Outlooks 2002

A Strategic Plan

Dave Christifulli Vice president of sales Wacker Corp. Menomonee Falls, Wis.

Rental companies, manufacturers, distributors and industry service providers all face various kinds of crossroads as we enter 2002. We asked many industry executives for their thoughts about a wide range of issues as we sail — on uncharted, recession-wracked waters — towards a recovery.

RER: What kind of an economy do you expect to see in 2002, both domestically and internationally?

Christifulli: The factors that play out in the domestic and world economy are different than they were in any past recession. U.S. and world economies are now tightly interlocked resulting in a globalization of economies and currencies. Now if there’s a downturn here or a downturn in Europe, we are both affected. That wasn’t the case in past recessions. The U.S. manufacturing output has declined for the past 12 months and that hasn’t happened since 1944! So there’s no question that we are currently in a worldwide recession. Right now, Wacker’s economic indicators predict a shallow recession in the U.S. with a 1 to 1.5 percent decline in our GDP during the first six months of 2002. A moderate 2 to 3 percent growth will likely follow this in the third and fourth quarters. At the same time, we predict a slower rebound in the European market due, in part, to the logistical and acceptance problems of the new Euro currency.

How would a soft economy affect the rental market?

While there will be a smaller expenditure pie, we think rental will have a bigger piece of it as contractors turn to rental rather than purchase in the soft economy.

Now that the economy has slowed, rental companies are tending to age their fleets. Faced with the likelihood of slower sales to the rental market in 2002, how will that affect your company’s strategy?

We’ve already seen a significant increase in the age of rental fleets — anywhere from 36 to 54 months. We don’t believe that this has affected us as much as some other manufacturers because we are constantly developing and introducing new products that offset the loss in revenues from many of our mainstay lines. For example, in 2002 we are introducing more than 30 new machines and more than 300 new accessories.

Most manufacturers these days are downsizing, scaling back production, and laying off employees. You have had comparatively few layoffs. How have you managed to lay off such a small percentage of your work force?

In part the answer is tied to our answer to the previous question. To support all of our new products we need to add to our production line, R & D department and engineering staff, and this creates new employment opportunities for new and existing personnel. Plus, we feed a growing product line to the global economy.

Is part of your strategy in a recession to expand and diversify your product offering? Are you trying to be a kind of one-stop shop within the light compaction arena?

Maybe the cat’s out of the bag here. Yes, this is and always has been our strategy. In past recessions we also continued to add new products for our dealers while many other companies were cutting back. This enables us to get a jump-start as the economy rebounds. And yes, we want to be more of a one-stop shop for our dealers. And not just for light compaction but for a growing variety of light construction products.

In past recessions, some companies expanded by acquiring other companies, or taking on diversified product lines. What is your view of their philosophy — expansion rather than contraction in times of recession?

First my personal viewpoint: after looking at over 300 businesses and buying five of them, I discovered that there were as many down-side issues as up-side. For example, rarely is a company sold at its real value — most often it’s inflated. And there are always some hidden skeletons. So you usually overpay.

Then there’s the issue of combining corporate cultures when you acquire. In a blended company you have to eliminate duplications of positions, products and facilities. Many mergers and acquisitions are doomed to failure. My personal view is supported by the failures of some consolidated distribution channels in our industry.

Professionally speaking: if you want to acquire core competencies and products quickly, acquisition may make sense but you must enter into this arena with your eyes wide open. You need to have people in place with the experience necessary to get you over the rough spots. And even then there is no guarantee of success. Wacker has always preferred to develop, as core competencies, all the products we intend to bring to market.

What advice do you have for rental companies during this uncertain economic period, both large and small rental companies?

I have a two-part answer. Number 1 — people, people and people. They are the keys to success in any business. The rental dealer, small or large, must find ways to retain their most competent employees. The dealer must involve these employees in all aspects of the business that their capabilities will allow. They should be encouraged to help develop strategies to help meet the changes in market conditions.

Number 2 — identify your company’s strengths and use them to develop your market niche. You must match your company’s value philosophy with the customers that have a similar viewpoint. In other words, if you deliver full service over low cost, market to customers who value full service. If low cost and volume drive your business, market to the cost-conscious customer who only wants the lowest price. In our experience, you can’t serve both philosophies successfully and survive.

