Create Conditions for High-End Equipment Manufacturers’ Technological Accumulation

Abstract

Equipment manufacturing is the central part of industrial engineering. In the current international environment, we believe China is at risk of facing bottlenecks on key technologies. We think it is prudent for China to elevate the level of the domestic equipment manufacturing industry, segments of which generally have large scale owing to sizable market demand, a sufficient labor force including engineers, and advanced infrastructure. However, the competitiveness of these segments has diverged: China’s new energy equipment and high-speed railway (HSR) industries have secured dominant positions in the global market, while its machine tools and large aircraft industries lag that of other countries. We believe assessing the underlying cause of the imbalance is important to investors as it helps clarify the pattern of development and policy orientation of the equipment manufacturing industry. In this chapter, we analyze the factors boosting the equipment manufacturing industry’s development based on substantial evidence and theories, and we proffer policy suggestions.

Industry overview: Limitations in highly sophisticated equipment and core components apparent. Horizontally, China’s equipment manufacturing industry has a large output value: Real estate infrastructure equipment, metalware, flexible units, and energy equipment represent a relatively high proportion of global supply. However, we see an insufficient supply of high-grade, high-precision, and advanced products in China. Vertically, domestic suppliers generally have weak capabilities in core components despite the strong deliverability of complete machines, in our view. Most of the domestically made components are at the lower ends of the smile curves (The smile curve represents the seven-step manufacturing value chain, demonstrating that value across a production cycle is largely derived from early stage R&D, design, and post production activities (i.e., distribution, sales, and after-market service activities.) along the industry chain. We expect the added value to increase in the future.

Industry chain changes: Complete machine manufacturing being relocated from developed regions to China. Looking at the changes in representative industries over the years, we note that market demand has become a prerequisite for industrial layout, while supply capacity and policies affect the distribution pattern of specific industries or segments. China has received a large number of industrial transfers from developed countries as the domestic market expands; however, most of these transfers are complete machines. Core components are not available through industrial transfer and require independent R&D.

To chase the technological frontier, China must accumulate manufacturing techniques essential for the equipment manufacturing industry’s development, in our view. China’s success in this regard is dependent upon: (1) The initial technological gap; (2) characteristics of downstream demand; (3) core supporting resources and competitive pressure from foreign capital; and (4) relevant policies, which could bring changes to the former three factors and create opportunities for companies to accumulate technologies. These factors influence the development paths and outcomes of different industries.

Policies should be formulated based on actual conditions of industries. Looking ahead, with the restructuring of the global industrial value chain, we believe policies for industries with different strategic positions will vary based on industrial relocation. For weak industries, reducing the costs borne by downstream companies replacing overseas equipment with domestically made products (hereinafter referred to as “trial-and-error costs”) and strengthening supply protection could help enhance competitiveness, in our opinion. For robust industries, we think it is necessary to strengthen their technological leadership and ensure companies’ global expansion.

Authors of this chapter: CHEN Xianfan, ZHANG Ziding, LIU Zhongyu, DING Jian, GUO Weixiu, ZOU Jing, YAN Jia, LIU Yunchang, WANG Zilin, LI Xinyang, ZHANG Xian, LIU Jing. Translator: YAN Shuyue. Editors: Kenneth HO, Carol KEATY, ZOU Jing, XIAO Xueyang, LIU Xinran.

12.1 Overview of Equipment Manufacturing Industry

The equipment manufacturing industry is an umbrella term for various manufacturing industries that provide equipment for simple production and expanded reproduction in all branches of the national economy.¹ Being at the core of industrial engineering, the equipment manufacturing industry plays an indispensable role in buttressing manufacturing processes from infrastructure construction to product fabrication. It usually has a long industrial chain, and its production relies heavily on technologies and capital.

China’s manufacturing industry accounted for about 30% of the world’s value-added output in 2021. Increasingly, China faces challenging externalities as it transitions from a manufacturer of quantity to one of quality. Some strategic industries (e.g., machine tools and semiconductor equipment) are confronted with major technology bottlenecks. Certain downstream sectors may be impeded from production once relevant equipment or core devices are not available through trade. Therefore, boosting the development of the equipment manufacturing industry is key to economic growth, in our view.

12.1.1 Comparison of Representative Equipment Manufacturing Industries in China, the US, Japan, and Europe

Our analysis shows that in 2022, the gross output of representative categories in the global equipment manufacturing industry totaled nearly Rmb9trn, including about Rmb3trn in China, approximately Rmb2trn each in the US and Europe, and nearly Rmb1trn in Japan.

China’s real estate infrastructure equipment, metalware, shipbuilding, and energy equipment-related industries represent a large proportion of the world’s total output, while high-precision equipment only accounts for a small proportion. Based on its exceptionally large volume of real estate infrastructure construction and foreign trade, China’s real estate infrastructure equipment, metal products, and shipbuilding industries have high global output value. In 2022, the output of China’s major general-purpose equipment accounted for one-third of the world’s total thanks to a sizable manufacturing industry. As a powerhouse both exploiting traditional energy and transitioning to renewable energy, China has secured a world-leading position as measured by the industry scale of both industries. However, China is a latecomer in high-precision industries² such as the semiconductor equipment and large aircraft industries, lagging behind overseas counterparts (led by the US) and representing a relatively small proportion of global output value (Fig. 12.1).

