Regional Reports Identify Dealer StrugglesMcGraw Hill Construction Editors
Article Date: 08-01-2008
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.
McGraw-Hill Construction editors provide insights in eight areas.
Editor’s Note: It becomes progressively more difficult to cite very many universal truths about the U.S. construction equipment industry – except in the present “perfect storm” in which we now find ourselves. Despite the variances among myriad metropolitan markets that dot the nation’s landscape, dealerships in most if not all regional hubs of business are being battered by the same rocky conditions: the housing decline, credit crunch, increasing fuel and steel costs, labor shortages, and a generally soft economy. Throw concerns about the election and taxes into the mix, and you’ve got a heck of a cyclone brewing.Editors from the regional publications of McGraw-Hill Construction have contributed brief reports reflecting the state of affairs in eight geographic areas around the country, offering a synopsis of how dealers are coping in this fierce climate. Many thanks to these journalists for checking in with AED members.Lower Interest Rates Close Gap Between Labor Shortages, Escalating Steel CostBy Sam Barnes, editor, South Central Construction and Eileen Schwartz, editor, Texas Construction Equipment distributors in Texas and Louisiana report a give-and-take market for 2008. In an economy where everyone is trimming fat and equipment prices are going up, the decision to purchase or rent construction equipment isn’t so much the issue. Instead, customers are asking, “Can we do with what we already have?” said Jim Anderson, president of Anderson Machinery Co. in Corpus Christi, Texas.
Anderson says that material costs, particularly steel, have had an affect on business, with manufacturers’ prices rising multiple times this year. Escalating oil prices hurt, too.“The cost of incoming freight has more than doubled,” Anderson said.Despite that, he says compared to this time last year, business is “off some, but still okay. Lower interest rates have helped us to close with people on the edge,” he said.Whit D. Perryman, an at-large director on the AED board and CEO of Schertz, Texas-based Vermeer Equipment of Texas Inc., also says manufacturers are raising prices. “In some cases, mid-year. The prior norm was once a year.” Perryman and Anderson say energy-related industries remain strong in Texas.Vicki Collins, director of marketing and human resources with CLM Equipment Co. of Lafayette, La., says difficulty in getting equipment technicians and operators is significantly impacting equipment distributors in the South Central states. “That weighs heavily on our minds,” Collins said. “The same labor shortage being felt by contractors is also affecting us.” In some cases, distributors are pulling technicians from other areas of the country, where the shortage is not as severe. CLM is involved with the Louisiana Department of Labor and local chambers of commerce in developing new training initiatives. Collins says equipment prices have continued to escalate, primarily due to rising steel and transportation costs. But she says contractors in Louisiana and other coastal states are benefiting from a decrease in construction volume being felt in other parts of the country. “We’ve seen really good availability and shorter turnaround times for equipment,” she said. “The longest time a contractor has to wait for a machine is 12 weeks, but that would be the exception. Most of the time it’s two weeks to a month.” Collins agrees with Anderson that lower interest rates provide another incentive for contractors to buy rather than rent equipment. Perryman says lower rates appear to be less effective “as contractor backlogs are shrinking.” He says in his region, purchase demand is down, but rentals are up “as contractors are taking a conservative approach.” He adds that the primary concern for contractors is the price of diesel fuel. James Emery, president of Emery Equipment Sales & Rentals in Baton Rouge, La. says equipment prices would be even higher if not for the national decline in housing construction. “I was expecting more significant price increases, but I think manufacturers are a little leery of raising prices right now,” Emery said. “They need to keep the machines moving through the factory. “We’re also getting the benefit from nationwide programs that are being used to offset market declines in other regions, and that helps our pricing.”
Nonconstruction Sales Help Northwest Stay Afloatby Lucy Bodily, editor-in-chief, Northwest Construction Slow sales in the Northwest have machinery dealers thankful and fearful at the same time. “We’re down about 5 percent, which is not nearly as bad as forecast,” said Patrick McConnell, president of Clyde West, Inc. in Portland, Ore. “But I talk to guys in other parts of the country and things are really ugly there.” The main difference is that last year, the dealer had a back log of orders. This year there is none, McConnell said. The Volvo dealer has the advantage, mostly because the manufacturer focuses on fuel efficiency, he said. With gas prices higher every day, contractors are focusing on gallons per hour. The majority of sales aren’t in the construction sector, McConnell says. Demolition, dock work and agriculture sales are doing a better.