Do you expect to see companies — rental companies, dealerships and manufacturers — facing critical survival issues in the year ahead? What kinds of companies face the gravest dangers and what measures should they take?

Yes, but not just in the year ahead. Today, tomorrow and as far into the future as I can see, all companies face survival issues. Those companies that haven’t developed a clear-cut strategic plan; communicated it well to its employees, and implemented it, will not succeed. To support your strategy you need the right people and have to ensure you’re financially prepared to support your strategy. You must always be aware that economies change, business practices change, and competition changes. Without the strategic plan process, a company will not be in a position to adjust and survive.

What kinds of changes do you expect to see in relationships between rental companies and manufacturers in the foreseeable future?

It’s sad to say that we have lost much of the strong manufacturer channel relationships in large part because of the consolidation of the channel. I only wish that the consolidators could see the value-added benefits resulting from a strong business relationship based on trust. It would benefit both parties with stronger profits and lower costs.

Manufacturers in general are facing lower margins. Will that necessarily translate into less service offered to customers such as rental companies, in areas such as co-op advertising support, and sales and parts support?

An excellent question. For some manufacturers the answer will be yes, they will cut services. The core of this answer lies within the question, “where do you cut costs to maintain margins?” If your strategy is to cut costs across the board, service has to suffer. Companies that choose to cut only non-value-added costs and look for innovative ways to re-stucture processes within, increase customer service and cut back office costs, will maintain good support. For example, in 2002 Wacker will roll out a major e-commerce initiative and customer call center. Its purpose is to help eliminate corporate administrative costs for Wacker and improve administrative efficiencies for our channel when dealing with Wacker. At the same time, this initiative will support an expanding field sales and service organization that will include technical jobsite positions and field service trainers.

National rental companies have decreased their level of purchases over the past year, a trend that will likely continue over the next year. Are you therefore more focused on the smaller independent rental company? How do you assess the future of the small independent and the small regional multi-location rental chains?

Wacker has to focus on all customers in the channel not just national accounts, not just independents. Although their needs may be different, they serve the same user market — our ultimate customer. Our job is to match our products and services to the special needs of each element of the distribution channel.

The future of the independent is in its own hands. Those that identify the market niche they want to serve and tailor their product and service offerings to that market will do fine. If the playing field isn’t level, you don’t want to be on it. The national accounts are clearly identifying the markets they are after and independents need to do the same.

Do you expect to see more consolidation of construction manufacturers over the next couple of years?

Yes. For those companies who haven’t increased their product offerings or minimized the impact on their margins, their only option may be through acquisition or to go out of business.

Be Intimate With Your Customers

Ron Defeo CEO Terex Westport, Conn.

RER: While many manufacturers are in the process of contraction — closing facilities, laying off workers and cutting back production — Terex is acquiring other companies. Is Terex looking to become a kind of one-stop shop for the construction equipment industry?

DeFeo: Terex is doing the things necessary to improve our competitiveness even in these challenging times. We have announced the closure of 11 factories and with the addition of Atlas and Schaeff in Germany we are significantly lowering the costs of running these new-to-Terex companies. We however, do not believe in the concept of one-stop shopping. This is thinking built around market intermediaries and not users of equipment. We want products that make users or customers more money than the alternative products they have a chance to buy. It is only with this mentality that we feel we can ask for the business. Sometimes customers want to package purchases and when this happens we want to have the logical packages.

RER: You recently entered the generator market, which has been enjoying growth. What are your expectations for Terex’ involvement in this market?

DeFeo: Let’s see how it goes. We enter with the full recognition that there are larger and better-positioned companies than Terex in this game. However, there is room for a quieter, powerful and superior value proposition in this business. We think we offer this.

RER: This is a very tough time for the aerial industry, with virtually all aerial manufacturers way down in sales. How do you see this market over the next few years?

DeFeo: Down for two years and then recovering. The current situation was readily visible for those wanting to see the future. It never feels good even though we knew it was coming. This is why we pulled back our emphasis here. We still offer the value-conscious buyer a great alternative. We just stayed away from those “mortgage the future” deals that were done.

