China Machine Tools 200402

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C H I N A
T O O L S
M A C H I N E
M A R K E T
February 2004
I N D U S T R I A L
M A R K E T S
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2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides
no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved.
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Preface
China is firmly on the radar screens of machine tool companies around the world.
Not only has China overtaken the US and Germany to become the largest machine
tool market in the world, Chinas skilled labor force and low cost base also makes
it a viable base for sourcing or manufacturing.
Information and insights on this market are difficult to come by however,
and the pace of development in China presents companies with a constantly
moving target. As a result we have prepared China Machine Tools Market
to provide a better understanding of the market and the issues of concern
to industry participants.
In our analysis, KPMG has drawn on a number of public sources of information
and spoken to both local and foreign industry participants in China. We have also
conducted a survey of leading machine equipment industry participants in
Germany to shed light on how they are responding to the opportunities in China.
Most respondents are already trading or manufacturing in China and provided
their first hand views on the issues of greatest concern to their business there.
Our analysis shows that there will continue to be a sizable market for imported
high-end machine tools in China, but that local firms are rapidly closing the
technology gap and improving quality and performance. Multinational players
will need to carefully assess how to participate in China effectively in light
of the rapidly changing competitive landscape and market conditions.
Please contact us if you wish to discuss this report or obtain additional copies.
Contact information can be found at the end of the report.
Paul Brough
Partner-in-charge
Financial Advisory Services
KPMG in China and Hong Kong
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Contents
Page
Executive summary
Market
18
Competition
28
Entering China
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Executive summary
Market
China is now the largest machine tool market in the world, with a consumption of USD 5.7 billion
in 2002(a)
Fuelled by a large influx of foreign investment, Chinas machine tool market is expected to continue
to grow
Automotive-related manufacturing has accounted for half of machine tool consumption in recent years;
aircraft-related manufacturing, in particular the repair and maintenance sector, is likely to become
another significant market in China
In line with the upgrading of key sectors in China, demand for numerical controlled (NC) machine
tools has been increasing
Continued imports of high value numerical controlled (NC) machines can help ensure China
continues to be an important export market; imported machine tools account for over half of the
Chinese market
Competition
Manufacturing is scattered throughout China; most Chinese machine tool manufacturers are small
in term of revenues when compared to overseas competitors
Competition in China is intensifying as China further integrates with the world economy; Chinese
manufacturers have become increasingly sophisticated in their choice of machine tools, leading
to growth in demand for NC machine tools
Accession to the World Trade Organization (WTO) has accelerated the development of the machine
tool industry
The low-end market is crowded with domestic players, which has resulted in significant pressure
on prices; foreign equipment still dominates the middle to high-end market with superior technology
and quality
To stay competitive, domestic companies are becoming more active in new product development
and more willing to use Joint Ventures (JVs) and cooperative arrangements to acquire new technology
Note:
(a) For metal cutting and forming machines only; does not include machine parts, tools and other consumables
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Entering China
Many foreign companies have decided to move production from higher cost locations to China
Joint venturing with a local manufacturer is a popular form of entry for foreign investors,
although wholly foreign-owned investments are permitted
Domestic machine tool companies are interested in finding foreign JV partners but generally
are reluctant to give up majority control
At present, machine tool manufacturers in China serve their customers directly from company
headquarters through regional sales offices or third party distributors
Outsourcing of some manufacturing activities is becoming more common in China as domestic

machine tool companies take steps to become more nimble
Survey in Germany
Given the fact the Germany is the second largest machine tool consuming country and one of the
leading machine tools exporters in the world, KPMG conducted a survey of machine equipment
and machine tools companies in Germany between August and November 2003
A structured questionnaire was distributed to 330 companies; a total of 50 were completed

and returned
Out of the 50 respondents, 98 percent are currently doing business with China either through
export (52 percent), established production facilities (36 percent), or licensed production (15 percent)
Findings confirmed that:

a large majority of survey respondents viewed China as an important end market
most of the respondents in the KPMG survey already in China are likely to expand
intellectual property is seen as the most critical business factor for respondents
over half of respondents indicated that recruitment and the regulatory environment
were two major business issues when doing business in China
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Market
The requirements of Chinas booming manufacturing
sector has made it the largest machine tools market
in the world, with sales of USD 5.7 billion in 2002
Economic development in China
Since the late 1970s China has been implementing various economic and political reforms
to restructure its economy and integrate China with the global economy
Chinas GDP has grown steadily over the past 10 years and reached around USD 1.4 trillion
in 2003; this represents a compound annual growth rate (CAGR) of 8.1 percent between
1998 and 2003
The economy is expected to continue to grow strongly at 9.3 percent per annum until 2007,
giving China a GDP of slightly more than USD 2 trillion
Chinas GDP 1998-2007e

2500
Forecast
2,028
USD billion
2000
1,853
1,691
1500
1000
1,315
961
1,005
1,080
1,420
1,544
1,159
500
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: Economist Intelligence Unit, Country Forecast, 2004
Global machine tool consumption

China overtook Germany as the worlds top machine tool market(a) in 2002; total consumption
grew from USD 4.7 billion in 2001 to USD 5.7 billion in 2002, a year-on-year growth
of 20 percent
Note:
(a) Represent metal cutting and metal forming machines only; does not include machine parts,
tools and other consumable
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Of the top 10 global machine tool markets, China was the only growth market in 2002
Germany, the worlds largest machine tool market in 2001, suffered a drop of 16 percent
in 2002
Japan and the US, the worlds second and third largest machine tool markets in 2001
suffered decreases of 35 percent and 36 percent respectively in 2002
China is the only growth market and hence everyone is focusing on it..., an overseas sales
group manager for JSW(1)
Of course, we are worried (about SARS(a)) ...but you have to make contact with the customers
(attending the 8th China International Machine Tool show) ...China is the only growth market
for us at the moment, participant of the 8th China International Machine Tool Show(2)
Over half of the China market is imported machines(3)
Top 10 machine tool markets 2001-2002

Change
from 2001
0.9
0.8
0.9
0.9
1.1
1.0
Spain
Canada
Taiwan
France
South Korea
Italy
US
Japan
Germany
China
-23%
-8%
3.1
2.9
-5%
5.2
-36%
3.3
5.3
-35%
3.4
4.8
4.7
1
2001
-7%
-13%
1.5
1.2
1.3
1.2
Source:
-7%
3
4
USD billion
5.7
-16%
5.7
20%
2002
Gardner Publications, World machine tool output and consumption survey, 2003
Most of the respondents in the KPMG survey in Germany viewed China as a very
important market
92 percent of the respondents believe that China is an important end market
this is in line with the fact that China has become the largest machine tool market in the world
Importance of China as an end market
Very important
58%
Important
34%
Neutral
8%
Not important
0%
No answer
0%
0%
Note:
Source:
10%
20%
30%
40%
50%
60%
70%
n = 50
KPMG survey
China is a bright spot for machine tool manufacturers

