Opportunities Arising from Infrastructure-Related Exports to BRI Countries

Abstract

The equipment manufacturing sectors play a crucial role in industry. As the growth of China’s economy enters a new stage, it is important for Chinese equipment manufacturing companies to increase their presence in overseas markets. Currently, some sectors in equipment manufacturing are making technological breakthroughs and enjoying cost advantages, but moves to increase Chinese companies’ presence in BRI countries have encountered obstacles. High-speed railway, nuclear power, and other sectors in China that were thought to be very likely to expand overseas have not been as successful as expected over the past decade. Understanding the reasons behind their uneven progress in overseas expansion can help improve the direction of policies for the future expansion of China’s equipment manufacturing sectors in BRI markets.

An overview of the equipment manufacturing sector in China reveals that the export of infrastructure construction equipment to BRI countries is playing an important role in the sector’s global expansion. Equipment manufacturing sectors in China enjoy high output value and balanced positions on the supply and demand sides of the global market, but the exports of leading companies remain low. Chinese companies have built a more significant presence in developing countries than in developed countries, and the export of infrastructure construction equipment is proceeding more rapidly compared to that of manufacturing equipment. The presence of domestic sectors overseas is highly correlated to their domestic production rates. However, we note that overseas market shares remain low for several sectors that have recorded high domestic production rates.

An analysis of major sectors reveals that project-based industries encounter many challenges. We note that overseas market shares of China’s product-based industries exceed those of its project-based industries, and overseas market shares of market-driven industries exceed those of government-driven industries. We believe that it will take time for Chinese companies to gain market share in developed countries due to limitations in their brands and distribution channels. Among China’s project-based industries encountering challenges in developing countries are high-speed railways and nuclear power. First, project-based industries require substantial funding and may come under pressure on the demand side in BRI countries. Second, these industries are likely to be affected by geopolitical issues. Third, China does not have advantages in project management and financing. As a result, Chinese companies may encounter challenges in expanding their overseas presence, even if they have technologies that meet overseas standards and their product costs are low.

Author: CHEN Xianfan, ZENG Tao, ZOU Jing, MIAO Yufei, QU Haoyuan, CHE Yunji, LIU Zhongyu, LIU Jing.

11.1 Overview of High-End Equipment Exports

Focusing on 15–20 high-end equipment subsectors, we analyze the position of China’s high-end infrastructure equipment sector in the global market and its overseas market share. A global comparison reveals that China is playing an important role in the equipment manufacturing sectors (Fig. 11.1). We note that of the total output value of select product categories in the global equipment manufacturing industry in 2022, China recorded the highest value (37%), exceeding the US (20%), Europe (20%), and Japan (9%).

Fig. 11.1

Source China Construction Machinery Association; China Machine Tool & Tool Builders’ Association; China Photovoltaic Industry Association; corporate filings and company websites of China International Marine Containers (CIMC), Hangzhou GreatStar Industrial, and China Railway; CICC Research

Comparison of representative equipment manufacturing industries in China, the US, Japan, and Europe. Note We use data on output value in 2022 (unit: Rmb bn); % figures in columns to the right refer to output value as a percentage of global output value, and figures in red represent countries and regions with the highest percentages.

A cross-sector comparison demonstrates that China’s traditional industries—such as the real estate and infrastructure construction, metal product, shipbuilding, and energy equipment industries—account for high proportions in global output. This is because the sizable market and mature industry systems in China have created conditions for the development of such industries. However, following China’s late start in semiconductor equipment, large aircraft, and other industries that require more sophisticated technologies, the country lags behind in high-end equipment industries that requires cutting-edge technologies, with the share in global output in these industries remaining low.

11.1.1 Position of China in Global High-End Equipment Markets: Supply and Demand Balanced; Companies Benefit from Comprehensive Cost Advantages

Supply and demand in China’s high-end equipment sector remain balanced in many domestic industries, but three categories of industries have seen supply exceeding demand (Fig. 11.2). The first category includes industries that rely on advantages in supply chains and costs. For example, the tool and container industries do not require sophisticated manufacturing techniques, while they utilize notable amounts of steel products. The metal processing industry in China enjoys a size advantage, making the downstream equipment manufacturing industries more competitive on the supply side, compared to other developing countries whose related supply chains are immature.

Fig. 11.2

Source: China Construction Machinery Association; China Machine Tool & Tool Builders’ Association; China Photovoltaic Industry Association; corporate filings and company websites of CIMC, Hangzhou GreatStar Industrial, and China Railway; CICC Research

Domestic industries’ positions on supply and demand sides of the global markets. Note: We use 2022 data; share in global demand refers to demand in the domestic market as percentages of global demand; share in global supply refers to supply in the domestic market (supply from foreign companies included) as percentages of global supply.