Fig. 12.1

Source China Construction Machinery Association, China Machine Tool & Tool Builders’ Association, China Photovoltaic Industry Association, corporate filings and official websites of CIMC, GreatStar, and China State Railway Group; CICC Research

Representative equipment manufacturing industries in the US, China, Japan, and Europe. Note Data in the table on the left refers to 2022 output value (Rmb bn), while the table on the right refers to the proportion of global output value, with countries or regions with the highest proportions marked in red.

12.1.2 Supply and Demand Conditions of China’s Equipment Manufacturing Industry in the Global Market

We note that most industries maintain coordinated supply and demand, as well as a relative balance between imports and exports. Specifically, China’s photovoltaic (PV) equipment and lithium battery (LiB) equipment industries account for a relatively high share of the global market. We think the two industries may be key fields wherein other countries promote reshaping of the industrial chain moving forward. In the machine tools, industrial robots, and large aircraft industries, China’s supply as a percentage of the world’s total is lower than its share of global demand, mainly due to certain unsolved technological barriers. We expect China to focus on the development of these industries in the future. In the tools and container industries, China’s percentage of global supply is notably higher than its share of global demand, demonstrating China’s advantages in the supply chain and manufacturing costs. Although containers and handwork tools do not have high technological barriers to entry, they need a large amount of steel for manufacturing, requiring a large-scale metal processing industry. Other developing countries have yet to develop mature supply chains for such manufacturing at this stage. In addition, due to the high transportation cost for containers, countries with large trading volumes can reduce additional sea freight costs while building them. We think China needs to further strengthen or maintain its advantages in the industrial chain, keep a relatively leading status in technology development, and avoid trade restrictions by diversifying its industry chains (Fig. 12.2).

Fig. 12.2

Source China Construction Machinery Association, China Machine Tool & Tool Builders’ Association, China Photovoltaic Industry Association; corporate filings and official websites of CIMC, GreatStar, and China State Railway Group; CICC Research

Global supply and demand patterns of various industries. Note Horizontal axis refers to China’s demand as a percentage of global demand, while vertical axis represents China’s supply (including that from foreign companies) as a percentage of global supply; data as of 2022.

12.1.3 Localization Rate of Segments in China’s Equipment Manufacturing Industry

Vertically, China’s equipment manufacturing industry focuses on complete machines rather than supporting products, and is experiencing an insufficient supply of mid-range and high-end offerings.

Focus on complete machines rather than supporting products. Compared with components, complete machines have higher output value, and their development is based on capital rather than technologies. As such, domestic manufacturers tend to first make breakthroughs in complete machines. In China, most industries pay attention to the R&D of complete machines in the early stages of development, but the production of supporting core parts is relatively ignored. For example, the proportion of domestically made products in the construction machinery, machine tools, and other industries is high, while the self-sufficiency rate of core components is low.

Supply of mid-range and high-end products insufficient. China has gradually achieved breakthroughs for some components with relatively low technical difficulties (i.e., light sources, conventional lenses, and cameras) in the machine vision segment. It takes time for breakthroughs to be made in some high-end parts, as well as for the new technologies to be adopted by clients. For instance, China has a low localization rate in the high-end product (e.g., large tow carbon fibers and smart cameras), laser equipment chip, and software industries.

12.2 Smile Curves of Equipment Manufacturing Industry and Changes in Industry Chains

The previous section addressed the overall development and global status of China’s equipment manufacturing industry. In this chapter, we analyze the smile curves of three representative industries and review the evolution of their industry chains to identify the global position and growth drivers of China’s equipment manufacturing industry. Among industries with strategic importance but relatively insufficient domestic supply, we select the large aircraft industry. We also choose the excavator and PV equipment industries among those with global competitiveness, large upside potential in overseas market expansion, and complete machines representing a high proportion of global output value.

From the smile curves of these industries, we observe that China’s PV equipment industry boasts comprehensive advantages, while other industries have ample potential for expansion into high-value-added segments. Regarding changes in the value chain, companies in all industries have shown a process of migration from the US, Japan, and Europe to China. However, these companies mainly transfer segments of complete machines while keeping core components local. Most of China’s equipment manufacturing industries see no pronounced pressure from relocation, in our opinion. Looking ahead, we think policies should be adapted to industries with different strategic positions.

12.2.1 Large Aircraft Industry

12.2.2 Smile Curve: China Mainly Participates in Subcontract Manufacturing in Segments With Low Added Value

OEMs are at the core of the entire value chain and see higher added value on both ends. The equipment manufacturing segment has the largest scale and a core position in the value chain, despite also having the lowest gross margins (GM). In the large aircraft industry, original equipment manufacturers (OEMs) such as Boeing and Airbus outsource the R&D of subsystems to other companies and assemble equipment themselves. They set high barriers to entry for suppliers, further consolidating their leading positions in the industry chain. Segments’ added value gradually increases from aviation equipment to each end of the value chain, with raw materials and maintenance segments reporting the highest GMs.

