Research From Cyclicals Team

• Strong order intakes for CAT, MTW, Liebherr, Sany (600031 CH), LiuGong (000528 CH) from large customers; orders anticipated from infrastructure, energy segments
• Weak European 2023 sales outlooks improved for CAT, Liebherr, Sany, LiuGong sources, but conditions remain challenging for small customers because of increasing interest rates, uncertainty
• Lead times, pricing expected to continue to increase because of strong order books, component shortages, Chinese harbor congestions
• Sany, LiuGong developing distribution networks in Europe, gaining share with pricing, availability

Attendance, Customers’ Mood Beat Low Expectations
All sources OTR Global spoke with at the Bauma 2022 exhibition said they were surprised by the strong attendance this year, which was down only 20% compared with the all-time high of most recent exhibition in 2019. (Bauma is the world’s leading sector event for construction machinery, building material machines, mining machines, construction vehicles and construction equipment, taking place only every three years.) All had had low expectations before the trade show because of declining 3Q22 European orders yy, increasing equipment prices and longer lead times in a context of growing interest rates and economic uncertainty (addressed in OTR Global’s Oct. 6 Heavy and Power Equipment report). Other negative omens before the trade show included the announced 13% decrease of exhibitors compared with Bauma 2019, as well as the expected low attendance of U.S. visitors because of the proximity of CONEXPO in Las Vegas (March 14-18, 2023), the very low number of Chinese visitors because of the travel restrictions imposed by China, and the total absence of Russian exhibitors and attendees. Several sources also noted Volvo AB was absent from Bauma for the first time ever.

Quotes
“Attendance at the Caterpillar [Inc.] booth was very high, and I’m not talking about simple visitors only, but also about qualified visitors willing to buy. This was a big positive surprise to all of us.” Caterpillar

“We [Liebherr Group] have the largest booth at Bauma, and you can see there is an extremely high number of attendees. It can be quite difficult to walk through, same as in 2019.” Liebherr

“There were few visitors from the U.K. and the U.S., but that might be due to the proximity of CONEXPO in the U.S. There were also very few Chinese attendees because of the travel restrictions in China. Also, it can cost millions to attend Bauma, so you need to make a lot of sales to make it financially interesting. This is why exhibitors like Volvo, [Terex Corp.’s] Genie or [J.C. Bamford Excavators Ltd.] were not here this year.” LiuGong

“I’ve talked to Volvo dealers, and they think it was a mistake not to attend Bauma this year. …  Customers will instead go to Caterpillar, Komatsu [Ltd.], Liebherr or Hitachi [Ltd. (6501 JP)].” Caterpillar

Order Intakes Beat Low Expectations, 2023 Outlook Improves
Dealers and sales representatives for Caterpillar, Liebherr, Sany Heavy Industry Co. Ltd. (600031 CH) and Guangxi LiuGong Machinery Co. Ltd. (000528 CH) said their customers’ order intakes for new construction equipment during the Bauma trade show beat their low expectations (and even targets for Caterpillar and Liebherr) because of anticipated demand from large customers active in the infrastructure and energy segments, who were eager to get their orders in before further increases in lead times and prices. A Komatsu dealer was the only one to be pessimistic because of his high exposure to the residential market (in line with OTR Global’s findings in its Sept. 9 European Heavy Equipment report.) To the surprise of most sources, only demand from small customers active in the residential and general construction segments seemed to be limited by increasing interest rates and growing economic uncertainty.

The four sources who commented on their 2023 sales outlooks (one each selling Caterpillar, Liebherr, Sany and LiuGong) said they improved since the beginning of Bauma because their order books further increased during the trade show. (Sources in OTR Global’s Oct. 6 Heavy and Power Equipment report and Sept. 9 European Heavy Equipment report also cited a strong order book for 1H23 deliveries because of extremely long lead times.) Nevertheless, all sources at Bauma said 2023 market conditions should remain challenging because of the economic environment in Europe, especially for the residential and general construction segments. (In OTR Global’s Heavy and Power Equipment report, five of seven Western European Caterpillar dealers expected their 2023 sales to decrease yy, while in the European Heavy Equipment report, dealers for Volvo, Komatsu and Liebherr expected their 2023 sales to be down 5%-8% yy on average, with six of nine expecting decreases.)

