Digging a hole

Guangfeng is China’s excavation capital

guangfeng w

Just what every family needs

When Li Kezun, from Guangfeng in Jiangxi, visited Shanghai in 1997, he was struck by the construction boom going on in the city. After he returned home, the aspiring entrepreneur borrowed money from his friends and relatives, raising just enough to pay for an excavator costing Rmb300,000 ($48,939).

It turned out to be a pretty lucrative investment. “At that time, a shift [8 hours of machinery work] fetched about Rmb2,000. On average, an excavator can handle about 30 shifts a month, sometimes 40,” Li told China Economic Weekly, adding that it took him less than a year to recoup the capital invested.

Li quickly put money into buying more heavy machinery. By 2003, he owned 27 excavators. He also alerted his neighbours and friends in Guangfeng to the opportunity. Over time, more and more people in the small county (population 760,000) got into the business of buying and then leasing digging equipment to building contractors.

By 2007, Guangfeng controlled as many as 20,000 excavators, which were now being deployed across the country for construction work. By 2009 the number had reached 70,000. Total sales of excavators in China in a similar period suggest that Guangfeng may have made about a third of the orders nationwide. Xinhua has also reported that the county made Rmb10 billion from the leasing business.

“In Guangfeng, you can tell how many excavators the family owns by looking at their house. If the house is beautifully built, the family probably has only one excavator. If they have a beautiful house and a car, they probably have more than two machines. And if the car was an Audi or Mercedes-Benz, the family has at least 5 excavators,” a resident explained to China Economic Weekly.

How did they finance such large purchases? Guangfeng residents used tax breaks and other incentives from their local government. It was also common for sales agents to offer people like Li incentives such as zero downpayments instead of the more traditional 30%. In some cases, buyers were given up to six months before they needed to make their first payment. Other agents tried to lure buyers with “group-buying discounts”.

Needless to say, sales to the good folk of Guangfeng helped boost heavy equipment makers like Sany and Zoomlion. Zoomlion’s revenues expanded more than five times between 2007 and 2011. Sany, China’s biggest producer of excavators, said its own revenues grew 13-fold between 2005 and 2010.

Then came the reckoning. For much of the last two years, many of Guangfeng’s diggers have been idle, with concern over property prices prompting Beijing to rein in the credit fuelling the construction boom. China Economic Weekly estimates that for every 10 machines sold to Guangfeng, eight are now experiencing deferred payment. Buyers from Guangfeng have gone from the VIP list to the black list.

In 2011, like many in Guangfeng, Li Yuzhou quit his job (as a teacher) to run an excavator leasing business. He bought the newest hydraulic kit from Hunan manufacturer Sunward with only Rmb50,000 cash up front and took out a Rmb650,000 loan from the bank for the remainder. But the slowdown in construction means that Li’s machine hasn’t been switched on for months. He is already late on several payments and the bank could soon come to tow his digger away. Li told China Economic Weekly that he isn’t alone. There are many cases like his in Guangfeng.

The heavy equipment makers are feeling the impact too, says Century Weekly, reflecting lower demand for new machinery, as well as the increasing difficulty that existing customers are now having with repayment. Other buyers are simply defaulting, a particular problem for companies like Sany and Zoomlion, which have offered financing in excess of Rmb100 billion to purchasers of their products.

In fact, Zoomlion was back in the headlines this week. Its stock was suspended on Monday after newspaper New Express made a fresh claim the manufacturer was falsifying sales. Zoomlion denied it.

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