China is mainly responsible for subcontract manufacturing in the global aviation value chain and has limited exposure to high-value-added segments. Western Europe and the US are deeply involved throughout the entire aviation value chain and enjoy significant advantages in raw materials, airborne equipment, engines, and other technology-intensive segments. They keep production of these segments local, and only outsource some labor-intensive segments. Currently, China’s aviation value chain mainly focuses on special-purpose aircraft. As for commercial aircraft, China mainly participates in the subcontract manufacturing of engine components (Aero Engine Corporation of China is the major manufacturer) and fuselages (Aviation Industry Corporation of China is the major producer). Domestic companies are less involved in technology-intensive segments due to overseas restrictions on subcontract manufacturing and the technological gap between China and other countries (Fig. 12.3).

Fig. 12.3

Source LV Fei. Analyzing the Path of China’s Aviation Manufacturing Industry Upgrade Based on Global Value Chain. Journal: Practice in Foreign Economic Relations and Trade. 2013 (5), Aero Dynamic Advisory, corporate filings, CICC Research

Global landscape of large aircraft value chain. Note Bubble sizes indicate 2022 output value; we use 2021 GM data in this figure.

12.2.2.1 Evolution of Value Chain: The US and Europe Have Secured Dominant Positions; China Shifting from Subcontract Manufacturing to Self-Built Value Chain

The US and Europe dominate core segments of the global value chain; East Asia increasing engagement in labor-intensive segments such as airframes and engine components. In the twentieth century, almost all manufacturing processes of large aircraft were completed in the US and Europe, with a small proportion of airframe components, engine parts, and maintenance services outsourced. In the early twenty-first century, the previously outsourced segments in the aviation industry were shifted to East Asia: China, Japan, and South Korea became more involved in the global aviation industry chain. We estimate that the participation of the US and Europe in airframe structure and maintenance support segments gradually declined to 74% from 86% and to 74% from 85% in the early twenty-first century. However, the raw material, airborne equipment, and engine segments are still dominated by the US and European companies, with nearly 100% participation.

Demand: Traded domestic market share for technologies; commenced subcontract manufacturing. According to data disclosed by the Civil Aviation Administration of China, the number of transport aircraft increased to 4,054 at end-2021 from 661 in 2003. The rapidly expanding aviation market has supported technological exchanges of latecomers. Under the subcontract manufacturing model in this stage, Chinese companies mainly signed aircraft orders with overseas OEMs in exchange for subcontracted production orders of aircraft parts and components, thereby transferring part of the manufacturing process. During this period, production costs in China were higher than those in overseas markets, and “trading market for technologies” became an important way to integrate into the global value chain.

Supply: Technologies drove industrial expansion; cost and technological advantages attract subcontract orders. By the end of the 1980s, China produced certain airframe parts and continued to expand the production scale and coverage backed by its early experience in subcontracting. Entering the twenty-first century, as technology transfer boosted industry expansion, China and other latecomers gradually abandoned the “market-for-technology” subcontracting model. Over time, China established full-fledged industrial clusters in the fields of airframe structure and maintenance support. Airbus and Boeing also built assembly lines in Tianjin and Zhoushan. China’s participation in complete aircraft and airframe structure increased further. Japan’s and South Korea’s participation in engines gradually increased thanks to the technological advantages of their high-temperature alloy and forging & casting companies in aircraft blades.

Policies: Embraced global value chain; domestic flagship enterprises forwarded core segments. From the 1980s to the early 2000s, China proposed exchanging the domestic market for subcontract manufacturing orders (i.e., the “three-step” strategy), expecting to complete the development of large aircraft with the help of advanced technologies from overseas manufacturers. At the end of the twentieth century, China held an approximate 8% share in the global airframe structure manufacturing commercial aviation market, as well as about 3% in engine parts manufacturing and about 5% in aircraft maintenance support. However, subcontracted production orders were stagnant, and relevant cooperative development in key manufacturing processes was rejected by major airlines in the early 2000s. China then started to develop its own large aircraft industry. With Commercial Aircraft Corporation of China (COMAC) as the flagship company, China integrated domestic and foreign suppliers and gave priority to domestic suppliers. In weak segments, China promoted cooperation between domestic and overseas manufacturers and eventually promoted the development of domestic industrial clusters (Fig. 12.4).

Fig. 12.4

Source LV Fei. Analyzing the Path of China’s Aviation Manufacturing Industry Upgrade Based on Global Value Chain. Journal: Practice in Foreign Economic Relations and Trade. 2013 (5), Aero Dynamic Advisory, CICC Research

Evolution of the global large aircraft value chain. Note Percentages refer to the proportion of China’s output in the world’s total.

12.2.3 Excavator Industry

12.2.3.1 Smile Curve: Leading Position in Equipment Application; Hydraulic Components and Engines to Improve

The excavator value chain mainly comprises components, complete equipment, and after-sales services. Excavator components mainly consist of components, engines, and hydraulic parts. Engines and hydraulic components are the most difficult to manufacture, while high-end hydraulic components and after-sales services generate the highest GMs.

