, but with a general slowdown across all end-user industries, SAC suppliers should look to boost efficiency rather than grow.
SACs have a large number of applications in a variety of industries. From a source of machine tools’ power in the manufacturing industry, to cleaning packages and other products in light industry, they are so ubiquitous that they are often called the 4th utility. There are three main types of SACs in the China market: screw, centrifugal, and piston. SACs usually come as part of a compressed air system which consists of the compressor, drive motor, and other accessories such as dryers, filters, pressure/flow controller, and control panel.
GCiS have conducted primary research with major SAC suppliers in China in both 2009 and 2014 and have found some interesting changes in this market. Currently the market was valued at about RMB 23 Bn or USD 3.6 Bn in 2014 (based on the Q2 2015 exchange rate of 6.3 RMB: 1 USD) and total sales volume was roughly 226,000 units. These figures were RMB 19 Bn in 2009 and sales volume was 178,000 units. At the moment, revenues in the SAC market are almost completely dominated by the screw SAC segment, which is worth 86% of the total SAC market value and 96% by volume. Centrifugal SAC segment accounts for 13% of market value, leaving the piston segment around 1%. As the growth of China’s economy has slowed and overall SAC market growth is well below GDP, the main question challenging industry players becomes, what opportunities are there when prospects are bleak?
Despite the lower growth in the piston and centrifugal SAC sectors, the screw segment grew over 5.5% in 2014. Screw SACs are the main type of SAC used by small and medium companies. This has been the same since at least 2009, when the total market size for screw SACs was four times the size of the next largest segment (centrifugal SACs) by revenue. Market share of revenues has increased in favor of screw SACs: the past 5 year CAGR was roughly 10% for screw SACs, but for the other two segments it was negative: -5% for centrifugal SACs and -30% for piston SACs. According to GCiS research this trend is likely to continue, leading to an even smaller market share for the piston segment. More energy efficient screw SACs can adapt to the needs of company with different sizes companies, as well as different end-user industries. As it is the largest segment, the screw segment offers the best prospects going forward, with the added caveat that overall growth will be low. In the power, printing and construction industries screw SAC market share by revenue is around 90% in contrast to other end-user industries where screw SAC market share by revenue is in the low 80% range. These three industries in particular heavily rely on screw SACs because they require SACs that have a large displacement range, low life cycle costs and high-quality air.
Figure 1: Sales Revenue (Bn RMB) for Target Products 2009 vs 2014
Compressing Energy Prices
There are three outlays buyers consider when purchasing a new SAC: The initial purchase price, maintenance/installation fees, and running costs. Taken together these three costs constitute the life-time costs of an SAC. It is important to note that for industrial SACs, the lifetime cost is significantly higher than the initial purchase cost: In general, the running costs make up roughly 70% of lifetime costs, as opposed to 15% coming from the initial purchase. Running costs include but are not limited to: load/unload time, air leak loss, demand charges, dryer energy costs, energy recovery, energy costs for auxiliary equipment etc. As Chinese industrial users become more aware of cost control and energy saving, energy efficiency is one of the key considerations when choosing SACs.
Technology that can boost efficiency is in high demand, and this is one of the reasons why screw SACs have replaced piston SACs. This trend for energy saving demand was shown at a recent industry fair “Energy Saving Expo”, at which many domestic suppliers have showcased several new techniques for saving energy. A variable frequency air compressor manufactured by Ecoair as part of their EPM product range had the potential to reduce energy usage by 30%. Another product on display was a new 3-phase asynchronous drive motor, produced by Guangdong Baldor Tech, that is predicted to save 22-33% of power used. Other suppliers like Shenzhen Kangpusi Compressor displayed their four screw VESYDE range of SACs which focused on improving the efficiency of core components of SACs, such as oil and air separators, and energy saving data management systems.
Another major trend is the rise in demand for air purity. When compressed air is required for products that will come in contact with consumers, such as in the packaging industry, then particulate and moisture free air is required. Oil-injection SACs gradually contaminate products, as well as requiring extra equipment such as a lubricant/air separator to keep oil separate from the air. This means extra costs due to recalls/stoppages and extra parts purchasing. Sales of oil-free SACs are slowly increasing in China as demand for filtered, high-quality air or CDA (Clean Dry Air) across different industries rises. GCiS research suggests that for multinational companies like Ingersoll Rand, 80% of piston SAC revenue comes from oil free products. For screw air compressors, revenue is roughly equally split between oil free and injection compressors. As domestic Chinese companies sell to the low-end marker, where there is less demand for CDA, the majority of their revenue is derived from oil injection SACs in the piston and screw segment.