Midwest Dealers Face an Unforgiving MarketBy Craig Barner, editor-in-chief, Midwest ConstructionA harsh market situation is confronting construction equipment dealers in the Midwest.Construction activity is declining in many sectors due in part to a recessionary economy, tight budgets and low consumer confidence as shocks from the subprime crisis first detected almost two years ago keep reverberating.Contributing to dealer pressure are unorthodox market dynamics in the era of free trade. Robust demand for construction materials from India, China and the Middle East is causing the cost of construction materials in the U.S. to hold or go up – mostly notably for fuel and oil-related products – even as the domestic economy sputters. Oil is trading for around a record of $140 a barrel, even though Americans are conserving fuel by curtailing their automotive use. “It’s kind of a perfect storm here,” said Dennis Kruepke, president and CEO of Addison, Ill.-based McCann Industries Inc., with wryness.As a result, equipment revenue from sales and rentals is dropping. Kruepke says sales overall are down 15 to 25 percent compared with the comparable period a year ago. “A lot of dealers depend on housing, nonresidential work and road and bridges,” he adds. “Housing is the worst of the three, but now your nonresidential is slowing as well.”Echoing the situation is Miller-Bradford & Risberg Inc. in Sussex, Wis., says Mike Soley Jr., president and CEO.For example, he says sales of articulated trucks have dropped 65 percent. Crawler cranes and excavators are down 20 percent. Wheel loaders and tractor-loader backhoes are “static.”
“Skid-steer loaders and compact loaders are up, but that happened because of heavy agricultural use in Wisconsin,” he said. The biggest impact on dealers is coming from the moribund building market. Data from the Research & Analytics Division of New York-based publisher McGraw-Hill Construction show construction starts in first-quarter 2008 in the Chicago area were down 53 percent, to $2.2 billion, compared with the same period a year ago. Also down were Indianapolis, 22 percent, to $822 million, and St. Louis, 20 percent, to $943 million. A megaproject in the Milwaukee area – the billion-dollar expansion of the Oak Creek Generating Station in its southern suburbs – helped benefit Brew City, which saw a 12 percent increase in the first quarter, to $324 million.But Milwaukee’s situation is unique, and dealers are facing other pressures. For instance, McCann’s Kruepke says equipment rentals – which normally increase as the economy sours – are down about 5 percent due in part to the rising costs that contractors are experiencing.“The field costs have just skyrocketed,” he said. In fact, McCann acts as a supply house for rebar, coatings and wire mesh and has reluctantly had to pass on some increases to its contractor-customers.Torrential rains in the Midwest this spring that have caused serious flooding on the Mississippi River and other waterways have had a mixed effect on dealers depending on their specific location.Those in urban areas are likely seeing a negative impact on business as projects are delayed because of the rain. But those in less densely populated areas are likely getting some activity. “There has been some emergency work that has positively affected us, such as a closure on Intestate 94 between Milwaukee and Madison,” said Soley at Miller-Bradford. “Also, there will be some demolition of homes and businesses because they cannot be saved, but I don’t know how much. It’s still early.”As dealers sort through these issues, they have been forced to make tough decisions. For instance, McCann has laid off about 15 to 25 percent of its workforce, which in late-June numbered 157 employees. Insurance costs are rising, and a decision has to be made about whether to absorb those or pass them on and risk impacting morale. “What we are doing is going into a constrictive mode,” Kruepke said.
Southwest Dealers Hit Hard by Residential, Buoyed by MiningBy Scott Blair, senior regional editor, Southwest Contractor With the Southwest hit hard by the mortgage crisis, many equipment dealers depending on single-family housing are feeling the pinch. “It seems like a downward spiral,” said Dallas H. Moyer, president of Las Vegas-based APCO Equipment. He says that sales were down last year, and 2008 will be down another 50 percent. “The scary part is not knowing where the bottom is.”So far this year, residential construction starts in Las Vegas are down 72 percent off last year’s already depressed numbers. Phoenix is down 52 percent and Albuquerque has dropped 53 percent.
Equipment rentals have also fallen victim to residential’s slump. “The rental market is really tied to the housing industry because they rent the most, and they rent the big stuff, like scrapers, water equipment and dozers,” said Mike Pack, president and COO with Las Vegas-based Cashman Equipment Co. Rental prices have fallen due to lack of demand, exacerbated by some firms selling off parts of their fleet.There are bright spots, however. Mining is very active in the Southwest, and makes up nearly half of Cashman’s business in 2008. While primarily known for its gold mines, Nevada’s mining industry is diversifying into molybdenum, which should help keep mining equipment demand high. Pack says one new molybdenum mine slated to go online next summer has purchased around $85 million of equipment. “If you wanted to purchase a 240-ton truck, then we could sell you one – in 2011,” Pack said.