China’s original excavator equipment manufacturing has a high localization rate and boasts the world’s largest output value. In the past two years, annual global sales volume of excavators stayed at about 600,000–800,000 units. China accounted for about 40% of global excavator output. The share of domestic brands in China’s excavator market exceeded 70% in 2021. Sany’s excavator sales volume reached nearly 100,000 units in 2020, overtaking Caterpillar as No.1 for the first time. Japan was second only to China, with an annual excavator output of nearly 200,000 units.

Japan, the US, and Europe dominated the high-end excavator parts market. Hengli Hydraulic led the oil cylinder market a step toward import substitution. However, a gap remains between its overseas position and that of Kawasaki (Japan). The latter and Rexroth (Germany) developed advanced technologies in pumps and valves. In the domestic small excavator market, Hengli managed to replace imported products and secured nearly 50% of market share, albeit with a relatively weak presence in the medium and large excavator markets. Excavator engines are mainly supplied by Cummins (the US) and Isuzu (Japan). Chinese OEMs rely on imports or supply from joint ventures — e.g., the Cummins manufacturing base in Guangxi, jointly built by Guangxi LiuGong Group and Cummins (Fig. 12.5).

Fig. 12.5

Source China Construction Machinery Association, corporate filings, CICC Research

Global landscape of excavator value chain. Note Bubble sizes indicate 2022 output value; we use 2021 GM data in this figure.

12.2.3.2 Evolution of Value Chain: Transfer as Real Estate and Infrastructure Construction Peaks; Japan Remains the Largest Supplier of Core Components

The excavator industry chain developed rapidly in Japan, the US, and Europe before it migrated to China. Excavators originated in Europe and the US as they took the lead in industrialization. Due to the geographical environment, application habits, and product prices, loaders were more commonly used in Europe and the US during the early stages. In the 1950s and 1960s, hydraulic excavators gradually replaced mechanical excavators. In Japan, the development of the construction industry led to the widespread use of hydraulic excavators. Since the beginning of this century, large-scale real estate and infrastructure construction have made China the world’s largest end market for excavators and boosted the development of China’s local excavator industry.

Policy-led infrastructure construction created a sizable excavator market in Japan. Japan’s infrastructure investment started explosive growth in the 1960s. Over 1960–1990, total output value of Japan’s construction industry (calculated based on constant prices) increased to more than JPY40trn from JPY2trn. In the early 1980s, annual excavator sales volume was less than 2,000 units in the US and around 10,000 units in Europe, while local demand in Japan exceeded 40,000 units. By the 1990s, annual output of excavators in Japan was close to 200,000 units. Japan experienced both an ongoing expansion of its local market and entry of domestically made products’ into the US and European markets.

Japanese companies overtook overseas rivals. In 1960, the Japanese government announced the opening up of the domestic market. Caterpillar and Mitsubishi established a joint venture and quickly occupied the local market. Japanese companies sharpened their competitiveness by improving product quality, strengthening services, and developing advanced technologies. Excavators have various application scenarios and face different performance requirements as working conditions vary, which benefits local companies that better understand customer needs. Accumulation of technological expertise of suppliers and explosive demand growth contributed to Japan’s sizable excavator industry. The rise of excavator OEMs also boosted the growth of Japanese component companies such as oil cylinder company KYB, pump & valve company Kawasaki, and Isuzu and Yanmar in the engine market.

China’s real estate and infrastructure investment since the 2000s has made it the world’s largest producer of excavators. China also entered a period of large-scale construction in the early 2000s. From 2000 to 2021, fixed-asset investment in China’s urban infrastructure increased to more than Rmb17trn from less than Rmb1trn, and that in real estate development grew to nearly Rmb15trn from less than Rmb500bn. The urbanization rate also rose to 64.7% from 36.2%.

Changes in Chinese companies’ market position show a V-shaped pattern. Before the 1990s, China achieved independent supply through approaches such as introducing technologies. Following greater amounts of foreign investment and an influx of used Japanese excavators in the 1990s, China’s excavator market underwent a slump in the localization rate to 6% in 2000 from previous 100%. Domestic demand grew rapidly amid macroeconomic stimulus. Chinese OEMs were presented with new opportunities after overseas companies faced capacity shortage. Small- and medium-sized excavators have largely achieved import substitution as domestic OEMs accumulated manufacturing techniques. However, the localization rates for large excavators used in mines are relatively low due to high shutdown costs. Leading companies such as Sany, XCMG, Zoomlion, and LiuGong Group stepped up efforts to expand into overseas markets. Sany exported more than 20,000 units of excavators in 2021.

Domestic production of components slower than that of complete machines; Japan remains the largest supplier in the global market. High-end hydraulic components and engines have high requirements for technologies and manufacturing techniques. Outstanding domestic companies such as Hengli have achieved import substitution of hydraulic cylinders after more than 20 years of continuous development. Regarding pumps and valve products, Hengli held a 50% share in the small excavator market and less than 20% in the medium and large excavator markets. Kawasaki and Rexroth still enjoy solid market share. China has yet to start the independent supply of engines in bulk. Heavy-duty truck (HDT) engine manufacturers (such as Weichai) have reported shipments and are upgrading their manufacturing techniques. We think domestic high-end components are not yet positioned for global mass production. In addition to supplying hydraulic cylinders in China, Hengli also exports products directly to Japanese OEMs. We expect Hengli to gradually expand its presence in overseas markets backed by competitive products.

