How to deal with market slowdown. Letter from China: Update on the economic Situation and Development in Selected Sectors GRUNDFOS MACHINING INDUSTRY

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1 GRUNDFOS MACHINING INDUSTRY Letter from China: How to deal with market slowdown Update on the economic Situation and Development in Selected Sectors be think innovate

2 2 GRUNDFOS MACHINING INDUSTRY 2 About Grundfos Industry Indicators 3 Letter from China: How to deal with a market slowdown 4-10 Industry Indicators Fig Page 4-10 / Industry Indicators Fig. 1, Economic Expectations for Key Countries and Industry Sectors (Source: ZEW indicator, ZEW, 16 July 2013) Fig. 2, New Passenger Car Registrations in Europe (Source: ACEA, 16 July 2013) Fig. 3, Machine Tool Order Intake in Germany (Source: VDMA, August 2013) Fig. 4, Machine Tool Order Intake in Japan (Source: JMTBA, August 2013) Fig. 5, Machine Tool Order Intake in U.S.A. (Source: AMT, 08 July 2013) Fig. 6, German Business Climate Industry and Trade (Source: Business Climate Indicator, Ifo Institute, 25 July 2013) Fig. 7, The Grundfos Global Automotive Indicators (Source: Automotive Information Platform, MarkLines.com, August 2013) Fig. 8, The Grundfos Raw Material Price Index (Source: London Metal Exchange, Steel Business Briefing, CME Group, August 2013) About Grundfos Industry Indicators This quarterly newsletter can give you a general idea of which way the wind is blowing in the machine tools industry. It is a special supplement to our subscribers of Knowledge Link, our new website for the machining industry. Almost all the charts and graphs here are publicly available. They come from the three major machine tool associations in Germany, Japan and the United States as well as global surveys from market analysts. We make the final graphs ourselves, the Grundfos Raw Materials Index and the automotive Monthly Production Output by country and manufacturer. We build the latter up from available automotive production figures. Grundfos Machining Industry segment uses automotive production statistics, because that market is such a big part of the machine tools industry. Based on that, we try to estimate how the coming one- to three months will look. Why do we want to share these statistics? Because we have a common interest in seeing how the market is doing. So please: read these statistics and comments as indicators alone. We publish a full version of the Grundfos Industry Indicators quarterly in five languages, as well a monthly version in English only. The Grundfos Industry Indicators Copyright 2013 Grundfos A/S. Permission to reprint graphs, tables and data has been granted to Grundfos from the various organisations represented in the publication. If you have comments or questions on the data from those organisations, please contact them directly with the links provided. We welcome your other comments.

