CHINESE MACHINE TOOLS: AN EMERGING COMPETITOR IN THE WORLD MARKET

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R000400810001-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 9
• Document Creation Date: December 22, 2016
• Document Release Date: July 22, 2010
• Sequence Number: 1
• Publication Date: February 28, 1983
• Content Type: MEMO

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Central intelligence Agency
DIRECTORATE OF INTELLIGENCE
28 February 1983
Chinese Machine Tools: An Emer in Competitor
in the World Market
Over the past two years the Chinese have steadily upgraded
the technical level of their machine tool industry with foreign
assistance. Beijing appears to be preparing to enter the
international market during the 1980s as an aggressive exporter
of machine tools. Some of these are technologically
sophisticated. Low start-up, overhead, and manufacturing costs
have enabled China to price machine tools below prevailing market
levels, making it a potentially serious competitor to the newly
industrializing nations such as Taiwan and South Korea. An
ability to produce sophisticated machine tools also will enhance
China's capability to manufacture higher quality military
equipment.
Although the world machine tool market has been sharply
depressed in recent years, the Chinese have managed to achieve
steady increases in exports.. Sales have more than..d.ou.bled.sinc.e
the late 1970s to a level' of about $70 million in 1982. The
Chinese are now offering highly attractive credit terms and are
steadily expanding their market in less developed countries and
have gained a foothold in North America, Western Europe, and
Japan. Chinese sales, however, still account for less than 1
percent of total world exports of machine tools. Although
improvement of the world economy could lead to a sharp increase
in Chinese machine tool exports within this decade, we expect the
Chinese to pose no major threat to Japanese sales of the most
sophisticated models.
This memorandum was prepared by
the China Division of the Office of East Asian Anal sis.
Et" M 83-10040
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Foreign Assistance Crucial to Development
In 1979, the Chinese started to solicit assistance from
foreign companies to help modernize their machine tool
industry. Since that time, at least a dozen firms have signed
licensing or coproduction agreements with China. This assistance
is beginning to show results in increased production and exports
of more sophisticated machine tools, including machines with
numerically controlled (NC) and computer numerically controlled
(CNC) systems.*
Several American firms have signed coproduction agreements
with Chinese machine tool factories. One firm has provided China
with the technology to produce CNC milling machines under
license. The Chinese manufacture the manual part of the machine,
and the US company supplies the necessary electronics. The
contract calls for production of at least 600 milling machines
over a period of five years, with initial production starting
last year. The terms of the agreement give China the right to
sell the US-designed milling machine in Asia, leaving the rest of
the world to the US company.
Two or three West European companies have struck similiar
deals with the Chinese. A French firm, for example, supplied the
Chinese with all of the necessary technical data to coproduce
lathes for export. Under the terms of the licensing arrangement,
China has the right to sell the lathes in Japan and Southeast
Asia under a Chinese trademark. The French firm has the rest of
the world. The agreement stipulates that after termination of
the contract, China will retain the right to continue production
and exports of the lathe.
Japan--Still Number One
The Japanese have been the most prominent in helping to
develop China's machine tool industry. At least four or five
Japanese companies have coproduction or licensing agreements with
Chinese plants. Yamazaki Machinery Corporation, for instance,
signed a licensing arrangement in 1979 which calls for the
Chinese to produce 5,000 small lathes and 1,600 large lathes over
a period of five years. In September 1980, Yamazaki signed
another agreement with a Chinese plant to produce 1,000 general-
purpose lathes over a five year period. Precise terms of the
* The use of NC and CNC systems on machine tools makes extremely
precise, complex, and repetitive machining operations possible.
Contoured shapes can be handled in relatively few steps, greatly
increasing machine efficiency and flexibility. One advanced
machine tool often can replace several pieces of nonautomated
equipment.
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contracts are unknown, but Yamazaki'appears to have worldwide
marketing rights for all production under license.
The foreign company that has supplied the greatest
assistance to the Chinese machine tool industry in recent years
is the well-known Japanese firm Fanuc, Limited. Fanuc makes
world-class controls for machine tools, and the Chinese started
producing these controls under license in 1981. That same year
Fanuc also agreed to install NC and CNC systems on Chinese
machine tools produced for export. In addition, Fanuc is
overseeing construction of a plant in China to produce two to
four axis machining centers. After production begins at the new
facility, the machining centers will be shipped to Hong Kong
where Fanuc employees will add the electrical computer control
systems .
