The U.S. construction industry is engaged in a fierce worldwide competition for projects that will be valued at hundreds of billions of dollars over the next 50 years.
As the industry emerges from recession along with the rest of the country, worldwide markets beckon for construction equipment.
Will U.S. contractors get there first? Sometimes. Nothing is certain in the new worldwide economy except that nothing comes easily. What’s happening and what’s coming?
Here is an overview of the current equipment trade picture, both imports and exports, based on interviews with leading experts at the Department of Commerce and industry trade associations. Sources also gave Construction Equipment Guide (CEG) their thoughts on the exciting times ahead tapping the huge potential markets in the worldwide arena.
Exports Versus Imports
The United States experienced a trade deficit in construction equipment trade for two of the past five years, including 2002, but this deficit was not a serious one.
We imported $7.7 billion in these machines or parts in 1999, $7.4 billion in 2000, $6.8 billion in 2001, and $6.9 billion in 2002.
Our equipment exports in these years were $6.3 billion in 1999, $7.3 billion in 2000, $6.9 billion in 2001 and $5.9 billion in 2002.
“In the late 1980s, we would traditionally have a trade surplus,” said Len Heimowitz, deputy director, Office of Machinery, with the U.S. Department of Commerce’s International Trade Administration in Washington, D.C., who provided the above data to CEG. “I can’t emphasize enough that a lot of the deficit represents off-shore manufacturing by U.S. companies or U.S. subsidiaries. The deficits were fairly close and I don’t believe they significantly affected contractors who historically purchase because of loyalty to a certain brand.
“Other factors which affect the trade picture include such things as general worldwide economic conditions, the availability of capital for infrastructure investment, the weakened dollar [which encourages exports] and, of course, the effects of the 9/11 attacks and terrorist activity all over the world have been part of it.”
What’s Happening in 2003?
Heimowitz indicated the equipment trade picture is improving somewhat, with imports up 4.8 percent and exports up 5.5 percent:
“For the first five months of 2003, imports are up slightly over 2002, totaling $3.1 billion compared with $2.9 billion. Exports for the same five-month period were $2.5 billion in 2002 and $2.7 billion in 2003. I would call it a very mixed rebound. Our trade picture is improving, but I don’t think it will ever be where it was back in the 1980s and 1990s.”
Why? More competition. More joint ventures. More offshore manufacturing, according to Heimowitz.
“Where the competition comes into effect is overseas. Mainly in construction equipment. You only have a few major players on big-ticket items in the overseas market. It’s the U.S., Japan, Germany and, to some extent, Korea.
“The market in underdeveloped nations is huge, but it comes down to what can they afford. Where will the dollars come from to buy and develop infrastructure? People in the industry have observed very astutely that there’s no problem creating a demand for construction equipment. The question is how will you finance it, where will the money come from to pay for it?”
“I would say that, worldwide, there are lots of opportunities for U.S. contractors both in the developed and emerging markets, but also lots of risk and lots of competition from Japanese, Chinese and European producers,” said Ken Simonson, chief economist of the Associated General Contractors of America (AGC) in Washington, D.C.
The trade picture is becoming brighter as the U.S. economy continues to recover from a recession that was aggravated by the 9/11 terrorist attacks.
“The latest Department of Commerce figures show that the value of construction put in place continued to edge upward (by two-tenths of one percent) in August, moving to within a whisker of the all-time record of a $3-billion annual rate,” Simonson observed.
China: ’A Wild Frontier’
Government and industry officials speak with awe of China, which is the fastest-growing market for U.S. construction equipment.
“China is a huge market, both potentially and in fact,” Heimowitz said. “The Chinese are like the U.S. before the development of the West and before our highway system. It’s a wild frontier with the largest potential for increased U.S. exports for the next several years. Someday China will have an interstate system like ours; its market is worth hundreds of billions of dollars.
“China has 2 billion people and an infrastructure, which needs to be developed. They have begun billions of dollars of public works projects. All kinds of dams, electrification, railroads and other projects are under way which are heavy consumers of construction equipment. However, the development is mostly on the coast and there must be a movement further east to the provinces.”
The trade expert said the exports of U.S. construction equipment to China have grown steadily, by about 47 percent over the past five years: “Shipments totaled $75 million in 1999, $91 million in 2000, $111 million in 2001 and $121.2 million in 2002. During the first five months of 2003, they were $55 million. China is the fastest-growing market for our equipment.
