China’s Machine Tools Industry is Changing Gears

Aug 30, 2016

After over a decade of growth fueled by foreign direct investment and internationally focused government policies, China has emerged as the world’s largest Machine tools industry. It is currently in the phase of shifting from producing low-end machine tools to manufacturing mid to high-end products to meet global demand.

China has emerged as the largest Machine tools industry in the world, followed by the US and Japan respectively. Since 2002, there has been a significant increase in Chinese imports and exports as a result of a more appealing investment landscape and increased demand and policies that facilitate global participation. In the past, China focused on the production of low-end machine tools; however, as both international and domestic demands shift, it is moving into the mid to high-end sector to remain competitive internationally and domestically.

Although China has become the largest Machine tools industry in recent years, this was not always the case. This transition occurred over the past decade, and has been driven by several factors, both internal and external.

Global Participation

In 2002, China began to play a more active role in the global economy as a result of political reform and industry demands. This increased participation and global integration attracted significant levels of foreign investment, which in turn began to propel growth in the Chinese industry towards more high-end production. Its demand for machine tools also increased significantly since 2002, which is another cause for increased foreign investment.

Domestic Markets and International Expansion

While domestic markets are growing in China, it is increasingly important for China to expand internationally, as domestic demand can be volatile and risky. Initially China was primarily self-sufficient, with most companies doing everything in-house; however a shift towards outsourcing and value added service has emerged. Flexibility is becoming a primary concern for machine tool producers, and modern machine tool companies need to accommodate diverse customer needs. In order to effectively address the diverse needs of regional markets, international machine tool producers are moving production operations closer to the markets in which they are sold. This trend is another factor driving the shift from low-end tool production towards high-end production in China as high-end international companies set up regional operations.

Forward Thinking Policies

Policies in China throughout the last decade have also been a major contributor to growth. China worked hard to make access easier, facilitated co-operation with the WTO, and focused policy in the right direction. The Policies were focused on funding in R&D, encouraging state owned entities to merge with large regional companies, and reducing rates for purchasing domestic products.  As China grew as a manufacturing hub, its Machine tools industry had to keep up with this growth as it is the foundation of manufacturing. Facilitating the growth of the Machine tools industry was essential for China’s emerging economic developments.

Competition Driving Innovation

As China expanded its markets in the following years, competition increased significantly. The increased competition from international companies drove demand for better performance, better after sales service, and better quality, while driving prices down. As competition rose in China, it drove domestic innovation and development as domestic players attempted to compete with new foreign investors. 10 years ago, China relied heavily on foreign imports for advanced technology, but that is slowly changing. Many foreign investors including DMTG, Trumpf, and Yamazaki Mazak, are all focused on mid and high-end machine tool production. While it will be some time before China can achieve the competitive advantage that countries like Germany, the US, and Japan enjoy in this sector, it is taking steps in the right direction.

Future for Chinese Machine Tool Production

With no slowdown in sight for China, the future looks promising for the Machine tools industry world leader. Expected to grow at a moderate rate, China needs to continue to focus on developing its mid and high-end Machine tools industry. Demand for low-end equipment is decreasing rapidly, and if China wishes to move into the future as a global leader, it must improve technologies and drive innovation domestically. China also needs to focus on domestic markets as they are the core of the industry and are the driving force behind consumption. Building global networks through mergers and acquisitions will allow Chinese companies to position themselves well globally and also enable them to expand operations and core competencies.

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