China Offers Low Labor Costs and a Potential Market
Low labor costs primarily explain the reason behind the
decision of foreign companies to help the Chinese upgrade their
machine tool industry. Assembling machine tools is a highly
labor intensive operation, and coproduction in China of export
models gives participating foreign companies a marketing edge.
When Yamazaki signed the licensing agreement with China in 1980,
for example, the company cancelled a similar agreement with a
South Korean firm because wage rates in Korea had risen
sharply.
Another reason foreign companies have agreed to coproduction
and licensing agreements is the hope that they can eventually
gain a foothold in the Chinese market. This hope so far has been
illusory. Demand for machine tools in China has declined sharply
in recent years because of Beijing's economic readjustment
policies. The Chinese have drastically cut investment in
construction of new heavy industrial plants, traditionally a
primary consumer of machine tools. As a result, production of
Chinese machine tools has declined by almost half since 1978
(Table 1).
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Table 1
China: Machine Tool Production
Year
1978
1979
1980
1981
1982
Units (1,000)
183
140
134
103
100
1985 (target) 100
Aggressive Marketing and Financing
The Chinese have strong marketing contacts in Asia and are
attempting to develop outlets in other areas of the world.
In another attempt to drum up
business, the Chinese last year exhibited some of their most
advanced NC models at an international machine tool show held in
Chicago.
In an unprecedented move to stimulate exports of all types
of machinery and equipment,. the Bank of China announced earlier
this year that it plans to make low interest loans available to
prospective buyers. Export credits to foreign customers are
expected to total $500 million between 1983 and 1985. Buyers of
Chinese machine tools qualify for such loans and undoubtedly will
benefit from the cost advantage of this latest Chinese initiative
to boost overseas sales of Chinese-produced machinery and
equipment.
the Chinese are
currently packaging "very attractive deals" for buyers of
machinery. In addition to good credit terms, the Chinese are
offering highly competitive prices, fixed prices for up to three
years, and guaranteed exclusive production for individual
customers. Moreover, the Chinese are taking special pains to
offer better terms than are available in Taiwan. To undercut
Taiwanese companies, the Chinese have offered prices as much as
25 percent lower and have agreed in some cases to credit terms
that call for no interest or payments for 90 days. These liberal
policies clearly indicate that China intends to increase its
share of the world market for machine tools and other machinery,
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particularly at the expense of Taiwan and other newly
industrializing countries (NICs). 25X1
PRC Sales Have Doubled
The Chinese in recent years have vigorously pushed exports
of machine tools in an attempt to increase their miniscule share
of the world market. They have succeeded in more than doubling
machine tool sales since 1978, from less than $30 million to
about $70 million in 1982. Nevertheless, the Chinese still
supply less than 1 percent of total world exports of machine
tools (Table 2).
Table 2
Machine Tool Exports
China Non-Communist Countries China as a
(Million US$) (Billion US8) Percent of Total
1978 29
6.5
1979 41
7.5
1980 51
9.2
1981 64
8.8
1982(est) 70
8.4
The bulk of China's machine tool exports has traditionally
gone to less developed countries (LDCs), primarily in Southeast
Asia. Hong Kong, however, is by far the largest customer, buying
more than. 2.0 percent of. China's t.otal machine tool exports. Most
of the machine tools sold to Hong Kong are re-exported. Machine
tools exported to Hong Kong and directly to the LDCs have been
standard units that contain less than state-of-the-art technology
but are well suited to handle the general-purpose machining jobs
needed in underdeveloped economies.
In recent years, the Chinese have also been able to
penetrate markets in such developed countries as the United
States, Canada, and West Germany (Table 3). Sales to the United
States, for example, accounted for about 12 percent of total
Chinese machine tool exports in 1982, up from only 4 percent in
1980. US firms imported more than $4 million worth of Chinese
made machine tools in 1981, and preliminary data indicate that
the value may have doubled in 1982. The Chinese have been able
to increase exports at a time when sales by the US machine tool
industry have fallen sharply because of the recession. China's
newest NC models are meant for export to developed countries, and
the Chinese hope to increase their foothold in the US market as
the business climate improves and capital spending, picks up. The
Chinese undoubtedly want to emulate the success of Taiwan, which
doubled machine tool exports to the United States from $50
million in 1978 to $100 million in 1981.
