Presented to

Paris, April 2009

Global Challenges

For

The Construction Equipment Industry

• A Management Consultancy that specialises in the research and

analysis of international construction equipment markets.

The largest of its kind in the world.

• Formed in 1981 as part of the Economist Intelligence Unit.

• Management Buy-Out in 1995.

Now privately owned.

• Offices in:

London, England

New York, USA

Tokyo, Japan

Beijing, China

New Delhi, India

• www.offhighway.co.uk

QUESTION

WHAT IS THE HEIGHT OF OPTIMISM?

ANSWER

A BANKER IRONING FIVE SHIRTS ON A

SUNDAY NIGHT!

“FORECASTING IS LIKE NAILING A JELLY TO A WALL”

Give me reliable data on:

– Financial frameworks and institutions

– Liquidity

– Credit lines

– Government spending

– Business cycles

– Business confidence . . . .

And I will give you a forecast.

• Events are moving at an unprecedented speed

THE JELLY IS MOVING DAILY

SO ARE OUR FORECASTS

WE ARE NOW STANDING ON THE EDGE OF A CLIFF

HOW HIGH IS IT? HOW STEEP IS IT?

NOBODY KNOWS!

• Current market problems caused by failure of financial systems

– NOT the real market: still plenty of real demand worldwide

• Future market problems will be caused by the market itself:

- Availability of credit - High levels of stock

- Reduced government spending - Large machine population

- Bankruptcies - Overcapacity

- Falling prices (Chinese entry?) - Business confidence

“MARKET DEMAND IS ULTIMATELY DETERMINED

BY ONE THING ALONE:

BUSINESS CONFIDENCE”

Global Overview

• Total world equipment sales in 2007 approximately $99 billion.

Up by 30 % since 2006.

Sales in 2008: $87 billion

Forecast for 2009: $68 billion

• Recovery in Europe and North America by 2010-2011: to 2003-2005 levels?

2008 Value 2008 Vs 2007 2009 Vs 2008

-North America $24.7 billion -13% -28%

-Europe $17.7 billion -10% -32%

-China $14.1 billion +26% +2%

-Japan $ 3.6 billion -22% -6%

-India $ 2.0 billion -5% -19%

-Others $25.5 billion -32% -16%

-World $87.6 billion -10% -12%

Short Term Outlook, Volumes

• North America - Down by 14% in 2007

- Very weak 2008 – down by another 23%

- Especially weak in smaller machine sizes, but all affected

- 2009: Ghastly – down by another 28%

• Western Europe - Up by 12% in 2007

- Profound downturn in 2008 – down by 25%

- Decline patchy over products + countries: mostly compact

- 2009: Even worse – down by another 26%

• India - Set to be the next BIG growth market

- Up 47% in 2007

- Down by 12% in 2008

- 2009: Down by 23% - then doubling in 5 years

• China - Up by 24% in 2007

- Up by 5% in 2008

- Flat in 2009

- Continue to grow at a slow pace, but at a high level

- Now the world‟s largest market in volume terms

• World - 2008 down by 19% - most of it in the last 3 months

- 2009 down by 14% - most of it in the first 6 months

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

1,100,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010* 2011*

World Sales of Construction Equipment

1999 – 2011*

(Units)

*Forecast

Average 699,200

ARE WE HEADING FOR A RECESSION

- OR NOT?

• Everything depends on:

• Who you are

• Where you are

• Your definition of „recession‟

„Cyclical Downturn‟ was more appropriate in September 2008

Everyone now feels that we are definitely in a deep and prolonged recession

Europe and North America in 2010-2011 = 2003-2004 levels at best

Everyone seemed happy then . . . .

Expectations for last 2 years have been too high

Outlook for 2009-2010

Worst Affected Less Affected

North America

Europe: ?

Ireland

Italy

Spain

UK

Others

Russia

China

India

Oil & Mineral Producers

Rental related

Compact equipment

Medium & heavy equipment

„Long liners‟ with export exposure

Source: Off-Highway Research

The Reasons Behind the Cyclical Downturn

• 2005 – 2007 all markets showing robust growth

Fuelled by: China

Easy (or very stupid) credit availability

Global economic growth

Markets +20% than 5 year average

• Worldwide „shortage‟ of machines

Overheated (artificial) demand

Delivery times of 6-36 months

Component shortages

Customers bring forward their orders to ensure delivery

Huge machine populations, all very young

CONTINUED . . . .

CONTINUED . . . .

• Credit crisis in mid-2007

House building + business confidence collapse

Banks take fright – no credit availability

Demand in 2008 + 2009 had been sold in 2007

No urgent need to replace equipment

• Financial banking collapse of September 2008 dumped on us all

= THE PERFECT STORM!