Similar to excavator equipment, China’s machine tool industry also had a V-shaped localization rate pattern. The difference is that Chinese excavator manufacturers are now globally competitive, and their position in overseas markets is gradually improving. However, China’s high-end machine tool market remains in the initial stages compared with the excavator industry. The underlying reasons leading to the gap merit further study, in our view (Fig. 12.6).

Fig. 12.6

Source China Construction Machinery Association, Off-highway Research, CICC Research

Evolution of the global excavator value chain. Note Percentages refer to the proportion of China’s output in the world’s total.

12.2.4 PV equipment Industry

12.2.4.1 Smile Curve: Ongoing Leadership in the Global Value Chain

The PV equipment value chain mainly includes components and complete machines. Silicon materials are made into silicon ingots and silicon rods through crystal-pulling equipment. They are cut into PV silicon wafers by slicing equipment, then manufactured into module products through cell and module equipment. The finished products are eventually used in PV power stations. After decades of technological innovations, China’s PV equipment industry has achieved a high degree of import substitution. Only a small number of components and auxiliary consumables rely on imports.

China leads global rivals in the output value of PV equipment. In China, most PV equipment has been provided by domestic manufacturers since 2018. Chinese PV equipment companies can independently supply turnkey production lines. At the same time, the number of overseas manufacturers’ product lines have gradually declined. Chinese PV equipment manufacturers enjoy both large local demand and rising overseas orders and market share. Kayex, a representative silicon wafer equipment manufacturer in the US, was acquired by LINTON Technologies in 2013. In 2021, S.C New Energy Technology, a cell equipment manufacturer, generated revenue eight times that of Singulus Tech, a representative German manufacturer.

Localization rate of components and auxiliary consumables has yet to increase. China has made significant progress in the import substitution of PV equipment’s core components, auxiliary materials, and consumables. Some segments still require a high proportion of imported components and materials. In the silicon wafer equipment segment, high-purity quartz sand is currently monopolized by Unimin (the US) and TQC (Norway). In addition, most power sources of PV cell equipment are imported. The localization of low-temperature silver paste for HJT cells is still underway (Fig. 12.7).

Fig. 12.7

Source China Photovoltaic Industry Association, Corporate filings, CICC Research

Global landscape of PV equipment value chain. Note Bubble sizes indicate 2022 output value; we use 2021 GM data in this figure.

12.2.4.2 Evolution of Value Chain: Policy Support, Growth in Demand, and Technological Transformation Foster a Large Value Chain

Over the past 20 years, the PV equipment value chain gradually shifted from the US, Japan, and Germany to China. As downstream production capacity is mainly located in China, favorable conditions exist for domestic equipment manufacturers to overtake overseas companies, in our view. Data from the China Photovoltaic Industry Association shows that China’s capacity of silicon wafers, cells, and modules accounted for 98.1%, 85.1%, and 77.2% of the world’s total at end-2021. Domestic equipment manufacturers are in relatively close proximity to customers. They have abundant accumulated process knowledge and achieved faster technological upgrades, resulting in advantages in cost reduction and efficiency enhancement. Domestic manufacturers have lowered the selling prices of their PERC and HJT PV cell equipment to around Rmb120mn/GW and Rmb400mn/GW, compared with around Rmb570mn/GW and Rmb1bn/GW for previously imported equipment in 2021. International PV equipment companies exited from this business under competitive pressure from Chinese firms. For example, Meyer Burger announced in 2021 that it would transition from a PV equipment supplier into a PV module manufacturer. Amtech announced the sale of its Tempress solar business department in 2020. We estimate the global market share of China’s PV equipment at 80–90%, with the presence in overseas markets expanding.

China to be the first country to apply emerging cell technologies in mass production; Chinese PV equipment manufacturers provide turnkey solutions. New cell technologies bring higher photoelectric conversion efficiency and boost the upside potential of future efficiency improvement, including TOPCon, HJT, and XBC technologies. Sanyo first developed HJT cells in the early 1990s, but failed to achieve mass production outside Japan. The company was acquired by Panasonic in 2015. Chinese manufacturers began to increase R&D activities and investment in HJT technology after Sanyo’s patent protection ended. Golden Glass and Huasun Solar have established production lines with GW-level capacity. Maxwell developed turnkey solutions for HJT cell equipment and secured a 70% market share in this segment in 2021.

Demand: Surging domestic PV installations and demand for economic efficiency accelerated changes in the PV equipment value chain. Statistics from China’s National Energy Administration (NEA) show that the country’s newly installed capacity of PV projects connected to power grids reached about 53GW in 2021, ranking No.1 in the world for nine consecutive years. In 2018, China’s newly installed capacity declined due to the “531” policy , while other countries increased incremental installed capacity amid falling product prices, boosting global PV equipment investment growth. In 2018, China’s equipment technologies for crystalline silicon cells and other segments surpassed those of overseas rivals, and domestic technologies and production capacity increased further.

