West Regionís Struggles Compounded by Tough Emissions RegsBy Gale Plummer
Article Date: 01-01-2008
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West Coast Region
San Leandro, Calif.
Housing remains the key downward pressure for the West. Housing starts vary from slightly down in a few regional areas to more than 20 percent below the 2006 pace. Excavator sales have slowed dramatically as major underground and site preparation projects have been delayed and/or canceled in much of California, Nevada and Washington. The majority of housing in this market is done by major builders on 400 unit and up greenfield sites. These are the key customers our construction equipment users relied on during the past run-up.
A bright spot for regions in the West is the commodities market, specifically metal mining. Record prices for gold and copper have helped soften the impact of the construction market for many AED members. Unfortunately, not all Western region members participate in the mining segment.
California's bond issue, valued at around $20 billion, has been slow-turning projects into direct funding of construction work. Expectations for 2008 and beyond call for a number of large projects to finally get off the drawing board and into the dirt. Given the large number of idle machines, the bond issue may be a boon for product support but may fail to rally unit deliveries.
Southern California may see some improved results as the rebuilding from recent wildfires gets underway.
In terms of the region's challenges going into 2008: California has passed very aggressive emissions regulations that, over time, will require major upgrade of existing fleets to the best available technology. This will include early retirement of Tier 0 to Tier II engines and aftertreatment of a majority of the existing machine fleet. Some have suggested the cost of compliance is in the billions of dollars.
California today has an expected deficit of $10 billion for the coming year. Money is already being shifted from traditional infrastructure projects, unrelated to the bond issue mentioned above, to health and welfare projects, further depressing the equipment market.
Most states are suffering from overall tax shortfalls as the pace of homebuilding depresses the overall business climate. Soaring costs for oil-related construction items like asphalt as well as increased overall fuel costs translate into less equipment needed for each dollar spent on projects.
Many large customers have surplus machines available to rerent or utilize for new projects. The average run hours, recorded by electronic means, for construction equipment in the West are down 30 to 40 percent from peak usage of '06. As customers have become reluctant to purchase, dealers have made RPO and rental agreements more liberal to capture available sales. There is a major shift from just 12 to 18 months ago when equipment was on allocation from the major suppliers and sales trumped rental every time.
Strategically speaking, we are actively engaged in repowering machines for emissions compliance. In 2008 we will add capacity to our used equipment marketing efforts to transfer Tier 0 to Tier II machines out of California. Even with the downturn in unit activity, our product support business will eke out some growth in the coming 18 months. A focus on customer service as well as raising our absorption ratios are keys to the coming 18 months.
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