The second category includes industries that have developed good value-for-money driven by large domestic demand. For example, in the power equipment and excavator industries, substantial investment in real estate and infrastructure construction has created opportunities for these industries to develop. These industries are thus likely to expand their overseas presence by leveraging good value-for-money products after they mature in the domestic market.

The third category includes industries that have built leading positions in the world thanks to policy support and market-based cost reduction (such as the photovoltaic [PV] and lithium-ion battery [LiB] industries). For the machine tool, industrial robot, and large aircraft industries, domestic supply as a percentage of global supply remains lower than domestic demand as a percentage of global demand due to less advanced technologies in these industries.

11.1.2 Global Expansion of China’s High-End Equipment Industries: Overseas Market Shares Remain Low; BRI Countries and Infrastructure Construction Equipment Play Important Roles in Exports

Global expansion of China’s leading high-end equipment companies remains limited, as evidenced by low overseas revenue as a percentage of total revenue as well as low overseas market shares (Fig. 11.3). The PV industry enjoys higher overseas market share compared to many other industries thanks to its notable cost advantages, sustained efforts to improve technologies, mature industry systems, and standardized products.

Fig. 11.3

Source China Construction Machinery Association; China Machine Tool & Tool Builders’ Association; China Photovoltaic Industry Association; corporate filings and company websites of Sany Heavy Industry, Longi Green Energy Technology, and China Railway; CICC Research

High-end equipment exports. Note We use 2022 data on high-end equipment exports; the horizontal axis represents the market sizes of industries, and the vertical axis represents overseas revenue of leading companies as percentages of total revenue.

By region, the market share of China’s high-end equipment companies in developing countries exceeds that in developed countries (Fig. 11.4). The following factors contributed to this pattern, in our view. First, customers in developing countries pay closer attention to value for money, while customers in developed countries are less sensitive to product prices but attach importance to product quality, brands, and distribution channels. Technologies utilized by Chinese companies remain less advanced than those used by overseas companies, and thus Chinese companies have less advantages in brands and distribution channels in developed countries. Second, local conditions in developing countries affect Chinese companies’ exports. China’s previous infrastructure construction in developing countries boosted product exports, and helped Chinese companies build distribution channels. As such, we are upbeat on China’s equipment exports to BRI countries.

Fig. 11.4

Source China Construction Machinery Association; China Machine Tool & Tool Builders’ Association; China Photovoltaic Industry Association; corporate filings and company websites of Sany Heavy Industry, Longi Green Energy Technology, and China Railway; CICC Research

Overseas presence of high-end equipment industries in developing countries and developed countries. Note We use 2022 data; the LiB equipment market is nearly non-existent in developing countries, and we assume Chinese companies’ market share in the LiB equipment markets of developing countries is 50%.

On the demand side, China has advantages in exporting infrastructure construction equipment, though exports of manufacturing equipment remain low. China, the US, Japan, and European countries account for high proportions of value-added output in the global manufacturing sector. As of 2021, the top 15 countries measured by the value-added output of their manufacturing sectors make up 79% of the value-added output in the global manufacturing sector. Of these top 15 countries, five are BRI countries that account for 10% of the value-added output of the global manufacturing sector. Of the five BRI countries, three are developing countries that account for merely 4% of the global manufacturing sector. Overseas market shares of Chinese manufacturing equipment companies are lower than those of infrastructure construction equipment companies, as: (1) Their technologies are less advanced than the technologies utilized by companies in developed countries; and (2) BRI countries and developing countries account for low proportions in the global manufacturing sector.

On the supply side, domestic production is a prerequisite for global expansion, in our opinion. The domestic production of complete machines is arguably a metric for how advanced technologies are. Limited domestic production in China suggests that the technologies are not sufficiently advanced and that Chinese companies offering such products are unlikely to have the ability to compete with overseas rivals. Limited domestic production also means that the domestic market share of Chinese companies remains low and that domestic entrepreneurs are not well poised to expand their overseas presence.

We note that global expansion remains limited for some industries with high domestic production rates, such as the nuclear power, coal mining machinery, wind power, and high-speed railway industries. For the underground coal mining machinery industry, China’s global expansion is limited as overseas mines are mostly open pits. Global expansion of the wind power industry also remains limited as developed countries used to be the main overseas markets for wind power, while the markets in developing countries did not expand until recently. However, the latter have grown rapidly, and the market share of Chinese companies in developing countries has increased swiftly. For the nuclear power and high-speed railway industries, China’s global expansion remains limited despite the country having developed advanced technologies. This may be due to multiple factors. In this report, we discuss why industries with cost advantages and technologies which meet overseas standards encounter obstacles in global expansion.

11.2 Major Industries: Analysis and Outlook

This section focuses on five industries. Among industries with low levels of global expansion, we focus on the high-speed railway and nuclear power industries due to their large size. In addition, we also concentrate on power equipment, engineering machinery, and PV industries as the markets for these industries are sizable and the export of these products is proceeding smoothly. We categorize representative industries based on the characteristics of their businesses from two perspectives: (1) Project-based and product-based industries; and (2) market-driven and government-driven industries (Fig. 11.5).