RER: A standard comment I’ve heard so often from aerial manufacturers is that only a very small percentage, say 15 to 25 percent, of the users who should use aerials actually do so and therefore the market’s potential for growth and expansion is tremendous. But I’ve heard little in recent years to suggest that use of aerial work platforms is really extending to this 75 to 85 percent. Is the aerial market really expanding to new areas?

DeFeo: I believe the major expansion of use is behind us and now the market will fall in line with other cyclical industries. It could be worse given the concentration of the customer base. We can all dream up new uses but ultimately economics prevail. Is it smart to have a $10,000 scissor lift to change light bulbs when a $100 ladder will do?

RER: National rental companies have cut down their equipment expenditures and are likely to continue aging their fleet over the next year. Is Terex, therefore, concentrating more on the smaller independent rental companies in its marketing strategy towards the rental industry?

DeFeo: We are as oriented as ever to the whole market. With the exception of those companies above that are financially restricted, all rental operations will be buying product that makes a return for them in the coming year and they will also age their fleet as they always told us in uncertain economic times. Smaller rental companies would be smart to do the same and if they really need equipment buy the best value proposition and not the name that takes you to the most parties. Industry parties are like one-night stands, you have to be able to live with the consequences in the morning!

RER: What kind of economy do you expect to see in 2002 - 2003?

DeFeo: The overall economy will recover in 2002. We will see a modest pick up in the middle of the year with companies needing equipment and not yet having the credit availability to buy it. Credit history is always a backward measure and this industry needs to look forward. 2003 will be better than 2002.

RER: How successful has Earthking been up until now and what kind of success do you expect to see over the next couple of years? Is it an idea ahead of its time in some ways?

DeFeo: Earthking is quietly winning more believers through a steady emphasis on the end user. We will help the user make more money if they participate in the programs that we have to offer. We also offer FleetEdge, a fleet management program that is not brand specific. Can you imagine a service that is designed to advise and help manage a fleet versus a system that is geared to get you back to the OEM’s dealer so you can be sold more services?

Another service is EK Pass, offering operator training that is job and customer specific. We also offer eConstruction Parts, a way to shop for the best value in construction parts. This is not a will-fit operation but rather a method of squeezing the prices so buyers of equipment get the best value. These kinds of services will have “legs” but they need the support of the investors, and that they have.

RER: What are some of the roles you expect e-commerce to play in this industry in the future?

DeFeo: E-commerce is only another tool that business people have to find ways of delivering value. The world will go paperless, eventually.

RER: What advice do you have for rental companies as they attempt to survive and prosper through an economic downturn?

DeFeo: My advice is simple: Be intimate with your customers and know what you have to do to help them be successful. Get everyone on the team focused on this mission and execute it every day in every way.

RER: In the 1990s, such terms as “focused factory”, “just-in-time manufacturing” and “total quality management” became buzzwords that played a major role in redefining manufacturing processes. What kind of trends do you expect to see in the coming years that might affect manufacturing?

DeFeo: Watch out for buzzwords and never go overboard with anything. The trend now is to be a “lean” company. I must say that I have a hard time understanding how companies in this industry consider themselves as “lean.” It is a good thing to be this way but the minute you see this on business cards and on office plaques be careful, it is how the concept is lived that counts, not how it is promoted. Too much talk and not enough action is a problem.

RER: As many manufacturers face shrinking margins, they may be compelled to cut corners on the services they offer to their dealers and to rental companies. What kinds of changes do you expect to see in relationships between manufacturers and rental companies and dealers?

DeFeo: This is an interesting area because my experience would suggest that many services that manufactures run are not fully used or appreciated by the distribution companies they are intended for. Nevertheless they continue. I do not see this changing, but I do think anything manufacturers can do to help produce better ROIC to customers, dealers, and rental companies will be appreciated. The benefits must be tangible and short term.

RER: Is there a danger of cutting out too many people important to customer service and might companies weaken themselves in ways far more important than the dollars they save in salaries?

DeFeo: We live in an environment where this is always a danger but in all our restructuring jobs this has never been the case. Frankly, it only happens if you are unwilling to admit that you made a mistake and then rectify it. If you are unwilling to do this than you will leave too much cost on the table.

