RERMAG

Outlook 2005

Terex CEO Ron DeFeo has never shied away from making bold moves or controversial statements. And Wacker’s vice president of sales and product support Dave Christifulli has never lacked a thoughtful forward-thinking perspective about the industry. In the following interviews, DeFeo and Christifulli discuss the future of manufacturing, rental, the global economy and more.

We Intend to Grow

RER: There has been considerable consolidation among equipment manufacturers over the past few years. Do you expect to see this continue over the next few years?

DeFeo: Our industry, although significantly better than a few years ago, is still a very fragmented business. Our desire and expectation is that further rationalization will take place, but in order for that to happen we will need to see companies willing to step forward and be leaders in this change. We have always put the interest of our owners and customers first, but Terex cannot effect this change alone.

Steel shortages are an area of much concern and many manufacturers are adding surcharges or raising prices of equipment because of increased costs. Do you expect steel availability to continue to be a long-term problem, and what must manufacturers do to address this issue?

We fully expect that steel will remain an issue for the foreseeable future, both in cost and availability. However, there are many factors that go into the future availability and pricing of steel, including the Chinese demand and the automotive sector consumption, each of which have the ability to materially move the market on a relatively small percentage demand swing.

With regard to the North American market, 2004 was a year of rapid demand increase, and the pricing of steel directly reflected this sharp demand increase. As we go into 2005, a continued strong agricultural equipment market, and the recovering construction and infrastructure markets, will continue to stress the system. Our challenge at Terex is to ensure that we get ahead of these issues, be creative in our sourcing of materials, and ensure that our pricing of our products to the end market continues to reflect the growing cost base.

What kind of impact do you expect the weakened dollar to have on construction manufacturers?

The weakened dollar will help bolster the export pricing of American manufactured products. For Terex specifically, a weak dollar is more of a negative, as more equipment is imported into the United States market, mostly from the United Kingdom and Germany, than is exported out of the U.S. Ultimately, our challenge and responsibility is to effectively manage currency movements and to set up a manufacturing system that creates the flexibility that will allow for us to buffer the impacts of the movements.

Fuel prices have risen significantly and probably will continue to do so. What kind of impact do you expect that to have on manufacturers?

Fuel pricing is one aspect of the global economy that we need to keep an eye on, but by itself won't have a meaningful impact. The truth is there is a great demand for infrastructure improvement and equipment, and that demand should prove fairly resilient. However, as oil continues to rise, and steel prices and other commodities also continue their upward trend, a slow-down potentially could become a reality.

What impact will all of the above-mentioned issues — consolidation, steel shortages, the weakened dollar, rising fuel prices — have on the rental industry?

Again, the fundamental demand is there in the marketplace. Similar to our business, the rental companies will need to be leaders in passing through their cost increases through increased rental rates. The end market demand for these products is increasing, and the market can bear some increase in rates. On the flip side, however, pressure will remain on the rental channel to continually improve their fleet management skills, and use this improved ability to help buffer the other pressures on their business, such as increasing input costs.

Speaking of consolidation, is Terex likely to continue to make acquisitions in the coming years? Any particular areas you could discuss at this point?

Our industry is very fragmented and growth through acquisition remains a viable strategy in this environment. Terex's earlier acquisitions began more from a survival instinct than any long-term consolidation strategy. More recently, we took advantage of the downturn in the industry to acquire excellent companies, such as Demag Mobile Cranes and Genie, at very attractive valuations. Our growth strategy historically focused on mergers and acquisitions, however, our future lies in taking advantage of the potential locked in our current businesses. We intend to grow significantly through organic means, but disciplined M&A will continue to be a part of our overall growth strategy.

Terex recently announced the acquisition of the Reedrill business from Metso. This is a good example of the types of businesses where we feel we can add real value. This deal brings a logical product extension into the drilling business, a product that fits nicely with our mining, construction and utility businesses.