Fig. 11.5

Source China Construction Machinery Association; China Machine Tool & Tool Builders’ Association; China Photovoltaic Industry Association; corporate filings and company websites of Sany Heavy Industry, Longi Green Energy Technology, and China Railway; CICC Research

China’s share of representative high-end equipment industries in overseas markets. Note We use 2022 data; government-driven describes participants in industries driven mostly by government departments, and market-driven describes participants in industries driven mostly by private entities.

Overall, China’s PV exports to BRI countries have reached a high level. Efforts to sell power equipment and engineering machinery in BRI countries have paid off as Chinese companies create synergies along industry chains in sync with their moves to expand globally. However, global expansion of the nuclear power industry has proceeded slowly as Chinese companies do not have extensive experience in nuclear power projects. We think global expansion of the nuclear power industry will likely accelerate following the launch of nuclear power projects, while global expansion of the high-speed railway industry will take time due to weak overseas demand.

11.2.1 PV: Green Transformation and Energy Security

On the demand side, we are upbeat on the growth potential of PV markets in BRI countries as their demand for new PV facilities increases. Data from Bloomberg New Energy Finance (BNEF) shows that the installed capacity of new PV facilities in BRI countries as a percentage of total global installed capacity of new PV facilities reached approximately 20% in 2018–2020 (vs. 6–9% over 2011–2016). Total installed capacity of new PV facilities in BRI countries came in at 26.04 GW in 2021, representing 14.3% of total global installed capacity of new PV facilities. The proportion of BRI countries’ total installed capacity of new PV facilities in global installed capacity declined in 2021 due to the end of a rush to install PV facilities.

On the supply side, Chinese companies are the main PV suppliers in BRI countries. We estimate that China’s PV module exports to Central and Eastern Europe accounted for around 74% of the installed capacity of new PV facilities in this region over 2019–2021 given the value of exports and the average prices of exported products.¹ China plays a leading role in meeting the demand for PV modules from other BRI countries.

We attribute China’s success in the global expansion of the domestic PV industry to two factors, one of which is cost reduction and efficiency enhancement. Cost advantages, coupled with sustained efforts to upgrade technologies, are accelerating the global expansion of the domestic PV industry, and Chinese companies are gaining economies of scale thanks to domestic PV demand and the large market in China.

First, costs play a crucial role in the PV industry. Labor, depreciation, electricity, and other non-raw material costs account for 5–27% of total costs in the PV industry. China has advantages in workforce, electricity supply, land, and equipment, enabling PV products to offer good value for money. Economies of scale also play an important role in helping companies reduce costs. As the production volume continues to increase, companies with economies of scale can gain advantages in supply chain costs and reduce production costs, thus cutting the costs along the PV industry chain.

Second, companies in the PV industry are continuing to improve technologies while manufacturing products. We think growing demand will not only help the PV industry gain economies of scale, but also create opportunities for companies to improve technologies through real-world application. China has rolled out a series of policies to reduce costs for end-market customers in order to boost domestic demand for PV and promote the development of the domestic PV industry chain. On the demand side, the domestic market has laid a foundation for cost reduction, efficiency enhancement, and the upgrading of technologies at PV companies. Given the distribution of the production capacity of PV manufacturing equipment, we estimate that China has accounted for more than 80% of production capacity for the main materials and core auxiliary materials along the PV industry chain.

The second important factor to China’s success in the global expansion of its PV industry is standardized products. Products of most PV subsectors are relatively standardized, and Chinese companies can sell them to international markets after obtaining the relevant overseas certifications, e.g., third-party product certificates. Despite originating in different markets, third-party product certificates share many common attributes. The Chinese PV industry has gained cost advantages, received product certificates, and built sales networks in many regions around the world.

The strategic value of China’s PV industry has increased as the global carbon neutrality-based energy transformation is underway. China’s PV industry has attracted attention in many countries due to its high market shares. We see two directions of development for the domestic PV industry. First, companies need to continue to upgrade technologies. Second, global expansion of production capacity will likely help Chinese companies increase their overseas presence, in our view. The global expansion of the domestic PV industry has proceeded more rapidly than that of many other manufacturing industries in China. We believe that seeking out stable regions and shifting the production capacity of midstream and downstream subsectors along the PV industry chain to such regions will create conditions for the sustained global expansion of the domestic PV industry.

11.2.2 Power Equipment: Strong Demand in BRI Countries; Chinese Companies’ Global Expansion Accelerating

Global power grid investment is increasing steadily, reaching US $273.8 bn in 2022, according to BNEF data, and it is likely to have increased by around 10% YoY to about US $300 bn in 2023.