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Principal Customers for Chinese Machine Tools, 1981
(Million US$)
Hong Kong 12.8
Singapore 7.6
United States 4.5
Indonesia 3.2
Australia 1.8
Canada 1.4
West Germany .9
Japan .5
Other (mainly LDCs) 32.0
Growth Potential is Substantial
By the mid-to-late-1980s the Chinese could become a growing
competitor in the international machine tool market if they can
maintain quality production at low cost. China claims that it
currently exports 123 different machine tools that meet
international standards and that all Chinese-made tools will
reach such standards by 1985. When current coproduction and
licensing agreements expire over the next five years, the Chinese
should have strong marketing contacts and a well established
distribution network. They also will have in place a modern
production capability, technical know-how obtained from foreign
partners, and experience in manufacturing particular lines of
machinery to international standards.
China's gain in market share during the 1980s probably will
come at the expense of the newly industrializing countries (NICs)
such as Taiwan and South Korea. The NICs have substantially
increased production and exports of machine tools during the past
decade because of their low-wage structure. Wage rates in these
countries, however, have increased substantially in recent
years. This trend has left the Chinese with a clear competitive
edge which they will undoubtedly attempt to exploit in pushing
exports of machine tools. Nevertheless, we expect that machine
tool manufacturers in the West, particularly in Japan, would
maintain their strong technological and marketing lead over China
and continue to dominate a major part of the international
Development of the machine tool industry will also have
implications for military modernization by reducing China's
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dependence on imports for the defense industries. China's
military industries have historically been major buyers of
foreign-produced NC machine tools because domestic models were
not available. Imported machine tools are used to produce
components for conventional and advanced weapons that require
machining to precise tolerances. Demand for foreign tools should
soften as the Chinese gradually modernize their defense plants
with increasingly available domestically-produced NC models.
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SUBJECT: Chinese Machine Tools: An Emerging Competitor in the
National Security Council
1 - Charles Carr, Intelligence Coordination
1 - David Laux, Senior Staff Member for China, Taiwan and
Hong Kong
Department of State
1 - William F. Rope, Director, Office of Chinese Affairs,
Bureau of East Asian and Pacific Affairs
1 - William Root, Office of East-West Trade, Bureau of
Economics and Business Affairs
1 - Richard Mueller, Office of Chinese Affairs, Bureau of
East Asian and Pacific Affairs
1 - Lorraine Takahashi, Office of Chinese Affairs, Bureau of
East Asian and Pacific Affairs
1 - John Danylyk, Office of Economic Analysis, Bureau of
Intelligence and Research
1 - Priscilla Stowe, Office of Economic Analysis, Bureau of
Intelligence and Research
Department of Treasury
1 - Patsy Haas, Office of East-West Policy
Department of Defense
1 - COMO Steward A. Ring, USN, Director, East Asia and
Pacific Region
Defense Intelligence Agency
1 - DB-4E2
Department of Commerce
1 - David Peterson, Office of Intelligence Liaison
1 - Robert Perito, Chief, China Office, East Asia and Pacific
1 - Jeffrey Lee, China Office, East Asia and Pacific
Department of Agriculture
1 - Charles Liu, International Economics Division, Economic
Research Service
Special Trade Representative
1 - William C. Triplett II, Director, East-West Affairs
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National Security Agency
1 - Chief, B4
1 Chief, B41
Central Intelligence Agency
DDI
Executive Director
NIO/EA
Chief, Chinas DDO
C/NIC
PDB
FBIS/Analysis
OGI/Civil
OCR/EA
D/OEA
FBIS/NEAAD/CE
Group/China
Technology Industry Division
C/Production/OEA
Chief, China Division
OEA/CH/DEV
OEA/CH/DOM
OEA/CH/FOR
OEA/CH/DEF
CPAS/IMB/CB
CH/EA
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