Business Is Good Now - But What's Next? - Industry Round Table
Construction Equipment Distribution magazine is published by the Associated Equipment Distributors, a nonprofit trade association founded in 1919, whose membership is primarily comprised of the leading equipment dealerships and rental companies in the U.S. and Canada. AED membership also includes equipment manufacturers and industry-service firms. CED magazine has been published continuously since 1920. Associated Equipment Distributors
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SECTION: Industry Round Table

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Business Is Good Now - But What's Next?

Written By Pam Gruebnau and Mary Sedor

Article Date: 09-01-2006
Copyright (C) 2006 Associated Equipment Distributors. All Rights Reserved.

Construction equipment execs discuss the economy and major issues facing the industry.

How long will the current economic boom last?

Distributors respond:

  • We think the current market is soft. People are buying, but it’s not as strong as last year.
  • For us, the first quarter was up significantly, but in the last three months, we’ve seen the market going down.
  • In mining, it’s been particularly hard to come by large equipment during the last few years, which has forced mining companies to plan ahead.
  • Nine months ago, we thought 2006 would be flat or have just modest growth, but we could still end up with 2006 sales as strong as last year. We’re not expecting the double-digit rate of the last few years.
  • Generally speaking, things have leveled out and we’re looking for that leveling to hold for the year.
  • We’ve spent the last few years working with outside consultants and economists to develop metrics to give us a better view into the future. Our traditional way of looking at things – lead times, rental rates, used equipment pricing – haven’t served us well. By the time we see changes in these three metrics, the bug hits the windshield. One of the metrics we’ve developed is looking at public engineering and construction companies. They’re an indicator of non-residential construction. Their cycle for work is 24 to 30 months from start to finish. Using that metric, the business cycle looks good for the next few years. We think the downturn in housing will be more than offset by growth in non-residential construction. We’re at the top of the cycle and growth will probably contract but not significantly.
Manufacturers respond:

  • We’re at a high peak right now. I don’t know where it’s going from this point. Some of the indicators we look at are housing starts and commercial activity. Housing in North America is slowing. Commercial is still very strong. We also look at architectural firms. They’re an interesting precursor before the permitting stages.
  • One month we’re convinced things are slowing, and then the next month demand increases.
  • If individual distributors would report whether their inventories are up or down – even if it’s using a rating of 1-10 – on a consistent basis and AED could publish it in the magazine every month, it would give us a good indication of the business cycle.
  • We watch energy costs. For our business, it’s a two-month rule. In January and February, there was a 34-percent increase in energy costs; in April and May business slowed.
Distributors respond:

  • We meet with engineers and architects, and we look at our inventory. In this particular cycle, the first quarter was a record breaker – it was almost a "misleading" indicator. Now things have softened a little. We’ve been in a supply and demand seesaw, and all of a sudden it seems like every manufacturer has caught up at the same time.
  • We look at auto sales too. They’re a pretty good indicator. If someone is willing to buy a car, they’re willing to buy a house, a boat, or whatever. Right now housing and car sales are slowing.
Manufacturers respond:

  • I think the days of double-digit growth for our company are over. Domestically, this year we’re going to realize a single-digit increase, between 5 percent and 10 percent.
  • Our fundamental problem is that we’re looking at lagging indicators. If we could get a look at how customers are using their machines – are they running them 1,000 hours, 600 hours, 1,500 hours – we’d know what was going on with the fleet and how it was aging. We don’t have a good leading indicator. I’m reminded of the saying, "It’s too early to tell and too late to do anything about it." If we had some kind of monitoring device on the machines, we’d know.
Will consolidation continue?