Demand for power equipment is strong in BRI countries. According to the World Bank, in 56 BRI countries (roughly a third of the total), more than 10% of the population did not have access to electricity in 2020. Moves to increase access to electricity in such countries have significantly boosted demand for power equipment. Green transition of the energy industry has also presented investment opportunities, in our view. Data from International Trade Administration (ITA) shows that to transmit renewable energy-based electricity, South Africa will likely increase the length of electric cables by 8000 km by 2030. Furthermore, the Philippines, Thailand, and Qatar have made intelligence and automation the directions for upgrading their power grids.

On the supply side, China’s power equipment technologies are more advanced than those of many other countries, and thus Chinese companies are competitive in overseas markets thanks to good value for money. China has taken the lead in building a complete ultra-high-voltage alternating current (AC) and direct current (DC) technology standard system and a smart power grid technology standard system. As of 2022, China had formulated more than 100 international standards. As of 2022, a total of 525 Chinese standards have been utilized in BRI countries. Chinese supply chains have advantages in raw material and labor costs. For example, the prices of plates (a main input in power equipment) of medium thickness are lower in China than in the EU, the US, and Japan.

China’s power equipment exports are increasing rapidly. Data from China Electricity Council shows that as of end-2021, major Chinese power companies’ cumulative overseas investment reached US $102.7 bn. The value of China’s transformer and inductor exports increased at a CAGR of around 14% over 2020–2022 despite the impact of the COVID-19 pandemic. The country’s transformer and inductor exports over 2020–2022 exceeded those of many other countries.

While overseas businesses are mature for leading European and US electrical equipment companies, Chinese companies are still at the initial stage of global expansion. Siemens, Schneider, and other leading companies in the European and US electrical equipment industries have long histories of global expansion. Their brands are well recognized, and their global sales and service networks are mature. Chinese companies were late to start their global expansion. Overseas revenue as a percentage of total revenue is lower than 20% at Shanghai Electric Group, Sieyuan Electric, and other leading companies in the domestic electrical equipment industry. Overseas markets will be an important strategic direction for domestic companies, in our view.

The key to success for China’s power equipment industry in overseas expansion is the building of a mutually beneficial, omni-industry chain model. This model is laying a foundation for global expansion, in our view. We believe that the global expansion of the power equipment industry will increase connectivity in power grid infrastructure facilities, promote clean and low-carbon energy transformation, and boost global economic growth and social progress, while improving local livelihoods. Mutually beneficial cooperation can help companies sell products and undertake projects overseas.

The omni-industry chain model that is composed of technological standards, planning and design, engineering and construction, and equipment manufacturing has helped advance the global expansion of the power equipment industry. The value of major Chinese power equipment companies’ exports reached US $2.5 bn in 2021, of which approximately 84% were equipment exports for overseas projects. For example, for the Pakistan Matiari-Lahore ± 660 kV HVDC transmission project, a major project in the China-Pakistan Economic Corridor (CPEC) program, nearly 80% of technology standards in the construction of this project were Chinese. More than 5000 Chinese employees from 96 Chinese companies took part in the construction of this project. In addition, power equipment and technological service exports related to this project reached around Rmb6.7 bn.

Direct power equipment exports will likely increase thanks to stronger overseas demand. China’s power equipment exports were mainly boosted by overseas projects conducted under the build-operate-transfer (BOT) model and the engineering, procurement, and construction (EPC) model at the initial stage of global expansion. Companies sold products in overseas markets thanks to these projects. However, overseas projects also face challenges. For example, payment collection is difficult and the risks of payment defaults are high in some countries. In our opinion, China’s exports to BRI countries will reduce reliance on engineering projects. Chinese companies may compete directly for equipment orders and they are likely to gain market share by leveraging technologies and value for money as Chinese power equipment companies continue to deliver products overseas and their brands gain popularity among overseas customers.

11.2.3 Engineering Machinery: Chinese Companies Taking the Lead in Increasing Their Presence in Overseas Markets

BRI countries account for around 20% of total demand in the global engineering machinery market. Demand for engineering machinery is increasing more rapidly in BRI countries compared to other regions. In 2020, the sales volume of engineering machinery in BRI countries reached around 210,000 units, with the sales value coming in at about US $20 bn, representing around 20% of global sales value of engineering machinery. Off-Highway Research estimates that the global engineering machinery market will increase at a CAGR of 0.6% over 2021–2025. Market research consultant Arizton expects demand for engineering machinery in Saudi Arabia and Southeast Asia to increase by more than 4% over 2021–2028, exceeding the global average.

In 2020, Chinese companies’ market shares exceeded 30% in the engineering machinery markets of some BRI countries with larger markets than other BRI countries. Their market shares in this sector reached 65% in the United Arab Emirates (UAE), 80% in Russia, and 96% in Singapore.