Quotes
“We exceeded our business targets at Bauma, which is a very positive sign — not only for Germany, but also for the whole European market. Eighty percent of our sales are made with large customers, but small customers are still buying, too. We’re telling our customers they should buy now because prices and lead times could continue to increase. … Only very small customers stopped buying, but that did not impact our business activity much.” Caterpillar

“My outlook for 2023 is definitely more positive than it was in early October because of the success of Bauma. Our order book has never been so strong. … Still, interest rates will again increase in a few weeks, and only then will we see the exact new level of what is ‘normal’ demand. Will the impact of interest rates be big or not?” Caterpillar

“Demand for our products is actually higher than we expected before Bauma, especially from the infrastructure and wind energy segments, and despite the economic difficulties in Europe and the world. We don’t see any slowdown of demand, except from small customers. … People now hesitate a lot more before building a new house because of increasing interest rates and building material prices. … Outside of Europe, U.S. demand for our products is very high because of the infrastructure works there, while the situation in China is much more difficult.” Liebherr

“Our 2023 sales outlook improved at Bauma. Large customers say there’s not enough equipment to buy. … Smaller customers struggle more, but are still buying. … Demand from the wind industry is gaining momentum in Europe, while demand from the infrastructure sector remains strong. We also see demand from the military segment gain momentum in Poland.” Sany

“Our 2023 sales outlook improved. In Europe, we started from zero in March to now 350 unit sales in Germany and the U.K., although all machines have not yet arrived.” LiuGong

“Usually, most of the equipment we have on display at the fair is already sold, but it’s not the case this year. The residential segment is suffering the most, but large customers are hesitant, too. I’ve been in the industry for 40 years, and I’m feeling the impact of increasing interest rates because customers have been accustomed to a close to 0% rate. … We’re also seeing the impact of increasing material costs.” Komatsu

Lead Times, Prices Expected to Increase, Except for the Chinese
All dealers of premium manufacturers (with the exception of the Komatsu dealer) expect lead times and prices to increaseqq again in 4Q22 and 1Q23 because of strong demand and component shortages. (The Komatsu source suspected lead times and prices might start decreasing sometime in 1H23 because of decreasing demand from the residential and general construction segments.) Meanwhile, Sany and LiuGong sources said their 4Q22 and 1Q23 lead times and prices were likely to remain stable qq or only slightly increase but remain at much lower levels than premium manufacturers’.

Quotes
“The lead time situation cannot improve before 2024. Our order book has never been so strong, there are component shortages, as well as shipment delays because of what’s happening with COVID in the Chinese harbors. … Lead times range between nine and 12 months. I believe that Caterpillar does not want to increase production in order to keep high prices.” Caterpillar

“New equipment prices will never decrease. The price hikes are here to stay.” Caterpillar

“Worldwide demand for big cranes is so high that we actually can’t produce enough. We’re planning to increase our crane production capacity in Germany, though.” Liebherr

“Our lead times remain stable, at two months on average. We have a strong production advantage against competitors. Our ‘lighthouse’ factories, for example — which are almost fully automatized — allow us to produce 20–30 cranes a day, with only five technicians present at the factory. Only two of those lighthouse factories are certified in the world, and both are Sany’s in China. … With the lighthouse productivity advantages, we don’t really care about increasing steel prices, for example.” Sany

“If the negative demand trend [in the residential and general construction segments] continues, we could be back to three- to four-month lead times in the second half of 2023.” Komatsu

Chinese Manufacturers Gain Ground in Europe
Sources said Chinese manufacturers are gaining ground in Europe based on their pricing and availability advantage (building on OTR Global’s previous findings). Sources for Sany and LiuGong said they were actively developing their distribution networks in Europe (and the rest of the world) in order to keep gaining share against the premium brands, and fight prejudices some potential customers might still have against Chinese brands.

Quotes
“Sany is gaining share everywhere in Europe. Sany entered the European market like 13 years ago, but only for five years have they been taking the right steps with the European customers — by having a European headquarters in Germany, for example. We had to make customers forget about the wrong steps other Chinese manufacturers like XCMG [Construction Machinery Co. Ltd. (000425 CH)]and LiuGong made when they tried to penetrate the European market a few years ago. … Sany is already the second-largest seller of construction equipment in Poland for example, and soon will become No. 1.” Sany

“The balance in the industry is changing. It used to be a U.S. and European manufacturer market only, but now the Chinese are coming and are here to stay. We have six dealer locations in Germany, and we are looking for distributors in France, the Netherlands and Belgium. … We are receiving our first machines in Germany, the U.K., the U.S., Italy, Canada, Brazil … and even Venezuela.” LiuGong

“The crane industry is a very conservative one — that’s why there’s less competition from the Chinese manufacturers than in other construction segments.” Manitowoc