Some examples of industries in China that require high quality, oil-free air are: Microelectronics, where small amounts of oil or particulate can affect the performance computer chips and boards; Food & Beverage industry, where products come into contact with customers, and contaminated air can result in spoilage of finished products; Pharmaceutical and Chemical industry, where air is used to convey and mix products, Manufacturing, where are is used in pneumatic tools and dirty air will reduce the performance of equipment, and result in more frequent repair, jamming and part replacement. Most of these areas are expected to continue to expand investment at a moderate and stable rate in the next couple of years.
Supply End Dynamics
There are 15 multinational suppliers in the top 20 companies, either as wholly owned subsidiaries or JVs. Overall foreign suppliers take up 55% of market value. With foreign companies taking up the high-end market, the low-end market is saturated with small producers, which make up 77% of all companies. These smaller companies push down overall price, and also use false advertising and fake products to try and get market share. Comparing the market structure in 2009 and 2014, there are few major changes among the top 10 suppliers. Atlas Copco remains the absolute leader in China after 5 years. Hongwuhuan Group and Shanghai Kobelco replaced Wuxi Woyo and Shanghai Feihe to rise among the top 10 leaders in 2014. Shenyang Blower’s market share also changed significantly, dropping from 8% in 2009 to 2% in 2014.
Figure 2: Market Shares by Product Segment and Ownership
Capacity has significantly built up: total capacity has grown 75% from 2009-2014, from around 250,000 units in 2009 to around 437,000 units in 2014, mostly in the screw SAC production lines. However, market and production did not grow as fast as capacity expansion. Over the five years, production units only increased 45%. Production utilization rate dropped from 70% in 2009 to 62% in 2014 with leading suppliers operating at fairly high rates of 60-80%. This indicates that smaller suppliers receive far less orders than large ones and their production utilization is even worse. Product replacement and excess capacity have contributed to a drop in the average market price: over the past 5 years, piston SAC price decreased 30% while centrifugal price decreased roughly 40%. Screw SACs managed to achieve a small price appreciation for around 5% compared with 2009.
The macro trend that has the most relevance to SAC suppliers is a general slowdown across almost all end-user industries. The sole exceptions to the general downturn in growth amongst SAC end-user industries are the printing and pharmaceutical industries, which saw high growth in 2015 H1 and consistently high growth over the past years. However, these two sectors are amongst the smallest in terms of market revenue by end-user industry. Main end-user industries such as mining, chemical, power, metallurgy and petrochemicals all saw reduced or negative growth in the first half of 2015, and these industries are in the top seven largest end-user industries for SACs.
Figure 3: YoY End-user Industry Revenue Growth Rate Comparison (2009, 2014 and 1H2015)
Source: GCiS, National Bureau of Statistics of China
Note: These figures show overall growth for downstream industries not SAC sales growth in downstream industries. End-user industries are ranked in descending order by revenue contribution to SAC market.
As a whole the manufacturing customers for SAC, which include automotive, general and specialized device manufacture, electrical equipment manufacture, and shipbuilding, among others, only grew 4.5% in 2015 H1. The construction industry and real estate market are also in a quagmire: figures for floor space of newly started houses are low. The outlook for major resource and energy sectors is less promising, particularly for the mining, petrochemical and power industries. Overcapacity, dropping commodity prices coupled with weak demand have troubled these industries. Even though demand from some of the niches markets, such as natural gas and nuclear power plants, helps to alleviate the pains, suppliers have reported that these industries are at their worst performance and difficult to sell to.
2014 figures stand in stark contrast to 2009, when many of these large heavy industries saw dramatic expansion soon after the Chinese government’s RMB 4 Tn economic stimulus package was announced. This has undoubtedly transformed the proportion of the revenue sources for SACs. For example, in 2009 the manufacturing sector generated 20% of market value, while light industry (including printing) generated 15%. In 2014 manufacturing fell 14% while light industry increased to 18%. Similar to the transform of China’s overall economy, as well as SAC demand, are shifting to consumption driven industries from investment driven industries.
This negative downstream growth has had an immediate and obvious knock-on effect on SAC sales growth. In 2014 total domestic SAC sector growth was roughly 5.4%, down from 6.2% a year ago. GCiS projects that altogether the domestic SAC market will be worth RMB 30 Bn by 2019 with 2% CAGR. With reduced growth comes increased competition, especially as companies are already operating in conditions of over-capacity. Companies need to be prepared to deal with further downward pricing pressure, even for screw SAC products. Facing weaker overall demand, GCiS suggests focusing on printing industry and pharmaceutical industries given their high growth perspective, demand for high quality air and demand for variable pressure SACs. Energy saving and oil-free systems are key features that customers will look for when making purchase decisions.
About GCiS China Strategic Research
GCiS (www.GCiS.com.cn) is a China-based market research and advisory firm focused on business to business markets. Since 1997, GCiS has been working with leading multinationals in sectors ranging from technology to industrial markets, medical, chemicals, resources, building and constructions and a few others.