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Game of Ants and Elephants: Fragmentation of Construction Machinery Aftermarket, Part 1/2
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Foreword

1. Definition of construction machinery market

The concept of the aftermarket began in the automotive market. In recent years, it has been used widely in the field of construction machinery. As the name implies, the definition of the aftermarket of construction machinery covers the sum of all relevant business activities after the first sale of construction machinery and equipment. This mainly includes: construction machinery rental, second-hand machinery trading, spare parts supply, repair and field services, technical information provision, technology staff training and more.

2. What is the actual situation of the aftermarket of construction machinery?

The annual demand for construction machinery rental was about CNY 2 trillion in 2018 and 2019. The transaction volume of the second-hand machine is about CNY 400 billion, and the supply of components and parts is about CNY 300 billion. By the end of 2018, the holding amount of construction machinery and equipment was between 7.5 million and 10 million sets.

These data are estimated values from various organizations or enterprises. The reason is that construction machinery involves complete machine manufacturing, component manufacturing and supply and after-sales service, including tens of millions of practitioners in various industries and fields. In particular, the actual situation at the construction site is more complicated. Therefore, it is not easy to describe systematically and accurately how the internal actors in the huge sector of the construction machinery market operate and correlate with each other.

Until now, most of the analysis and research has been top-down, that is, the logic and analysis comes from the manufacturer’s perspective, moving towards the end customer of construction machinery. However, this article is from another perspective – we observe and analyze the problems from the bottom of the business chain, in order to further discuss the real situation of the aftermarket. 

Traditional business model of the construction machinery aftermarket
The so-called traditional after-market model is actually a business model developed by big-name manufacturers for their own product after-sales services. Subsequently, the business model followed by and adopted by most manufacturers was established, and the after-sales services further developed for this business system.

The traditional business model of the aftermarket has the following characteristics:

a. Manufacturers have the right to act in every aspect of the aftermarket. After the special operation rights granted to agents, from manufacturers to agents to end customers, a closed and independent business service cycle system has been formed.

b. Under this closed aftermarket model, manufacturers have the exclusive right to speak on the standards of service operation, the formulation of parts prices and service prices, including the handling of after-sales product quality and after-sales service disputes.

c. With the characteristics of the closed and independent business model of the above after-sales service, the end customer is basically in a passive position, without any bargaining power.

d. The above-mentioned commercial characteristics of aftermarket operations have provided manufacturers and their agents with huge profits:

In the life cycle of each product sold, the profit of the market after the traditional sale is several times more than the profit of the entire initial sale. For manufacturers' agents, the operating profit of the aftermarket can cover 70% -100% of their total operating costs, and even if there is no complete machine sale, they may still be profitable.

Aftermarket fragmentation

The so-called fragmentation is a trend that is set to break the traditional post-market closure and the manufacturer-centric business system to form a relatively open market state. In order to describe this phenomenon concisely, and to effectively discuss the complexity of fragmentation, the relevant parties are defined as follows:

Elephant

Machine manufacturers, various types of overseas and domestic brands. The strength of the elephants is that they heavily invest in assets. Take the excavator as an example. The investment of domestic and foreign giants is more than CNY 30 billion each. They are the fundamental players in the construction machinery industry.

Rabbit

Manufacturers of so-called 'substitutes' for parts, small and medium repair manufacturers, second-hand machine refurbishment manufacturers, and small home factories.

'Rabbits' also includes groups that:

-Are professional, dedicated, family-owned SMEs.

-Have certain funds, equipment, technology, and patent accumulation.

-Employ flexible management and extremely fast response to market demand.

-Seek infiltration of every demand link of construction machinery product sales services, including infiltration to elephant agents.

-Provide 'ants' with parts, materials, information, logistics, intelligence and funding (loose alliance).

-Support the OEMs, upholding the processing and manufacturing enterprises of the complete machine.

-Provide large-scale parts supply for terminal customers.

Ant

In the industry, there are various names for self-employment at each level, such as self-employed, hawkers, and down-lords; second-hand hawkers, workshops, counterfeiters, backpackers, and materials, etc., are mostly derogatory terms and seem to be somewhat unfair. To this end, give it a neutral and visual title: ants. According to occupation classification: parts ants, repair ants, service ants, data ants, second-hand ants, manufacturing ants, etc. This covers a class of economic behavior with a mixture of business and personal management.

Ants tend to have the following characteristics:

-Hard work, unlimited self-drive.

-The number is huge, perhaps up to ten times greater than that of similar people in the elephant aftermarket system.

-Workplace and fixed asset inputs are flexible and highly efficient, with high input and output efficiency.

-Quite a few of them have a higher level of expertise than similar staff in the elephants' system.

-Great flexibility in social security, tax payment, and insurance, and extremely low indirect costs of economic behavior.

-Ants' personal income tends to be much higher than the income of similar professionals in the elephant aftermarket, and some have an income several times higher.

Inducements of the emergent of ants and rabbits – elephants' huge profits.

In terms of parts, for example: for the door lock of an excavator's cab, the sales price of a foreign elephant was above CNY 1100, and the price of rabbit products was CNY 50-100, and the manufacturing cost was tens of yuan. The quality is almost identical and may even be made in China itself. In the same way, from the maintenance parts and wear parts: filters, bucket teeth, pin sets, chassis parts and other maintenance parts, to the engine, hydraulic parts, electrical parts and other core parts, the huge profit margin between the manufacturing cost and the sales price of elephants. Including the huge spread of the after-sale supply chain that elephants once monopolized. Today, in the construction machinery parts manufacturing industry, there are many big rabbits with annual sales in the billions.

The elephant-led business system inhibits rabbits and ants

There is no doubt that the emergence of rabbits and ants violated the interests of elephants and agents. Over the years, elephants and their agents have made every effort to use all economic and commercial measures, attempting to establish a business relationship directly with the customer, using means such as various legal actions (including trademarks, intellectual property rights, etc.)

The above method has been used for more than ten years, and the results are as follows:

-After the warranty period of the equipment sold by elephants, more than 90% of the on-site repairs and services are provided directly by ants and rabbits.

-After the sale of equipment, the sales volume of ‘authentic parts’ for each single piece of equipment is lost by 40 to 80% and the price of 'authentic parts' drops by at least 30%-70%. Some of the parts completely lose their sales opportunities and are completely replaced by rabbit products.

-Many elephants have to choose and accept rabbit supplies.

The direct reason for this result is: with the rise of China's manufacturing industry and the self-employment of the grassroots employees in the industry, there is an unlimited self-driving force to become rich. At the same time, the huge profit margin of elephants in the aftermarket of construction machinery indirectly provides huge business opportunities for ants and rabbits.

ANALYST
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