“The Chinese do not represent a risk in the long run because of the used equipment market — they don’t have a powerful name in the industry — and in times of crisis, customers only go for manufacturers whose name helps used equipment sales. Furthermore, the Chinese don’t have the dealer network in Europe, nor in developing countries, to sell their used equipment.” Komatsu

Manufacturers Highlight Alternative Fuel Options, But Sales Remain Anemic
All manufacturers at Bauma highlighted various alternative fuel options — especially full electric, as well as some hybrid, but very few fuel-cell (hydrogen) solutions. However, all sources said full electric and hybrid sales have remained anemic, while fuel-cell solutions are still at the prototype stage. Liebherr and Hyundai Motor Co. (005380 KS) were the only ones to show their fuel-cell prototypes at Bauma, with Liebherr winning the innovation award in the climate protection category for the fuel-cell crawler crane it demonstrated during the trade show. Several sources said fuel cell was the only viable alternative-fuel option for construction equipment because of the lack of autonomy and charging infrastructure for full-electric solutions, building on findings in OTR Global’s Oct. 18 Heavy-Duty Trucks note on alternative fuels.

Quotes
“We only have four full-electric models: a mini excavator, an excavator, a wheel excavator and a wheel loader. … For a mini excavator, for example, it takes nine hours to recharge on a 220V plug, and three hours on a fast-charging installation. You can use it around eight hours for light work, and four hours for heavy work. So, it has limitation when you need to work eight to 12 hours, also when you take into consideration that price is between 2.5 and three times more expensive than the equivalent diesel model. … There are Cat hydrogen prototypes in the U.S., but we don’t have anything to show in Europe yet. Hopefully, we’ll have something to show at the next Bauma in three years.” Caterpillar

“We have a hybrid truck crane prototype at Bauma, and a lot of customers ask us when we’ll have it available for sale. We don’t plan to go full electric, as we believe the hybrid technology offers the advantages of both the diesel and electric technology without the disadvantages of the full electric technology in terms of power, weight and driving range. … But we don’t have a price yet.” Manitowoc

“A fuel-cell car costs €75,000 and can drive 660 km. Charging takes five minutes in a refueling station that can provide a 75 bars pressure. Meanwhile, trucks need refueling stations that can provide a 350 bars pressure, and construction equipment need 700 bars. So, the main problem for us right now is the absence of refueling stations in Europe, especially for construction equipment. … We don’t have an official price for our 14-ton, fuel-cell wheel excavator, but it should be at least three times the price of an equivalent diesel model.” Hyundai

ADDITIONAL QUOTES
“The last three or four years were rather quiet in Europe for crane sales, but 2022 and 2023 look good, driven mainly by the residential and infrastructure segments. … We don’t expect much from the wind segment — contrary to Liebherr — because it is a different type of cranes that we sell.” Manitowoc

“Lead times are increasing, prices are increasing — it’s very positive for us.” Manitowoc

“The used-equipment market also remains very positive, with prices for Europe that continue to increase. Brokers, however, report a different story, with demand from developing countries decreasing.” Caterpillar

“A lot of manufacturers are struggling with availability, and that’s why some like Volvo are not here at Bauma. The Chinese have the availability advantage, while their quality recognition is improving.” LiuGong

“For construction, Deere [& Co.] still only sells graders and dozers in Europe, both manufactured in the U.S., and both distributed by [Deere’s] Wirtgen dealers. Those products fit well with Wirtgen’s products for road construction and mining.” Deere

“We only have four full electric models to show at Bauma. Demand is not really increasing, although interest is there. Demand will pick up if the government makes it compulsory to use low-emission equipment in the cities, but so far, it’s not the case.” Caterpillar

“Putzmeister, with its parent company Sany, already offers a full electric cement mixer truck of 14.5 tons in all northern European countries. Putzmeister is the exclusive distributor for now. … In China, Sany already has 5,000 full-electric trucks on the road. … Such a truck costs between three and four times more than an equivalent diesel model, but it becomes financially interesting for the customer after six or seven years because of advantages on tax, maintenance, CO2 credits you can sell, and the absence of road tolls for electric trucks. Our full-electric truck uses a 350 kW per hour battery manufactured by [Contemporary Amperex Technology Co. Ltd. (300750 CH)] … It takes about 1.5 hours to charge at 250 kW per hour, or three hours with a charging station of 120 kW per hour. A charging station of 120 kW per hour costs between €20,000 and €30,000. … Battery prices used to decline, but they are increasing again because of booming demand, and we don’t know when they could decrease again.” Sany