Navigating the Next Bend - Together - 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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Navigating the Next Bend - Together

Compiled By Mary Sedor
Article Date: 08-01-2007
Copyright (C) 2007 Associated Equipment Distributors. All Rights Reserved.

The dealers and manufacturers gathered at AED's Industry Round Table dialogued openly about trust, planning, rental and more.
The dealer-manufacturer relationship has been likened to a marriage – in which case the May meeting of dealers and manufacturers sitting face-to-face and sharing honest opinions might be considered the AED equivalent to a marriage counseling session. On May 8, AED’s annual Industry Round Table convened to address a host of critical topics that touch both the relationships and individual businesses involved in the CE distribution channel.

Industry forecasting, the impact of Chinese manufacturers and succession planning were among the tough subjects the group addressed.

Essentially, the Round Table is a focus group comprised of senior executives – both manufacturers and dealers – of major construction equipment lines. The group is charged with the task of analyzing, developing perspectives, and providing recommendations for AED on key issues and trends affecting the distribution channel.

In many instances, participants in the dialog shared their candid (and even brutally honest) points of view, and the group did not always arrive at consensus or conclusion. The editors of Construction Equipment Distribution present the highlights from this year’s meeting in an outline format – organized by discussion topics – to give the AED membership an overview of the chief discussions. Round Table members who are quoted are not identified by name in order to preserve and encourage candor and freedom of expression throughout the meeting.

 

Forecasting Change

Forecasting changes in demand for construction equipment is a perennial challenge for dealers and manufacturers. How do dealers/manufacturers predict fluctuations in demand? a) What economic indicators are used?

b) How accurate are these tools?

c) Are dealers and manufacturers held accountable to their forecasts?
If so, how?

Manufacturers and dealers alike agreed that neither of them is very good at forecasting change. The problem that occurs with forecasting is that the manufacturers are working to supply equipment to the dealers in a timely manner, and it’s incredibly difficult to predict how much equipment the dealers will need.

 

Dealers said:

  • "Forecasting is a big issue. Manufacturers have a hard time trying to provide equipment in a timely manner, and distributors are not the best at forecasting. It puts us all into this tough process."
  • "We do a 12-month forecast. Every month we’re looking out and asking ‘what did we sell, what do we think we’re going to buy.’ You can see 30 and 60 days out, but beyond that it gets foggy."
 

Manufacturers said:

  • "We’ve been struggling with that for five years. We’ve concluded that it’s almost impossible to forecast. We’re extending our responsiveness upward to the dealer channel and down to the supply base. We’re firmly convinced that the most inefficient part of business is from the factory door and out. We’re developing a system to link to dealers electronically to reduce reaction time between 50 and 75 percent.
  • "We wind up building the wrong product because we thought that’s what everybody said they needed."
  • "We look at highway funding and we try to use energy prices and such, but the reality is the dealer is the one out in the marketplace. They are our eyes and ears. I don’t think we have good models in place. It’s all hit or miss."
 

Business Plans

How many dealers supply their business plans to the manufacturer?

Of the 10 dealers in attendance at the meeting, six said they provide their business plans to the manufacturer. Most dealers said they found the exercise of having a business plan to be helpful, but say that some manufacturers don’t use the business plans once they’ve received it. Manufacturers responded by saying that they find having the business plan to be helpful.

 

Dealers said:

  • "In all the years I’ve been putting strategic plans together, once it goes to the manufacturer it’s a worthless piece of paper. We would go through the exercise, spend a day preparing it and find it was a total waste of time. It never became a working document."
  • "We do a strategic plan because we want to do it. We try to look three years out, and then we do a more detailed plan over the next 12 months. We sit down quarterly and review it and write action plans. Everyone knows what we’re doing and our people are held accountable. We do it because we need to be doing it and to keep everyone on board."
  • "In the short term, a strategic plan of four or five years is invaluable. I recommend every dealer should look at their strategic plan and see what they can in three years and five years. Even though a lot of this is ‘seat-of-the-pants,’ you’ll have indicators to look at to give you some feel for [how to plan.]
  • "I think what we’re dealing with is two worlds colliding – the macro and the micro. We do formal business planning and then we never hear about it again other than when we submit an order or we missed the order board. On a macro basis, it would stand to reason that manufacturers would see a more global perspective. Obtain your global data, use your global information to create a trend line, and then consult with the dealer. We could anticipate some supply shortages, but there would be no break in communication."
  • "All business is local. I think the big challenge in all business is two-way communication. Planning is fine, but it’s what eventually comes out of the planning and how you work together to manage the plan that matters. That’s what we don’t see in our dealership."
 

Manufacturers said:

  • "We have very strong AED distributors that have a total lack of strategic planning."
  • "Where we have seen some drawbacks is when we ask for strategic plans, dealers feel they are going to be held too accountable. They feel like we’ll come back to them in two or three years. We’re trying to get over that mentality."
  • "We look at it from the overall process point of view. We recognize there is a very big distinction from the manufacturer point of view to the development and delivery of value to the distributor. The distributor is the best person to deliver the value. We can develop a very good strategic plan and develop value that the dealer can deliver to the end user. Manufacturers can and should develop more value for the dealers to deliver."
  • "If manufacturers supplied data to dealers, how much would dealers believe it? For instance, coming out of 2003, anyone in the crane industry would agree it was one of the worst construction markets. We saw some things turning in 2004 and we tried to convince the dealer base that we saw some things on the horizon, but it was such a bad time you couldn’t convince anyone."
 