As for other opportunities, we will continue to look for product lines and companies that we feel can benefit from our business system. As we sit here today, there are very few products really missing from our product portfolio, so there is not the absolute need to do an acquisition. However, the opportunity to bring new or adjacent product lines and expand our geographic footprint remains an exciting prospect for us. These opportunities may provide growth in a business that could provide some diversity to our cyclical businesses.

Any predictions on how the U.S. economy will fare over the next few years?

While not wanting to play economist, I reiterate that there is a fundamental growing demand for infrastructure repair and improvement. This fundamental demand won't go away, only can be deferred for so long, and will require substantial amounts of machinery to do the work. Based on this, I see steady growth over the next few years in most of our product lines and businesses.

What trends do you expect to see in manufacturing and product development in the foreseeable future?

For Terex, our focus will be the continued education and deployment of the Terex Business System, a system with a core based on lean manufacturing and continuous improvement. The offshoots of this effort should be quicker response times, reduced investments in working capital, and a flexible manufacturing footprint that allows for the relative portability of assembly lines.

The more macro trends will be the continued outsourcing to low-cost markets such as China and India, and concentrating on the emerging market economies. As the Chinese supply chain becomes more robust and aligns itself closer with Western standards, we would expect to take advantage of those resources. Currently, however, the focus on China and India revolves around providing product for domestic consumption and not export.

On the product side, we maintain that our products are built more for the customer's need and less as a feature-rich design that is the result of over-engineering. We will work to ensure that any product we produce has reliability equal to, if not greater than, our competitors while maintaining our value focus on the customer.

Any particular thoughts on the future of rental? Do you expect the outsourcing trend to continue and rental to increase penetration in North America?

I do expect the outsourcing and rental trends to continue to grow. The two principles are based on making the most profits out of a job. We focus on that every day at Terex, and measure our progress through a return on invested capital metric. By allowing others to manage and utilize a piece of equipment at a much higher level than a single owner/operator can allows the end-user to increase their ROIC. These are the economic forces at work that will continue these trends.

Anything you'd like to add?

Yes, I would just like to say that we are in a great industry that has a noble purpose — to build things that make people's lives better. We forget this at times as we focus on selling iron or renting it.

Lastly, long term we need to attract the best and the brightest to this industry as well. We cannot forget that our legacy will not be the fact that we have been capable to build things but rather the strength of their foundation. We need to focus on our industry's fundamentals and attract a diverse and talented future team of leaders. At Terex we are doing this but, the industry has this need as well.

Bring Value to the Customer

RER: 2004 has been an excellent year for most manufacturers, with strong sales and profits. Yet those results have been tempered by a number of concerns, most specifically the impact of steel prices and other resources on the costs of producing equipment. How seriously has Wacker been affected by this issue, and what steps are you taking to alleviate these costs?

Christifulli: Yes, 2004 has been a good year for everyone and Wacker was no exception. Double-digit increases in raw material and rising fuel energy costs have certainly impacted everyone. Wacker has undertaken several measures to try and minimize the effects. At Wacker, we continually challenge our employees to evaluate and streamline processes to manage organizational process costs as well as manage material and supply costs. Our focus is to bring value-added products and services to the customer. As a result, we develop core competencies to support those value-added activities and maintain a flexible, responsive organization.

Let me throw out a few other issues that could be concerns to manufacturers and let me know if these are concerns to the manufacturing community and if you have any thoughts about them? a. rising fuel prices; b. weak U.S. dollar; c. U.S. negative trade balance, especially with Asian countries.

Rising fuel prices are of concern as they impact both sales-related costs, as well as overall logistics costs. To reduce operating costs on sales vehicles, Wacker will be switching its fleet to diesel. In addition to the reduced fuel costs, we anticipate increased vehicle life, an added cost savings to the organization. The weak U.S. dollar is certainly of concern to the U.S. economy; however, for a global company such as Wacker, with manufacturing, engineering, and sales facilities around the world, we are well positioned to manage these fluctuations with minimal impact to the entire organization. There is no question that our proactive global strategies have significantly affected our ability to better manage such global fluctuations and ensure corporate success.

Wacker has for years been very strong in its relationships with the rental channel. How do you see this relationship evolving in the coming years?