Note:
Sources:
(a) SARS refers to the highly infectious Severe Acute Respiratory Syndrome which caused hundreds of deaths
in China between November 2002 and May 2003
(1) Chemical Week Associates, Modern Plastics, 1 May 2003
(2) Financial Times, Tool companies place business health ahead of threat from SARS, 16 April 2003
(3) China Machine Tool Builders Association, China Machine Tool & Tools Industry Yearbook, edition 2002
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10
Fuelled by an influx of foreign investment, Chinas

machine tool market will see continued growth
Foreign direct investment (FDI)
Foreign direct investment to China reached USD 57.0 billion(1) in 2003
with a population of 1.3 billion(2), China has quickly become one of the most important
manufacturing centers in the world
foreign companies have focused on China both as a marketplace and to establish a low
cost manufacturing base for export to other markets
total value of global FDI amounted to USD 653 billion(1) in 2003; Chinas share
was around 9 percent
FDI in China was USD 57.0 billion in 2003(1), representing 8.2 percent growth from 2002
levels, despite the impact of SARS(a)
Foreign direct investment in China 1998-2003
USD billion
60
52.7
45.5
40
57.0
46.9
40.3
40.7
1999
2000
20
0
1998
2001
2002
2003
Sources: (1) National Bureau of Statistics, PRC, China Statistical Yearbook,

editions 2002 and 2003
(2) United Nations Conference on Trade and Development,
Global FDI decline bottoms out in 2003, 12 January 2004
Note:
Sources:
(a) SARS refers to the highly infectious Severe Acute Respiratory Syndrome which caused hundreds of deaths
in China between November 2002 and May 2003
(1) United Nations Conference on Trade and Development, Global FDI decline bottoms out in 2003,
12 January 2004
(2) Central Intelligence Agency, The World Factbook, edition 2003
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11
China machine tool consumption

Machine tool consumption(a) in China has grown steadily over the last six years and is expected
to continue through 2005, with a compound annual growth rate (CAGR) of 15 percent
between 1998 and 2005
by 2005(1), China machine tool consumption is estimated to reach USD 7 billion
in sales value
growth in the period 2003-2005 alone is equivalent to the size of the entire South
Korean market
Growth drivers
Local manufacturers need to improve quality levels (including precision, speed, reliability, etc.)
to stay competitive
Chinas accession to the World Trade Organization (WTO) in late 2001 has exposed
the country to greater global competition
local Chinese manufacturers see machine tools as a means to improve their product quality
More foreign manufacturers are shifting production to China(2)

foreign manufacturers of goods want to maintain the same level of quality in China
as elsewhere
frequently they specify the same production equipment (usually high-end machine tools)
as they would normally use elsewhere
Consumption of machine tools(*) in China 1998-2005e
USD billion
8
7
6
5
4
3
2
1
0
Forecast
7.0
CAGR 98-05:
15%
5.7
4.8
3.7
2.7
1998
3.0
1999
2000
2001
2002
2005
Note:
(*) Machine tool covers metal cutting and forming machines only,
excluding any machine parts, tools, and consumables
Sources: (1) National Bureau of Statistics, PRC, China Markets Yearbook,
(2) China Machine Tool Builders Association (CMTBA), Consumption
of Machine Tools in China, 23 October 2003
The need for companies in China to produce to global

quality standards is driving demand
Note:
Sources:
(a) Consumption is the summation of domestic production and import, net of export
(1) China Machine Tool Builders Association (CMTBA), Consumption of Machine Tools in China,
23 October 2003
(2) Credit Suisse First Boston, China: An opportunity for Japans manufacturers, 30 April 2003
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12
Automotive-related manufacturing has accounted

for half of machine tool consumption in recent years
Key market segments
Major buyers of machine tools typically include manufacturing companies from the
automotive, aerospace and military(1) sectors, which normally have annual capital investment
budgets, a large portion of which is invested in renewing or purchasing new and advanced
machine tools
It was estimated that the automotive industry accounted for nearly 50 percent of the total
consumption of machine tools in 2001(1)
Auto makers demand special purpose precision machine tools

Auto enterprises not only needed universal-precision machine tools, but also special
purpose precision machine tools, participants of the China International (Beijing)
Machine Tool Exhibition(2)
The automotive industry

Total vehicle sales(a) grew from 1.4 million units in 1995 to 3.3 million units in 2002,
a compound annual growth rate (CAGR) of 12.5 percent(3)
most of the growth was recorded in the last four years. Between 1999 and 2002,
the number of vehicles sold grew by 21.2 percent per annum
Annual sales are expected to reach 7.0 million units in 2010 and 8.9 million units in 2015,
a CAGR of 7.9 percent from 2002 to 2015. The seventh largest market for vehicle sales
globally in 2001, China is expected to be the third largest by 2010(4)
Annual sales of vehicles by type 1995-2015e
Million units
Forecast
10
9
8
7
6
5
4
3
2
1
0
8.9
1.3
7.0
1.2
4.1
3.2
1.4
1.5
1.6
1.6
0.4
0.7
0.3
0.4
0.7
0.4
0.4
0.7
0.5
0.4
0.7
0.5
Sources:
Bus
1.9
2.1
0.5
0.8
0.6
0.7
0.8
0.6
2.3
0.8
1.0
1.1
Truck
Sedan
1.3
5.6
1.2
1.1
0.8
0.7
1.1
1.1
1.6
4.2
2.6
1.8
1995 1996 1997 1998 1999 2000 2001 2002 2003 2005 2010 2015
Sources: (1)
(2)
(3)
(4)
Note:
2.0
5.0
Credit Suisse First Boston, China Auto Sector, January 2003

Peoples Daily, Auto sales to hit 4 million units in 2003, January 2003
Peoples Daily, Chinas 10th 5 Year Plan, 4 March 2002
KPMG analysis
(a) The automotive industry for the purpose of this report includes buses, trucks and sedans, and excludes
other vehicles, such as motorcycles
(1) China Machine Tool and Builders Association, China Machine Tool & Tools Industry Yearbook, edition 2002
(2) Financial Times, Business Daily Section, 29 May 2003
(3) ING, Gearbox: China, January 2003
(4) McKinsey & Co, Chinas Automotive Market, 2001
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13
The aircraft industry

