Foreign investors target acquisitions at domestic construction machinery and electrical appliance companies to penetrate into Chinese market, Sohu News reported.   Currently, 9 out of the top 10 global construction machinery corporations have entered China through acquisitions and have strengthened market penetration strategies. Starting from 2005, Carlyle Group  acquired Xuzhou Construction Machinery Group; America’s Caterpillar acquired Xiagong Machinery, Liugong, Hebei Xuahua Construction Machinery and Zoomlion. In June 2006, the State Council announced a series of incentives, policies, as well as capital support to enhance the competitiveness of domestic construction machinery sector against aggressive foreign acquisitions. Effects of the entrance to the WTO The entrance to the WTO not only adjusted the import tax system but also shed structural requirements of the machinery manufacturing sector. Upon entrance to the WTO, some small-scaled corporations lacking competitiveness can no longer survive in the market. Competition is accelerated not only between foreign and Chinese companies but also between Chinese companies themselves. Chinese companies struggle to reform their corporate structure in order to compete. In this sense, entrance to the WTO creates more opportunities than fatal challenges.   Rapid growth of domestic market From 2000 to 2005, China’s construction machinery sector had annual growth exceeding 30 percent. By the end of 2005, its market was worth more than 250 million US dollars, which is one fifth of the size of the global market and the third most important market after the US and European Union. Loader, excavator and bulldozer are among those that are constructed for the world’s biggest market.   The market does not only grow in size but also faces the demands of numerous varieties. Many new products are launched and promoted such as small-scaled excavator, crawler cranes, and new models of drilling machines. These new products prove to be very profitable and of interest to foreign corporations.   Change of marketing strategies Although China’s construction machinery market has been growing rapidly, sole exports to penetrate the market is not the best strategy. Imported machineries are generally 50 to 150 percent more expensive than China-made products. Therefore, many consumers still prefer cheaper domestic products instead of imported products of higher quality. Under such circumstances, foreign companies are in search of domestic production and sales opportunities, in order to penetrate the market through series of acquisitions which will allow them to obtain the established production lines and sales channels.   Many China-made construction equipment suffers from over-production and low profitability. Fierce competition puts pressure on income. Many corporations are forced into passive positions and rely on price wars without enough capital to support long-term sustainability.   Although the market grew in 2005, net income decreased by 20 percent. All these provide favourable circumstances for foreign companies to acquire domestic corporations and enter at a lower cost. Foreign acquisition is a double-edged sword Advantages Foreign investment relieves state-owned enterprises’ financial burden and improve their quality as listed companies. Since foreign investors bring with them advanced computer-managed information systems, corporate production, supply, sales, financial and logistics management are thus modernized. Foreign acquisitions also help domestic products to enter international markets through the development arms of foreign companies. Disadvantages Acquisition gives multinational corporations the ability to use their human resources and capital to create monopolies or controlling stakes in certain areas of China. Since they eye China’s potential market, acquisition serves as a tool to maximize market share. After acquisitions are completed, foreign companies takeover of Chinese enterprises’ management, technology, sales and customer base, which in turn reduces domestic capability of development and innovation.   During the process of the acquisition of Xuzhou Machinery Group, the foreign company suggested the abolishment of Xuzhou label, absolute ownership and restrictions over Xuzhou’s products within China. This implies how acquisition would place state enterprises into foreign corporations’ global supply chain and division of labour, which is negative to national development.   The Chinese government has recently introduced new measures to raise the threshold for foreign acquisition with the aim to protect state enterprises against aggressive foreign penetration.