Establishing strong relationships with the rental channel is an extremely important aspect of the Wacker strategy. There is no question that the rental channel is vital to our success. Consequently, we tailor our programs, service and support to meet their needs. We supply a premium product that provides the best value for the channel and the contractor, providing the maximum return from the date of acquisition and placement in the fleet, through product resale.

Although the independent rental dealer's role has changed with the expansion of the consolidators, they continue to bring value to construction rental. We believe their continued success will come from concentrating on small to medium contractors, who value the reliability and performance of premium product brands and the personalized touch. Independent rental dealers can successfully compete by focusing their efforts on premium product brands that allow them to differentiate themselves to the contractor.

Companies such as Home Depot Tool Rental and the Do It Yourself (DIY) segment recognize and have successfully implemented this marketing model, featuring premium products such as Wacker, and enjoy continued success and growth.

The light construction equipment market has grown considerably in recent years. What new developments do you expect to see in light construction equipment in terms of technological development?

We believe that safety, ergonomics, including hand-arm vibration and sound emissions, and ease of operation will be the focus of product development in the future. With the declining skills of the workforce, these types of technological enhancements are vital to ensure worker comfort and provide continued productivity gains. Product designs must be innovative, providing increased performance and the best results on the jobsite. Durability, reliability, serviceability, and up-time equal maximum productivity and ensure maximum resale value. Wacker is also expanding its product offering with a new Concrete Solutions division that offers innovative products for on-site and pre-cast concrete applications. Concrete Solutions products automate concrete consolidation thereby increasing quality and productivity and reducing labor costs.

Do you expect rental penetration to continue to increase in the coming years?

Today approximately 50 percent of all light construction equipment sold goes to a rental fleet. We believe that will increase to 60 percent in the not-too-distant future.

Any thoughts about the economy for 2005?

Non-residential construction is expected to be up approximately 6 percent in 2005. Wacker is very well positioned to have another strong year in 2005 and possibly in 2006, barring any unforeseen global events.

As a close observer of the rental market, what kinds of services would you want to see rental companies develop in the coming years?

As we touched on briefly, we feel it is paramount that the independent rental dealer focuses his efforts on the small to medium contractor. As such, it is absolutely necessary that they not only have the best, most reliable products available for the contractor, but also provide the technical service and support to maximize productivity on the jobsite. By providing exceptional products and services they enhance their value to the contractor.

How do you see the overall distribution channel changing in the future?

One of the most significant changes we have observed here at Wacker is the specialization of contractors. As a result, both the channel and the manufacturer are developing more specialized support. We have added Regional Product Specialists for many of our business fields that require specialized development that we see as a primary responsibility of any leading manufacturer in this new competitive environment. This allows us to deliver the quality products and services to the specialty contractor that enables him to maximize efficiency on the jobsite.

The channel is also responding by focusing on select specialty contractors as opposed to providing a wide range of products and services. This allows them to develop expertise and increase their value to the contractor. Specialization is being driven by the contractor back through the channel and to the manufacturer. Customer-driven organizations like Wacker recognize the importance of adapting to the needs of the contractor. We see the channel adapting by offering both rental and sales focused on the needs of the specialty contractors that they have partnered with. We do see continued channel segmenting by both the consolidators and independent dealers into specialized business models. For some, there is a distinct shift to either equipment sales or rental, rather than diluting sales efforts on both.

In addition, we see new segments emerging in used equipment and service. This poses new challenges to the manufacturer as they determine the most effective means of managing the used equipment and service segments. At Wacker, we recognize the importance of these two emerging segments and have taken steps to position ourselves and the channel to provide differentiation to the contractor.

Anything you'd like to add?

I would like to emphasize the continued importance of training, both for the channel and the contractor. Because of the continued emphasis on training, the Wacker Visitor Training Center continues to flourish! We expect to train more than 1,000 sales and service personnel in the coming year. We also plan to increase training capacity by offering online training services in the near future. Training is an important part of an organization's overall success and one of the chief contributors to our projected growth as we look ahead to 2005 and beyond.

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