On the supply side, Chinese engineering machinery companies are ready for global expansion as they have gained cost advantages thanks to domestic supply chains. Hydraulic parts, castings, and steel are the main raw materials in engineering machinery, according to corporate filings of Sany Heavy Industry and other companies. We estimate that these raw materials account for 88% of total costs of engineering machinery.

The domestic production rate of engineering machinery is increasing rapidly, and Chinese companies have the appropriate conditions for global expansion, in our view. Domestic demand for excavators reached approximately 300,000 units in 2020, representing 44% of global demand. The sizable market in China has created opportunities for domestic companies to improve technologies. Domestic production rates of pump valves, cylinders, and engines for excavators reached 30%, 70%, and 15% in 2022. Leading hydraulic part companies sell products in China and other countries, with the domestic production rate for excavators exceeding 80% in 2022 (vs. 7.5% in 2006).

For Chinese companies that have just started to sell excavators in overseas markets, excavator exports, to a large degree, rely on infrastructure construction projects in these countries as most companies sell excavators under business-to-business (B2B) and business-to-customer (B2C) models. Companies are likely to build their own distribution channels as they increase their overseas presence. We note that engineering machinery markets are growing rapidly in developing countries. In addition, we think Chinese companies can pay attention to the engineering machinery markets in developed markets as the markets there remain sizable.

The major challenge to Chinese engineering machinery companies expanding overseas is that they mainly sell products in BRI countries, while their distribution channels and brands remain weak in non-BRI countries. For example, China has cooperated with Southeast Asian countries, investing in more than 22 large construction projects since 2013, but its infrastructure construction orders from India² are equivalent to only 15% of its orders from Southeast Asia. Engineering machinery offered by Chinese companies as a percentage of all engineering machinery in India came in at a mere 13% in 2020, lower than their shares in major BRI countries.

As for developed countries, Chinese companies account for low proportions in engineering machinery exports to them (including to those participating in the BRI). Off-Highway Research data shows that Chinese companies currently have 5–10% shares of the engineering machinery markets in North America, Germany, and the UK in 2022, as European and US companies impose standards that are not quite compatible with Chinese products, and Chinese companies do not have mature distribution channels in overseas markets. In addition, Chinese companies have low market shares in the engineering machinery markets of developed countries participating in the BRI.³

As Chinese companies continue to expand market share in the engineering machinery market in Southeast Asia, their sales in this region will likely increase alongside the expansion of local markets, in our view. We expect Chinese engineering machinery companies to increase efforts to expand their presence in BRI countries in South Asia, Central Asia, and the Middle East. Their efforts to sell products in developed countries participating in the BRI will likely pay off as they continue to improve brands and distribution channels.

11.2.4 Nuclear Power Equipment: Opportunities Exceed Challenges

We think the number of nuclear power stations in BRI countries will likely increase rapidly given their nuclear power station construction plans. Data from the World Nuclear Association shows that as of April 2023, the number of nuclear reactors in BRI countries (Russia and South Korea excluded)⁴ reached 51 units. The installed capacity of nuclear reactors in BRI countries came in at 26 mn kW, representing merely 8% of total installed capacity in overseas markets, and 7% of total installed capacity in the global market. If the nuclear power stations currently under construction are all completed and construction of nuclear power station projects being planned is carried out, the number of new nuclear power stations in BRI countries will reach 29 stations, and the installed capacity of these new nuclear power stations will reach 30 mn kW, representing 30% of the total installed capacity in overseas markets. Factoring in proposed nuclear power stations, we estimate that the number of new nuclear power stations will reach 100 and the installed capacity of these nuclear power stations will reach around 110 mn kW, representing 40% of the total installed capacity in overseas markets.

We estimate that the size of the nuclear power markets in BRI countries will exceed US $200 bn, and suggest keeping an eye on markets in Saudi Arabia, South Africa, and Eastern Europe. Assuming the construction cost of nuclear power stations in BRI countries is US $2000/kW, we estimate that the size of the markets for nuclear power stations that are currently planned or under construction in BRI countries will reach US $60 bn in 5–8 years. Factoring in proposed nuclear power stations, we estimate that the size of the nuclear power station markets in BRI countries will reach US $215 bn. Saudi Arabia, Türkiye, Ukraine, and South Africa will likely account for 16%, 13%, 10%, and 9% of the BRI countries nuclear power station market.

On the supply side, the number of nuclear power exporters is limited, leading to a high concentration ratio in the nuclear power export market. Countries that have the capabilities of exporting nuclear power include Russia, China, the US, France, Japan, and South Korea. Russia, China, France, and South Korea are currently nuclear power exporters. Japan and the US do not export nuclear power as weak demand for construction of nuclear power stations in the two countries has hindered development of domestic nuclear power companies. Based on the scale of overseas nuclear power stations constructed by companies from the other four countries, we estimate that Russia and China accounted for 68% and 4% of the global nuclear power export market in 2022. Companies in three countries—Russia, China, and South Korea—are constructing nuclear power stations in BRI countries. We estimate that Russia and China account for 76% and 7% of the nuclear power markets in BRI countries.