Commercial construction is also holding up in most areas. While some buyers are just beginning to look at fuel efficiency as an important selling point, Pack says the bigger trend is buyers looking to buy machines that will take them through the EPA’s new Tier 3 and Tier 4 engine requirements, new rules intended to reduce emissions of diesel particulates and nitrogen oxide.Most real estate experts forecast some improvement in the region’s housing market by next year and through 2010, especially if interest rates begin to creep upwards and people continue to flock to the Southwest. “We need residential to stabilize and home building to come back and we’ll be fine,” Moyer said. “I just hope that light at the end of the tunnel isn’t a locomotive coming at us! Mining, Natural Gas Remain Among the Muscle Markets for intermountain By Brad Fullmer, editor-in-chief, Intermountain ContractorThe continuing housing market slump is catching up to various AED dealers in the Intermountain region, causing a sharp downturn in expected 2008 revenues, and forcing them to pursue business in other markets."We are right now down 40 percent, and I don’t see it getting any better,” said Lance Bringhurst, general manager of Intermountain Bobcat in Salt Lake City, a division of Scott Machinery. “A lot of our industry is tied to housing, so we’re looking to expand into other markets that are going better.”“We’re feeling the pinch in the residential market,” said Danny Auer, director of sales for Wheeler Machinery, Salt Lake City. “It’s going to be an off year.” Auer says that the Utah market is down approximately 60 percent industrywide in terms of purchases of new equipment, and things would be even worse if markets like mining, natural gas and oil exploration, and heavy highway weren’t doing so well. "Mining is strong, natural gas and oil exploration is strong, and there is still a lot of infrastructure work going on,” said Auer. “We’ve felt a decline in sales of machines and service, but we were fortunate to have a couple of big sales go through recently so the dollars aren’t off as bad.”Auer adds that overall 2008 hasn’t been necessarily a bad year; it’s just that sales from 2005 to 2007 were so strong that it’s hard to keep up a strong pace.“Even though we’re off [from ’07], it’s still going to be a good year,” he said. “It’s not a stellar year, but we’re not in trouble. We just need to respond to the market.”
Mishawn McKinley, marketing director for Salt Lake-based Arnold Machinery says her firm’s sales are okay, but definitely not as good as the past three years. “We’re still doing great – mining is as good for us as it is for anybody,” said McKinley. “The price of gold is through the roof. We haven’t been hit with any downslide because we’re so diversified that when one market slows down, another picks up.”Bringhurst, believes the housing market will eventually rebound. In the meantime, business will have to be found in other markets.“I don’t think the housing market in Utah is overbuilt,” he said. “We still have low interest rates, so the ingredients are there to rebound. We just need to look at other markets like commercial landscaping, commercial building and even road building.”
Southeast Distributors Feeling Pain of Housing Bust, Economic DeclineBy Scott Judy, editor, Southeast Construction A housing market that is continuing to decline to new lows and soaring energy costs are combining to cause considerable pain to equipment distributors and contractors in the Southeast region.“The contractor base in Florida is getting hit pretty hard,” said Chris Wilmot, president of Flagler Construction Equipment, an Orlando-based Volvo distributor. Wilmot cites the continuing housing slowdown and the “double whammy” from the current downturn in projects funded by city, county and state governments.As a result, he says, “The Florida machinery market is off about 50 percent from 2006 levels. Business is down significantly for all equipment houses in Florida.”Statistics from McGraw-Hill Construction validate Wilmot’s claims. According to the company, through May, new contract activity in Florida is 41 percent behind 2007’s pace, with residential off by 49 percent and nonbuilding – about 45 percent lower than last year.To date, Wilmot says the infrastructure market has held up well enough in 2008. But he sees pressures there, too, as materials prices – such as for liquid asphalt – continue to escalate and a potential significant decline in transportation funding looms for 2009. Elsewhere, the news is similar. “Activity is considerably poor,” said Dusty Zeigler, president of Unified Equipment Resources, a JCB and Case distributor based in Pooler, Ga. “We are nearly 60 percent off last year’s pace. We’re quoting many folks for rentals. However, we get no committals because of the lack of construction starts.”
