Influence of “Supply-side Structural Reform” on Air Compressor Industry

“Supply-side Structural Reform” has established itself as a hot economic term in 2016. I think, at the very beginning, many are seemingly familiar with it, but not knowing why.  On the 12th meeting of the Central Leading Group on Financial and Economic Affairs presided over by CPC General Secretary Xi Jinping, he first mentioned “supply-side structural reform”. I’d like to  discuss about the influence of the reform measures proposed by the government on air compressor players.

Current industries with severe overcapacity include: steel, coal, cement, non-ferrous metal, electrolytic aluminium, sheet glass and so on. While in fact, there are few industries left without overcapacity, no exception for air compressor industry.

Many domestic enterprises are suffering from low technological level, humble equipment and outdated production and management level. A majority of products are just low-level imitators, quite a few of which are even manufacturing in a rough way. Such enterprises, however, also got the chance to grow thanks to the economic prosperity and the huge market demands. In particular, some, by fully leveraging the unfamiliarity of customers with the products, managed to “hoodwink” many customers through the e-commerce channels on the Internet. These enterprises claimed to seek for small profits but large turnover and gained considerable sales through price dumping so that it even became a “consensus” for some time that any product at a low price will take a market share, resulting in great compromise in performance and value orientation of the product itself. In this light , we see the madness that many compatriots, rather than buy the domestic electric cookers at just several hundred Yuan, choose to spend thousands of Yuan buying those in Japan. Such a development strategy of Chinese enterprises never enables them to upgrade and fails to further raise the income of our fellow countrymen, thus keeping China enmeshed in the middle income trap. In the long run, it bites off our own heads.

With the worsening economic environment and declining market demands, the disadvantages are laid bare, which is possibly the context for the said policy.

II. What’s the influence of capacity cutting on air compressor industry?

With regard to capacity cutting, enterprises with low quality, high energy consumption, inefficient operation and no core technology will be shut down and restructured while those with technologies and products of real cost performance will get “reborn”. Analysis of the author is as follows (the author’s opinions only):

1. Reduction of air compressor customers: means further decrease of air compressor demands, in particular low-end customers;

Many enterprises who just pursue “machine procurement price” of air compressor products or who are running in high energy consumption and low efficiency might be shut down and restructured. What types of air compressor players might be impacted? The answer is self-explanatory.

2. Reduction and restructuring of air compressor manufacturers.

Those who only offer low prices without after-sales service system, or only imitate others but hold no core technologies, efficient and systematic management system or builds no comprehensive management, training and support systems for agents and customers will find themselves in a more difficult situation after this flood.

3. Rise of costs for raw materials of air compressors.

While some companies are shut down, others shall be enabled to make benefits and profits. Only in this way, are they financially capable of R&D for sustainable development. Of course, prices of products will rise accordingly. Rise of raw material prices will lead to price rise of products of related industries.

The 1st quarter of 2016 has seen rise of prices of major raw materials, steel and non-ferrous metals for air compressors.

Ever since screw compressor entered into China, its price has been declining.Gross profits of some enterprises are lower than 5%, some even no profit or in loss. Rise of raw material cost make those products originally advantaged by their prices difficult to “digest” the rise of material cost whereas enterprises capable of “transferring” cost rise to customers through value transformation survive.

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