Driven by increasing demand for air travel, the number of commercial aircraft in China
is expected to grow from around 550 units in 2002 to nearly 700 units in 2005, 1,000 units
in 2010 and 2,200 units in 2020(1)
The need to provide repair and maintenance, and Chinas emerging role as an outsourcing
center for major aircraft manufacturers, will lead to increased demand for high quality
machine tools
China is understood to be Boeings biggest parts supplier outside the US; an estimated
3,200 Boeing aircraft, a quarter of the total, fly with parts made in China(2)
to date, Airbus has signed six outsourcing agreements (worth USD 200 million) in China(3)
leading Chinese aircraft component makers include Chengdu Aerospace and Xian Aircraft(4)
Number of commercial aircraft in China 2002-2020e
Forecast
2,500
2,198
Number of aircraft
2,000
Others
1,500
China National
Airline Group
1,018
1,000
550
500
0
594
642
2003
2004
China Eastern
Airline Group
693
China Southern
Airline Group
110
118
142
180
2002
2005
2010
2020
Sources: (1) Economist Intelligence Unit, Country Forecast, 2003

(2) Civil Aviation Administration of China (CAAC), The Development
of Chinas Civil Aviation Industry, October 2000
(3) KPMG analysis
The aircraft manufacturing sector is likely to become

a significant market for machine tools in the next
five years
Sources:
(1)
(2)
(3)
(4)
Center for Asia Pacific Aviation, Chinas Airline Groups Officially Launched, November 2002
Boeing, Current Market Outlook, June 2003
Peoples Daily, Airbus joins hands with Chinas Aviation industry for business expansion, June 2002
Uniworld, China Civil Aviation report, September 2003
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14
In line with the upgrading of key manufacturing sectors

in China, demand for numerical controlled (NC)
machine tools has been increasing
Production of NC machine tools in China
Production of NC machine tools has grown at a CAGR of 13 percent between 1992
and 2002(1). The annual production tripled to 26,320 sets in 2002, from a low base in 1998
NC machines represent a growing share of machine tool production(1); NC production

accounted for 10 percent of the total machine tool sector in 2002, up from only 3 percent(2)
in 1992
At present, most NC machines produced by domestic machine tool manufacturers are low-end
and offer less precision
As competition intensifies, there will be more urgency for domestic machine tool
manufacturers to upgrade their technology and increase the proportion of NC machines
in their product portfolio
Production of NC machine tools, China 1992-2002
Annual production of NC
machine tool (sets)
30,000
26,320
25,000
20,000
18,593
14,053
15,000
10,000
9,478
7,450
6,223
7,291 8,142
9,007
9,051
7,087
5,000
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Source: National Bureau of Statistics, PRC, China Statistics Yearbook,

Sources:
(1) National Bureau of Statistics, PRC, China Statistical Yearbook, editions 2002 and 2003
(2) Institute of Scientific and Technical Information of China, China CNC Machine Tool Market, 1998
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15
Technological edge for imported NC machine tools

There is an obvious technology gap between domestic and imported NC machine tools,
with imported machine tools being generally more advanced in terms of quality, precision,
speed, reliability, and ease of maintenance(1)
Prices reflect this technological gap, with imported NC machine tools costing roughly four
times the average price of domestic machines in 2001 (USD 80,000 versus USD 21,000)(1)
People are willing to pay for the difference because they know imported machines
will have better quality and reliability(2)
Average price difference of imported and exported NC machine tools

1996-Oct 2002
Price difference (USD '000)
100
80
66
63
60
64
58
53
40
44
44
1999
2000
20
0
1996
1997
1998
2001
Oct-02
Note:
Price difference = average import price - average export price
Source: China Machine Tool Builders Association,
China Machine Tool & Tools Industry Yearbook, edition 2002
Imported machines have commanded a significant

price premium over domestically produced ones
Sources:
(2) KPMG interviews with a leading Beijing machine tool manufacturer, July 2003
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16
Imported machine tools account for well over half

of the Chinese market; NC cutting and metal forming
machines are the main import items
The import market
Machine tool imports to China are expected to reach USD 4 billion in 2005, a CAGR
of 10 percent from 2002; 60 percent were metal cutting machine tools and 40 percent metal
forming machine tools, mainly from Germany, Japan, Italy, Switzerland and Taiwan(1)
Imports will continue to account for around 60 percent of total machine tool consumption
in China through to 2005(1)
I think imports will continue to be large as long as foreigners continue to keep their
best technologies in their home country(2)
Imports are mainly high-end machines not normally available in the domestic market
67 percent and 45 percent of imported metal cutting and metal forming machines
respectively, were NC machines(3)
almost all the worlds first tier global companies have brought new products into
the Chinese market. They find that it is almost impossible to enter the Chinese market
with obsolete or older generation technologies. US Department of Commerce(4)
Average unit price of imported NC machines was USD 70,000-100,000 from 1996 to the
end of October 2002, about 2-5 times the average unit price of exported NC machines
Imports and exports of machine tools(*), China 2000-2005e
Forecast
4.0
3.5
USD billion
3.3
Imports
3.1
Exports
2.4
1.9
1.2
1
0
0.6
0.3
0.3
0.3
2000
2001
2002
2003
0.9
2004
2005
Note:
(*) Metal cutting and forming machines only
Source: China Machine Tool Builders Association, China Machine Tool & Tools
Industry Yearbook, edition 2002
Sources:
(1)
(2)
(3)
(4)
China Machine Tool Builders Association, China Machine Tool & Tools Industry Yearbook, edition 2002
KPMG interviews with a leading domestic machine tool manufacturer in Beijing, July 2003
KPMG analysis
US Department of Commerce, China Machine Tools - Market Assessment
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17
The export market(1)

Chinas machine tool exports were USD 305 million in 2002, about 10 percent of the value
of its imports in the same year
Exports are rising and are expected to reach USD 1.2 billion in 2005, a CAGR
of 58 percent from 2002
Major export markets include the US, Hong Kong (mainly for re-export), Germany,
Canada, the UK and Southeast Asia; most exports are low-end NC machines
The average unit price of exported NC machines varied between USD 11,489-40,000
from 1996 to the end of October 2002
Prices of imported and exported NC machines 1996-Oct 2002
USD
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
1996
Average price
of imported NC
Average price
of exported NC
1997
1998
1999
2000
2001
Oct-02
Source: China Machine Tool Builders Association, China Machine Tool & Tools
Industry Yearbook, edition 2002; China Machine Tool Builders Association web-site
Exports, mainly low-end NC machines, are one-tenth

the value of imports
Source:
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18
Competition
Manufacturing is geographically scattered
throughout China
Liaoning and Jiangsu are the largest machine tool production regions in China
Machine tool company revenues by region 2002
Heilongjiang
Jilin
Xinjiang
Liaoning
Gansu
Inner Mongolia
Shanxi
Ningxia
Qinghai
su
ng
Jia
Sichuan
ng
do
an
Sh
Henan
Shanxi
Tibet
Beijing
Tianjin
Hebei
Shanghai
Anhui
Hubei
g
in
gq
on
Ch
Zhejiang
Jiangxi
Hunan
Guizhou
Key: USD 000

