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Assessment of China's Market for Servo Motors

China’s Servo Motor Suppliers see Light at the End of the Tunnel

2012 was, all things considered, a rather poor year for industrial servo motor suppliers in China. Hit by weakening demand across a range of downstream industries, virtually every player in this industry saw lower revenues than the previous year – market research and advisory firm GCiS China Strategic Research estimates an average fall of around 8% compared to 2011. Revenues are falling across all market categories, with a particularly strong decline in lower-power motors.

Figure 1: Industrial Servo Motor Revenue Growth by Power Range (2012)

Industrial Servo Motor Revenue Growth by Power Range (2012) - GCiS
Source: GCiS. Power ranges include the lower but not the upper bound – for example, the 1-3 kW segment covers servo motors with output power of at least 1 kW but less than 3 kW. Very low-power “RC servos”, which have an output power of a few watts or less, are not included.

There is a stark divergence between this decline and the plans the government set out just a year earlier, with the country’s 12th Five Year Plan setting a target of growing China’s high-end manufacturing market to RMB 6 Trillion ($980 billion USD) by 2015. 2013, too, looks set to bring poor results, with even lower sales than 2012, along with higher competition due to the market’s overcapacity.

Based solely on these numbers, one might assume that suppliers in this industry face a grim future. But in fact, many players in the market are very positive about the prospects for the next few years. Signs are pointing towards renewed downstream growth in 2014, which combined with technological advancement and Chinese government support for high-end manufacturing is likely to stand the domestic servo motor industry in good stead for the medium-term future.

Most Problems are Caused by Downstream Overcapacity

The roots of servo motor suppliers’ current troubles, as in so many other industries, can be found in the global economic crisis of the last few years. Industrial servo motors (as distinguished from the smaller “RC servos” often used in remote control models or hobbyist projects) are typically used as components of machines which manufacture a variety of products for consumers or industries further downstream. Many of these products are exported, so falling demand in Europe and the US has naturally had a knock-on effect.

Why, though, are servo motor sales falling now, when many of these industries are already in recovery? The answer is overcapacity – specifically, overcapacity of the downstream manufacturers who purchase machines containing servo motors. Many of these manufacturers already have more than enough production capacity to fill all their orders and have therefore decided against buying new machines. This is largely due to previous optimistic forecasts which anticipated higher growth than actually materialized and therefore led to higher-than-necessary machinery purchases during the recent economic crisis. Based on a 2012 report from the International Monetary Fund, capacity utilization across all industries in the Chinese economy as a whole declined to around 60% in 2011. Although these downstream manufacturers’ sales are now rising, in many cases they have not yet increased enough to require new machines.

Figure 2: Industrial Servo Motor Market Flow

China Industrial Servo Motor Market Flow - GCiS
Source: GCiS. Servo motor companies typically sell their products to machinery suppliers, whose output is used by manufacturers rather than being sold on to consumers. For example, one major user of servo motors is Shanghai Electric Printing and Packaging Machinery, which produces machinery sold to both publishers and packaging manufacturers, who in turn sell these products to individuals or to other companies further downstream. This creates a lag between end user demand and the servo motor industry, allowing servo motor sales to fall even as end-user consumption grows.

Some Fields are Still Seeing Rising Sales

The situation, of course, is not entirely negative. Although CNC machine tool suppliers are seeing lower sales and therefore require less servo motors, the opposite is true of the industrial robotics industry. In the past, China has been a long way behind Western countries in this field, due partly to the country’s low wages that made it cheaper to employ manual workers than to invest in robotics. However, this situation is now changing. Increasing wages coupled with advancing technology mean that robots are becoming more suited to a wide range of applications. This increasing mechanization means that the market for servo motors in this application is seeing rapid growth. Many suppliers report double-digit growth rates in this area, and some are seeing even greater success. One supplier reported motors for industrial robots are seeing annual growth of 30-60% in the Pearl River Delta region, which includes the large manufacturing centers of Guangzhou and Shenzhen.

Another field which uses a large and growing number of servo motors is the packaging industry. China’s increasing consumer affluence has seen an increase in the consumption of packaged food, beverages and consumer goods, which has increased demand for packaging machinery and in turn servo motors, which the industry is using in ever larger quantities. To quote one servo motor supplier, “the [domestic] packaging industry is expanding at a rapid rate, and servo motor applications will grow along with it”.

Although these two fields account for only a minority of total servo motor sales, these trends are expected to continue and their share of the overall market will increase in coming years. Based on GCiS’s research, the robotics field will account for over 8% of industrial servo motor revenues by 2017 if current trends continue as predicted, while packaging will increase from 13% to 20%.

Figure 3: Industrial Servo Motor Market by Downstream Industry

China Industrial Servo Motor Market by Downstream Industry - GCiS
Source: GCiS. The proportion of servo motor revenues coming from robotics and packaging machinery is predicted to increase substantially, while that from machine tools, printing machinery and textiles is likely to fall

At the same time, the abilities of servo motor suppliers themselves are improving, increasing the performance and widening the application scope of these products. Domestic Chinese suppliers are improving at a rapid rate and increasing their share of the market, especially at output powers below 5 kW. Although this shift is a net positive for customers and the domestic industry as a whole, it will obviously have negative implications for foreign suppliers. Japanese companies such as Mitsubishi or Panasonic, who tend to specialize in this power range, will be particularly affected, while European or American companies focus more on high-end and high-power servos and will largely escape this effect over the next few years.

Increasing focus on improving energy efficiency across a wide range of downstream industries, encouraged by the government with a combination of incentives and tightening efficiency standards, is also helping servo motor suppliers in some areas – for example, injection molding machines using servo motors can save a large amount of energy compared to hydraulic actuators. And the Chinese government’s support for high-end manufacturing industries can also bring many positive effects to the servo motor sector, either directly, in the form of benefits and export tax rebates or indirectly due to support for the machinery manufacturers that use these motors.

A Brighter Tomorrow

The current woes in the Chinese servo market, then, are almost entirely due to the poor performance and overcapacity of a number of key downstream manufacturing industries. Fortunately for suppliers in this market, this situation is likely to get better in the next few years. Observers expect a lessening of excess capacity in the Chinese economy as a whole – to quote a recent UBS report, “we believe the overall capacity utilization rate bottomed in 2012, with gradual improvement likely going forward”. In some key downstream industries, particularly CNC machine tools, growth in demand is likely to recover, increasing their demand for new machinery. Meanwhile, other industries which are already seeing positive growth will see a reduction in excess capacity as time goes on, with further expansion directly resulting in more servo motor sales.

This return to above-zero growth is likely to happen over a relatively short timescale. Indications from the first half of 2013 show that, although total revenues and unit sales are still likely to be lower than those of the previous year, the relative decline will be substantially lower. The industry is on track for 2014 revenues to be slightly higher than those in 2013, while subsequent years are likely to see further increases in growth rates.

 

 

About GCiS China Strategic Research

GCiS (www.GCiS.com.cn) is a China-based market research and advisory firm focused on business to business markets. Since 1997, GCiS has been working with leading multinationals in sectors ranging from technology to industrial markets, medical, chemicals, resources, building and constructions and a few others.


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