UPDATE 1-With tough market at home, China's heavy gear makers gain traction overseas
* Chinese firms ride on emerging markets' construction boom
* Overseas expansion cushions tough domestic market
* Made inroads in Southeast Asia, North Asia, South America
* Still face uphill battle to become global players
By Fang Yan and Matthew Miller
BEIJING, Oct 30 (Reuters) - When Guangxi Liugong Machinery was bidding to sell wheel loaders to a Thai rice merchant a few years ago, company president Zeng Guangan knew he needed to customize his equipment to beat off Komatsu Ltd and other Japanese rivals.
"Thailand has been using Japanese wheel loaders for years," explained Zeng. "The seating was getting higher and higher, but the vehicle's arm wasn't long enough." That works for loading dirt or concrete blocks, but was unwieldy for hauling rice.
Liugong's modifications won over buyers, and the Guangxi-based firm says it now makes one of every three wheel loaders sold in Thailand. It has also increased its marketing in Brazil, Russia, India and Turkey, helping increase overseas revenue to 30 percent of its total sales - up from below 9 percent in 2010.
Other Chinese machinery makers, including Sany Heavy Industry, Zoomlion Heavy Industry Science & Technology and XCMG Construction Machinery , are also turning to emerging markets for growth as they wrestle with cut-throat competition at home, exacerbated by a supply glut - partly a legacy of heavy stimulus spending in the wake of the global financial crisis.
Caterpillar Inc and Komatsu, however, still see China as a bright spot in a global market suffering from a downturn in orders for mining equipment. While the global market is forecast to grow to $189 billion by 2017, the world's two leading equipment makers have this month cut their full-year profit outlooks.
"Market demand (in China) may not be falling as much as before, but the industry has yet to feel the breezes of spring," said Shi Yang at UK-based industry consultancy Off-Highway Research Ltd. "Foreign companies' clients in China are mostly big state enterprises and their business tends to be more stable."
Zoomlion said on Wednesday its June-September earnings fell by a third from last year, while Sany's net income dropped by 54.3 percent. Smaller rival Liugong on Tuesday reported a 2.6 percent increase in its third-quarter profit. Quarterly net income at XCMG fell 45.5 percent.
Shares in Sany and XCMG have fallen by around a third so far this year, while Zoomlion is down 40 percent. The sector median stock price decline is just 6 percent.
Chinese equipment makers are gaining traction overseas, pulled by the construction boom underway in Southeast Asia and South America, where new home and infrastructure building has lifted demand for affordable earth-moving gear.
In January-June, Sany's sales outside China rose by two-thirds from a year earlier, with growth in Asia Pacific up more than 90 percent. Same-town rival Zoomlion - whose annual sales of close to $8 billion make it the world's No.6 construction machinery maker - also made breakthroughs in Thailand, Chile, Costa Rica and Ecuador with its truck-mounted concrete pumps and concrete mixing plants.
"Emerging markets represent a good opportunity when domestic demand is weak," said Xu Mingle, an analyst with BOC International. "Even though export volumes remain small and cannot offset the slump at home, it at least cushions the blow."
While Caterpillar, Komatsu and Volvo AB remain dominant in most emerging economies, Chinese gear is making inroads. In 2011, XCMG group won a $745 million bid to supply cranes, concrete pumps, excavators and other equipment for a housing project in Venezuela that Caterpillar also bid for.
A year earlier, Liugong beat Caterpillar, Komatsu and South Korea's Hyundai Heavy Industries Co Ltd and Doosan Heavy Industries & Construction Co Ltd to provide wheel loaders and excavators for an afforestation campaign in Turkey, according to Liugong vice president Luo Guobing.
"Chinese companies are certainly not yet the largest in these markets, but they're getting really aggressive," said Raymond Tsang, a Shanghai-based partner at consultant Bain & Co.
ALMOST AS GOOD ... AND CHEAPER
Encouraged by the rising popularity of Chinese equipment, Samcorp, a Hong Kong based dealer, started selling Zoomlion and Lonking Holdings Ltd's products in Peru three years ago. It recently opened another showroom in Columbia.
"People like these products," said company director Laurence Lam. "They are almost as good as those made by Western companies, but 30 percent cheaper."
Chinese equipment manufacturers are also gaining access and recognition in emerging markets as they have improved their component sourcing, according to Hermann Beck, an executive vice president at ZF Friedrichshafen AG. Besides the German parts maker, Chinese firms are turning to Eaton Corp and Cummins Inc for parts, he said.
There have also been offshore acquisitions. Over the last five years, Chinese firms have bought a variety of struggling European equipment makers, including Italy's CIFA Spa, Germany's Putzmeister Holding GmbH, and Poland's Huta Stalowa Wola, which has boosted access to Eastern Europe.
Industry executives caution that it will take time for Chinese companies to compete against global giants such as Caterpillar, which operates at the higher end of the value chain and books about 65 percent of its sales outside North America.
"They're going to have to learn how to be domestic players around the world, the way we did," said Ron DeFeo, Chairman and CEO of Terex Corp, which now increasingly faces Chinese companies in emerging markets.
"You can't just make it in China and ship it abroad."