> 400,000
250,000-400,000
100,000-250,000
Fujian
Yunnan
Guangxi
g
don
ang
Gu
Taiwan
Hong Kong
Hainan
50,000-100,000
< 50,000
Source: National Bureau of Statistics, PRC, China Markets Yearbook, 2004
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19
There are over 600 machine tools manufacturers in China, however, most are small
listed below are the top 10 manufacturers for metal cutting and metal forming
machine tools
Top 10 Chinese machine tool companies in metal cutting and forming, 2002
Metal cutting
Ownership
Location
1.
State owned
Liaoning
USD 228 M
USD 140 M
Dalian Machine Tool Group Co Ltd
2. Shen Yang Machine Tool (Group) Co Ltd
Joint Stock
Liaoning
3. Wuxi Kaiyuan Machine Tool Group Co Ltd
Limited liability
Jiangsu
2002 Revenue
USD 74 M
4. Qin Chuan Machine Tool Group Co Ltd
State owned
Shanxi
USD 62 M
5. Nanjing Machine Tool Group Co Ltd
State owned
Jiangsu
USD 52 M
6. Beijing No. 1 Machine Tool Factory
State owned
Beijing
USD 41 M
7.
State owned
Shanghai
USD 34 M
Shanghai Machine Tool Works Co Ltd
8. Henan Xinji Co Ltd
Joint Stock
Henan
USD 33 M
9. Suzhou San Guang Group Company
Foreign funded
Jiangsu
USD 31 M
10. Jinan No. 1 Machine Tool Group Co Ltd
State owned
Shandong
USD 28 M
State owned
Shandong
USD 56 M
Metal forming
1.
Jinan No. 2 Machine Tool Group Co Ltd
2. Jiangsu Yangli Forging & Pressing

Machine Tool Co Ltd
Limited liability
Jiangsu
USD 38 M
3. Nanjing Zhouyu Machine Tool Manufacturing Co Ltd
Limited liability
Jiangsu
USD 20 M
USD 18 M
4. Nanjing Juwei Machine Manufacturing Co Ltd
Limited liability
Jiangsu
5. Zhejiang Shuangli Group Co Ltd
Limited liability
Zhejiang
USD 16 M
6. Jiang Yin Machine-building Inc.
Limited liability
Jiangsu
USD 16 M
7.
Joint stock
Zhejiang
USD 14 M
8. Guangdong Forging & Pressing Machine

Tool Factory Co Ltd
Zhejiang Forging & Pressing Machine tool Factory
Limited liability
Guangdong
USD 13 M
9. Jin Feng (China) Machinery Industry Co Ltd
Foreign funded
Zhejiang
USD 13 M
Shandong
USD 12 M
10. Shandong High Density High Forging Machine Co Ltd Limited liability
Note:
Source:
State-owned: firms owned by different level of governments; collectively owned: firms owned by collective
bodies, e.g. a village, township; joint stock: owned partly by private investor or the government
National Bureau of Statistics, PRC, China Markets Yearbook, 2004
Compared to overseas competitors, most Chinese

machine tool companies are small in terms of revenue
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20
Competition in China is increasing as China further

integrates with the world economy; Chinese
manufacturers have become increasingly sophisticated
in their choice of machine tools
Performance
Increasing demand for high performance machines(1)
Multipurpose NC machine tools offering better integration, higher speed, more intelligence,
greater accuracy and more environmentally friendly features are increasingly required
by domestic and overseas customers, in particular those from the automotives,
aerospace and the military sectors.
Performance is one of the most important factors in our customers consideration and that
is why customers are willing to pay more for imported components in their machines.
After-sales Service
Important but becoming ubiquitous(1)
After-sales service is crucial in our business; we normally guarantee an eight-hour response

time. If the problem persists, we can provide on-site support within 48 hours in most locations
in China.
I dont think anyone can afford not to provide prompt after-sales service in the current market.
Although we are small, we still promise 24 hours on-site support to most of our customers.
In some provinces, we work with our distributors to provide after-sales service.
Quality
Brand = Quality; an important factor in winning new customers(1)
The ability to perform consistently is extremely important in our business. People just come
to us because they know our quality is good.
Poor quality wont get you very far; people will begin to know after a while.
Some people have tried to imitate our brand because they know our quality is good.
People like to purchase from manufacturers because they want to make sure that the machine
is genuine.
Price
More pressure on pricing in the low-end market(1)
There is more pressure to cut the price of our manual machines than our NC machines.
Customer will expect us to cut the price but there is really a limit to what we can do because
of the cost of imported components.
Most of our machines are aimed at the middle-end market. There is some pressure on price,
but in general it is still manageable.
After-sales service has become less of a differentiator
Note:
Source:
For metal cutting and forming machines only; does not include machine parts, tools or other consumables
(1) KPMG interviews with leading domestic machine tool manufacturers in Beijing and Shanghai
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21
Accession to the WTO has accelerated the development

of the machine tool industry in China
Lower entry barriers(1)
Further opens the market to foreign competition
no restriction on foreign ownership
the machine tool industry is defined as an encouraged(a) category for foreign investment
State enterprise reform to encourage the private sector to play a bigger role in the industry
As part of its WTO commitments, the Chinese government has reduced most import tariffs
on machine tools
Tariffs before and after accession to the WTO

Before WTO
2003 onwards
Metal cutting machines
9.7% - 20%
5% - 12%(*)
Metal forming machines
9.7% - 18%
9.7% - 12%(*)
Notes:
Source:
(*) final bound tariffs

China Industrial Press, Tariff on major machine tools in 2003, 19 June 2003
Policy support aimed to help domestic companies become more competitive(1)

Continue to provide funding for R&D projects in state-owned enterprises through the
State Machinery Bureau
Encourage joint research programs between research institutes and state-owned companies
Tax concessions for companies that have purchased machines from domestic companies
(up to 40 percent of the cost can be deducted from taxable income)
Preferential treatment for domestic machine tool companies in government-sponsored projects
Encourage the merger of state-owned companies to form a few large regional machine tool
companies that have the scale to compete effectively
The machine tool industry is regarded as the foundation of the manufacturing industry
and hence has an important role in Chinas ongoing economic development(2)
The machine tool sector is one of the encouraged

categories for foreign investment and one with
relatively few restrictions
Note:
Sources:
(a) China classifies its industries into 4 categories for foreign investment, i.e. encouraged, permitted, restricted
and prohibited; those classified as encouraged will receive the least amount of restriction from the government
(1) China Industrial Press, Tariff on major machine tools in 2003, 19 June 2003
(2) KPMG interviews with China Machine Tool Builders Association, July 2003
2/20/04
2:53 PM
Page 22
22
The overcrowded low-end market has resulted

in significant price-based competition
Small, inefficient producers
State-owned and private domestic companies together accounted for 78 percent and 80 percent
respectively of the total number of companies in metal cutting and metal forming sectors
in 2002(1)
Most of these companies are small and relatively inefficient

in metal cutting, only 22 out of 411 companies managed to achieve sales of over
USD 12 million in 2002
in metal forming, the number was only 10 out of 218 companies
most of these companies are products of the former centrally planned economy and hence
are burdened with excessive labor, outdated production facilities and technologies
Ownership of metal cutting machine tool manufacturers 2002
36%
42%
Privately owned
State owned
Collective-owned
Foreign invested
14%
8%
Note:
Of 411 companies, only 22 companies had sales over RMB 100m (USD 12m) in 2002
Ownership of metal forming machine tool manufacturers 2002
20%
Privately owned
State owned
11%
60%
Collective-owned
9%
Foreign invested
Note:
Of 218 companies, only 10 companies had sales over USD 12m in 2002
Source:
(1) National Bureau of Statistics, PRC, China Markets Yearbook, 2004
2/20/04
2:53 PM
Page 23
23
Increasing competition at the low-end