Distributors respond:

  • Consolidation isn’t going to continue at the rate it did in the past. The issue is how big do you have to be to be an effective competitor. Being successful as an independent dealer with one location is more difficult than with multiple branches. You have to be able to spread out your overhead. There are advantages to being close to the customer.
  • I think consolidation will slow. What we saw in the 1990s is over. You have to look at the valuations; everyone would sell for a certain price, but I don’t think there are a lot of players out there willing to pay those prices.
Manufacturers respond:

  • Consolidation is inevitable in any industry. We see it on the manufacturer side too. On the distributor side, it will be much slower, more orderly and much more rational.
  • We’re seeing the sharing of inventory between two major independent rental companies. They bought equipment they’re going to share – that’s a trend for rental.
  • Manufacturers have two types of consolidation — strategic and financial. We’re doing strategic acquisitions.
Distributors respond:

  • Consolidation will never end. Huge consolidations occurred on the rental side and a new model was formed. I don’t believe we’re going to see the huge consolidation effort we saw in the 90s, but strategic consolidations are inevitable.
  • Banking started consolidating 20 years ago. Now they’re coming in with small local banks. Today, you have the Bank of America and lots of local banks. Local banks are doing well. I think we’re seeing that in our industry.
Manufacturers respond:

  • Inevitably, our market is about choice; consolidation takes away choice. Our nature as humans is to demand choice, but economies of scale demand consolidation.
  • Not a lot of consolidation goes on during an up-cycle. It’s when we get to the top and start down that things happen. That’s where we are now – at the top of the cycle.
  • We don’t want any of our dealers to get too big.
  • In rental, there’s still a place for good "mom and pop" shops in a lot of areas. I know people who don’t like going into a dealership, stopping at a door with a glass wall and having someone tell them to wait there. A lot of people don’t like automated voicemail systems. Let’s not forget the customers that come in the door with muddy shoes. They are the ones that write the checks that fund the whole thing. If a "mom and pop" is well funded, they are still going to be a significant competitor. They can run on virtually nothing, and they don’t have to worry about investors.
Manufacturers respond:

  • Demming’s model is "The first rule of business is to stay in business."
  • I’m hearing from some multiple-line dealers that they plan to narrow their list of manufacturers in the next downturn.
  • Maybe consolidation is the wrong way to put it; it’s channel development.
What are the issues in manufacturer/dealer relations?

Manufacturers respond:

  • We’re starting to use Lean principles. It gives us a better understanding of the problems we cause dealers.
  • We all wish we had a better relationship with the distributor.
Distributors respond:

  • There are three entities: customers, distributors and manufacturers. Within each we tend to focus on input and output. We need to look at input on the manufacturer end and output on the customer side and streamline everything in between. Little things like bar coding – there’s nothing standardized in our industry.
  • We send a guy to change forks and one has a 2-inch pin and the other one has a 21/4-inch pin. Those things are hugely frustrating.
Manufacturers respond:

  • I’m sure every manufacturer has ideas of what benchmarks should be for distributors and I’m sure they’re somewhat – if not totally – self-serving. However, I do think there are benchmarks that could be identified.
  • Benchmarks tend to be an internal measure of success but are they a measure of what the customer thinks?
Distributors respond:

  • We bar code every work order, but we can’t bar code parts because there is no consistency from the suppliers.
  • The excess in product is our biggest challenge.

Manufacturers respond:

  • I have 30 dealers’ cards on my desk and their biggest complaints is manufacturers are forcing products on them. Machines show up that they didn’t order. When you’re getting product shipped to you that you don’t need, it drives up your cost.
Distributors respond:

  • We have a constant battle with changes in personnel on the manufacturing side. I can’t tell you how many times I’ve had to introduce myself to different people during a one-year period. As soon as I get to know someone, they’re out of the position.
Rental companies respond:

  • We’re a major national account to manufacturers. We’re taking on more products than entire dealer networks – we’re a "phantom" dealer. The dynamics have significantly changed and I don’t know if we’ve addressed that as an industry. I’m a national account acting as a phantom "dealer" and I’m a customer, yet where’s my voice in this?
Distributors respond:

