The Chinese Building Technologies (BT) industry experienced a moderate growth in 2008 with a level of 13 percent year on year. Signs have indicated that it is in the early maturity stage of its life cycle. Growth rates are slowing down and products' profit margins have started to fall.
According to Frost & Sullivan's China Consultant for Automation and Electronics practice Sandy Wu, companies are prioritizing building their brand's name allocating a high proportion for promotion expenditure. In terms of technologies, participants are increasing offers for custom interfaces and proprietary integration.
Unlike other mature markets such as the US, Germany, and UK with a growth rate of no more than 5 percent, China has great potential deriving from demand for new Building Automation Systems (BAS), services and maintenances, and retrofitting markets on top of heavy investments in construction and urbanization trends. She said, "The market concentration of the top 3 companies in 2008 is less than 20 percent, well below the average level of 50 percent in the mature market, which implies a tendency for mergers and acquisitions."
Wu continues, "The toughest challenge for the growth of the BT market in China is the high initial cost and expenditure associated with the installation of integrated building automation systems. A shortage of skilled people is another challenge affecting market growth."
The Chinese economy growth rate fell to 9.0 percent in 2008 and has witnessed a severe slowdown since the reform. In the past few months, the impact of the global financial crisis has been transmitted to economy sectors as indicated by the deceleration of industrial production growth and weaker real estate investment.
According to Wu, companies in the BT industry are affected in three major aspects under such circumstances. Firstly, demand from traditional end users such as office buildings, retail and wholesale trade buildings is anticipated to shrink. The investment growth in office buildings declined to zero in 2008 and is estimated to fall into negative territory in 2009.
Secondly, in many cases, low price is the sole decisive factor to win a contract, pushing providers to adopt poor quality products with low price. Furthermore, the market lacks accountability from building management and control systems (BMCS) providers. It is hard to test if the system is functioning as claimed upon commissioning, particularly in an energy efficient system.
Thirdly, with an increasing number of small-to-medium sized companies entering the market over the last few years when large investments were put into the property sector, the differentiation becomes even more difficult. In order to survive in the sluggish real estate market, companies need to strive to concentrate on innovation, cost control, and seek new profit growth points.
Speaking of the Chinese government's stimulus policy, Wu says, "In view of the significant growth slowdown, the government has adopted fiscal expansion plans, industry specific stimulus policies, as well as aggressive monetary easing."
It is anticipated that a few vertical markets of the BT industry may benefit from the RMB4 trillion fiscal stimulus package. About 45 percent of the stimulus package is set aside for infrastructure-related projects, bringing opportunities in railway and metro.
Wu elaborates, "Nearly RMB40 billion is estimated to be invested in healthcare, stimulating new construction or retrofitting demand of healthcare facilities. Unprecedented emphasis has been put on environmental protection, with 9 percent of the stimulus package. Other hot sub-sectors include water/wastewater treatment plants and nuclear power plants."
With regards to the industry specific stimulus policy, steel, auto, equipment manufacturing and textile industries have been put on the aid list, while real estate is still uncertain in this scope. Because of the lack of clarity in the timing of implementation, the short-term impact on growth is particularly hard to estimate at this point.
Given the complex macroeconomic environment, Frost and Sullivan predicts the Chinese BT industry to experience a slowdown with a CAGR of 8.9 percent from 2007 to 2012.
Although the downward trend of interest rates have a positive impact on the real estate market, the commercial property which accounts for over 50 percent of the overall demand in BT industry, has cooled off as expected due to the developers' weak sales and tightening cash flow. Although, it still has long-term potential, considering the secular urbanisation trend.
"Compared with deceleration in property markets, heavy fixed assets investment have been put into industrial sectors," Wu says. "Opportunities in BT industry can be sought in the sectors with characteristics such as abundant cash flow like cigarette manufacturing and power plants or having a strict requirement in environmental control like pharmaceutical and R&D centres," she continues.
In order to achieve the target of sustainable growth on the way to modern society, the central government has put the priorities on energy saving and environmental protection. There could be a tendency to develop more energy efficient products or integrate energy management systems to cut down the energy consumption in buildings though it still has a long way to go.
About Frost & Sullivan
Frost & Sullivan, the Growth Partnership Company, enables clients to accelerate growth and achieve best in class positions in growth, innovation and leadership. The company's Growth Partnership Service provides the CEO and the CEO's Growth Team with disciplined research and best practice models to drive the generation, evaluation and implementation of powerful growth strategies. Frost & Sullivan leverages over 45 years of experience in partnering with Global 1000 companies, emerging businesses and the investment community from 31 offices on six continents.