Supply: China’s PV equipment segment is more technologically advanced and cost-effective than its overseas counterparts amid ongoing technological innovations. Driven by technological improvement, production automation, and intelligent transformation, domestic PV equipment manufacturers gradually equaled or even exceeded overseas equipment names in technological competitiveness, and they also enjoy price advantages. Domestic PV equipment manufacturers are also making rapid progress in developing new cell technologies. S.C New Energy Technology’s PE-poly equipment and DR Laser’s second laser doping technique for TOPCon cells have been recognized by downstream clients. Maxwell’s single-sided crystal-ceramic technology for HJT batteries was adopted by Golden Glass and Huasun Solar. In particular, emerging metallization techniques such as laser transfer printing and copper electroplating are rapidly being applied to produce solar cells, facilitating lower manufacturing costs and higher PV battery efficiency.

Policies: China has introduced a number of policies related to achieving carbon neutrality and boosting intelligent manufacturing, shoring up the PV industry. The State Council issued eight policy measures in July 2013 specifying that China’s total installed capacity should exceed 35GW in 2015. In July 2017, China targeted installing 86.5GW of PV capacity during 2017–2020. In 2018, the “531” policy was promulgated, followed by falling PV installation subsidies, fiercer competition along the PV industry chain, and lower prices. PV equipment companies were compelled to upgrade technologies, reduce costs, and improve efficiency. In 2016, in a guideline on emerging sectors of strategic importance during the 13th Five-Year Plan period (2016-20), China proposed promoting collaboration in applied research between universities and different industry sectors, improving the design and manufacturing of key supporting equipment, solving technological bottlenecks of advanced crystalline silicon cells and key cell equipment, and promoting the industrialization of emerging solar utilization technologies and materials with high efficiency and low costs.

China’s PV equipment industry achieved rapid development in a relatively short period, which forged world-leading competitiveness with relatively full-fledged supporting capabilities along the industry chain. This is quite different from the experience of large aircraft and robot industries. The possible reasons are elaborated in Section 3 (Fig. 12.8)

Fig. 12.8

Source China Photovoltaic Industry Association, CICC Research

Evolution of the global PV equipment value chain. Note Percentages refer to the proportion of China’s output in the world’s total.

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12.2.5 Outlook for Changes in the Equipment Manufacturing Industry Chain

The aforementioned changes in the industrial value chain show that industries have migrated to China from the US, Japan, and Europe as China’s market size and manufacturing capabilities grow. Due to trade frictions, some industries have been passively relocated overseas. For example, after US-China trade frictions escalated in 2018, the US imposed tariffs of 7–25% on the hardware tool industry, of which more than 80% of global capacity originated in China. As a result, domestic and overseas companies stepped up efforts to expand their presence in Southeast Asian countries such as Vietnam and Thailand to avoid tariffs, including Techtronic Industries, Chervon Holdings, GreatStar, and Stanley Black & Decker.

Enterprises in some industries took the initiative to build manufacturing bases overseas to explore local markets. Since 2015, domestic construction machinery OEMs have been accelerating their expansion into overseas markets. They built production facilities in countries such as India and Indonesia to reach out to local markets. In the past two years, Europe has been focusing on the construction of automotive battery capacity. Chinese equipment companies enjoy advantages in capacity and product categories, delivering integrated equipment and services and winning recognition from European customers. Leading domestic equipment manufacturers have started to plan construction of overseas factories.

However, in most industries, domestic and foreign companies maintain relatively stable production capacity in China, exhibiting little pressure from industries migrating overseas. China remains attractive to equipment manufacturing companies as it still boasts a sizable market and cost advantages. In recent years, some of China’s manufacturing industries have been relocated to Vietnam and other Southeast Asian countries. These transferred segments mainly have low barriers to entry for supply chains and a high proportion of labor costs.³ The machinery equipment value chain is a complex system and has higher supply chain requirements due to customized needs from downstream segments. For example, China maintains its advantages in the container industry, which is not necessarily high-tech as it is sensitive to supply chains and costs rather than labor costs. Similarly, China keeps its dominant position in the aforementioned hardware tool industry despite the global supply chain being reshaped due to the impact of tariffs. Given the capacity of existing supply chains in Southeast Asia, OEMs only plan to build 10–20% of overall capacity in relevant countries, mainly for products subject to higher tariffs. Tariffs and other factors have brought about an irreversible reshaping of the global distribution pattern in the hardware tool industry, but regional manufacturing advantages and the overall structure of different regions have remained largely intact.

Against the backdrop of relocation, we believe policies should be adopted differently for industries with different strategic positions.

12.3 Analysis of Equipment Manufacturing Industry Drivers From a Latecomer’s Perspective

The first two sections elaborate on the status and catalysts of China’s equipment manufacturing industry from the development of different segments and the industry as a whole. Economies of scale play a significant role in advancing industrial development. We also note a sizable divergence in the independent supply capacity among different industries in China despite large domestic markets. In other words, economies of scale can effectively promote industrial development, but does not ensure successful industries.