Zeigler adds, “Both sales and rentals are very sporadic and there is no one type [of equipment] to hang our hat on at this point.”On a positive side, he says the industrial and municipal construction markets have provided some stimulus to the construction slowdown, but he isn’t optimistic about any kind of quick improvement.“We anticipate a down market for at least 12 months…until customers’ income levels can afford a higher (but) stable fuel price and their confidence comes back,” Zeigler said. Wilmot’s expectations for the future are about the same, and definitely more negative than a year ago at this time. Last year, Wilmot expected to see recovery by early to mid-2008. Now the earliest he expects to see some relief is mid- to late 2009. In the meantime, he sees plenty of potential for consolidation.“You’ll continue to see consolidation in the supplier business, in the contractor business, in the distributor business, and you might even see it on the manufacturing side,” said Wilmot.In the end, he says, “It’s not the end of the world. We’ve all enjoyed a lot of years of solid growth and solid returns. Now what we need to do is just manage our business accordingly.”
Construction Equipment Dealers Feel Heat from Rising Fuel PricesBy Nichole Altmix, news editor, New York Construction Increasing fuel prices, coupled with rising construction costs, are significantly impacting equipment sales in the Northeast, regional construction experts say. “The rising construction costs are affecting us incredibly because people don’t want to invest to buy anymore, they want to rent,” Jack Dopp, equipment procurement manager at Pine Bush Equipment Co., Inc. in Pine Bush, N.Y. Incidentally, the rising price of fuel is now affecting Pine Bush’s rental costs as well. “We have to charge increased rental fees because of rising fuel prices,” he said. “We are looking at cutting vehicle use of people going out in the field as well as personnel right now because of the increase.” Casagrande USA, Inc., a foundation equipment dealer in Lafayette, N.J., is actually part of the rising construction costs, according to Mike Steinhardt president of Casagrande USA as well as Casagrande Canada. The company’s biggest problem is the weak dollar. “Ninety percent all of our equipment is built in Europe, so it’s priced in Euros,” he explained. “The value of the dollar has raised the prices to contractors, in order to cover the exchange rate.”Although rising fuel costs is not an impeding issue at Casagrande, USA, it has affected the company in certain aspects. “It makes importing our parts and rigs more expensive…but typically there may only be one or two foundations machines on the site, so running one drill isn’t that significant and fuel isn’t a large part of the operating cost,” said Steinhardt. Additionally, the minimal residential housing starts have also had a negative impact on the industry. “We don’t think rising construction costs are affecting us as much as housing starts being currently way down,” said a spokesperson from Stone Construction Equipment, an OEM in Honeoye, N.Y. “Rising fuel costs, however, are affecting everyone in the same way and we are all trying to find ways to deal with it.”
All three sources anticipate a market turn around in 2009.
In California, Dealers Must Abandon Housing to SurviveBy Joe Florkowski and Robert Carlsen, California Construction Stephen Nixon, president of Nixon-Egli Equipment Co., which has operations in Ontario, Canada, and Tracy, Calif., says that equipment rental remains strong for his company and the industry, particularly in the crane market. “We sell every crane we can get,” Nixon said.Part of the reason for the strength of the crane market is such equipment is not as reliant on the flat housing industry, he says.“Let’s be honest – you don’t need cranes in a housing development,” he said.Other markets, such as those for pavers and grinders, are a little soft, says John Skaff, Nixon-Egli’s vice president of contract sales. That type of equipment is more reliant on housing developments, he says.“The housing market has left us,” Skaff said. “There are no new roads being built into housing developments.” Nixon-Egli Equipment is having a better year than last year but the economy looms as a big issue, according to Nixon.“There is no question we’re headed into a recession,” he said. “No one is quite sure how long it will last, but by the end of this year we’ll know where we’re going.” At Shanahan Equipment Co. in San Leandro, vice president/general manager Gale Plummer says his firm’s heavy equipment segment is fairly depressed, feeling the effects of the state’s housing slump.However, Plummer says mining equipment and government infrastructure business is doing well.
Shanahan Equipment is the exclusive distributor for Komatsu and Dressta mining, construction, and utility products from Arcata to Bakersfield, with seven branches in Arcata, Redding, Sacramento, San Leandro, Bakersfield, Fresno, and Reno, Nev.“The market for new machinery is off 40 percent,” he said. “Added to this slump is the new emission rules for off-road vehicles and all the questions that brings up and you can understand why companies are not making capital investments.” Last summer, the California Air Resources Board adopted regulations requiring the reduction of oxides of nitrogen and particulate matter emissions from off-road equipment. These regulations are expected to reduce emissions of air pollutants from diesel engines by 74 percent for particulate matter and 32 percent for oxides of nitrogen by 2020.
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