Manitowac

Sany's bold U.S. move

June 17, 2013: 5:00 AM ET

China's construction giant Sany has ambitious plans for the U.S., and other Chinese companies are watching. But its tactics are rubbing some people the wrong way.

By Nin-Hai Tseng, writer

Cranes and lifting hooks just outside the Sany plant in Peachtree City, Ga.

Cranes and lifting hooks just outside the Sany plant in Peachtree City, Ga.

FORTUNE -- In the middle of March 2011, anyone who was anyone in the multibillion-dollar construction equipment industry gathered in Las Vegas for Conexpo/Con Agg, the industry's massive five-day trade show. Held every three years, the event is a sight to behold, with excavators, cranes, and other construction equipment lining the aisles. But amid the more than 2,000 exhibitors, one booth in particular stood out: the one with a giant, 100-foot blowup poster hanging from the ceiling featuring a burly-looking man in his mid-fifties. Wearing tinted eyeglasses and a red hard hat, he is standing, looking defiant, in front of a massive crane. The caption read QUALITY CHANGES THE WORLD. The poster boy was John Lanning, who may not be a familiar name to the average person, but in the construction world he is an icon -- one of the few top American crawler crane engineers. When it comes to designing the world's most powerful cranes -- the kind that can hoist a dome roof atop a nuclear power plant -- Lanning is one of the best.

Crawler cranes are so named because they're supported by a set of tracks -- crawlers -- that provide stability and can maneuver through uneven or tough terrain. Moving the heavy machines themselves from one job site to the next, however, is complex. Lanning made it easier, helping to pioneer some of the earliest models that crews can assemble just as easily as they can break them down into movable parts. For 24 years he did this for Manitowoc Company (MTW), the Wisconsin-based Fortune 1000 company (2013 ranking: 591) that he helped make a leader in the category.

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But the poster of Lanning at Conexpo wasn't Manitowoc's. It belonged to his new employer, Sany Heavy Industry, the massive Chinese construction-equipment firm that had poached him a year earlier. And while Lanning might have had a doughy-faced grin in the blown-up poster, Manitowoc wasn't smiling. Less than a week before the Vegas show kicked off, the company filed a lawsuit against Lanning, accusing him of helping Sany recruit former colleagues at Manitowoc. Lawyers for Manitowoc served him papers at the show.

Hiring Lanning -- and flaunting it with a billboard-size poster -- was just the latest salvo in one of the more aggressive pushes into the U.S. by a Chinese company. Sany has long dominated markets at home, where it has rocketed to becoming the biggest construction equipment manufacturer. Now as China's construction boom slows, it is looking for sales elsewhere, and it has moved aggressively into the U.S. market. Too aggressively, if you ask Manitowoc -- or President Barack Obama, which Sany executives are suing -- yes, that's right, suing -- for stopping an affiliate from starting a wind-farm project in northern Oregon.

As Sany has attempted to gain a foothold in the U.S., it has made a series of brash moves, and it has both grown and stumbled. Whether it makes big inroads here will say a lot about its strategy. More broadly, since Sany is among dozens of Chinese firms looking to invest and expand in the U.S., it offers lessons for other Chinese companies maneuvering onto U.S. shores.

An assembled model SRC885 crane destined for a North American customer

An assembled model SRC885 crane destined for a North American customer

Most Americans have never heard of Sany, but in China it's as big as Caterpillar (CAT), if not bigger. With revenues of $7.6 billion, it is the largest construction equipment company in China and the fifth largest in the world. It is also one of China's most important homegrown success stories. Sany's main founder and biggest shareholder, Liang Wengen, is one of mainland China's richest people, with a net worth of $7.3 billion as of March. Liang, 57, is politically connected -- he joined the Communist Party of China in 2004 and has become one of the party's most influential members. (He's also one of its most outspoken: Last year at a press conference in Beijing he drew fire for saying communists also tend to attract "prettier" wives.) Liang's rise within the party is notable in a country where private entrepreneurs were historically denied membership (Liang reportedly applied three times before he finally joined). He has been a vocal believer in the private sector, pressing the Chinese government to support private businesses in an economy that remains largely driven by the state. In 2012 Sany ranked No. 3 in Fortune China's list of the most innovative companies in China.