In this section, we address issues including the underlying factors as to why the computer numerical control (CNC) machine tools, robots, and large aircraft industries remain dominated by overseas companies while the alternative energy equipment, HSR, and shield machine industries have achieved a high degree of import substitution and established relatively full-fledged supply capacity along the value chain despite sharing the same broader market conditions and supporting industry chains. What insights can be used for the future development and policy formulation of China’s equipment manufacturing industry? In the following section, we analyze drivers of the equipment manufacturing industry based on the previous review of changes in sub-sectors and other industries.

12.3.1 Assumptions: Core Drivers of Equipment Manufacturing Industry Lie in Ongoing Technological Accumulation

Technological accumulation is an important source of core competitiveness in the equipment manufacturing industry. From the perspective of technical paradigms, University of Sussex professor Keith Pavitt⁴ believes equipment enterprises are typical specialized suppliers. Their competitive advantages depend to a large extent on firm-specific skills, which are reflected in product design, continuous improvement in product reliability, and rapid response to user needs and feedback. We think equipment companies make progress in technological upgrades by relying on practices and applications with continuous trial and error. Therefore, practical applications of equipment in downstream industries constitute a prerequisite for the continuous improvement of equipment strength, and the two are mutually reinforcing.

China’s equipment companies participated in global competition as “latecomers in technological development”. As overseas countries commenced industrialization earlier than China, foreign equipment companies accumulated technologies for a longer period than domestic firms did. After the 1990s, downstream market demand rapidly expanded in China’s manufacturing industry, and overseas companies entered the Chinese market through exports, technology transfer, and foreign investment. Thanks to competitive products, foreign investors accelerated the replacement of their Chinese counterparts, resulting in a strong “demand crowding-out effect”.⁵ As such, fledging domestic equipment companies were technological latecomers amid intense foreign competition, leading to their common role as “technology chasers” initially. The history of the alternative energy equipment, HSR, and excavator industries tells us that if domestic firms can shake overseas rivals’ market dominance, they can give full play to their unique advantages of large end-markets, high-value-for-money products, and low engineer costs, as well as accumulate numerous techniques, thereby surpassing overseas companies in terms of technologies and market share.

12.3.2 Internal Cause Analysis: Explaining Technological Gap Between Latecomers and First Movers Through Four Industrial Characteristics

As China is a latecomer in equipment industry growth, we think its opportunities for technological accumulation mainly depend on: (1) Initial technological gap; (2) characteristics of downstream demand; (3) core supporting resources and competitive pressure from foreign capital; and (4) relevant policies, which could affect the accumulation progress of domestic equipment firms by regulating demand and supply.

12.3.2.1 Breadth of Initial Technological Gap Determines the Difficulty of Starting Technology Accumulation

Second movers often face a cold start problem.⁶ Foreign brands with technological advantages tend to hinder technology diffusion, and users are hesitant to buy complex products manufactured by latecomers. As a result, latecomers often find it difficult to accumulate manufacturing techniques in the early stages relying on their capabilities.⁷

The size of the initial technological gap is largely determined by the time lag between the industry’s initial development and the industry scale. For example, China’s LiB equipment industry began to develop in the early 2000s, and the installed capacity in China’s domestic market since 2015 has reached dozens of times that in Japan and South Korea. This provides relatively favorable conditions for the accumulation of technological expertise of domestic LiB firms. As a result, the initial technological gap between Chinese and foreign LiB companies was relatively small, and Chinese firms rapidly caught up with overseas rivals fueled by economies of scale.

However, Chinese excavator and CNC machine tool companies experienced large technological gaps when they started to expand. China accelerated urbanization around 2000, driving up annual domestic excavator sales volume to over 10,000 units from about 2,000 units in the 1990s. Therefore, a significant technological gap exists between China’s excavator companies and overseas rivals, which was formed early on and is difficult to bridge simply through economies of scale. The same is also true for the machine tool, robot, and large aircraft industries, in our opinion.

However, technological changes can narrow the gap and sometimes lead to the replacement of industry leaders. For example, the rapid technological iterations in the PV industry could change the time-based technological gap between followers and leaders. Therefore, we believe it is relatively easy for domestic companies to catch up with rivals despite sizable gaps at present. Industries should also pay attention to potential technological changes in the future, and second-mover industries could seek opportunities to narrow the gaps. Leading companies should concentrate on how to retain technological leadership.

12.3.2.2 Demand: Downstream Companies’ Trial-And-Error Costs and Existence of Differentiated Demand

The global competitiveness of China’s excavator and machine tool industries diverged during the past 20 years, though the two industries both lag their overseas counterparts in technological development. We believe downstream demand could affect companies’ accumulation of technological expertise and catch-up in capturing market share. Latecomers usually have lower technology levels than leading companies, and they generally make breakthroughs in the market by offering value-for-money products. However, not all industries offer companies the opportunity to gain market share with cheap products due to downstream clients’ trial-and-error costs. In industries with high trial-and-error costs, it takes latecomers more time to make breakthroughs in the market, making it more difficult to start a positive cycle between technological accumulation and market share acquisition.