“At present, our exports to China include Blaw-Knox and Gomaco paving equipment, plus earthmoving equipment. Meanwhile, U.S. companies like Caterpillar, Ingersoll-Rand, Case and Deere have, or are looking at, joint ventures in China to manufacture in China for the Chinese market. Do a Google search and there are all kinds of reports on the jobs that are being exported to China.”
The Chinese also manufacture some equipment themselves, but, Heimowitz said, “It’s not very high quality.”
“The Chinese market [for exports] is the biggest market in the world; there are construction sites everywhere,” said Kaien Li, international marketing manager for Asia at the Association of Equipment Manufacturers (AEM) in Milwaukee, WI. “They have already started a large water diversion project, and the Olympic project in Beijing, and there are huge bridge projects. China has purchased a lot of equipment from the U.S., and has just signed a contract with Manitowoc.”
“There have been a lot of stories about the tremendous growth in the use of automobiles in China,” commented Christian Klein, Washington, D.C., counsel of the Associated Equipment Distributors (AED) in Oak Grove, IL. “Automobiles are becoming more affordable for the middle class. Quite clearly, as they become more common, they will need better highways on which to drive. My sense is that road construction will increase significantly. The entire China market seems to be moving.”
AGC’s Simonson agreed, and said: “China is still a very hot market and it looks like it will be for years to come. It seems to have done a good job over the past several years in growing its economy without having runaway inflation. They have certainly become an extremely competitive exporter of a wide range of goods, which is giving them buying power to purchase things like equipment. Their manufacturers are also becoming more sophisticated and able to produce their own stuff, so that it’s not just a matter of going there and taking orders. We’re going to have to fight for every sale over there.”
Simonson said China’s Three Gorges Dam project “is one of the biggest construction projects ever” with major water-diversion and channeling projects associated with it. He added that, besides highway, rail, airport, and port facilities work, “There is lots of factory, office and housing construction plus the very special case of construction for the 2008 Olympics in Beijing. There’s a lot of demand, which won’t be satisfied anytime soon, for almost any kind of construction you can think of,” he told CEG.
Top World Markets
In terms of growth, Heimowitz forecasted that the top 10 potential markets for increased U.S. exports of construction equipment in 2003-2004 are (starting from the top): China, Italy, Spain, Canada, Australia, Israel, Taiwan, South Korea, Mexico, and Malaysia.
In terms of actual shipments, the AEM says the top 10 export destinations for U.S.-made construction equipment in 2002 were Canada ($2.02 billion), Mexico ($473 million), Australia ($429 million), Belgium ($421.5 million), Chile ($227.5 million), United Kingdom ($154 million), Japan ($152 million), Indonesia ($151 million), Singapore ($139 million) and Germany ($132 million).
“Asia and Latin America are the two top potential markets for U.S. exports,” Heimowitz said. “Africa has a lot of potential but has no money. Europe is a very highly developed market with a lot of domestic suppliers within the continent to supply it. It’s a tough market both from a real and a potential standpoint.”
Commented Simonson: “The biggest growth opportunities are likely to come in China and across Central Asia, the Asian part of Russia, the Soviet Republics, and perhaps Iraq, which is a question mark, obviously.”
Heimowitz said the top 10 exports of construction equipment, and their value in 2002, are (from top): Miscellaneous spare parts — $801 million; buckets, shovels, grabs and grips — $449 million; off-highway dump trucks — $336 million; backhoes, shovels, clamshells and 360-degree crawler-mounted drag lines — $276 million; motorgraders and self-propelled levelers — $217 million; front-end loaders, rear-engine-mounted four wheel drive with a bucket capacity under 1.5 cu. yds. — $207 million; parts for backhoes, shovels, clamshells and drag lines — $163 million; track-lane tractors (bulldozers) with net engine power of 345 hp or more — $156 million; parts of boring or sinking machinery — $152 million; and parts of lifting, handling, loading or unloading machinery — $144 million.
