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Industrial Opportunities and Threats Under COVID-19
COVID-19 and China
Image Credit: Sean Pierce / Unsplash

From the US-China trade war to COVID-19 in 2020, China has suffered an economic downturn in most of its industries. Specifically, US-China trade put limitations on exports and imports, negatively affecting overseas businesses. As for COVID-19, it has stopped many companies’ ongoing projects and even bankrupted massive firms.

In such an unpleasant situation, the industrial marketplace has also endured a hard time. However, the US’s ban on China’s technological firms has triggered the Chinese government to pay more attention to innovative development, such as the new infrastructure projects. Moreover, the death of offline sales has shifted companies’ direction towards online and digital modes. For instance, equipment-maker Sany is trying its best to conduct a digital transformation.

Overview of industrial primary sectors

As for the whole industry, it experienced three stages, from 2019 to the first half of 2020: from slow growth to downturn to economic resurgence. In 2019, there were adverse effects from trade frictions and global economic downturns, most months in 2019 had manufacturing PMIs lower than 50. Especially after May, the US increased the tax rate to 25% on Chinese exports, which further intensified the conflict. Hence, the resulting decrease in exports also heavily slowed industrial growth and negatively affected firms’ expectations of economic activities.

When it comes to 2020, the unexpected emergence of COVID-19 gave a heavy knock to the industrials. Specifically, the manufacturing PMI dropped to 35.70 in February 2020, implying economic recession. Moreover, industrial firms’ revenue decreased by 19.3% compared with last month, as they had to shut down most projects. Nevertheless, many companies started returning to work after April 2020 when China controlled its infected cases. Under this favorable situation, the manufacturing PMI increased sharply to 52, as the economy regained confidence. During the period of economic recovery, the Chinese government is also promoting intelligent manufacturing, which might further help the industrials to regain health – for example, it is planning to build 6 million 5G base stations within seven years.

Regarding the four primary sectors in the industrials industry – machinery, transportation, electrical equipment and construction – the construction sector accounted for an average of 52.73% of total operating income in the last three years. Thanks to the fierce competition and low entry barriers in construction sectors, massive firms and projects played significant roles in making money. However, even if the operating income shows an upward trend during these periods, the average gross profit margin dropped mostly to -5.92 in 2019. This may be explained by the trade conflicts and rising costs of manufacturing.

Top 10 performing companies

To further elaborate on the industrials industry, R&D expenditure should not be ignored. The top ten firms in terms of R&D expenditure to operating income ratio in 2019 reflect the importance of research, as innovation continues to be more critical under China’s new infrastructure projects.

The top ten firms' ratio of R&D expenditure was much higher than the industrials' average rate in 2019, which was 3.24%. Moreover, all of the top eight firms come from the machinery sector. Specifically, the machinery sector's average ratio was 6.33% in 2019, the highest one within the overall four sectors. It is not hard to conclude that the machinery firms are concentrating more on R&D these days. 

Weihong Equity (维宏股份), a high-tech firm, provides resolution methods in the motion control system. With its core value as innovation, it keeps promoting innovative products. For instance, it has approved its software platform, phonenix, which helps it manufacture the glass machine. 

Huazhong (华中数控) is a tier-one firm in numerical control. Digital control technology is the critical factor for mobile, auto and plan manufacture. Hence, Huazhong is pretty essential for China's economic security and national security. 

SMTCL (沈阳机床) specializes in R&D, manufacturing and financial services in the machine tool segment. To be precise, its core business is in intelligent machine tools, providing a one-stop service to customers. It is currently cooperating with governments to build an intelligent center, further promoting intelligence development. 

Yuhuan (宇环数控), a numerical control firm, focuses on grinding equipment. The firm uses the online sales channel to improve its influence and reputation, further increasing order volumes. Moreover, it was awarded the National Torch Program Project (国家火炬计划项目).

Taihai (台海核电) is good at selling and manufacturing nuclear power equipment. It is the first manufacture who can produce the main pipelines in nuclear power. Further, the firm is keeping expanding its innovation scope, such as cooperate with the academy of sciences.

Jinma (中山金马) is a company concentrates on manufacturing large amusement equipment. As more and more famous investors start investing in China's amusement equipment, the firm tries its best to create new amusement products, which helped it get CNY 625.27 million in operating profit in 2019. 

Zhiyun Equity (智云股份) is an automation equipment maker. With its core competence in innovative technology, the firm holds intelligent resolution methods in detection technology and equipment manufacturing. Moreover, it applied for 33 patents in 2019.

Zovan (中元股份) is specialized in electrical power system manufacturing, R&D and sales. By the end of 2019, the firm owned 59 patents. Moreover, it also retains 234 software copyrights.

Increase (英可瑞) is an intelligent switching power manufacturer. The firm increased its R&D expenses in 2019, with a rise of 42.85%. Specifically, it successfully promoted the power modules products in 2019. 

Tianhuai Technology (天准科技), focused on AI, has primary products like visual equipment, including intelligent manufacturing systems and driverless logistics vehicles. With over ten years of R&D, it counts development of algorithms and platform software among its strong points now.  

From the above, the top ten firms all have benefited a lot from their technological advantages. in other words, innovation might contribute more to firms, industries and even the new era.

 

Editor: Luke Sheehan
ANALYST
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