3 GRUNDFOS MACHINING INDUSTRY 3 commentary Letter from China: How to deal with a market slowdown As the world s machining market slows, now is the time to rethink your business By Sean Xie, General Manager, Grundfos Pumps (Chongqing) Co., Ltd. China has experienced high growth over the last 3 years in the machining industry market. The country has grown bigger than Germany, taking the No. 2 position behind Japan, the market leaders. After the global economic crisis in 2008, the manufacturing centre of the world moved to Asia. And in Asia, China is seen as a leader. Domestic demand drives Chinese industry. The international cities in the East Shanghai, Beijing show huge growth potential. Meanwhile, the government s new Go West policy is bringing the country s development focus to the south-western and north-western markets. In three years, these are expected to grow into rich markets. Conditions are good for manufacturing in China. We have great advantages with our large labour force, labour costs, resources and logistics. China s challenges Our industry faces some difficult challenges, however. And the way Chinese companies approach these challenges can make or break them in years to come. The challenges include: Lack of competitive advantage China might have one of the biggest machining industries, but we are on the low or middle end of the technological side. Generally, we lack innovation and high-tech enterprises. We lack international competitive advantage. Tight Chinese monetary policy The monetary policy is tight in the general economic environment in China. This influences manufacturing. The domestic market tends to focus only on cost and not quality or innovative products. Customers who do want the middle or high-end components for their machines or systems are losing sales, because their customers are not buying their machines. And this along with the first challenge above of lacking competitive technological advantage only creates a downward spiral of that can be difficult to stop if we do not take action. Global economic slowdown Many joint ventures in China have slowed down their foreign investments. The export markets are suffering. The 2008 financial crisis might have helped to launch China into the major league of machining markets, but it is also one of the continuing handicaps. Time for reflection I suggest that now is the time while things are slowing down to adjust your strategies: your sales, marketing, or even your general company strategy. Now is the time to think about your weakest areas and how you can improve them. When we are busy with sales, there is no time for thinking about these things. Take the opportunity to think about how you can improve quality, improve the technical make-up of your products, improve your management. Of course, you must keep going with your traditional way of doing business, but you must also try something new. We have done this, and it has led us to change our mind set in how we conduct our business. First, we are meeting with our key, OEM accounts. Previously, we dealt exclusively with original equipment manufacturers who manufacture machine tools or systems. We never dealt with their customers the end customers. we face some difficult challenges. the way Chinese companies approach these challenges can make or break them in years to come. Our customers customers Now, we visit those end customers either with our OEM customers or even by ourselves. We want to learn about their business, their needs and requirements. Maybe they have some new requirements that we do not know about, yet our OEM customer knows. We want to know their processes. Only then can we offer improved solutions. Maybe this requires some adjustments our technology, our products, our supply chain to meet their new requirements. We have now held several seminars with our automotive industry customers, and we have invited their customers, as well. We want to hear from them, and at the same time, we want to teach them about our technology. We want them to understand our full-line pump supply. They should learn how we can help them save energy, discovering the potential energy-saving areas in their factories with our professional energy audit or pump audit. We want to help our OEMs to sell more, to do more. Doing this calls for a change of mind-set. We should do lots of things that we did not do before. If we are successful, then we will be doing our part to help the Chinese market continue its growth.

4 4 GRUNDFOS MACHINING INDUSTRY Grundfos analyst: Sluggish Global Economy Continues Once again, promised economic improvement was hardly recognizable in July. Some improvement in activity and stability was seen in Europe and North America, but it made little effect on our focus industries. A weaker Chinese economy and deceleration in most of Asia contributes to this sluggish global economy. The machining industry must continue to be patient for now. Frank Baake, Senior Strategy & Intelligence Analyst 1 Economic Expectations for Key Countries and Industry Sectors The Centre for European Economic Research (ZEW) writes, The ZEW Indicator of Economic Sentiment for Germany slightly declined in July The indicator fell by 2.2 points compared to the previous month and is now hovering at the 36.3-points mark. Economic expectations for the Eurozone slightly improved in July. The respective indicator increased by 2.2 points to 32.8 points. The ZEW Indicator of Economic Sentiment is ascertained monthly. Up to 350 financial experts take part in the survey. The indicator reflects the difference between the share of analysts that are optimistic and the share of analysts that are pessimistic for the expected economic development in Germany in six months. The survey also asks for the expectations for the Euro-zone, Japan, Great Britain and the U.S.A. For more information, visit ZEW s website at zew.de.

5 GRUNDFOS MACHINING INDUSTRY 5 ZEW Indicator of Economic Sentiment (Germany)

6 6 GRUNDFOS MACHINING INDUSTRY 2 New Passenger Car Registrations in Europe The European Automobile Manufacturers Association writes: In June, new passenger car registrations totalled 1,134,042 units, declining by 5.6% compared to the same month last year. In the first half year of 2013, 6,204,990 new cars were registered in the EU, or 6.6% less than in the first six months of In June, the UK was the only major market to expand (+13.4%), while the Spanish slipped by 0.7% and the German (-4.7%), Italian (-5.5%) and French (-8.4%) contracted. Total new registrations in the EU were on the lowest level recorded since From January to June, except for the UK which expanded by 10.0%, all other major markets faced a downturn ranging from -4.9% in Spain to -8.1% in Germany, -10.3% in Italy and -11.2% in France. For more information, see ACEA s website at acea.be. 3 Machine Tool Order Intake in Germany For the German Machine Tool Industry, the order intake was -14.2% in June, compared to the same month in 2012, according to figures from the German Engineering Federation (VDMA). The export number fell drastically from the peak in April. For January to June the order intake was -12.8% versus last year. The VDMA (Verband Deutscher Maschinenund Anlagenbau - German Engineering Federation) is a network of around 3,000 engineering industry companies in Europe. For more information, please visit the VDMA s website at vdma.org.