Liang wasn't always rich and powerful. Born poor in central China's Hunan province, he graduated with an engineering degree from China's Central South University and, after a stint as an engineer at a state-owned factory, founded Sany in 1989 with three partners. (Its name is derived from its Chinese name, Sanyi, which means "three ones," a reference to the company's goals: to build a first-class enterprise, to foster first-class goals, to make first-class contributions to society.) The company started off making welding materials but in 1995 expanded into the business of construction equipment, first manufacturing concrete pumps that pour and transfer liquid concrete and then broadening its line of products.

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In just 23 years, the company has grown to dominate China's market for concrete machinery, excavators, and truck cranes. Its rise coincides with China's rapidly growing economy, particularly in the years following the global recession. In 2008, when much of the rest of the world struggled with weak economies, China largely avoided a downturn.

Sany benefited as the government poured hundreds of billions of dollars into the economy by launching enormous infrastructure projects, which in turn fueled demand for trucks and trailers. Revenues rose from $2.2 billion in 2008 to nearly $8 billion in 2012. Amid the boom, other Chinese firms emerged, too, including companies like Zoomlion, XCMG, LiuGong, and Shantui, altering an industry that has long been dominated by well-established firms. But none so much as Sany.

Sany's sales have surpassed some of the world's biggest competitors, according to annual rankings by KHL Group's Yellow Table, a publication serving the construction industry. In 2010 the company rose to No. 11 from No. 20 in Yellow Table's annual rankings, surpassing U.S. competitors Illinois-based Deere & Company (DE) and Manitowoc. It has continued to climb, to No. 6 in 2012 and edging up to No. 5 in the just-out 2013 rankings, putting it within striking distance of the top three -- Caterpillar, Komatsu, and Hitachi.

Liang Wengen, founder of Sany Group

Liang Wengen, founder of Sany Group

And while Caterpillar remains the global giant, with $66 billion in revenue, Sany has bested it in China, the world's largest construction market. In 2009 Sany overtook Caterpillar in market share in excavators, the giant shovel-like machines that lumber through construction sites on tracks or wheels, scooping up mounds of earth, sand, and gravel. Last year Sany owned 11% of China's market for excavators, while Caterpillar trailed with 7%, according to Off-Highway Research. Last year it outsold Japan's Komatsu too. Emboldened by Sany's fast rise amid the global giants, Liang has said he wants to grow sales to $47 billion within 10 years.

But Sany faces significant challenges. China's torrid growth has slowed, forcing all players, including Caterpillar and Hitachi, to cut production. And now that the growth is slowing, some weaknesses in Sany's strategy are starting to show. One of the reasons the company was able to grow so quickly, for example, is because it followed other Chinese manufacturers (and possibly the U.S. housing industry circa 2006) in offering generous financing terms on loans for its machines. Buyers could make small down payments and hold off longer than usual before making their first payment. Such sales tactics are risky, says Julian Bu, an analyst with Jeffries & Co. in Hong Kong; if slower growth in China continues and it becomes harder for Sany's big customers to pay down their debts, Sany could face a wave of customer defaults.

Already, industrywide default rates have risen, and sales have slowed sharply. Sany's stock, listed on the Shanghai Stock Exchange, has fallen 16.5% this year; profits slumped by 44% during the first three months of this year, compared with a year earlier.

Even though Sany's overseas revenues have risen in recent years, it still makes the bulk of its revenues, 81.3% as of 2012, in China. This has given Sany all the more reason to hunt for sales elsewhere. In recent years it has expanded with sales and marketing operations in Europe, Latin America, and India. But no spot is as sweet as the U.S., where poaching John Lanning from Manitowoc was just the latest of several aggressive moves it has made here in the past few years -- some of which have worked out better than others.

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In Peachtree City, a sprawling suburb 30 miles south of Atlanta best known for the network of golf cart paths that wind around it, a few years ago residents watched as a $60 million modernist cube went up and opened with great fanfare in August 2011. It's from this glassy structure that Sany has been executing its push into the North American market. At 400,000 square feet, the building is about a quarter of the size of Sany's typical factories in China, but it is state of the art and ambitious in size and scope. There's an airy assembly factory, where rows upon rows of equipment stand mummified in sheets of plastic and where crews assemble excavators, which will be sold to the U.S. and the rest of North America. There are currently 150 employees; Sany says it plans to raise its headcount to around 400 over the next few years.

Sany's plans are fluid, however. It has held off on a proposed research and development center, partly because the Chinese economy has cooled off. The company could start assembling crawler cranes next year, but those plans are still under review.