China accounts for low market share in the global nuclear power export market, which we attribute to three reasons. First, the late start to China’s global expansion strategy for third-generation nuclear power units. The global expansion of nuclear power companies requires the support of national strategies. The National Energy Administration (NEA) of China put forward the strategy for expanding the overseas presence of nuclear power companies for the first time on November 26, 2013, but Russia had already established the Rosatom State Atomic Energy Corporation in 2007. The second reason is that the nuclear power standards are not unified. For example, three technology standards (CAP1000, ACPR1000+, ACPR1000) coexisted until China launched Hualong One HPR1000 for overseas customers in 2015. The third is the lack of extensive experience in nuclear power projects. Construction of a nuclear power station that utilizes the third-generation Hualong One units independently developed by China was not completed in Pakistan until 2021, prior to which other countries may have been hesitant about the safety of nuclear power provided by China. After completing the construction of the nuclear power station in Pakistan, China has received nuclear power project orders from Argentina and the UK.⁵

We believe the global expansion of the nuclear power equipment industry will have more opportunities than challenges going forward. First, Chinese companies exporting nuclear power equipment have gained competitive advantages. They are likely to improve the capabilities of winning overseas bids, in our view. For example, Chinese companies have utilized third-generation Hualong One nuclear power technologies in six nuclear power units in Pakistan. They have amassed extensive experience in overseas nuclear power projects. Second, Chinese nuclear power projects require shorter construction periods and cost less than those constructed by foreign companies. Construction of Hualong One nuclear power units typically lasts 67 months, equivalent to a mere 60% of the construction period for nuclear power units offered by the companies of other countries. The construction and installation costs of Hualong One nuclear power units are on par with those offered by companies in Russia and South Korea, but lower than those offered by French, US, and Japanese companies.

We think the global expansion of China’s nuclear power industry will continue to encounter some challenges. First, China is not competitive in offering advanced financing schemes. Construction costs of nuclear power stations and the interest costs of startup funding account for more than 60% of the total costs of nuclear power stations. Countries that own nuclear power stations typically pay attention to liabilities resulting from financing schemes, and they are not willing to utilize state credit to guarantee loans. China currently only offers common export loans, and nuclear power station owners are required to use sovereign credit as collateral.

Second, China’s omni nuclear power equipment solutions and closed cycle treatment technologies for spent fuel disposal are not sufficiently mature. In addition, China does not offer nuclear waste recycling and treatment services.

Third, China’s R&D projects on small modular reactors (SMRs) have yet to diversify. SMRs can help BRI countries with low investments to build nuclear power stations. China has taken the lead in developing light water reactors (LWRs) and high-temperature gas-cooled reactors (HTGRs). HTGRs require less water, and they can meet the needs of countries with desert environments. However, China’s R&D SMRs projects can be expanded to more areas. For example, fast-neutron reactors have advantages in the utilization rate of uranium, while molten salt reactors have advantages in water usage and fuel reserves.

11.2.5 High-Speed Railways: Weak Demand in BRI Countries, and Overseas Expansion Takes Time

On the demand side, the length of high-speed railway networks in BRI countries remains limited, and construction of high-speed railway networks remains uncertain in the long term. Union Internationale des Chemins de fer (International Union of Railways, or UIC) data shows that in 2021, the length of high-speed railways that had commenced operation and were under construction in BRI countries reached 4034 km and 3748 km, respectively. The corresponding data for China in the same year was over 40,000 km and 13,000 km, respectively. A total of 22 countries have released plans to build high-speed railways. The length of high-speed railways planned for construction in these countries has reached around 21,000 km (vs. 18,000 km for high-speed railways planned for construction in China), with 11,755 km planned for construction in the short and medium term, and 9159 km in the long term. Construction of high-speed railway projects has been disrupted due to various factors, and the execution of such projects remains uncertain in the long term.

Demand for high-speed railways is currently weak in some less economically developed BRI countries. High-speed railways require capital investment, population density, and power supply, as well as the appropriate economic conditions. Many less economically developed BRI countries cannot afford to build high-speed railways. Investment returns remain uncertain. Construction of high-speed railways in countries that have released plans to build high-speed railways is subject to changes in the macroeconomy and financial conditions of these countries.

On the supply side, China Railway High-Speed (CRH) is one of the most advanced high-speed train technologies in the world. The China Railway Rolling Stock Corporation (CRRC) exports electric multiple units (EMUs of 100 km/h and 160 km/h), urban rail transit, locomotives, subways, and freight wagons, while high-speed EMU exports remain low. The Jakarta-Bandung High-Speed Railway was the first overseas project to utilize 350 km/h high-speed trains offered by China. China has also exported 200 km/h EMUs to Austria. UIC data shows that Alstom (France) and Siemens (Germany) account for 38% and 11% of the high-speed train markets in BRI countries (measured by the number of carriages that have been put into operation). The two companies have higher market shares and larger customer bases. Hyundai accounts for 34% of the high-speed train market in South Korea due to its competitive advantages in the local market. It accounts for approximately 11% of the high-speed train market in Italy.

