ASSEMBLY REQUIRED With outside help, China is becoming a global equipment powerhouse.

While manufacturers join a continually growing pool of foreign competitors in China’s $8.4-billion equipment marketplace, sales in the rest of the world are getting stronger after a three-year buying drought. Following a modest 1 to 2% price inflation this year in North America, where international prices typically are at their highest, analysts now think that China’s sudden influx of research, development and manufacturing will have prices there skyrocketing in the next five to seven years. That eventually could match the developing nation with its Japanese, Korean and western counterparts.

This is welcome short-term news for international manufacturers and dealers who have been lucky to grab 3 to 5% profit margins on new equipment sales, says David Phillips, managing director of Off-Highway Research in London. "The international manufacturers have been looking very closely at the Chinese market," he says. "Instead of exporting, they are manufacturing locally." Such local partnering will help equipment outsiders tap into an otherwise unfamiliar market and boost margins overall, he says.

But the effect in the long run could commodify the technology, eventually driving prices downward and even contributing to foreign "gray" markets. "We don’t yet know if all the manufacturing is only for the Chinese market…but there’s no question that what is made in China will find its way out of the country," says Charles Yengst, president of consulting firm Yengst Associates, Wilton, Conn.

Phillips strongly disagrees, arguing that a 30 to 50% machine growth in the last five years is strictly "to cope with the domestic demand in China."

The need for equipment is huge. According to the Association of Equipment Manufacturers, Milwaukee, capacity in China has doubled from $4.2 billion in 1998 to $8.4 billion in 2002, and the gross domestic product is growing at a solid 7% each year.

"This is one of the great nations of the future, and the prospect for further growth is immense," says Ron DeFeo, chairman, president and CEO of Terex Corp., Westport, Conn., and chairman of AEM. Terex is the world’s third-largest manufacturer, trailing Caterpillar and Komatsu with $3.5 billion in annual revenue. Terex began engaging China in 1992, with an off-road truck partnership in Inner Mongolia.

Other manufacturers like Daewoo, Hitachi and Volvo have plants in China, with hydraulic excavators and wheel loaders at the forefront, notes Lee Haak, Komatsu America product manager. He says China is Komatsu’s "number-one focus."

Caterpillar holds a 30-year presence in China. Last month, the Peoria, Ill.-based company secured a deal with Shandong Engineering Machinery, a wheel-loader producer in Zhuhai. A Cat official recently told ENR that licensing intellectual property to Chinese manufacturers is the firm’s most lucrative prospect. Caterpillar also is investing in neighboring countries, such as India’s earthmoving and power-generation markets.

Machinery will come at a higher price as China plays catch-up, but experts think that top-notch dealer support will be the ultimate driver. For now, the questionable solvency of the country’s banking system still poses investment challenges.

Down the road, China will help reinforce "value with a capital ‘V’ as opposed to lower prices with a capital ‘C,’ for cheap," DeFeo says. To validate his proposition, DeFeo poses one question to the buyer: "What is the customer really paying for? The iron, or the hole that the iron produces?"