Global Challenges For

The Construction Equipment Industry

Presented to

Paris, April 2009

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? NOBODY KNOWS!

HOW STEEP IS IT?

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 - Reduced government spending - Bankruptcies - Falling prices (Chinese entry?)

- High levels of stock - Large machine population - Overcapacity - 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
-North America -Europe -China -Japan -India -Others -World $24.7 billion $17.7 billion $14.1 billion $ 3.6 billion $ 2.0 billion $25.5 billion $87.6 billion

2008 Vs 2007
-13% -10% +26% -22% -5% -32% -10%

2009 Vs 2008
-28% -32% +2% -6% -19% -16% -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% - 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% - 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

Western Europe

India

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 worlds largest market in volume terms
- 2008 down by 19% - most of it in the last 3 months - 2009 down by 14% - most of it in the first 6 months

World

World Sales of Construction Equipment 1999 2011* (Units)

1,100,000 1,000,000 900,000 800,000

Average 699,200
700,000 600,000 500,000 400,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010* 2011*

*Forecast

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 North America Europe: Ireland Italy Spain UK Others Russia China India Oil & Mineral Producers Rental related Compact equipment ? Less Affected

Medium & heavy equipment

Long liners with export exposure

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)

250,000

200,000
Average 160,000

150,000

100,000

50,000

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010* 2011* 2012*

*Forecast

Europe: Development of Production, 2000-2010* (Units)

250,000

200,000

Average 176,150

150,000

100,000

50,000

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010*

*Forecast

Europe: Forecast Sales, 2008-2009 (% Units Change)

Austria Belgium Denmark Finland France Germany Ireland Italy Netherlands Norway Portugal Spain Sweden Switzerland United Kingdom Total Europe

-9 -29 -33 -23 -7 -9 -45 -60 -22 -19 -26 -13 -16 -11 -10 -13 -16 -16 -14

-5 -2

2007-2008

2008-2009 6 12

-68

-43 -19 -8 -28 -30 -25 -26 -5

-80

-70

-60

-50

-40

-30

-20

-10

10

20

Europe: Sales Forecast 2009 Vs 5 Year Annual Average, 2004-2008 (% Units Change)
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
-32 -22 -41 -27 -12 -27 -37 -18 -31 -47 -22 -28 -20

-50

-40

-30

-20

-10

Europe: Sales Forecast 2009 Vs 5 Year Annual Average, 2004-2008 (% Units Change)
Portugal Sweden Finland Switzerland Austria Norway Germany Belgium Netherlands Italy Denmark United Kingdom France Ireland Spain TOTAL EUROPE
-75 -33 -55 -44 -38 -31 -34 -16 -19 -11 -11 -7 -2 -3 2 11

-80

-60

-40

-20

20

Europe: Structure of Sales, by Country, 2003-2008 (% of Total)

2003
Others 19% Spain 10% UK 19%

France 17% Germany 16% Spain 4% Others 22%

2008
UK 18%

Italy 19%

France 21% Germany 20%

Growing importance of France & Germany Decline in UK & Italy Dramatic fall of Spain

Italy 15%

Europe: Structure of Sales, by Product, 2003-2008 (% of Total)

2003
Others 18% Backhoe Loaders 10% Telescopic Handlers 15% Backhoe Loaders 5% Mini Excavators 31%

2008
Others 17%

Wheeled Loaders 12%

Crawler Excavators 14%

Mini Excavators 32%

Wheeled Loaders 15%

Growth of crawler excavators & wheeled loaders Decline in backhoe loaders

Crawler Excavators 16%

Telescopic Handlers 15%

North America: Development of Sales, 2000-2012* (Units)

250,000

200,000

Average 182,000

150,000

100,000

50,000

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010* 2011* 2012*

*Forecast

North America: Development of Production, 2000-2010* (Units)

250,000

200,000
Average 158,600

150,000

100,000

50,000

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010*

*Forecast

North America: Forecast Sales, 2008-2009 (% Units Change)

Articulated Dump Trucks Backhoe Loaders Crawler Dozers Crawler Excavators
-31 -27 -28 -30 -28 12 -27 -33 -29 -18 -27 3 -33 6 -28 -12 -31 -34 -31 -23 -29 -25

Mini Excavators Rigid Dump Trucks

Telescopic Handlers Skid-Steer Loaders Wheeled Excavators Wheeled Loaders < 80 Hp Wheeled Loaders > 80 Hp

2007-2008 2008-2009

-40

-30

-20

-10

10

20

North America: Sales Forecast 2009 Vs 5 Year Annual Average, 2004-2008 (% Units Change)
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
-59 -41 -42 -44 -46 -47 -49 -50 -52 -53 -38 -30 -32 -9

-70

-60

-50

-40

-30

-20

-10

North America: Structure of Sales, by Product, 2003-2008 (% of Total) 2003

Others 19% Wheeled Loaders 9% Others 24% Mini Excavators 10% Skid-Steer Loaders 37%

2008
Skid-Steer Loaders 29%

Crawler Excavators 11%

Backhoe Loaders 14%

Wheeled Loaders 11%

Backhoe Loaders 11% Crawler Excavators 12%

Mini Excavators 13%

Decline in skid-steer loaders, backhoe loaders Growth in hydraulic excavators, mini excavators

India: Development of Sales, 2000-2012* (Units)

50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010* 2011* 2012*

*Forecast

India: Structure of Sales, by Product, 2003-2008 (% of Total) 2003

Compaction Equipment 8% Others 19% Backhoe Loaders 35% Compaction Equipment 7%

2008
Others 6% Backhoe Loaders 38%

Crawler Dozers 2% Mobile Cranes 10%

Crawler Dozers 2% Crawler Excavators 20% Mobile Cranes 18%

Wheeled Loaders 6%

Wheeled Loaders 6%

Crawler Excavators 23%

Very steady except for growth in cranes

China: Development of Sales, 2000-2012* (Units)

320,000 270,000 220,000 170,000 120,000 70,000 20,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010* 2011* 2012*

*Forecast

China: Structure of Sales, by Product, 2003-2008 (% of Total) 2003

Compaction Equipment 10% Mobile Cranes 7% Crawler Dozers 5% Others 4% Wheeled Loaders 54% Compaction Equipment 2% Crawler Excavators 19% Mobile Cranes 7%

2008
Crawler Dozers 2% Others 5%

Mini Excavators 1%

Continued growth in wheeled loaders, hydraulic excavators, mini excavators

Mini Excavators 7%

Crawler Excavators 20%

Wheeled Loaders 57%

Decline in compaction equipment, crawler dozers

Global Production of Wheeled Loaders, 2008 UNITS

Kawasaki JCB CNH Changlin Foton Chenggong Komatsu Volvo Xugong SEM Lingong Caterpillar XEMC Liugong Longgong

3,200 3,600 4,300 6,915 7,310 9,680 10,575 10,900 11,520 11,940 17,630 20,322 23,900 29,210 30,420

Chinese

Others

5,000

10,000

15,000

20,000

25,000

30,000

35,000

China: Exports of Construction Equipment, 2005 2008 (Units)

Backhoe Loaders Skid-Steer Loaders Crawler Dozers Mobile Cranes Mini Excavators Motor Graders Compaction Equipment Hydraulic Excavators Wheeled Loaders 0
563 3,545 758 5,190 1,640 3,836 2,778 17,750 42 774 600 1,608 548 3,357 395 4,350 1,940 2,874

2005 2008

5,000

10,000

15,000

20,000

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 . . . .

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

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 . . . .

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

And Finally . . . .

THANK YOU!
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DAVID C A PHILLIPS

Managing Director