Hydraulic Industry Analysis

01 Hydraulic Transmission

The hydraulic system uses liquid as the working medium and transmits power by utilizing the pressure energy of the liquid. Due to its advantages of smooth transmission, rapid response, and high power-to-volume ratio, hydraulic transmission is widely applied in fields such as construction machinery, machine tools, and agricultural machinery, making it the primary type of fluid transmission. A hydraulic transmission system typically consists of four components: the power element (hydraulic pump), the actuating element (cylinder or motor), the control element (hydraulic valve), and the auxiliary elements.

Hydraulic system composition

Hydraulic products are the key to controlling the host to complete various actions, and their technical level and product performance directly affect the automation level and work reliability of the machine, directly affecting the performance and development of electromechanical products and national defense products. As an important component of transmission and control systems, it is a crucial foundation of modern industrial society.

Although hydraulic products play a significant role in the industrial system, there is still a gap in the development level of China's hydraulic industry compared to developed countries. From the perspective of product structure, China's hydraulic parts industry presents a situation of coexistence of structural surplus of ordinary hydraulic parts and structural shortage of high-end hydraulic parts: on the one hand, domestic enterprises have overcapacity in ordinary hydraulic parts products, and product homogenization competition is severe; On the other hand, the research and production level of high-end hydraulic components is insufficient, which cannot form an effective supply, resulting in a large dependence on imports for high-end products.

02 Hydraulic market size

Hydraulic products have a wide range of applications, and with the continuous advancement of technological innovation, the applicable fields of hydraulic products are constantly expanding, and the overall scale of the industry is showing an upward trend year by year.

From a global perspective, the market size of the hydraulic industry was 17.6 billion euros in 2003, and by 2016, this number had risen to 28.2 billion yuan, expanding the market size by over 10 billion euros. The Chinese hydraulic industry has grown from scratch and has become a major global hydraulic market after more than 60 years of development. The demand for hydraulic components and parts has increased with the improvement of China's industrialization level. The total output value of hydraulic systems and related accessories in China, including the aftermarket, reached 51 billion yuan in 2016, and is expected to accelerate growth in 2017 driven by the high prosperity of the domestic construction machinery industry.

Global hydraulic industry market size

Output value of China's hydraulic industry

The market size of the hydraulic industry is highly correlated with a country's total economic output and industrialization level. As the world's second-largest economy and largest manufacturing country, China's hydraulic industry market accounted for 28% of the global market in 2016, only slightly lower than the United States' 34%, and far higher than developed countries such as Japan and Germany. From a horizontal comparison, in 2000, the sales revenue of hydraulic products in China was less than 500 million euros, but by 2014, this scale had reached 6.913 billion euros, approaching the level of the United States, and the market size had rapidly expanded.

International market share of hydraulic industry in 2016

03 Application Fields

Hydraulic products are widely used in various fields of the national economy, and their direct downstream demand includes equipment manufacturing fields such as engineering machinery, aerospace, and metallurgical machinery.

Construction machinery is the largest demand area for hydraulic products. In 2014, the Chinese construction machinery market consumed 35.4% of domestic hydraulic products, while in the same year, this proportion even reached 43.3% in Japan, demonstrating the driving role of construction machinery in the hydraulic industry. In addition to engineering machinery, there is also a significant demand for hydraulic components in fields such as aerospace and metallurgical machinery.

In fact, hydraulic components applied in different fields have significant differences in accuracy, intelligence, and price. Generally speaking, hydraulic components used in agricultural machinery and other fields have lower requirements, while hydraulic components used in aerospace, shipbuilding, and other fields often require advantages in accuracy, response speed, and reliability.

Application characteristics of hydraulic components in different fields

Hydraulic components are mainly divided into five categories: hydraulic cylinders, hydraulic pumps, hydraulic valves, hydraulic motors, and auxiliary equipment. Hydraulic products are sold not only in the form of individual items, but also in the form of hydraulic systems. According to the above classification, the domestic hydraulic parts market has been divided since 2010. As shown in the chart, the value of the main hydraulic parts in each year accounts for a large proportion. Hydraulic pumps, valves, and cylinders all have a significant value share, and each hydraulic part category is a large market.