Top imports: parts — $772 million; hydraulic excavators — $768 million; dumpers — $316 million; portal or pedestal jib cranes — $103 million; motorgraders or scrapers — $138 million; bulldozers — $124 million; parts of backhoes, shovels or clamshells, except axle housings — $118 million; parts of other boring or sinking machinery — $109 million; backhoes, shovels, clamshells and draglines with 360-degree revolving superstructure, used or rebuilt — $102 million; and buckets — $98 million.
The dollar is currently weak relative to the Japanese yen and European Euro. This affects both exports and imports of equipment. A weaker dollar makes conditions more favorable for U.S. exports because other countries can buy more with their stronger currencies. But the weak dollar also tends to discourage imports, which become more expensive as foreign manufacturers raise prices to maintain profit margins when they convert dollars back to their home currencies.
“While it helps exports, the weaker dollar can make imported machinery here more expensive,” Simonson said. “So the construction industry may be seeing higher prices on imports. And of course when Komatsu raises its prices, that makes it easier for Caterpillar to raise its prices as well. From the construction equipment buying standpoint, the dollar slipping in value isn’t necessarily a good thing.”
Simonson pointed out that in the last few weeks, the dollar has dropped approximately 6 percent against the yen and has depreciated approximately 30 percent against the Euro from a trading low approximately 18 months ago.
“That [the decrease in value versus the Euro] should make it easier for U.S. equipment makers to sell in European markets,” added the economist. “The European recovery is still fairly shaky so I don’t know how much equipment buying is going on over there. China, on the other hand, has been controlling its exchange rate, which has produced some criticism.”
“Exports to Latin America are definitely improving in 2003,” said Arnold Huerta, AEM’s international marketing manager for that region. “2002 was a pretty bad year for the area. That was basically due to the September 11 attacks, which affected both this country and the Latin American market. We were in a recession here and our purchases decreased. Most Latin American projects depend on public investment. With less imports from the U.S., governments had less funds to invest in construction projects and equipment. This year, it’s picking up little by little.”
After several consecutive quarters of negative results, total U.S. exports of construction machinery and parts to this region increased by 8.28 percent during the second quarter of 2003, to a total of $351.5 million.
Japan is a leading source on construction equipment imports. Many of the imports from Japan are by U.S. companies that have plants or joint ventures in Japan.
“Caterpillar, Caterpillar Mitsubishi, and Shin Caterpillar Mitsubishi are bringing in excavators which are showing up on the import data,” said Heimowitz. “They are still classed as imports although they might be marketing here in the U.S. as a Caterpillar machine. I don’t mean to under emphasize the fact that imports are a problem but in some product areas, like excavators or the smaller-type machines like loaders which aren’t being widely manufactured in the U.S., they would be coming in to supplement product lines of U.S. suppliers.” Most imports of excavators come from Japan.
“Russia is a big market, but they have no money,” Heimowitz said. “They make a lot of equipment but it’s not very high quality. We’re not exporting a heck of a lot there.”
AGC’s Simonson said Russia poses “the multiple challenges of a questionable economy and very difficult political and legal conditions.”
“Russia needs a lot but whether they can pay for it, and whether it’s possible for private enterprise to flourish there, are still question marks,” he added. “Their oil production and export has grown, however, to where they have surpassed Saudi Arabia as the world’s biggest oil producer. This is a big turnaround from the early 1990s, when oil production really spiraled downward there.”
Reconstruction in Iraq
U.S. companies are project managers for reconstruction in war-torn Iraq and Afghanistan. Bechtel, San Francisco, CA, is the prime contractor for rebuilding Iraq’s infrastructure, with contracts potentially worth as much as $680 million. The Berger Group in New York, NY, is prime for rebuilding the Kabul to Kandahar highway in Afghanistan.
This overseas work involves many hundreds of U.S.-manufactured machines, but observers say it won’t have a major effect on the export-import balance.
“The overall management is under U.S. companies but there’s pressure throughout to subcontract a lot of work and bring in local participation,” said Nick Yaksich, AEM’s vice president, government affairs in Washington, D.C. “Though the contract is with the U.S., the work could be parceled up so there shouldn’t be a huge swing.”
Said Heimowitz: “As the situation stabilizes in Iraq, there will be more and more need for construction equipment, but right now it’s not very stable. Even if the equipment is coming out of U.S. funds, it will still be classed as an export. It could be a big market for bulldozers, cranes, excavators, everything.”