China inventory backlog hits engine manufacturers
Machinery inventory in China will impact future sales says Cummins
Manufacturers of engines and other components are unlikely to see a rise in sales even if the Chinese machinery market picks up in 2013, due to the large amounts of inventory held by suppliers, according to Cummins chief executive Tim Linebarger.
With the new Chinese government in place, and large infrastructure projects in the pipeline, it is expected that equipment sales will rise following the Chinese New Year celebrations.
"It's not going to do enough to change engine demand because you've got to get rid of inventory in the field," Linebarger said in a call to analysts.
"There is still a significant overhang of inventory that will dampen new equipment production in 2013, even after the end markets begin to recover."
Cummins was hit by a 20% decline in engine sales in China in 2012, where it supplies engines to large number of manufacturers, both Chinese and international. The company reported a 30% drop in fourth quarter earnings.
"We were consistently disappointed, especially by China," said Linebarger.
"We thought as the new government got seated we'd see some improvement and we did not see that. It was a pretty rough year for every one of our major markets in China."
Cummins recorded revenues of $17.3bn in 2012, down 4% from the previous year. Fourth-quarter revenue of $4.3bn dropped by 13% on the same quarter in 2011, "reflecting weakness in most major markets and geographies" said Linebarger.
“After a strong start to the year, demand declined across most geographies and end markets in the second half of 2012 as the global economy slowed,” he said
"The work we have undertaken to reduce costs and lower inventory should benefit the company when the global economy improves, however there is uncertainty surrounding the timing and pace of improvement in end markets in 2013.”