For example, in 2013, the global value of hydraulic pumps, valves, motors, and cylinders accounted for 19.2%, 18.9%, 9.9%, and 20.4%, respectively. The total value of hydraulic pumps, valves, and motors is approximately 2.5 times that of hydraulic cylinders.

International hydraulic product structure ratio in 2013

The overall technical difficulty of hydraulic pumps is higher than that of hydraulic cylinders, which is currently a key and difficult point for major domestic enterprises to overcome. After years of technological and process accumulation, the production capacity of hydraulic pumps in China has also been greatly improved. According to the data from the Liquid Gas Sealing Association, the output value of hydraulic pump products in China increased from 5.918 billion yuan to 10.56 billion yuan from 2009 to 2016, with an astonishing development speed and a significant increase in domestication rate in the later stage. The situation of needing to import a large amount of foreign products every year will be improved.

Changes in domestic hydraulic pump output value

The added value of hydraulic motors is relatively low, with a domestic market space of less than 4 billion yuan in 2016. But as an indispensable and important component in the entire hydraulic system, the innovation and development of hydraulic systems, especially in the field of mechatronics integration, hydraulic motors and their accessories will undertake more functions in the future.

Changes in domestic hydraulic motor output value

2、 Industry competition

01 Market Concentration Situation

From global experience, the international hydraulic industry has obvious market concentration characteristics, with the top 6-7 major enterprises occupying 80% to 85% of the international hydraulic market share. China's hydraulic industry started late and has a weak technological foundation, so global leading enterprises represented by foreign or joint ventures occupy an important position in China's hydraulic parts market.

Represented by Bosch Rexroth, Kawasaki, and Eaton, global hydraulic component leaders have firmly occupied the core market of hydraulic components in China through rapid technological changes, rich product lines, and pursuit of excellence in craftsmanship. It is estimated that in 2009, Eaton, Bosch Rexroth, and Parker held market shares of 11%, 17%, and 7% respectively in the hydraulic parts market in China; By 2015, foreign-funded enterprises still held a market share of over 70% in the domestic hydraulic pump/motor market.

Market share of major foreign hydraulic brands in China in 2009

The research and development of high-end hydraulic components are still maintained in the home country to maintain technological advantages, while a large number of exports are made to gain market share. Currently, top global hydraulic component suppliers such as Kawasaki from Japan and Rexroth from Germany have established production bases in China. In addition to localizing the production of non core products, major manufacturers have kept their high-end hydraulic components locally for research and development, and have gained domestic market share by exporting to China. In 2013, Eaton, Parker, and Rexroth accounted for 15%, 21%, and 27% of the hydraulic components imported into China that year, respectively.

Market share of imported hydraulic component brands in China in 2013

As strong competitors of domestic hydraulic product manufacturers, Kawasaki, Rexroth, and Eaton have been operating in the Chinese market for even longer than many existing domestic enterprises. They are important participants in the development history of China's hydraulic industry. By analyzing the expansion history of the three in the Chinese market, we can further understand the development history of the domestic hydraulic industry and learn from its successes.

Kawasaki Precision Machinery products hold a leading position in the excavator market, with manufacturing factories located worldwide. Kawasaki's expansion in the Chinese hydraulic market began in the early 1980s and accelerated with the slowdown of the Japanese economy and the large-scale construction in China. At present, Kawasaki has more than 20 manufacturing factories, sales companies, and representative offices in Jiangsu, Zhejiang, and other places in China, firmly grasping the supply of hydraulic components for excavators in our country.

Bosch Rexroth has a development history of over 200 years and is a global provider of hydraulic high-tech solutions, with transmission and control technology leading the world. At present, the company's business covers more than 80 countries around the world. Since entering the Chinese market in 1978, Bosch Rexroth has established production bases in Beijing, Jiangsu, and Shaanxi, with thousands of employees. Bosch Rexroth hydraulic products comprehensively serve various industrial fields in China, providing customized hydraulic transmission solutions.