As China further embraces market competition, many local companies find it increasingly
hard to compete for market share and resources to invest in new technologies. Most are
forced to compete in the low-end market with little or no differentiation
Chinas state-owned machine tool companies mainly produce low to mid-level tools
for their own market and export to other markets(1)
Changing market demand is exacerbating competition at the low-end

Chinas manufacturing industries have undergone significant transformation over the
last few years
increasing demand for new product features and quality are prompting manufacturers
to upgrade their tools and equipment
future demand for machine tools is expected to shift towards middle to high-grade machines
Intense competition and shifting demand are putting pressure on pricing
There are too many suppliers in the low-end market

where demand is shrinking. We have decreased the
price of our low-end machines by around 10-15 percent
since last year(1)
Source:
(1) KPMG interviews with a domestic machine tool manufacturer in Beijing, July 2003
2/20/04
2:53 PM
Page 24
24
To stay competitive, domestic companies are

becoming more active in new product development
and more willing to use JVs and cooperative
production(a) to acquire new technologies
Domestic companies rolling out new products
365 new machine types were developed by leading Chinese machine tool companies in 2001,
of which 212 or 58 percent were NC machines(1)
Most of these new machines were developed in-house, indicating a high level of internal
product development capability
We have purchased a lot of machine tool technology from our Japanese partners
since the early 1990s. In addition, we have received funding from the state to develop
new products(2)
Number of new products developed in 2001

Total
Source:
Note:
Sources:
Non NC
NC
Total
% developed in house
100
198
298
97%
53
14
67
85%
153
212
365
89%
China Machine Tool Builders Association, China Machine Tool & Tools Industry Yearbook, 2002
(a) Cooperative production refers to an one-off project-based cooperation between domestic and foreign
manufacturers; in most of the cases, foreign manufacturer provides technology and management know-how
and domestic manufacturer is responsible for production
(1) China Machine Tool Builders Association, China Machine Tool & Tools Industry Yearbook, 2002
(2) KPMG interviews with machine tool manufacturers in Beijing, July 2003
2/20/04
2:53 PM
Page 25
25
Technology transfer methods

Technology transfer is still the major approach in acquiring more advanced machine tool
technologies among Chinese machine tool producers
Instead of outright technology purchases, JVs or cooperative production have become

more popular. Some even went as far as acquiring overseas companies
in 2001, at least nine JVs and 32 cooperative production agreements were signed(1)
in 2003, Dalian Machine Tool Group company purchased Ingersoll International
(a US company), in order to acquire better technology and management know-how(2)
Chinese machine tool makers have progressed 50 years in the last 10... some gained
at the expense of foreign intellectual property rights but more through joint ventures
and cooperative agreements with US, Japanese or European companies, exhibitors
at the China International Machine Tool Show 2003(3)
Leading Chinese machine tool manufacturers have begun to gain market share in the middle
grade machine segment which was traditionally dominated by imports from Taiwan and Korea
Our machines now compete head to head with those produced by Taiwanese
manufacturers. The price gap between a Taiwanese machine and ours used to be around
20 percent, but now it is no more than 10 percent, a domestic machine tool manufacturer
in Beijing(4)
Number of joint ventures and cooperative production agreements in 2001

Joint Ventures
Total
Source:
Cooperative production
25
>3
>7
32
China Machine Tool Builders Association, China Machine Tool & Tools Industry Yearbook, 2002
Domestic machine tool companies may acquire

technology by purchasing companies overseas
Sources:
(2) PR Newswire Association, Ingersoll International Announces Sale of Ingersoll Production Systems,
11 October 2002
(3) Financial Times, Tool companies place business health ahead of threat from SARS, 16 April 2003
(4) KPMG interviews with machine tool manufacturers in Beijing, July 2003
2/20/04
2:53 PM
Page 26
26
Foreign companies have dominated the middle to

high-end market with superior technology and quality
Domestic machine tool component technology development
Chinese machine tool companies have traditionally put more emphasis on in-house
manufacturing and less on outsourcing
The lack of specialization has limited the development of dedicated machine tool component
manufacturers and hence constrained the development of key machine tool component
technologies locally
Since the opening of its economy in the mid-1980s, China has been aggressive in acquiring
foreign technology
China is already able to produce a range of key machine tool components domestically
but still relies on foreign imports for more advanced technologies
... China still has a long way to go to catch up with the developed world in
terms of speed and intelligence of CNC machine tools, as well as in the area
of green manufacturing(1)
Respondents in our survey indicated that the significance of competition from local
companies is similar to that from foreign companies(2)
Major Machine Tool Components Technology Comparison

Standard in China
Electric spindle
Precision ball screws
Linear guide ways
Overseas standard
Torque: <100 Nm
Speed: <15,000 r/min
Lubrication: oil/grease
Precision: 0.004 / 300mm

Speed: 45 m/min
Surface hardness:
lack of uniformity
High noise
Torque: <300 Nm
Speed: <75,000 r/min
Lubrication: atomized oil
Precision: 0.002 / 300mm
Speed: 80-160 m/min
Surface hardness:
high uniformity
Low noise
Precision: 0.005 / 1,000mm

Speed: 100 m/min
High noise
Precision: 0.003 / 1,000mm

Speed: 200 m/min
Low noise
NC systems
MTBF: 10,000 hours
MTBF: 30,000 hours
Robotic arm tool change
Tool change time: 3-4s
Tool change time: <1.5s
High speed cover
Breadth: 2,000-4,000mm
Speed: 15 m/min
Breadth: 4,000-5,000mm
Speed: 30-40 m/min
Note:
Source:
Sources:
MTBF stands for machine time before failure

China Machine Tool Builders Association, China Machine Tool & Tools Industry Yearbook, edition 2003
(1) KPMG interviews with China Machine Tool Builder Association, July 2003
(2) KPMG survey in Germany
2/20/04
2:53 PM
Page 27
27
The high-end machine tool(a) market(1)