Can’t Cut to Prosperity

Roger Euliss President & CEO Multiquip, Irvine, Calif. RER: Multiquip has made a number of major acquisitions of other manufacturers over the past few years. Are you planning on looking at other acquisitions ahead?

Euliss: We are always interested in good opportunities for quality growth and market expansion. So, yes, we are looking for other products to either bring into our existing plants, or as stand alone operations. They just have to expand or complement our existing program, and any addition must be of top-shelf quality.

RER: Many manufacturers are currently laying off employees and reducing production. Others, such as Multiquip, are expanding and growing and adding lines. Are we coming towards a period of increasing consolidation among manufacturers? Are there similarities to the type of consolidation we saw in the rental industry several years ago?

Euliss: During economic times such as these, more opportunities present themselves than in market expansions, so at least in the short term I feel that there will be more consolidation among manufacturers. However, this will not compare to the very rapid and wide-spread consolidation that we saw in the rental industry due simply to the greater number of independent rental operations that were available then.

RER: What do you believe will be the keys to be successful for manufacturers during this period of economic slowdown?

Euliss: Certainly the same things all companies do, control costs and improve efficiencies. However, to really claim success, I feel that positioning the company properly for the turnaround — and the economy will certainly return to a reasonable growth mode — is really key. You cannot “cut” yourself into prosperity, and you cannot afford to cut costs for today’s profits at the expense of your customers and your existing market.

RER: What do you believe will be the keys to success for rental companies during this period of economic slowdown?

Euliss: Certainly the same basics that apply to manufacturers apply to rental operators. However, this downturn provides a time for rental operators to refocus true customer service and support. We have heard from numerous contractors that the service and support they once received from their suppliers is not what it used to be. Other than operating on good business fundamentals, I feel strongly that all of us must keep the customer’s needs in the forefront — and this is not just low price.

RER: What do you predict for the economy in 2002?

Euliss: I tend to be more optimistic than most, and I am looking for an upturn in the construction equipment sales activity by the beginning of the second quarter. I do not see a return to the pre-2000 levels anytime in the future, and frankly, I don’t think it would be healthy in the long run. Construction itself has remained comparatively strong as indicated by the fact that this is one of about six sectors actually hiring today. If this can hold, we should see a faster rebound in the equipment side than in the general economy.

RER: It appears that an increasing number of manufacturers are attracted to the generator market. Why is this segment of the business so attractive?

Euliss: Power generation demand is certain to grow for many reasons, so any market offering growth is attractive to business. Engine manufacturers benefit from any type of equipment that uses their engines, so the engine manufacturers are certainly interested in power generation. For a while, there was somewhat limited competition in the larger generators. But, as you point out, this is rapidly changing as more manufacturers move into this field.

RER: How do you expect the relationship between manufacturers, dealers and rental companies to change and evolve over the next few years?

Euliss: We likely will see some manufacturers move into more direct distribution through manufacturer-direct stores. There will be some others that become involved in some way in the rental business to attempt to control their distribution. This could result from dealerships or rental operators actually buying manufacturers as well as manufacturers buying rental operations. Traditional distribution through dealers and rental operators will continue, but certainly with changes.

One big area again is service and product support. Dealers, and even specialty service-only centers have an excellent opportunity over the next few years to gain market share and competitive position through good product support activities. In any event, it will become ever more important for manufacturers, dealers and rental companies to be open to a changing environment and have a willingness to change and to adjust how business is conducted.

RER: Are there any current trends or future trends that you expect will play a major role in defining manufacturing during the coming few years — for example, the just-in-time or focused-factory trends that had an impact during the 1990s.

Euliss: Technology in the workplace is the largest single factor that we will be dealing with in the future. Workers will become ever more technical as opposed to performing labor- intensive tasks. This applies not only to U.S. manufacturers but to offshore manufacturers as well. “The cheapest labor is no labor,” someone once said, and they are correct.

Also, higher quality is attained with increased technology. Given the additional costs involved in outsourcing — transportation, lead times, and especially quality control, almost all manufacturing will rely more on technology and less on actual labor. This will be the true key to the success of manufacturers in all industries.