Eaton is a leading global manufacturer of diversified industrial products, enjoying a reputation for advanced technology and reliable quality in the global industrial sector. We have 55000 employees in over 125 countries across 6 continents worldwide. Eaton entered the Chinese market in 1993 and established its first joint venture in Jining, Shandong, mainly producing steering gears and hydraulic cycloidal motors for agricultural and construction equipment. Subsequently, Eaton rapidly developed its business in China through mergers and acquisitions, joint ventures, and sole proprietorships, and established Eaton Fluid Power (Shanghai) Co., Ltd. in 1998.

02 Development History

China's hydraulic industry started late and has a weak foundation. Before the founding of the People's Republic of China, there was almost no hydraulic industry in our country, and only a very small number of hydraulic components were used in fields such as presses and machine tools. After the founding of the People's Republic of China, the domestic hydraulic industry roughly went through three stages of development, which can be roughly divided into the foundation and entrepreneurship stage from 1952 to 1962, the development and growth stage from 1962 to 1978, and the rapid development stage after 1978. After decades of effort, the overall technical level of China's hydraulic industry has been significantly improved.

• 1952-1962: Foundation and Entrepreneurship Stage

Development achievements: Starting from the imitation of the Soviet Union, the hydraulic industry emerged from scratch and formed an independent professional hydraulic component production factory in the early 1960s, with applications covering machine tools, agricultural machinery, and engineering machinery;

• 1962-1978: Development and Growth Stage

Development achievements: Gradually establish a hydraulic industry management planning department and technical research institutions. Introduced complete sets of processes and equipment from Japan, developed from simple imitation of the Soviet Union to a combination of self-designed products.

• 1978 present: Rapid development stage

The delegation of management rights to directly affiliated hydraulic enterprises has accelerated the introduction of overseas technology, and joint ventures have been established successively; The rapid release of downstream demand has led to the rise of national hydraulic brands.

The introduction of technology, which began in 1965 and accelerated after 1978, is crucial for the development of China's hydraulic industry. After integrating and forming large-scale professional hydraulic enterprises such as Beijing Huade, Yuci Hydraulic, Shanghai Electric, Guizhou Airlines, and Liaoning Hydraulic, China began to vigorously introduce advanced hydraulic evaluation and manufacturing technologies from abroad, successively introducing advanced technologies such as VICKERS, ETON, REXROTH, and ATOS, and carrying out planned digestion, absorption, and localization work. At the same time, we have introduced advanced foreign hydraulic manufacturers to set up factories in China through various means such as joint ventures, sole proprietorships, and cooperation, rapidly narrowing the gap between China's hydraulic industry and the international advanced level.

After more than 60 years of development, China has established a complete hydraulic industry system, which will gradually meet the supporting needs of China's machinery industry. According to the statistics of the Liquid Gas Sealing Association, there are currently over 1000 hydraulic enterprises in China, including more than 300 large-scale enterprises and over 100 major enterprises. Among them, backbone enterprises such as Hengli Hydraulic, Zhongchuan Hydraulic, and Taizhong Yuye are rapidly narrowing the gap with global leading technologies and achieving breakthroughs in high-end hydraulic pump and valve products.

03 Downstream demand

The construction machinery industry is the largest downstream application industry for hydraulic products in China, with over 35% of hydraulic products used in the construction machinery sector. The high prosperity of the excavator industry since the third quarter of 2016 has provided an opportunity for domestic hydraulic enterprises to regain market share.

The economic recovery of the domestic construction machinery industry, which began in the third quarter of 2016, has brought breakthrough opportunities for domestic hydraulic component enterprises. From January to October 2017, the sales growth rate of domestic excavators nearly doubled. In the first three quarters, the sales growth rates of loaders, truck cranes, and forklifts were 44.6%, 114.9%, and 34.9%, respectively. The sustained high growth of various categories of construction machinery has driven the rapid growth of hydraulic components used in domestic construction machinery.

The hydraulic system and its accessories constitute the main part of the production cost of hydraulic excavators

The sustained high prosperity of the construction machinery industry in the Chinese market has driven the continuous increase in sales of related hydraulic components. As of September 2017, KYB's semi annual report shows that its sales revenue growth rate in the China region exceeded 40%, far higher than that in Japan, the United States, and the European market.