Machine tools that meet the highest level of specification in speed, precision, quality
and automation
Typically used for production of precision parts in the automotive, aerospace, military,
medical equipment and electronics industries
A stronghold for foreign machine tool companies from Germany, Japan, the US, Switzerland,
France and Italy
The mid-range machine tool(a) market(1)

Mid-range machines that are capable of volume production in a highly automated environment
Typically used in large scale production by small to large industrial companies
Predominantly served by companies from Germany, Japan, the US, Switzerland, France,
Taiwan and South Korea, and increasingly by leading Chinese companies
The low-end machine tool(a) market(1)

Manual and low grade NC machines
Typically used in small machine shops and processing factories
Completely dominated by Chinese domestic machine tool companies
Leading domestic machine tool manufacturers have

been able to move up-market to compete in the
mid-range market
Note:
Source:
(a) Represent metal cutting and forming machines only; does not include machine parts,
tools and other consumables
(1) KPMG interviews with China Machine Tool Builder Association, July 2003; KPMG analysis
2/20/04
2:54 PM
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28
Entering China
More foreign companies have decided to move
production into China to be able to provide product
to customers in China at competitive prices
Market entry for foreign companies
A total of 77 foreign-invested metal cutting and metal forming companies have been set up
since China opened its door to foreign investment in the mid-1980s, with around 46 since 1998
The rise in the number of foreign-invested companies reflects:

a desire to move production onshore to serve customers in China
a response to increasing competition from leading domestic companies as well as foreign
competitors already in China
Number of foreign invested machine tool companies in China - 1998 and 2002
Metal cutting machine tool companies
1998
2002
32
57
Metal forming machine tool companies
14
20
Total
46
77
Sources:
(2) National Bureau of Statistics, PRC, China Markets Yearbook, 2004
2/20/04
2:54 PM
Page 29
29
Results of the KPMG survey in Germany confirm that China is a key production base
58 percent of respondents indicated that China is important as a production base
this is roughly the same as the percentage (54 percent) of respondents which already
have some sort of production in China
Importance of China as a base for production
Very important
30%
Important
28%
Neutral
24%
Not important
No answer
18%
0%
0%
5%
10%
15%
20%
25%
30%
35%
Note:
n = 50
Source: KPMG survey in Germany
Moving production to China has a clear impact on the cost base

cost reduction stems from Chinas more favorable input costs such as labor, land,
and utilities
investment in machine tool manufacturing falls into the most favored investment
category and is potentially eligible for favorable tax treatment and other incentives
such as exemption of import duty on production machinery(1)
local production has enabled us to sell at a price 20 percent lower than equivalent ones
produced in Japan, a leading Japanese machine tool manufacturer(2)
Manufacturing locally brings the company closer to its customers in China,

which is increasingly an important attribute in todays purchasing considerations
localization of our products will reduce costs and ensure more competitive
and personalized products and services for Chinese customers, a European machine
tool manufacturer(3)
Sources:
(1) KPMG interviews with machine tool manufacturers, July 2003

(2) Chemical Week Associates, Modern Plastics, 1 May 2003
(3) Business Weekly, DMG Enters Chinas Machine Tool Market, 2 November 2003
2/20/04
2:54 PM
Page 30
30
Our KPMG survey in Germany revealed that most of the foreign manufacturers already
in China are positive about their China businesses
59 percent of respondents indicated that they had new products already in the pipeline,
and 52 percent will expand geographically
most hold a positive view about the future and expect to continue to expand
of the three respondents yet to develop a presence in China, all indicated they plan
to either export to or produce in China
For those already with a presence in China, what is your plan for future
development in China?
Already have
new products in
pipeline for
Chinese market
Expand
geographically
within China
0%
YES (59%)
NO (41%)
YES (52%)
20%
NO (48%)
40%
60%
80%
100%
Note:
n = 44
Source: KPMG survey
Overseas companies that have already moved into China

will have the advantage of a lower cost base and better
market information
2/20/04
2:54 PM
Page 31
31
A JV is a common form of entry for foreign investors

in this sector
Increasing Risks and Return
Technology Transfer
One-off licensing
deal, with limited
scope for further
cooperation
Whole product
technology will
be transferred
The technology
transferor will receive
a one-off payment as
well as a continuous
stream of royalties
from the use
of its technology
Cooperative Production
More direct involvement

with the local partner
than technology transfer
Work together to fulfil

specific orders from
customers, e.g. respond
to bid request from
key customers
Ownership to key
technology can
be retained
Foreign partner typically

provides the technology
and utilizes the local
partners manufacturing
facilities for production
Declining in
popularity
only early
generations of
technology are
available to
transfer
Generally of limited
duration; may or may not
continue after the order
is fulfilled
Allows foreign companies

to take part in key
development projects
without heavy investment
in plants and equipment
problems obtaining
continued support
from transferor
transferor may
lose control of
the technology
transferred
transferor may
end up competing
with its own
technology
Source:
Allows domestic
companies to shop
for needed technologies
without loss of control
Popular in mid-1990s
but gradually giving
way to other forms
of domestic/foreign
cooperation
Joint Venture
More permanent
working relationship
between involved
companies
Foreign companies
typically provide both
funding and technology
while domestic
partners provide land,
facilities and labor
Transfer of more
advanced technology
and continued support
from foreign partners
Able to utilize the
domestic partners
local knowledge,
relationship with
customers and
government officials,
and existing sales and
distribution network
May be difficult for
foreign companies
to exert control, even
in majority-owned JVs
Potential to enjoy
preferential tax
treatment and other
benefits if located
in high-tech zones
Steadily gaining
popularity in
recent years
Wholly foreignowned company
More permanent
way of doing
business in China
Start with a
clean slate
and avoid potential
partner issues
Large investment in
new facilities, need
to develop sales
and distribution
from scratch
Possibility of better
management control
over operations
Potential to enjoy
preferential tax
treatment and other
benefits if located
in high-tech zones
Retain full control

of intellectual
property and key
technologies
Likely to become
more common
after foreign
companies become
more experienced
in China
KPMG analysis of discussion with industry participants, July 2003
Despite their drawbacks, JVs are likely to remain

as the most viable entry option; it is crucial that any
partnership be based on a shared set of objectives
2/20/04
2:54 PM
Page 32
32
Domestic machine tool companies are interested

in finding foreign JV partners but some are reluctant
to give up majority control
There is tremendous pressure on domestic machine tool companies to find foreign JV partners
all of the five companies we interviewed in Beijing indicated that there had been
ongoing foreign JV discussions in the company
all agreed that finding a foreign partner would be a positive development for
their companies
Apart from their more advanced technology and access to capital, foreign partners are expected
to instill better management, more rigorous process control and stronger product development
capabilities in the JV
Local Companies Views on Joint Ventures

