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In an excellent read in the Forbes ChinaTracker, Jack Perkowski lays out the dynamics of China’s booming construction equipment market. Jack points out, I think correctly, that bit by bit the construction equipment market in China will be taken over by Chinese companies.

I don’t think anyone (except, perhaps, the folks over at Caterpillar (NYSE:CAT), Komatsu (OTCPK:KMTUY), et al.) would disagree. But there are two issues that face the industry that Jack alludes to but does not directly address.

First, China is in the midst of a construction boom, driven by ready bank lending on major projects, a rush of infrastructure development, speculation, and a relatively small number of reasonable investment alternatives for non-institutional investors. At some point, that boom must cease, and there will be a shakeout in the construction equipment industry. Which of the firms in the industry are best positioned to survive that shakeout should it come, say, tomorrow?

Second, when China ceases to be a growth market for construction equipment, which (if any) of China’s local companies will have established sufficient overseas sales and service networks to withstand the contraction at home? Which of the companies is building the skills necessary to operate in markets where Chinese is not the language of business and where deals are done differently? And what are Cat, Komatsu, and company doing in anticipation of Chinese competiton overseas?

The long-term survival and prosperity of these Chinese construction equipment firms is going to depend on answers to these questions, not whether they can win in China or not. And if you have any interest in whether China’s capital goods industries can compete overseas, this is a great sector to watch going forward.

Source: The Real Question for China's Construction Equipment Makers