  • I’m a customer, too, for my rental fleet. Am I a customer when I buy product for my rental fleet? The manufacturer doesn’t treat me like a customer. They look at the end user as the guy that owns it for the life of the product.
Manufacturers respond:

  • Our vision is to take the dealer’s cost out of doing business until he needs that equipment. Don’t pay right away for the product; pay when the customer wants it. That’s when our dealers are going to pay for it. It’s not going to be lean manufacturing or lean distribution.
Distributors respond:

  • Thirty years ago, there were more manufacturers and each one had fewer models, and they were distributed through fewer channels. The distance between the machine and the customer was much greater than it is today. In those days, we’d serve customers 500 miles from our nearest location. Now it’s the other way round. There are fewer manufacturers with more product lines. If a machine is 50 miles from a customer, there’s no way to serve him. How do we take the cost and investment out and still serve the customer?
  • Even though business is more complicated and the issues are more challenging, relationships are better than they were 10 years ago.
  • How many manufacturers today have dealer-wide inventory databases so you can see how much inventory is in the system and where it is? That would take cost and investment out of the channel.
  • The manufacturer comes in to do an evaluation of a dealership and it’s a one-way street. If a dealer wants to represent something else, he can’t do it, but a manufacturer can add products and the dealers have to take it.
Manufacturers respond:

  • Manufacturers don’t come up with those ideas; people do.
How bad is the technician shortage?

Distributors respond:

  • There is a definite need for qualified technicians. How do we get thousands more a year into our industry?
Manufacturers respond:

  • We have to start somewhere. To be very successful, you have to guarantee jobs. You have to do it at the local level.
  • We have to design an apprenticeship program. We should offer scholarships. You can't just go out and hire kids right out of school.
Distributors respond:

  • We offer scholarships. We have three or four technicians now that we're helping put through school. We ask them to work for us for two years when they get out.
Manufacturers respond:

  • Kids are coming out differently educated than they were when we graduated. They want to know what's next. A career path should include an organizational chart, pay grades, and training to achieve different goals.
Distributors respond:

  • The AED Foundation has all of that, but people aren't using it.
  • We're competing with UPS and FedEx; that's who's taking the technicians.
  • We're hiring one technician every other day because we lost one. They're hard to find.
  • We have a graying workforce, and it takes a minimum of three years to develop an experienced technician. The guys with 10 or 20 years experience are like gold. They're very difficult to replace. You invest a lot in training them. We have to develop training programs, long-term recruiting, career paths, compensation, training and opportunities. If you can't provide service, what's the point of being a distributor?
  • Is there a way to make it easier to work on machines? Equipment seems to get more and more complicated and frequently, it's that stuff that makes diagnostics and repairs difficult. Is there an opportunity to make something that technicians without 20 years of experience can fix?
Manufacturers respond:

  • It's not going to happen. Efficiency, reliability, uptime, and safety are driving the technology. We can't do what we need to do without it.
  • We could do a better job of finding commonality between models.
  • We've spent a lot of time unitizing componetry, using one piece where we use to use four or five. We've tried to simplify product as much as possible to make it easier to build.
  • With some companies, you're part of a team, like the military. There are cultural and social aspects that we might not be playing as well as we should. "Be a proud member of the team that builds the country." We're missing this piece of the puzzle. We grow the food, raise crops, and build bridges - we make it all happen with our equipment. It's not just money and benefits; it's being part of this industry.
  • I've learned a lot from the military, particularly regarding recruiting service technicians. Recruiters are in high schools recruiting early. The military says, "Sign up with us and you'll get all these things for three or four years."
  • We don't pay technicians enough. There's not a shortage of technicians; there's a shortage of technicians willing to work for what we're willing to pay.
Distributors respond:

  • In the end, you will get the quality of technician you market. If you continue to market your technicians at a certain value, that's what you'll get and you won't survive.
  • Some of us are bound by union contracts. I have to hire my guys from a hall and take what I'm given.
How will dealer succession issues impact the industry in the next 10 years? How do manufacturers feel about public ownership of dealerships?