The Impact of Chinese and Indian Manufacturers

When will products manufactured in China and India begin to significantly impact the North American market? What will their channel strategies look like?

At this point in time, none of the dealers in attendance represent any Chinese or Indian manufacturers. However, many manufacturers say they’ve noticed an increase in the amount of Chinese equipment at industry trade shows. One manufacturer noted that XCMG is aggressively looking for dealers, and Sany is opening a manufacturing plant in Illinois, meaning the Chinese manufacturers will have an impact – sooner rather than later. Dealers are struggling with what price point the Chinese and Indian manufacturers will come in at, which could impact their ability to retain customers.

 

Dealers said:

  • "The Chinese manufacturers will have a $2,500 automobile by 2010. There is already a $7,000 no-frills model, and yet we continue to put bells and whistles on our construction equipment. At some point we’re going to hit a price break. We’re at $300,000 and they will come in and offer one at $100,000 that does the same job without the bells and whistles."
  • "Generally speaking, the Chinese manufacturers pick a couple of products in different product categories in high industry classes. They don’t have a full breadth of product. Would customers gravitate toward that and at what price point? I don’t know the answer. Product support is very high on our customers’ radar screens, and their expectation level is high. I don’t see that getting watered down if the Chinese come in with a low price."
  • "What’s important for all manufacturers to understand is the product life cycle of the equipment you sell. You can get too enamored with service and support and ignore manufacturers like Sany."
  • "I think a big factor in how successful Chinese and Indian manufacturers are going to be is distribution. There is always room for new manufacturers with a lower priced product. I think that’s going to be a problem because of consolidation in the distribution industry. Assuming that continues, there are going to be fewer good choices for those new manufacturers."
 

Manufacturers said:

  • "We can’t bury our heads in the sand. It’s here and it’s going to come faster."
  • "I’ve seen the influence of foreign manufacturing for the last seven or eight years. We’re still in denial. The interesting thing is that now they have the attention of the stronger dealer network."
  • "We like to have this false sense of security that they are going to come in and be cheap and they won’t be able to support the equipment. I think that would be a fatal mistake. One of the challenges with the global economy is that everything goes at a faster pace."
  • "Distribution is the key. I don’t think anyone can be successful with just a direct strategy. I don’t think we need to look too far behind our backs to see it coming."
 

Issues Impacting Manufacturer/Dealer Relationships

What are the key issues?

The consensus around the table was that trust, communication and clarity are among the most important aspects both manufacturers and dealers alike must work on to improve their relationships.

 

Dealers said:

  • "I think manufacturers that treat dealers more like their customers get more respect than if they treat them as an avenue to their customer. The more open communication dealers have through dealer councils, the better off everyone is."
  • "Trust is absolutely vital and in this industry – it’s the bottom line."
  • "We look for manufacturers to deliver products on time. We make commitments to the customer, and when it doesn’t get there it creates friction and cost in the channel. You have to have the best loyalty between the manufacturer and dealer for continued growth. You must work together."
  • "We each have our roles to play. In our dealership, no one is bringing us into the board meetings of manufacturers. You enter into this ‘marriage’ with expectations. You both thought it was a good idea to get married and the first thing they want to do is work around the marriage rather than have a tough conversation about what they want to do to strengthen it."
  • "Getting full clarity from the manufacturer is important – what are their goals and how does their distribution work."
 

Manufacturers said:

  • "Many times when we start talking about manufacturer/dealer relations it comes down to a lack of trust. We need to eliminate waste in this industry and broken down communications. There is a lack of understanding."
  • "The level of trust is not there. We both approach it from independent business perspectives."
  • "The manufacturers that have the best market share and the highest customer satisfaction are the ones that have learned to trust the dealers [and] have transparency and communication."
  • "There needs to be more understanding on both sides so that there is a full value stream from end to end."
  • "I’ve been a manufacturer all my life, and I put the blame pretty squarely on the manufacturing segment. They are pushing stuff out to wholesale and clogging up the channel even though utilization is ‘first-in-the-dirt’ market share. Let’s talk about consignment. It’s cheaper on financing costs as opposed to dealer net. Let’s leverage the capabilities instead of doing it the way it was 20, 30 years ago. Let’s figure out a way to work together."
 

Succession Planning

How will dealer succession issues impact the industry in the next 10 years?

As the dealer principles in the construction equipment industry age, manufacturers must be aware of what the future holds for the equipment dealership. Dealers, on the other hand, must also create succession plans well in advance of retiring simply because it takes time to ensure the talent is in place to run their dealerships.