We have talked to a number of foreign machine tool companies about forming joint ventures
but most did not go too far. One of the key issues was that our management wishes to retain
majority control...
We are a state-owned enterprise and have recently been selected by the government as one of the
104 companies to be privatized. The buyer can be anyone and it is largely up to our management
bureau to decide.
When we announced that we are interested in finding a foreign partner, many companies have
knocked on our door... there are still other foreign companies which might be interested to work
with us, but we will be more selective and give more consideration to the JV we just formed.
Source:
KPMG interviews with domestic machine tool manufacturers in China
For some state-owned companies, the process of forming a JV may also bring much-needed
clarity and streamlining of the ownership structure
in state-owned enterprises, management rights are scattered (e.g. multiple levels
of ministries and government bureaus)
making decisions is complicated, which has often led to delays and missed opportunities
in the market
outside investment will help dilute the ownership of the government and put company
executives in the drivers seat
Executives from domestic machine tool companies are in general reluctant to give majority
control to foreign companies
ownership issues have become major obstacles in many foreign JV discussions
intervention from the relevant government bureaus is often needed for the deal
to move ahead
The government is expected to welcome foreign/domestic JVs that make domestic companies,
in particular state-owned companies, more competitive
In most state-owned companies, it is the relevant

government bureau rather than the company executives
that makes the final decision in JV discussions
2/20/04
2:54 PM
Page 33
33
After-sales service is an important issue for customers;

manufacturers have several options
Major customer groups
Large industrial companies in the automotive, shipping, aerospace, military and heavy
equipment sectors
require more attention

prefer to deal directly with company headquarters
increasingly looking for turnkey solutions and specialized machines
stringent requirement on service and quality (e.g. 12-hour response time and 24-hour
on-site service from suppliers)(1)
bidding may be required for high value orders
Small and medium sized manufacturing companies, processing factories and machine shops
served by machine tool company sales representatives in regional offices or through
non-exclusive third party distributors
need less specialized machines and can be price-sensitive
less sophisticated and require frequent support (usually provided by local distributors)
Sales channel
A three-tiered sales channel has evolved over time with
sales representatives at headquarters serving large industrial customers nationwide
directly owned regional offices in major cities serving small to medium customers
third party distributors in cities not covered by the company serving small
to medium customers
Machine Tool Sales and Distribution and Repair and Maintenance Service Map
Larger industrial
customers
ABC
Machine
Tool
Company
Regional Representative offices
Small to medium
customers
In key markets only
Third party distributors
On site response
within 12 hours
On site response
within 24-48 hours
Small to medium
customers
In other large cities where the company

does not have a direct presence
Source:
KPMG interviews with leading machine tool manufacturers in Beijing and Shanghai, July 2003
Repair and maintenance

Repair and maintenance are usually provided directly by the machine tool manufacturer
due to the complexity of machine tool technology
Service quality has increased rapidly and 12-48-hour service response time has become
the industry standard(2)
Providing good quality service nationally is a huge

challenge, in particular to new entrants
Sources:
(1) KPMG interviews with leading machine tool manufacturers in Beijing and Shanghai, July 2003
(2) KPMG analysis
2/20/04
2:54 PM
Page 34
34
In the past, machine tool companies were

self-sufficient and highly vertically integrated
Chinas machine tool manufacturing
Chinese companies were historically organized on the basis of self-sufficiency and most
companies sought to produce everything in-house. A typical Chinese machine tool company
would have a relatively large manufacturing operation producing most of the parts required
by its products(1)
The over-emphasis on self-sufficiency has prevented Chinese companies from specialization

and capturing the economic benefits from volume production
Large in-house production has also tied up substantial working capital and prevented many
companies from responding to fast-changing customer needs
A traditional machine tool manufacturer

R&D
Product
Design
Sourcing
Manufacturing
& Assembly
Sales
Service
Most parts, components

and sub-assemblies
Mainly raw materials and

certain key components
A flexible machine tool manufacturer

R&D
Product
Design
Sourcing
Assembly
& Processing
Some raw materials, most are

components and sub-assemblies
Source:
Sales
Service
Limited manufacturing, mainly

involved in assembly and processing
KPMG interviews with leading machine tool manufacturers in Beijing and Shanghai, July 2003
Focus on flexibility and restructuring

Following state enterprise reform in the late 1990s, many domestic companies began to realize
the need to change and become more flexible
Many machine tool manufacturers have identified a greater need for outsourcing and concentrated
on value-added activities, such as R&D, product design, sales and services
A great deal of restructuring and downsizing has resulted

We will continue to look for opportunities to outsource. We have already outsourced a lot
of machine tool parts to third party processing factories. We have reduced our headcount from
over 4,000 to around 800 two years ago(1)
Some of the Taiwanese companies in China are simply assembly factories. They buy nearly
everything from outside and hence they are extremely flexible. There are only around
20 people in the company(1)
Smaller or virtual companies are emerging as more

flexible competitors
Source:
(1) KPMG interviews with a domestic machine tool manufacturer in Beijing, July 2003
2/20/04
2:55 PM
Page 35
35
Understanding the local industry participants is

important when assessing potential partners in China
Two snapshots of relatively large Chinese firms to illustrate their operations, scale
and development issues
Snapshot One
Background
Large, highly integrated company
One of Chinas state-owned computer numerical control (CNC) machine tool manufacturers
Currently 2,000 employees after a significant headcount reduction in the last two years
Engaged in both export and import businesses. Sales in 2002 exceeded USD 50 million
Business plan
Is vertically integrated and manufactures its own components, in contrast to other companies
which outsource some or all component product activities
Recently formed a JV with an Asian machine tool manufacturer, commenced operations in 2003,
with a planned capacity of over 1,000 CNC machine centers annually
Market / product
Specializes in heavy types of milling machines, such as plano milling and boring machines
Have captured a significant share of the non-CNC milling machines market in China
Core customers are molds and auto-related manufacturers
The CNC plano milling machine tool market dominates the market with a majority share
A heavy machine tool is 30-40 percent less expensive than equivalent imported units
Sales and distribution
Promotes its products mainly through exhibitions and advertisements in trade magazines
Employs sales representatives in major cities
Engages third party distributors for areas not covered by sales representatives
Handles repairs and maintenance work on its own
Sources:
(1) Company literature

(2) KPMG interviews with industry participants, July 2003
(3) KPMG research
2/20/04
2:55 PM
Page 36
36
Snapshot Two
Background
A medium-sized state-owned enterprise
Currently 800 employees after massive downsizing since 2000
Engaged mainly in assembly process, with component parts outsourced
Included in a recent privatization scheme by a municipal government
Business plan
In four to five years, the company aims to become a small to medium scale grinding machine
tool company
Aims at diversifying its product lines
Wishes to develop its own R&D capability
Market / product
Specialized in grinder manufacturing, such as cylindrical grinders and CNC cylindrical

grinding machines
Has a significant share of the market in small to medium sized grinding machine tools
Over one third of production is for automotive-related manufacturers
Normally takes 6-8 months to produce a CNC machine tool
Has recently cut prices
Sales and distribution
Find it difficult to sell directly to the market
Engage third party distributors to cover most provinces, except Tibet, Hong Kong, and Macau
Prefers non-exclusive agencies for distribution
Sources:
(1) Company literature