Manufacturers respond:

  • The potential for public companies to buy dealerships is a concern.
  • Manufacturers are opposed to it because of disclosure issues, etc. plus there's a short time frame in which they're trying to make profits.
  • I disagree. Publicly held dealers have to look for growth, just like publicly held manufacturers.
  • There is public money in dealerships; it's in rental. They have access to capital.
Distributors respond:

  • Manufacturers want succession planning from dealers, but how do manufacturers reciprocate?
Manufacturers respond:

  • Hedge fund groups are sniffing around the industry. We've been approached by a few.
  • And their normal exit strategy is to go public or sell to another hedge fund. They may come in initially as a partner to provide funding but eventually they'll want to cash out.
  • I think we'll be looking at a roll-up of dealers like we saw with rental companies.
Are third-party providers of product support a concern?

Distributors respond:

  • We don't see much of it. We do see contractors doing more of their own service.
  • We're seeing dealers contract out field service technicians, but you lose control of what that technician works on. He's working on other brands.
How will e-sales impact the industry during the next five years?

Manufacturers respond:

  • We're not looking to sell stuff on the Internet. We have to support the product and not just sell something and forget it.
  • We will sell parts over the Internet to the channel but not to the end user.
  • We don't sell direct via the Internet, but we have a lot of dealers that do.
Distributors respond:

  • Will the customer demand the ability to do business with a distributor over the Internet? The business systems we use would have to develop that functionality.
Rental companies respond:

  • We've probably sold $5 million to $6 million in whole goods over the last six to eight months in all price ranges, and quite frankly, I've been shocked at how well it's gone and the kind of pricing we've been able to garner. I'm from the old school. When online sales started, I thought who would ever buy $200,000 machines over the Internet, but it's turning into big business.
Distributors respond:

  • We've sold equipment on eBay. We didn't make money on it. We were getting rid of junk, but we turned it into cash.
  • There are a lot of searches for used equipment on the Internet, but the transaction is done over the phone.
Rental companies respond:

  • We've had success selling over the web, but it's also been small and controlled.
  • To some degree, the people buying used equipment via the Internet aren't the most experienced buyers out there. They come up with some criteria to determine whether they'll buy the equipment or not. If it does this or that, it's good. People who have a phantom set of criteria purchase billions of dollars of equipment.
  • People are comfortable with the Internet. We get great margins on the equipment we sell. I can't believe some of the margins and some of the equipment we've sold there. I think it'll grow quickly.
Distributors respond:

  • We've seen the Internet become a de facto pricing mechanism for smaller used equipment. It's also taken out the disparity of what something is worth here as opposed to in Idaho or Texas or Florida. It's leveled the playing field across the country.
Manufacturers respond:

  • Is the equipment selling with no reserves?
Rental companies respond:

  • We're doing both reserve auctions and classified sales, which are not really an auction. You put it out there and you get an inquiry or you don't. It seems to be working both ways, and we're finding the trick is to provide a good description of what you're selling and 10 to 12 pictures, so the customer has a good feel for what he's considering buying.
Distributors respond:

  • What about renting online?
Rental companies respond:

  • It's not a high percentage of our volume. It's a convenience to customers who know what it is they want or are a national account.
Distributors respond:

  • When they click the rental order to reserve it, do they know you have the product?
Rental companies respond:

  • Yes.
Distributors respond:

  • My system won't even let me do a reservation.
Rental companies respond:

  • Business to business on the Internet side is huge. And it can reduce our collective cost of doing business.
Distributors respond:

  • Who's going to support it - the Help Desk?
Manufacturers respond:

  • Are new emissions requirements and increasing sophistication of the equipment going to drive business back to the dealers because customers won't be able to fix it?
Distributors respond:

  • Once you get into that level of software, it's very complex. It will bring customers back to get a high-quality certified technician.

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