The continuous shortage of some models by major domestic excavator manufacturers indicates the increasingly prominent contradiction between the sustained high prosperity of China's excavator market and the production capacity of hydraulic pump valve suppliers such as Kawasaki and Rexroth for excavators. If the previous industry association's judgment that the sales volume of the excavator industry will continue to grow in 2018 is later verified, the domestic procurement gap will further expand, and the market share of each excavator host factory will largely depend on the number of hydraulic pumps and valves they can purchase. In addition, if Caterpillar closes its hydraulic valve manufacturing plant in Japan in 2018, the company will rely on Kawasaki, Japan to make up for its hydraulic component demand gap, and domestic OEMs will face a more severe situation in ensuring the supply of hydraulic pumps and valves. It is imperative to support and shorten the verification cycle of domestic hydraulic component enterprises and achieve the localization of core hydraulic components.

This situation provides a historical opportunity for domestic hydraulic component enterprises. After decades of accumulation, the hydraulic components of domestic construction machinery have become relatively mature. The excavator cylinders and non-standard hydraulic cylinders manufactured by domestic manufacturers have been recognized by top global customers such as Caterpillar, and have the strength to share the feast of the construction machinery industry with international giants. At the same time, domestic hydraulic manufacturers are focusing on technological breakthroughs in higher difficulty areas such as hydraulic pumps and valves after completing the import substitution of hydraulic cylinders with relatively low barriers to entry. With the sustained prosperity of the domestic construction machinery industry, the insufficient production capacity of foreign hydraulic pump and valve manufacturers will provide a rare market access opportunity for domestic hydraulic manufacturers.

04 Import substitution

The import and export situation of hydraulic components in China can indirectly demonstrate the continuous progress of the domestic hydraulic industry, and at the same time indicate that the import substitution process of domestic hydraulic components is continuously advancing, from quantitative change to qualitative change. From the perspective of import and export quantity, the export quantity of hydraulic components in China is far greater than the import quantity, and the gap is widening year by year. In 2010, the import and export quantities of hydraulic components in China were 2.01 million and 3.32 million respectively, while by 2015, they were 3.49 million and 9.15 million respectively, with export growth rate significantly higher than import growth rate.

From the perspective of import and export amounts, the trend of mutual growth and decline is more evident. From 2011 to 2016, the import value of hydraulic components in China decreased from 3.424 billion US dollars to 1.55 billion US dollars in 2016; During the same period, the export value of hydraulic components increased from 502 million US dollars to 800 million US dollars. The trade deficit is gradually narrowing. With the breakthrough of domestic hydraulic components in the high-end field in the later stage, the trade deficit is expected to reverse.

3、 Aftermarket

01 Market size

The hydraulic parts aftermarket mainly includes maintenance and replacement, which is different from the front-end market that is easily affected by many factors and prone to ups and downs. The hydraulic parts aftermarket faces a huge stock market with lower volatility than the front-end market.

The scale of China's hydraulic parts aftermarket is over 20 billion yuan, with nearly 40% of the demand coming from construction machinery. The cost of repairing each hydraulic component varies depending on the brand and mining conditions, but it usually undergoes a major overhaul every 3-4 years, which involves replacing numerous hydraulic components. During the 10-year service life of construction machinery, the maintenance and replacement of hydraulic components is roughly equivalent to resetting the entire hydraulic system components twice. According to this maintenance pattern, it is expected that the current market demand for hydraulic components in China will exceed 20 billion yuan, and the market size for hydraulic components in construction machinery is expected to exceed 10 billion yuan, providing sufficient market space for domestic hydraulic component enterprises.

02 Market Pattern

Considering the high cost of hydraulic components from foreign brands, in the aftermarket, construction machinery owners usually try to choose domestic brand hydraulic components with the same performance. At the same time, due to the relatively low barriers to entry in the domestic hydraulic parts aftermarket and the serious homogenization of products, there are many participants in the entire market, and the competitive landscape is relatively chaotic. Therefore, high-quality complete machine supporting enterprises at home and abroad participate less in the competition of the domestic hydraulic parts aftermarket. In the aftermarket, domestic small and medium-sized enterprises dominate, and the market structure is very scattered. The market share of high-quality enterprises has further room for expansion.

The main suppliers in China's hydraulic parts pre installation market