However, China’s high-speed train exports remain low as foreign companies have more extensive experience in improving technologies, and operate businesses in many regions around the world. Alstom, Siemens, Kawasaki (Japan), and Bombardier (Canada) have operated high-speed train businesses for nearly a century, and have exported high-speed trains to many countries. Data from the Union of European Railway Industries (UNIFE) shows that Siemens, Alstom, and Bombardier each account for approximately 10% of the global rail transit market (China excluded), while CRRC’s market share is only 3% in 2022. Leading overseas companies enjoy higher market shares in the global high-speed train market.

The domestic production rate of high-speed trains exceeds 90% in China. China has gained notable advantages in technologies and costs. Data from the World Bank shows that the construction costs of high-speed railways in China is Rmb129 mn/km, lower than those of high-speed railway systems in other countries. Domestic production rates of traction, braking, network control, and bogies for high-speed trains in China have exceeded 90% as companies continue to improve technologies. High domestic production rates help reduce manufacturing and operating costs.

Looking ahead, we believe that China can improve its financing support for overseas high-speed rail systems. Project owners typically pay attention to financing programs due to the high construction costs and long construction periods of high-speed rail systems. For example, Japan has offered zero interest rate and even negative interest rate financing since the beginning of the 1990s. It has also launched a specialized official development assistance (ODA) program, offering loan interest rates of 0.1%. China has advantages in the construction periods and construction costs of high-speed rail systems, but it still needs to improve financing schemes so as to better meet the needs of project owners. For example, high-speed rail systems constructed under the BOT model can help lower the sovereign credit-based collateral requirements on project owners.

Construction of high-speed rail systems takes time, and it is subject to external factors. Unlike market-based products and projects, execution of high-speed rail projects is, to a large degree, determined by factors at the state level. Chinese companies do not have notable advantages in developed countries and regions as rail transit equipment suppliers are mature there. In addition, unstable social conditions will likely have adverse impacts on high-speed rail projects.

Chinese companies are likely to export high-speed rail systems to the Middle East and Southeast Asia. Demand for infrastructure construction is strong in the Middle East due to sound economic conditions, high population density, and technologically underdeveloped infrastructure in this region. We think the Middle East is a potential market for Chinese high-speed railway companies. Chinese companies may also have opportunities in Thailand, Malaysia, and other Southeast Asian countries due to high population density and the sound economic conditions of these countries. Advanced economies like Europe and the US already have advanced high-speed railway technologies, and Chinese companies are less likely to sell products there due to fierce competition from local companies such as Siemens and Alstom.

11.3 Factors Influencing Expansion in BRI Countries

Previously, we analyzed the current state and key factors in the global expansion of China’s high-end equipment industries. We note that some high-end equipment industries have advanced technologies, while global expansion within these industries is not proceeding smoothly. In this section, we summarize factors influencing expansion in BRI countries from two perspectives—demand and supply—so as to analyze factors that have hindered the global expansion of high-end equipment industries and find potential directions for improving global expansion.

11.3.1 Demand: Large Overseas Markets and Stable Regional Circumstances

While large overseas markets are a prerequisite for the global expansion of Chinese companies, BRI countries typically have medium-sized markets, with large populations but relatively underdeveloped economies. Purchasing power and consumer demand are stronger in developed countries, and the demand for infrastructure construction equipment in these countries is significant due to the presence of large infrastructure construction projects. Therefore, developed countries and regions represent major overseas markets for many high-end equipment industries. Manufacturing equipment industries are more reliant on markets in developed countries and regions than infrastructure construction equipment industries.

BRI countries account for a combined 20–30% of the global market for high-end equipment industries, while major overseas markets are mostly in developed countries in recent years. For example, Indonesia has a larger population and greater demand for infrastructure construction than many other BRI countries, but its engineering machinery industry is still at the initial stage of development. Off-Highway Research data shows that demand for excavators in Indonesia is about 10,000 units/year, compared to around 50,000 units/year in Japan and around 100,000 units/year in the US.⁶

Companies in the energy industry typically build basic power facilities to meet household demand for electricity before considering green transition and the replacement of traditional fossil fuel energy with clean energy. BRI countries account for high market shares in the global power equipment market as their demand for power equipment is relatively inelastic due to their large populations. In contrast, the sizes of their nuclear power, wind power, and solar power markets are small. China’s shares in overseas power equipment markets are higher than its shares in overseas wind power and nuclear power markets.