RER: Do you have any suggestions or advice for rental companies as we go through this economic downturn?

Euliss: The most important assets any business has are our customers and our employees. Concentrate on providing better customer service than ever before, and be honest and as open as you can with your employees about operating your business. Take care of both and you will be positioned well for the certain-to-come recovery. The better-managed companies will lead the way as the recovery begins, and the benefits to this leadership will prove tremendous.

RER: Manufacturers in general are facing lower margins. Will that necessarily translate into less service offered to customers such as rental companies, in areas such as co-op advertising support, sales and parts support?

Euliss: Something has to give. At the least, I would see parameters tightened and I would expect that the dealers and rental operators would be expected to provide more benefit to the manufacturer for the value received. Continued manufacturing cost reductions are difficult in an industry that needs and demands consistently high quality and durability.

Given the nature of the construction equipment industry, good forecasting is almost impossible, especially for light and medium equipment. Neither dealers nor rental companies can provide forecasts because contractors don’t generally plan and schedule this type of equipment in advance. This requires the manufacturer to really play a guessing game with long-lead-time components and engines, and to risk either having excess inventory, or to be short of inventory and lose sales, and potentially, customers. The result is a more costly product. If manufacturers could plan better and further in advance, costs could be controlled better to help to offset the margin squeeze. Margins are where other benefits are funded.

RER: National accounts have decreased their level of purchases over the past year, a trend that will likely continue over the next year. Are you therefore more focused on the smaller independent rental company? What do you see is the future of the small independent and small regional multi-location rental chain?

Euliss: We have always strived to serve the entire rental industry and consider each and every customer equally important. It takes the full realm of customers to provide the sales volume required to pay for the services that they all deserve and demand. When a customer, large or small, stops or reduces purchases because of fleet or financial management, they still have the same support needs. Selling equipment is really just a by-product of our business. Service is truly what we sell.

The small independent and the regional rental chains certainly have a place in today’s market, and I think they always will. What the nationals do well, they do really well in many instances. What they cannot offer is the degree of personal attention and again — product support to the local customer base — the relationships, in many cases. Also, the independents and regional players can prosper in specialty areas where the nationals frequently struggle. I anticipate seeing more ex-operators returning to the business for many of these same reasons. The rental concept continues to grow, so there is room for the nationals, the independents and the regional operators as long as each has a realistic business plan and a willingness to perhaps operate a little differently than in the past.

RER: You spoke at the AED executive forum about a new level of service and maintenance support Multiquip is offering to augment what dealer networks are able to provide? Can you discuss the essence of this initiative and what you’re attempting to accomplish?

Euliss: You are speaking of the “MQ Authorized Service Centers” (ASC) that we began establishing a couple of years ago. This concept grew out of a need that we recognized from requests from both contractors and some multi-location rental operations a few years ago. Many rental operations, and even a lot of dealers, do not emphasize service, or product support, as a key profit center of their operations. The MQ ASC’s are independent operators that offer a high degree of service on general construction equipment and seek business from contractors, equipment dealers, and industry and rental operators. They provide service as a profit center, or service as truly their core business.

These operations are not exclusive to Multiquip, but generally offer service for a broad range of manufacturers. Our ASC candidates are existing service-only facilities; engine distributors with broad service capabilities; MQ dealers with good service capabilities; and in at least one instance, a new concept “National Service Center” designed to eventually provide a broad range of service for numerous manufacturers of construction equipment nationwide.

An “MQ ASC” is required to retain at least one MQ factory-trained mechanic at all times, maintain a reasonable MQ service parts inventory appropriate to the machine population in their general service area, provide both service and warranty repairs for MQ equipment to all credit worthy customers — contractor, industrial, MQ dealer and MQ rental operator. This item is important because many rental customers are utilizing the MQ ASC for some of their service needs, and we insist that they be provided timely service even if they may also be competitors in the rental and/or sales arena. So far, the concept is working quite well, and seems to fill a void. Time, of course, will tell, and at the pace that our industry is changing, who knows how this all will ultimately shake out?

What Recession?

Bob Fien CEO Stone Construction Equipment, Honeoye, N.Y. President Construction Industry Manufacturers Association

RER: How will the members of the Construction Industry Manufacturers Association and the Equipment Manufacturers Institute benefit by the new merger into the Association of Equipment Manufacturers?