Europe: Development of Sales, 2000-2012*

(Units)

*Forecast

0

50,000

100,000

150,000

200,000

250,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010* 2011* 2012*

Average 160,000

Europe: Development of Production, 2000-2010*

(Units)

*Forecast

0

50,000

100,000

150,000

200,000

250,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010*

Average 176,150

Europe: Forecast Sales, 2008-2009

(% Units Change)

-26

-30

-5

-19

-43

6

-11

-26

-19

-14

-16

-45

-9

-23

-29

-5

-25

-28

-8

12

-68

-10

-16

-13

-22

-60

-16

-7

-33

-2

-9

-13

-80 -70 -60 -50 -40 -30 -20 -10 0 10 20

2007-2008

2008-2009

Austria

Belgium

Denmark

Finland

France

Germany

Ireland

Italy

Netherlands

Norway

Portugal

Spain

Sweden

Switzerland

United Kingdom

Total Europe

Europe: Sales Forecast 2009 Vs 5 Year Annual Average, 2004-2008

(% Units Change)

-32

-22

-12

-27

-41

-27

-18

-37

-31

-22

-47

-20

-28

-50 -40 -30 -20 -10 0

Articulated Dump Trucks

Asphalt Finishers

Backhoe Loaders

Crawler Dozers

Crawler Excavators

Mini Excavators

Rigid Dump Trucks

Telescopic Handlers

Skid-Steer Loaders

Wheeled Excavators

Wheeled Loaders <80 Hp

Wheeled Loaders >80 Hp

TOTAL

Europe: Sales Forecast 2009 Vs 5 Year Annual Average, 2004-2008

(% Units Change)

-33

-75

-55

-44

-38

-34

-31

-19

-16

-11

-11

-7

-3

-2

2

11

-80 -60 -40 -20 0 20

Portugal

Sweden

Finland

Switzerland

Austria

Norway

Germany

Belgium

Netherlands

Italy

Denmark

United Kingdom

France

Ireland

Spain

TOTAL EUROPE

Europe: Structure of Sales, by Country, 2003-2008

(% of Total)

Others

19%

Spain

10%

Germany

16%

UK 19%

France

17%

Italy 19%

2003

2008

Others

22%

Spain 4%

Germany

20%

UK 18%

France

21%

Italy 15%• Growing importance of France & Germany

• Decline in UK & Italy

• Dramatic fall of Spain

Others 17%

Backhoe

Loaders 5%

Crawler

Excavators

16%

Mini

Excavators

32%

Telescopic

Handlers

15%

Wheeled

Loaders

15%

Europe: Structure of Sales, by Product, 2003-2008

(% of Total)

Others 18%

Backhoe

Loaders

10%

Crawler

Excavators

14%

Mini

Excavators

31%

Telescopic

Handlers

15%

Wheeled

Loaders

12%

2003

2008

• Growth of crawler excavators & wheeled loaders

• Decline in backhoe loaders

North America: Development of Sales, 2000-2012*

(Units)

*Forecast

0

50,000

100,000

150,000

200,000

250,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010* 2011* 2012*

Average 182,000

North America: Development of Production, 2000-2010*

(Units)

*Forecast

0

50,000

100,000

150,000

200,000

250,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010*

Average 158,600

-31

-28

-33

-27

-29

-27

-28

-28

-31

-29

-31

-12

6

3

-18

-33

12

-30

-27

-25

-23

-34

-40 -30 -20 -10 0 10 20

2007-2008

2008-2009

North America: Forecast Sales, 2008-2009

(% Units Change)

Articulated Dump Trucks

Backhoe Loaders

Crawler Dozers

Crawler Excavators

Mini Excavators

Rigid Dump Trucks

Telescopic Handlers

Skid-Steer Loaders

Wheeled Excavators

Wheeled Loaders < 80 Hp

Wheeled Loaders > 80 Hp

North America: Sales Forecast 2009 Vs 5 Year Annual Average, 2004-2008

(% Units Change)

-59

-53

-52

-50

-49

-47

-46

-44

-42

-41

-38

-32

-30

-9

-70 -60 -50 -40 -30 -20 -10 0

Rigid Dump Trucks

Wheeled Loaders <80 Hp

Motor Graders

Wheeled Excavators

Wheeled Loaders >80 Hp

Asphalt Finishers

Skid-Steer Loaders

Mini Excavators

Backhoe Loaders

Crawler Excavators

Crawler Dozers

Articulated Dump Trucks

Telescopic Handlers

Motor Scrapers

Others 24%

Wheeled

Loaders

11%

Crawler

Excavators

12%

Skid-Steer

Loaders

29%

Backhoe

Loaders

11%Mini

Excavators

13%

North America: Structure of Sales, by Product, 2003-2008

(% of Total)

Others 19%

Wheeled

Loaders 9%

Crawler

Excavators

11%

Skid-Steer

Loaders

37%

Backhoe

Loaders

14%

Mini

Excavators

10%

2003

2008

• Decline in skid-steer loaders, backhoe loaders

• Growth in hydraulic excavators, mini excavators

India: Development of Sales, 2000-2012*

(Units)

*Forecast

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010* 2011* 2012*

India: Structure of Sales, by Product, 2003-2008

(% of Total)

