Due to sluggish domestic demand, Chinese manufacturers are targeting African markets for profits, report Wang Chao and Huo Yan in Liuzhou, Guangxi

Going overseas is no longer as easy as loading products on a ship and selling them quickly in the Middle East or Africa.

As tax barriers increase and profit margins get slimmer, Chinese manufacturers have to try other approaches to explore overseas markets, including building "complete knock-down" plants, where machinery is delivered in parts and assembled locally, and procuring materials locally.

Africa has become an increasingly important investment destination for Chinese machinery and auto companies. Liugong Machinery Co, based in Liuzhou in the Guangxi Zhuang autonomous region in South China, has listed Africa as one of its "second home markets", along with Southeast Asia, Russia and Central Asia.

Qin Yong, deputy general manager of international business at Liugong Machinery, said the most popular models in these markets are loading machines and excavators.

South Africa is the "superstar" in the African market. During the first three quarters of 2012, the company sold 830 units in South Africa and gained revenue of 390 million yuan ($62 million), up 117 percent year-on-year. The company is represented in most African countries with around 30 dealerships.

The unprecedented attention to overseas markets is partly results from the sluggish domestic market in the past two years.

Wang Xiaohua, president of Liugong, said the market has changed since 2011.

"The past 10 years have been golden ones for the Chinese market, but over the next decade, it will slow down and see modest growth," he said.

Liugong's financial report shows revenue in the third quarter of 2012 fell 27 percent year-on-year to 2.57 billion yuan ($407 million).

Domestic truck sales are also stalling sharply. Major commercial vehicle manufacturer Dongfeng Liuzhou Motor Co estimates its truck sales will drop 50 percent from 60,000 last year to 30,000 in 2012 due to shrinking demand.

Huang Ziqiang, deputy general manager of Liuzhou Motor, said the greener pastures are overseas and the domestic truck market is almost saturated. The company has exported trucks to Southeast Asia, Africa and South America.

SGMW, a joint venture in which SAIC Motor Corp, Liuzhou Wuling Motors Co and GM China have stakes, is also treating Africa as one of its most important overseas markets. A factory has already been established in Egypt, serving the North African and Middle Eastern markets.

Liugong's efforts to concentrate on overseas markets seem to have paid off. This year, Liugong is expected to export 10,000 units. Five years ago, it was only 2,700 units.

Since 2002, the company's export volume has increased 70 percent annually, and its export value has risen from $4 million to $500 million. It aims to make overseas sales one third of its total sales by 2015. Currently, they account for 24 percent of its total export volume.

Qin said Liugong Machinery attributes its success in overseas market to good distribution networks and after-sales service.

It has signed agreements with local distributors to sell products, so the brand can respond quickly to customers' needs.

"Building overseas networks is very expensive and time-consuming. It is made much easier by cooperating with local distributors," Qin said.

To assist research and development, the company has hired 140 local experts as they "have more knowledge of the global market".

Although Liugong has made impressive achievements in overseas markets, it is yet to enter mature markets such as Western Europe.

"To enter these markets, we need to meet the high standards set by these countries, which emphasize noise control and operational comfort."

Qin said Liugong's greatest advantage remains its machinery's competitive pricing. Compared with renowned brands such as Caterpillar, the loading machine produced by Liugong is a third of the price.

But as more Chinese companies enter emerging markets, the price competition is getting fierce.

Qin said the company is following the route Japan took during the 1970s and 1980s, when products were cheap and lacking in strong brands. "But as costs increase, price competitiveness will fade out, and we have to improve product reliability and build our brand, so we can increase our profit margin in the future."

Lack of technology to produce key components is another challenge on its way to becoming a world-class company.

Currently, hydraulic parts are purchased from Japan, the power train from Europe and engines from Cummins Inc, a Chinese engine maker.

But the situation is changing slowly. Earlier this year, Liugong partnered with Cummins to build an engine company in Liuzhou, which will begin operations next year. The total investment amounts to 1.65 billion yuan.

Exporting products is the first step and Liugong machinery is seeking cooperation in various forms. In 2009, the company established a complete knock-down company in India, and earlier this year, it acquired Polish bulldozer company Huta Stalowa Wola SA to supply clients in eastern and southern Europe.

The complete knock-down form is just temporary, said Qin. "Liugong machinery eventually needs to operate locally in the target markets," he said.

"Back in the 1990s, the foreign governments welcomed us building complete knock down plants and assembling machines in their countries, but now they expect much more from us. We have to create jobs and help to build the supply chain for them."

Huang Ziqiang, deputy general manager of Liuzhou Motor, said companies need support from the Chinese government when exploring overseas markets.

"The Chinese government is offering duty refunds for export companies, but that's not what companies need the most," he said. "I wish the government could provide more legal services to us, so that we can get around various barriers and settle down in the target markets."

Huang Feifei in Nanning contributed to this story.

Contact the writers at wangchao@chinadaily.com.cn and huoyan@chinadaily.com.cn