(2) KPMG interviews with industry participants, July 2003
(3) KPMG research
2/20/04
2:55 PM
Page 37
37
The Chinese business environment poses operational

challenges to foreign companies
Market factors
Intellectual property rights and the legal and regulatory environment were rated very critical
and critical by most respondents
In general, respondents to KPMGs survey in Germany do not seem to be overly concerned

about the political environment and the state of the economy in China
How important are the following factors to your business in China?
Intellectual
property
2.44
Legal and
regulatory
environment
1.66
Political
environment
1.06
State of the
economy
0.86
Notes:
(a) n = 50
(b) 0 - not critical; 1 - somewhat critical; 2 - critical; and 3 - very critical
Key issues encountered in China

Over half of the respondents to KPMGs survey in Germany indicated that recruitment
and the regulatory environment were major issues in doing business in China
This is in line with our report findings that JVs are the preferred form of entry
by foreign companies because of the difficulty of hiring good people and dealing with
government and regulatory bodies
What are the major issues you face in China?
Recruitment
62%
Regulatory
environment
52%
Identify a partner
for cooperation
20%
Cultural issues
18%
Speed of change
in China
0%
12%
10%
20%
30%
40%
50%
60%
70%
Note:
(a) n = 49
(b) Multiple answers per respondent were accepted
Local knowledge and patience will be required

to address the issues involved in entering and
operating in China
2/20/04
2:55 PM
Page 38
Please contact KPMG for further information:

KPMG in China
KPMG in Germany
Global Industrial &

Automotive Products
Paul Brough
Partner
Head of Financial Advisory Services
27th Floor, Alexandra House
16-20 Chater Road
Central
Hong Kong
Tel:
(852) 3121 9800
Fax:
(852) 2973 6616
E-mail: paul.brough@kpmg.com.hk
Richard Markus
Partner
Head of Industrial MarketsCorporate Finance
Kurfrstendamm 207-208
10719 Berlin
Germany
Tel:
(49) 30 2068 4126
Fax:
(49) 30 2068 5 4126
E-mail: rmarkus@kpmg.com
Oliver Gross
Global Executive
Industrial & Automotive Products
Kurfrstendamm 207-208
10719 Berlin
Germany
Tel:
(49) 30 2068 4254
Fax:
(49) 30 2068 5 1630
E-mail: olivergross@kpmg.com
Thomas Stanley
Director
Strategic & Commercial Intelligence
27th Floor, Alexandra House
16-20 Chater Road
Central
Hong Kong
Tel:
(852) 3121 9812
Fax:
(852) 2973 6616
E-mail: thomas.stanley@kpmg.com.hk
Thorsten Amann
China Desk Germany
Hessbrhlstrasse 21
70565 Stuttgart
Germany
Tel:
(49) 711 9060 1741
Fax:
(49) 711 9060 2 1741
E-mail: tamann@kpmg.com
Warren Phillips
Partner
Head of Transaction Services
8/F, Office Tower E2
Oriental Plaza
1 East Chang An Avenue
Beijing 100738
China
Tel:
(86) 10 8518 9225
Fax:
(86) 10 8518 5111
E-mail: warren.phillips@kpmg.com.cn
Honson To
Partner
Transaction Services
50th Floor, Plaza 66
1266 Nanjing West Road
Shanghai 200040
China
Tel:
(86) 21 5359 4666 Ext 2708
Fax:
(86) 21 6288 1889
E-mail: honson.to@kpmg.com.cn
KPMG International, as a Swiss cooperative, is a network of independent member firms. KPMG International provides
no audit or other client services. Such services are provided solely by member firms in their respective geographic areas.
KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained
herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint
venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG
International or any member firm in any manner whatsoever.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular
individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such
information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act
on such information without appropriate professional advice after a thorough examination of the particular situation.
Our information and analysis used in the report is based on research and interviews conducted in July 2003 and updated
in December 2003.
China machine tools market

February 2004
Designed and produced by KPMGs UK Design Services
No: 207 - 220
2004 KPMG International. KPMG International is a Swiss cooperative
of which all KPMG firms are members. KPMG International provides
no services to clients. Each member firm is a separate and independent
legal entity and each describes itself as such. All rights reserved.
Printed in the UK.
The KPMG logo and name are trademarks of KPMG International.

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207220 Chinese Machine WEB.

207220 Chinese Machine WEB.qxd

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Outsourcing of some manufacturing activities is becoming more common in China as domestic

A structured questionnaire was distributed to 330 companies; a total of 50 were completed

Findings confirmed that:

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Chinas GDP 1998-2007e

Source: Economist Intelligence Unit, Country Forecast, 2004

Global machine tool consumption

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Over half of the China market is imported machines(3)

Top 10 machine tool markets 2001-2002

Importance of China as an end market

China is a bright spot for machine tool manufacturers

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Fuelled by an influx of foreign investment, Chinas

Foreign direct investment in China 1998-2003

Sources: (1) National Bureau of Statistics, PRC, China Statistical Yearbook,

China machine tool consumption

More foreign manufacturers are shifting production to China(2)

Consumption of machine tools(*) in China 1998-2005e

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The need for companies in China to produce to global

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Automotive-related manufacturing has accounted

Auto makers demand special purpose precision machine tools

The automotive industry

Annual sales of vehicles by type 1995-2015e

Credit Suisse First Boston, China Auto Sector, January 2003

The aircraft industry

Number of commercial aircraft in China 2002-2020e

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Sources: (1) Economist Intelligence Unit, Country Forecast, 2003

The aircraft manufacturing sector is likely to become

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In line with the upgrading of key manufacturing sectors

NC machines represent a growing share of machine tool production(1); NC production

Production of NC machine tools, China 1992-2002

Source: National Bureau of Statistics, PRC, China Statistics Yearbook,

Technological edge for imported NC machine tools

Average price difference of imported and exported NC machine tools

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Imported machines have commanded a significant

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Imported machine tools account for well over half

Imports and exports of machine tools(*), China 2000-2005e

The export market(1)

Prices of imported and exported NC machines 1996-Oct 2002

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Exports, mainly low-end NC machines, are one-tenth

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Machine tool company revenues by region 2002

Key: USD 000

Source: National Bureau of Statistics, PRC, China Markets Yearbook, 2004

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Dalian Machine Tool Group Co Ltd

2. Shen Yang Machine Tool (Group) Co Ltd

3. Wuxi Kaiyuan Machine Tool Group Co Ltd

4. Qin Chuan Machine Tool Group Co Ltd