OREANDA-NEWS. September 06, 2012. Hitachi Construction Machinery Co, the world's third-biggest maker of building equipment, is shutting its Chinese plant for two weeks a month until October as the nation's economic slowdown triggers a sales slump.

The first weekly suspension at the Hefei plant has reduced average production rates to 25 percent, half the level of a year earlier, its President Yuichi Tsujimoto said on Aug 29 in an interview at the company's headquarters in Tokyo. The plant, set up in the eastern Chinese province of Anhui in 1995, has capacity to make 30,000 excavators a year.

"We had expected Chinese demand to pick up in the October to December quarter," Tsujimoto said. "Given accumulated inventories and machine utilization, the market is unlikely to grow as we had thought."

The company, which gets 16 percent of its sales from China, and rivals Caterpillar Inc and Komatsu Ltd, has cut production in the world's biggest construction equipment market. While Tsujimoto said demand may recover in the first quarter of 2013, the pace of growth wouldn't be fast enough to fill the "huge" capacity added by Chinese and foreign suppliers.

In July, Hitachi Construction Machinery forecast industry sales of excavators built by foreign suppliers in China will drop 20 percent to 56,000 units in the year to March 2013, following a 37 percent slide in the previous year.

The government's tighter monetary policy has cooled the construction boom and curbed sales at Hitachi and Komatsu since the April to June quarter of 2011.

Tough competition

Tsujimoto expects competition in his industry will spread to other emerging markets from Southeast Asia to Brazil as it tries to offset falling demand in Asia's biggest economy.

Sany Heavy, based in Changsha, Hunan province, surpassed Japan's Komatsu as the biggest excavator maker in China by units last year, according to China Construction Machinery Association data.

Sales at the company, run by billionaire Liang Wengen, have surged by almost 10 times in the past five years. The new rival isn't an immediate threat because it buys high-end hydraulic components from Japan, Tsujimoto said.

"Given that the company imports key components from Japan, we compete with them on the same playing field," meaning there's limited room for the competitor to cut costs, Tsujimoto said. "But they may produce hydraulic components by themselves in 10 years so we'll always need to develop new technologies."

Sany Heavy has said it hires dozens of foreign engineers, many of whom are Japanese, to help improve quality and boost overseas sales.

Larger rivals

Hitachi ranks third worldwide by total sales of construction and mining equipment, with its revenue still less than half that of Komatsu, the biggest manufacturer after Caterpillar.

Tsujimoto said he wants to make the company the world's largest supplier of excavators and mining dump trucks as it tries to close the gap with bigger rivals.

The slowdown in China's economy curbed demand for coal mining equipment in Indonesia and some customers delayed orders, he said. While the slowdown hasn't yet spread to iron ore and copper mining, the company will need to closely monitor demand, Tsujimoto said.

Hitachi Construction Machinery has three to four months of inventories in China, above the normal one-and-a-half to two months, Tsujimoto said. Despite the slowdown, the company at this stage is going ahead with plans to add a second Chinese plant near its existing factory in 2014, he said. When fully open it will double local production capacity to 60,000 excavators a year.