 

Dealers said:

  • "One of the things manufacturers are going to have to get their arms wrapped around in the next 10 years is the demographics of their dealer networks."
  • "It’s amazing how many 72- and 75-year-old dealer principals there are with sons and daughters who don’t want anything to do with the business. The talent and the capital aren’t there."
  • "One of the things we hear from manufacturers is their concern to have skilled managers running these dealerships versus family members or people who grew up through the business. They want trained people with degrees in accounting and finance."
  • "I think there are two aspects to succession. One is operation – that’s your leaders of the future who will succeed the existing management. The second aspect is financial, and that one is looking into the future. How do you value your business? I’m quite confident that the vast majority of dealers don’t have a clue. I don’t think distribution management spends enough time truly understanding all their assets, liabilities and debt."
  • "We talked with the manufacturer about our succession plan. You have to take it way in advance, identify what you’re going to do and what traits you’re looking for. You can’t ask one person to have all the financial background. You have to hire people who will have the background and develop those traits. That takes time."
 

Manufacturers said:

  • "We feel uncomfortable having a low percentage of dealers with succession plans. It seems as a manufacturer we have to push that."
  • "The manufacturer has to provide more training, whether it’s their own sponsored training or not, they have to take a proactive approach and help with these types of things."
  • "I think it’s our role to bring it to your attention that you must have a plan."
  • "We talk to dealers about the future so they are confident their business will be around for another 20, 30 years. There is a tremendous shortage of good distributors out there. We try to go out of our way to make the distributor comfortable with us to the extent of the investment we’re making in their business. [We want to] make the distributor aware that his business is going to succeed."
Rental and Its Impact

Will rental continue to grow as a percentage of how customers consume equipment? If yes, what percentage of <100-hp equipment will be in rental fleets five years from now?

Manufacturers and dealers agree that rental is growing and will continue to grow. One dealer noted that a lot of what the construction industry does mirrors the auto industry. Rental became popular between five and seven years ago in the auto industry, and more and more end users asked if they could rent the equipment. Today, at least one manufacturer says the pendulum is swinging back to the independent dealer.

 

Dealers said:

  • "Rental continues to grow. As we look at the marketplace, we continue to see a shift from ownership over to rental. I’m not sure how fast that will shift. All of the studies I’ve seen show that the shift continues to grow and more of the fleet will end up in rental than it is today over the next several years."
  • "If you look back eight to 10 years ago, the amount we were selling versus RPO has increased substantially, and it will continue to increase. Customers are looking more at statements than utilization."
  • "The more complex a product, the less successful it is in rental. You need a repeatable use of product and a commonality in order to be successful. You can’t be a "one of" rental."
  • "One of the best definitions I’ve ever heard of rental versus dealer was by Dan Kaplan. He said, ‘Rental is summed up in five letters: G-R-E-E-D.’ You’ve fulfilled your obligation to the manufacturer but not yourself.’ There’s a different dynamic at work in rent to rent versus rent to sell."
 

Manufacturers said:

  • "The dynamics over the last 15 years have changed. In the early 1990s the amount of sales that went to crane rental companies was less than 40 percent. Today, in the advent of crane rental companies or just a rental company, it’s upwards of 60, 70, 80 percent of their business. Now we have dealers who have small rental fleets because that’s what people want to do – daily, multi and the RPO side of leasing."
  • "The pendulum is swinging back. We are seeing people who sold out of the business getting back in. This is a relationship business and it’s done locally – that’s where the dealer excels, and the pendulum is swinging back toward the independent dealer."
  • "The less-than-100-hp equipment is sold and serviced within a 25-mile radius of where it’s being operated. We’re not selling direct to rental any more than we’re selling direct to dealers. It’s a channel, and it’s here to stay. From our perspective, we see it as a growing market not a scourge."
  • "Manufacturers that let rental chains talk them into thinking they are only a commodity – shame on them because that’s the kiss of death."
 

Recruiting and Retaining Employees

How can dealers attract quality employees? How will generational issues play out? How are dealers affected by the technician shortage?

Dealers are still having trouble locating and keeping technicians. Manufacturers and dealers believe the root of the problem lies in the negative stereotype that the public has of equipment technicians. Both manufacturers and dealers agree that they must work more closely with schools to change the image and get the word out about the career opportunities available.

Dealers said:

  • "The industry needs a presence with school recruiting departments and university managers. Kids have no knowledge of this industry."
  • "Once you get them in they get hooked because it’s real world and they get to play with big toys."
  • "Employee benefits are the ante
    you need just to be in the game.
    If you don’t have it, it’s counted against you."
  • "We’re reactive instead of having a proactive plan – we need to show them it’s a career. We need to get involved in schools and get the word out because the shortage isn’t going to change."
 

Manufacturers said:

  • "In our industry, we tend to ignore the four-year degree campus – we think we won’t attract them. There are good people out there who have the desire and are focused on two-year degrees."
  • "We must do a better job recruiting the younger generation. Service today isn’t the greasy, dirty job it used to be. Today, they pull out electrical components and plug in a laptop."
  • "High school is too late. We should start talking to kids back in middle school. We need to get involved with local school districts and tell them what kind of levels of compensation there are in this industry."

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