Running the show is Tim Frank, chairman of Sany America, a 45-year-old Illinois native who had a brief stint at Caterpillar before spending 10 years at Swedish manufacturer Volvo. Part of Sany's plan is to shed its "Made in China" image. Like other Chinese companies, Sany struggles with the view that its products aren't as good because they're made in China. Executives hope that will change by hiring American talents like Lanning and Frank.

Tim Frank, chairman and CEO of Sany America

Tim Frank, chairman and CEO of Sany America

But cracking the U.S. market is not going to be easy. Like the auto industry, the construction equipment market relies on vast networks of dealers to sell and lease its products and, notably, to service them -- a critical component in the construction industry, where hours or days lost on a project quickly add to costs. Sany needs to build a distributor network from scratch in the U.S. and compete with Caterpillar, which has a vast network of dealers, who are regarded as experts in their local markets -- and all of whom sell Caterpillar products exclusively. Sany also lacks the core skill or technology to make many of its components, which it buys from companies like Kawasaki and Bosch Rexroth. In 2012 Sany acquired one of these suppliers, Germany's Putzmeister, the leading maker of concrete pumps. The move was applauded by Sany investors, who sent the stock to a two-month high.

But things in Georgia thus far are off to a slow start. Only a few hundred excavators have been sold, a fraction of the 24,000 sold in the U.S. last year. When Fortune made a visit to the headquarters last year, the offices were surprisingly quiet, with a handful of employees idling around the assembling warehouse that adjoins the office building. Sany expects excavator sales in North America to rise more than 100% in 2014.

And then there's the nagging matter of those legal papers John Lanning was served at Conexpo in Las Vegas. Manitowoc executives were miffed by the massive poster display. Losing one of their top crane designers had been a big blow. But most Manitowoc executives didn't know about the lawsuit. In October 2009, about a year before Lanning resigned from the company, Eric Etchart, president of the company's crane division, wrote a terse letter to Sany, accusing recruiters of contacting employees at their offices.

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The warning didn't work; the solicitations continued. Etchart sent another letter about two months after Lanning left, when it had become clear that Sany was targeting other key employees, and this time he warned Sany that Manitowoc was monitoring the company and its products. "Please be aware that Mr. Lanning and other engineers possess Manitowoc information and intellectual property regarding products, product design, engineering, project plans, etc. … , that may not be shared or used," Etchart wrote. One year later, Manitowoc filed its lawsuit against Lanning, alleging that he broke a two-year noncompete agreement and went on a mission to poach Manitowoc employees, calling them, meeting them, and giving Sany's recruiters a list of names and phone numbers of key candidates.

Both companies declined to comment on the case, which is ongoing. Lanning, too, declined to comment, but his attorney, John Murray, told Fortune the lawsuit is merely a vehicle to attack Sany. "There's no crime in being more attractive than your competitors," he says, adding that employees at Manitowoc's crane division willingly contacted recruiters at Sany and other companies. They were unhappy for various reasons, and Lanning was unhappy too, Murray says, adding that employees felt that management and culture changed following a series of acquisitions. The lawsuit is simply seeking "to be a thorn in Sany's side," Murray says.

Whether it's a thorn or more, Manitowoc's situation isn't the only legal battle Sany is entangled in. Last fall an affiliate of Sany's, a wind farm company called Ralls Corp., owned by Liang's deputy, Wu Jialiang, and Sany's CFO, Dawei Duan, filed a lawsuit against President Obama -- yes, that President -- after the U.S. government blocked it from developing a wind farm project in northern Oregon. The company had bought land and rights to build the farm, but in July 2012 the U.S. Committee on Foreign Investment halted the project because of its proximity to the Naval Weapons Systems Training Facility in Boardman, Ore., a military site where the government flies drones. In an unusual move in September, the President stepped in, issuing an executive order that called for Ralls to sell off the wind farms -- and prompting Ralls's suit. Earlier this year a judge ruled that Ralls didn't have the right to challenge Obama's authority to require a sale on national security grounds, but that it could continue to argue that the President should explain how he arrived at the decision. Ralls has said it plans to pursue that route.

Ralls's efforts are widely viewed as a long shot. And its decision to sue the president of the country where its sibling company is trying to establish a major market presence may not have been the best tactical move. But for Liang, suing competitors and targeting the leader of the free world are as reasonable as challenging Caterpillar on its home turf and quintupling sales in the next 10 years. Sany has ambitions. Whether it can make them happen is another question.

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