Global heavy machinery manufacturers like Caterpillar and Komatsu are facing the heat in China as the construction sector slows down and local competitors eat into their market share, industry players tell CNBC.
A pullback in China's construction sector brought on by the government's property cooling measures and higher borrowing costs have taken a toll on foreign heavy equipment makers that had bet on a boom.
Caterpillar , the world's largest maker of earthmoving equipment, said at the end of April that it had overestimated Chinese demand for construction equipment and was now exporting inventory from China to other markets.
"Chinese sales were down between $250 million and $300 million in the first quarter of 2012 compared with the first quarter of 2011, mostly related to excavators," Mike DeWalt, Director of Investor Relations at Caterpillar, said during the release of first-quarter earnings, according to a transcript on the company's website.
"That's why this year we're going to divert some of the excavators that we make in China to other regions of the world where we're very tight on supply. We'll export probably around 20 percent of China's 2012 midsize excavator production this year," he added.
Japan's Komatsu , the world's second-largest maker of excavators, which had an estimated 17 percent market share of China's excavator business in 2011 according to Nomura Equity Research, also posted a 25 percent decline in the January-to-March quarter from the year before after Chinese sales declined.
Excavator sales are the best indicator of foreign companies' participation in China's construction sector as this is the only sector where they have dominant market share, Nomura Equity Research said. Chinese companies dominate other segments such as cranes and concrete mixers.
Overall sales of excavators, used to dig trenches, holes and foundations for buildings, will likely drop 12 percent this year to 154,600 units, as growth in fixed-asset investment slows, Nomura Equity Research estimates.
According to Patrick Olney, President and CEO of Volvo Construction Equipment, a unit of Sweden's Volvo , the market for construction equipment in China declined 26 percent in 2011 from 2010, but the company's revenues there managed to stay flat.
"Actually we are coming off a record first quarter and a big part of that strength was the China market," Olney told CNBC. "The market itself was down 26 percent year-on-year for construction equipment but due to the strength of the business that we've built up over more than 10 years, we actually saw revenues flat year-on-year."
Ge Wenjie, Associate covering China's machinery sector with Nomura in Hong Kong, says that foreign manufacturers like Caterpillar, Komatsu and Hyundai Heavy will likely see sales of excavators fall 17 percent this year compared to domestic players who will see a much less 4 percent drop in sales.
"Overall the demand situation will be very bad," Ge said. "But I think the U.S., EU, South Korean and Japanese players will lose more market share because Chinese players are upgrading their products."
He expects the market share of foreign players in excavators to drop to 58 percent this year from 62 percent in 2011.
"They (the local players) are getting more competitive and are introducing a lot of flexibility in financing. The construction sector is facing a liquidity crunch and have to go for cheaper products, (made by domestic manufacturers)." Ge added.
The biggest Chinese manufacturers Sany Heavyand ChinaYuchai International managed to improve their share of the market by 3.5 percent and 1.3 percent to 12 percent and 5.8 percent, respectively, at the end of 2011, Ge said.