Furthermore, the stability of a region also influences whether a Chinese firm will attempt to increase its overseas presence. General project-based industries are more influenced by regional circumstances. High-speed railway and nuclear power industries are project-based industries, and their development is mostly government-led. For example, China has extensive experience in high-speed railway projects and mature technologies, and the construction costs of its projects are lower than those of other countries. However, project owners in developed countries are more likely to hire well-established suppliers in their own countries than Chinese suppliers.

Overseas expansion of project-based industries in developing countries requires regional stability. For example, China’s share in the excavator market in Southeast Asia (a relatively stable region) exceeded its shares in the excavator markets of many other BRI regions in 2020. China’s excavator exports to BRI countries are closely correlated to the amounts of its local infrastructure construction investments.

China’s PV industry has marked cost advantages. Its market size as well as its global market share exceed those of many other countries. While green transition has become global consensus, restrictions on China’s PV exports have increased in recent years partly due to protectionism. For example, India and Türkiye have imposed restrictions on imports of Chinese PV products.

11.3.2 Supply: Technology, Cost Advantage, Brands, and Distribution Channels

Factors on the supply side also influence the expansion of Chinese high-end equipment industries in BRI countries. First, technological reliability is a prerequisite for overseas expansion, and experience in projects plays a key role. We note that for domestic industries in China that have steadily expanded their overseas presence, localization rates have reached high levels. The localization rates are low for the machine tool industry, the robotics industry, and other domestic industries that are at the preliminary stage of global expansion. Chinese companies in such industries usually account for low proportions in the domestic market. Their potential for gaining market share in the domestic market is significant, and their moves to build overseas distribution channels require substantial investments, in our view.

We believe that the lack of experience in projects is a challenge to the global expansion of firms in some project-based industries, even if they have advanced technologies. For example, although the domestic production rate of third-generation Hualong One nuclear reactors has reached nearly 90%, the lack of experience in construction projects in the early years of “going global” has weighed on the global expansion of China’s nuclear power industry as project owners attach great importance to contractor experience in such projects.

Global expansion of China’s PV industry is proceeding more smoothly than that of its wind power industry. The PV industry is a product-based industry, while the wind power industry is a project-based industry as wind power projects require assembly and installation. China’s wind turbine industry enjoys cost and price advantages in the long term. However, the global expansion of the wind turbine industry has proceeded slowly as customers purchasing wind turbines usually require follow-up maintenance services. They impose stringent requirements on the local maintenance service teams of wind turbine companies. Chinese wind turbine companies do not have competitive advantages in developed countries and regions. However, as demand from developing countries continues to grow, China’s wind turbine exports to BRI countries have increased in recent years.

Second, domestic manufacturing industries have cost advantages, and we think moves can be made to improve financing schemes. Chinese manufacturing industries have clear cost advantages thanks to the large domestic market, demographic dividend, mature industrial system, and the infrastructure in China. Companies in Southeast Asia have benefited from lower labor and land costs in the past two years compared with Chinese companies. However, most industries in Southeast Asia do not have comprehensive cost advantages due to less mature industrial systems. We believe that almost all domestic firms that sell products or have overseas projects have cost advantages in manufacturing.

Chinese firms also have cost disadvantages in global expansion. The high-speed railway industry, the nuclear power industry, and other project-based industries require long construction periods and substantial capital investments, and they are sensitive to interest rates. China does not have an advantage in interest rate costs vs. developed countries. As such, we think Chinese companies can improve investment and financing schemes for overseas construction projects, and attract project owners by making investment plans more appealing.

Third, brands and distribution channels play important roles in helping domestic companies gain market share in developed countries. Chinese companies have made significant breakthroughs in expanding to developing countries in the BRI, and we believe they will soon be able to turn their attention to the sizable markets in developed countries where they do not currently have much of a foothold. We believe that markets in these countries are of significance for the initiatives of Chinese industries that plan to go global over the long term.

For example, Chinese companies sell excavators in Southeast Asia and other overseas markets where Chinese contractors undertake infrastructure construction projects. Chinese companies have improved marketing channels, service centers, and component factories in these overseas markets. However, their efforts to sell products in developed countries via infrastructure construction projects have yet to pay off. This is largely because they do not have distribution channels in developed countries.

Overseas supply faced headwinds following the onset of the COVID-19 pandemic. Production efficiency remains low in developed countries due to high inflation and low labor force participation rates, even if the direct impacts on the supply sides of overseas markets have eased. Chinese companies have gained opportunities to increase their share in overseas markets thanks to macroeconomic stimulus in those markets. For example, sales volumes of high-end equipment at Sany Heavy Industry have doubled in Europe and the US. Tight supply during the COVID-19 pandemic presented opportunities for Sany Heavy Industry and other leading Chinese companies to export excavators. We think Chinese companies will be able to improve their brand power and the reputation of their products if they can improve overseas marketing channels, service systems, and financing schemes.