Downstream firms often show strong risk aversion as they cannot accurately predict the performance and reliability of equipment. This leads to a vicious spiral in which opportunities in the domestic market decline as buyers prefer overseas brands due to risk aversion, resulting in local companies lacking successful track records and independent innovation capabilities. Downstream segments of different equipment subsectors also show varying characteristics. For example, differences in high-end CNC machine tools will negatively affect the processing accuracy and yield of production lines, and consequently, the economic benefits of downstream companies using these machine tools. The difference in machine tool prices could reach Rmb1mn, which could possibly affect the final economic benefits of the entire production line by Rmb10mn. Therefore, companies bear high costs in trying new high-end machine tools, making it difficult for domestic machine tool companies to tap potential markets, in our opinion.

As for positive effects, we think local enterprises may benefit from the differences between local demand and mature overseas demand. For example, excavators and shield machines are usually designed according to local geological conditions and construction environments. Domestic companies’ proximity to the market enables them to recognize local demand and develop innovative or customized products more easily. Furthermore, the customized development of products relies heavily on engineers, and labor costs, efficiency, and supply vary greatly at home and abroad. New energy equipment is also a customized product, which can be innovated by suppliers based on downstream clients’ specific needs, such as production capacity expansion, better product performance, and lower cost. It is difficult for overseas first-mover companies to quickly meet the large-scale customized development needs of domestic downstream companies due to limited production capacity and high wages of engineers. As such, products of domestic equipment companies may potentially be used in downstream segments.

12.3.2.3 Supply: Core Supporting Resources Ensure Industry Security; Supply Bottleneck of Foreign Capital Brings Opportunities

Core resources of the equipment manufacturing industry include key technologies, components, basic materials, and high-level skilled labor. For example, CNC systems of domestic machine tools are usually imported from Japanese manufacturers such as Fanuc and Mitsubishi. They are often sold after downshifting, with limited available functions and parameters that restrict the market development of domestic machine tool companies. We think components with low added value but irreplaceable functions also merit attention, in our view, as these industries may face major technology bottlenecks if their sources of supply are relatively concentrated (such as power supply and vacuum pumps used in PV equipment).

Another factor that plays a role is the supply shortage of foreign companies, which provides a valuable window of opportunity for domestic companies as followers. For example, downstream segments of the excavator industry, including real estate and infrastructure construction, are mainly affected by macro policies. Demand in these segments is difficult to forecast and fluctuates sharply. Industry growth could double at times, leading to relatively insufficient foreign production capacity. China has experienced three large-scale upcycles in the real estate and infrastructure sectors since 2000. The localization rate of domestic excavator companies increased rapidly during the period, as did that for hydraulic cylinders (a core component). In the past two years, the COVID-19 pandemic caused lower efficiency of the global supply chain and disruptions to overseas supply, further weighing on foreign companies’ supply capacity in China. We think this provides opportunities for domestic companies’ products to be used by downstream clients.

Certain policy measures could facilitate the accumulation of technological expertise for domestic companies. When China developed the HSR industry in the early 2000s, the Ministry of Railways obtained core technologies for high-speed electric multiple units (EMUs) with speeds of 250 km/h and 350 km/h from Bombardier (Canada), Kawasaki (Japan), Alstom (France), and Siemens (Germany) via two rounds of technology transfer by leveraging its advantages in market size and centralized procurement. Since then, China independently developed high-speed EMUs and established a relatively complete value chain through technology introduction, absorption, innovation, as well as joint research by multiple market participants. China used its self-developed China Railway High-speed Train and Fuxing Electric Multiple Unit in most of the projects during the stage of rapid HSR construction. As of end-2021, the cumulative HSR mileage in China exceeded 40,000 km, accounting for more than 60% of the world’s total. This experience has helped China establish a leading position in the global HSR market, in our view.

12.3.2.4 Industrial Policies Affect Companies’ Technological Accumulation by Regulating Supply and Demand

Based on the characteristics of supply and demand, we have analyzed the factors that affect companies’ continuous technological accumulation. We think policies can help local companies achieve this and catch up with overseas rivals by altering demand or supply conditions. For example, China granted renewable energy subsidies to customers, boosting rapid domestic market expansion and creating a wide range of application scenarios for renewable energy equipment. Supply cultivation policies (e.g., industry-university collaboration in research) can help break the supply bottleneck of core resources, enhance customer confidence, and lower costs of trial and error in downstream industries.

The technological gap between new energy and laser equipment manufacturers and their foreign counterparts was relatively small in the early stages. Against the backdrop of booming domestic demand and low trial-and-error costs in downstream industries, domestic companies quickly acquired a large amount of technical expertise and caught up with foreign firms. Although a large gap existed between excavator producers and their global rivals in the early stages, small- and medium-sized excavators were the first to benefit from increasing localization rates thanks to: (1) Low trial-and-error costs in downstream segments; (2) extensive innovations made by excavator manufacturers to meet the differentiated needs of the domestic market; and (3) certain overseas supply bottlenecks. As for the HSR and shield machine industries requiring complex technologies, favorable domestic policies changed the trial-and-error costs and willingness of downstream clients, shoring up trials of domestically made equipment and technological accumulation.

In contrast, the domestic machine tool, robot, and large aircraft industries face a latecomer problem due to high requirements for product reliability, high trial-and-error costs for downstream owners, and varying degrees of technology bottlenecks in core components and basic materials.