Others 19%Compaction

Equipment

8%

Crawler

Dozers 2%

Wheeled

Loaders 6%

Backhoe

Loaders

35%

Crawler

Excavators

20%

Mobile

Cranes 10%

2003

2008

• Very steady – except for growth in cranes

Others 6%Compaction

Equipment

7%Crawler

Dozers 2%

Wheeled

Loaders 6%

Backhoe

Loaders 38%

Crawler

Excavators

23%

Mobile

Cranes 18%

China: Development of Sales, 2000-2012*

(Units)

*Forecast

20,000

70,000

120,000

170,000

220,000

270,000

320,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010* 2011* 2012*

China: Structure of Sales, by Product, 2003-2008

(% of Total)

Others 4%

Crawler

Dozers 5%

Compaction

Equipment

10%

Mini

Excavators

1%

Wheeled

Loaders

54%

Crawler

Excavators

19%

Mobile

Cranes 7%

2003

2008

• Continued growth in wheeled loaders, hydraulic

excavators, mini excavators

• Decline in compaction equipment, crawler dozers

Others 5%

Crawler

Dozers 2%Compaction

Equipment

2%

Mini

Excavators

7% Wheeled

Loaders

57%

Crawler

Excavators

20%

Mobile

Cranes 7%

Global Production of Wheeled Loaders, 2008

UNITS

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

Longgong

Liugong

XEMC

Caterpillar

Lingong

SEM

Xugong

Volvo

Komatsu

Chenggong

Foton

Changlin

CNH

JCB

Kawasaki

Chinese

Others

3,200

4,300

6,915

7,310

9,680

11,940

11,520

10,575

10,900

17,630

20,322

23,900

29,210

30,420

3,600

17,750

3,836

5,190

3,545

2,874

4,350

3,357

1,608

774

2,778

1,640

758

563

1,940

395

548

600

42

0 5,000 10,000 15,000 20,000

Wheeled Loaders

Hydraulic Excavators

Compaction Equipment

Motor Graders

Mini Excavators

Mobile Cranes

Crawler Dozers

Skid-Steer Loaders

Backhoe Loaders

2005

2008

China: Exports of Construction Equipment, 2005 – 2008

(Units)

China: Threats and Opportunities for the

Construction Equipment Industry

Threats

• Poor quality of domestic component industry

– Reliant on expensive imports for export machines

• Poor pricing levels in domestic market

– Not enough margin to invest in new developments

– Heavily reliant on export markets

• Over reliance on export markets

– An absolute necessity to survive

• Over reliance on third world, poor margin, export markets

• Increased value of RMB

• Diminished export markets

CONTINUED . . . .

• Difficulty in penetrating developed, profitable markets

– Dealer networks

– Spare parts availability

– Residual values

– Customer support

• Poor international perception of Chinese manufactured goods

– Low price = poor quality

• „Brand China‟ has been damaged in last 2-3 years

Much work yet to be done

CONTINUED . . . .

Opportunities

• No longer 1 product companies

Huge broadening of range and depth of products

Many are now „long liners‟

– Liugong

– Xugong

– Sany

– Zoomlion

• Very good production facilities

– enormous capacity to export

• Too many participants = excellent opportunities for consolidation

• Strong local and central government support

– Great passion to be global leader

• Improved quality of products – now being taken seriously overseas

CONTINUED . . . .

CONTINUED . . . .

• Weaker markets demanding lower prices

– Will look to Chinese if good quality and support is offered

• Many international OEMs – and component suppliers – will not survive

Wonderful M+A opportunities in next 12-18 months

Opportunity to acquire:

– international technology

– international brand and recognition

– international distribution network

THE FUTURE OF OUR INDUSTRY

CONTINUED . . . .

THE FUTURE OF OUR INDUSTRY

SHORT TERM: UP TO END 2009

2008: BAD

EUROPE DOWN BY 25%

NORTH AMERICA DOWN BY 23%

Problems of credit availability, resolved by mid 2009?

Lack of business confidence

Large new equipment populations

no real need for new equipment for 2-3 years

2009: EVEN WORSE

EUROPE DOWN BY A FURTHER 26%

NORTH AMERICA DOWN BY A FURTHER 28%

CONTINUED . . . .

THE FUTURE . . . .

MEDIUM TERM: UP TO 2012

• Too much stock, new and used

• Too much capacity

Lower pricing

Invitation to the Chinese?

• Bankruptcies all the way through supply chain

Rental

Component suppliers OEMS Dealers

• Moves towards consolidation, mergers and acquisitions

• Recovery starts late 2010, early 2011: But who knows?

Replacement of large fleets bought in 2004-2005?

Recovery in the financial sector? – that is the key

THE GLOBAL INDUSTRY WILL BE A VERY DIFFERENT PLACE BY 2011

CONTINUED . . . .

And Finally . . . .

mail@offhighway.co.uk

Telephone: +44 (0)207 404 1128

www.offhighway.co.uk

We are here to help you,

so please do not hesitate to contact the team at:

Thank you!

DAVID C A PHILLIPS

Managing Director

THANK YOU!

Please visit us at

Hall 6, Booth J019