7 GRUNDFOS MACHINING INDUSTRY 7 Machine Tool Order Intake in Japan 4 The order intake for the Japanese Machine Tool Industry in June 2013 was -12.4% compared to June Decrease was higher for non-domestic orders (-14.5%). January to June 2013 is -18.7% below last year, according to figures from the Japan Machine Tool Builders Association (JMTBA). For more information, please visit the JMTBA s website at jmtba.or.jp Machine Tool Order Intake in U.S.A. 5 The Association for Manufacturing Technology (AMT) writes, May U.S. manufacturing technology orders totalled $ million. This total, as reported by companies participating in the USMTO program, was up 13.6% from April but down 7.6% when compared with the total of $ million reported for May With a year-to-date total of $2, million, 2013 is down 6.9% compared with The United States Manufacturing Technology Consumption (USMTC) report, jointly compiled by the two trade associations representing the production and distribution of manufacturing technology, provides regional and national U.S. consumption data of domestic and imported machine tools and related equipment. Analysis of manufacturing technology consumption provides a reliable leading economic indicator as manufacturing industries invest in capital metalworking equipment to increase capacity and improve productivity. For more information, visit the website at amtonline.org.

8 8 GRUNDFOS MACHINING INDUSTRY 6 German Business Climate Industry and Trade Ifo Business Climate Germany: The Ifo Business Climate Index for industry and trade in Germany in July rose for the third time in a row. Assessments of the current business situation are more positive than last month. Although the six-month business outlook weakened slightly, firms remain cautiously optimistic with regard to their future business outlook. Conditions in the German economy remain fair. The Ifo Business Climate Index is based on ca. 7,000 monthly survey responses of firms in manufacturing, construction, wholesaling and retailing. The firms are asked to give their assessments of the current business situation and their expectations for the next six months. They can characterise their situation as good, satisfactorily or poor and their business expectations for the next six months as more favourable, unchanged or more unfavourable. The balance value of the current business situation is the difference of the percentages of the responses good and poor ; the balance value of the expectations is the difference of the percentages of the responses more favourable and more unfavourable. The business climate is a transformed mean of the balances of the business situation and the expectations. For calculating the index values, the transformed balances are all normalised to the average of the year The CESifo Group, consisting of the Centre for Economic Studies (CES), the Ifo Institute for Economic Research and the CESifo GmbH (Munich Society for the Promotion of Economic Research) is a research group unique in Europe in the area of economic research. It combines the theoretically oriented economic research of the university with the empirical work of a leading Economic research institute and places this combination in an international environment. For more information, visit the website at cesifo-group.de.

9 GRUNDFOS MACHINING INDUSTRY 9 The Grundfos Global Automotive Indicators 7 Data source: MarkLines Co. Ltd Data source: MarkLines Co. Ltd June production levels in the four countries were on the same level as in 2012 and the first half of 2013 was even slightly above that figure. There is also a relatively high oscillation in Chinese production (with exception of the New Chinese Year impact) compared to the 3 other countries.

10 10 GRUNDFOS MACHINING INDUSTRY 8 The Grundfos Raw Materials Price Index Raw Materials Update Source: London Metal Exchange, Steel Business Briefing, CME Group. Raw materials price index, General status July 2012 Source: London Metal Exchange, Steel Business Briefing, CME Group. Grundfos Cost Analyst Jesper Bjerregård Juul comments on the price fluctuations of raw materials and their impact on the manufacturing industry. He writes: Bad News in China Means Sluggish Global Commodities There was an overall decline in commodities in July US commodity markets were helped by promises that the Federal Reserve System will continue stimulating the US economy until unemployment rates decrease. China s manufacturing industry continued to decline, indicating a contraction of the economy. Positive impact on prices came from a record high import of metals since last year and speculation of a helping hand to the Chinese economy after statements from the Chinese Prime Minister, Li Keqiang.

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13 GRUNDFOS MACHINING INDUSTRY issue 3, 2013 Pumps: A New Market Barometer Update on the economic Situation and Development in Selected Sectors be think innovate