Fien: First, we hope to increase services to our members. There is considerable synergy between CIMA and EMI and we hope to capitalize on that. Second, our industry is becoming more dependent on activities in Washington. The new AEM, with the combined membership of CIMA and EMI, will represent a single more powerful voice, in Washington and at the state level, for equipment manufactures. And there obviously will be cost reductions when you combine the organizations. This translates into a stronger association capable of responding quickly to the ongoing needs of our members.

RER: What was the merger process like? Were there any significant obstacles?

Fien: The merger process was remarkably smooth. Sure, we had differences of opinion, but they were resolved by sticking with the substance, not allowing egos to get in the way of rational judgment. This whole process was successful for two reasons. First, we had the overwhelming support of the CIMA and EMI Boards to try to get the merger accomplished. Second, the eight members of the steering committee (four from CIMA and four from EMI) concluded early on that we would enter the negotiations as equals, that we would respect the strengths of both CIMA and EMI, and that we would forge the memorandum of understanding based on best business practices and not on how CIMA or EMI did things.

RER: What are some of the primary goals of AEM in the coming year or so?

Fien: Clearly, the major short-term goal is the successful integration of our staffs and programs without degrading the services to our members. Longer term, I don’t see any radical departure from what is being done today. We will continue to improve our services and add new ones to meet the emerging needs of our membership.

RER: What are your expectations for the Conexpo show next month?

Fien: We expect it will be the biggest show ever in terms of square footage. We expect to host more than 135,000 attendees from 135 countries. We have expanded our Virtual Trade Show computer site and, with more than 350 industry meetings and eight annual conventions during the show, Conexpo-ConAgg will be the first industry mega-gathering of the 21st Century in the western hemisphere.

RER: What do you expect to see in the economy in 2002 and how will the recession affect manufacturers?

Fien: I am perhaps the only one in the world who does not think the construction industry is in recession. The fundamentals have been and continue to be strong. Housing starts are healthy. Oil is priced reasonably. Interest rates are low. Contractors are busy. And distributors, for the most part, are having a good year. The reason the order level is down for manufacturers is the glut of used equipment and low rental rates.

Contractors are opting to buy used equipment rather than new. Because of the low rental rates, those in rental are stretching the life of their rental fleets. But the situation is changing. There is no longer a major glut of used equipment so sales of new equipment will increase. Rental fleets are at the point where they will have to be replaced. These factors make me quite optimistic for 2002.

RER: Stone, among others, made significant investments into providing electronic services for its customers. What benefits do you expect to see from these investments and to what degree to you expect to see the industry continue its trend toward e-commerce?

Fien: The industry will definitely continue its trend toward e-commerce. It is simply inevitable given the way business is being done today. The speed by which this occurs, however, is debatable. My sense is that all of our customers see the commercial value of e-commerce. But it seems that the independent dealers are on the leading edge of making it happen. They have a deep appreciation for reducing back-end costs and e-commerce gives them that capability. And that additional value added through e-commerce that some manufacturers offer is factored into the dealers’ buying decisions. The national chains, on the other hand, are a little behind the curve, with one notable exception. For the most part, the senior managers of the national chains appreciate the value of e-commerce and are anxious to enter into partnerships with manufacturers who can utilize e-commerce to reduce back-end costs. But there is a disconnect between the desires of the senior managers and those making the buying decisions.

Buying decisions are still being made on raw cost of product and not on a manufacturers ability to reduce total cost of ownership through e-commerce partnerships. This will change as the national chains get better control of their operational disciplines and strategic communication.

RER: Many manufacturers these days are downsizing, scaling back production and laying off employees. Isn’t there a danger of losing too many good people and therefore diluting the services you are able to offer to your customers?

Fien: Sure, and it’s happening today. Dealers in our industry have seen degradation of services from some manufacturers because of downsizing. It’s most evident in technical support, parts response time, and the ability to get certain models of product. But your question goes much deeper and highlights two distinct manufacturing philosophies and how they impact labor force management during down times and up times. Most manufacturers in our industry are moving toward an assembly-only operation.

In that configuration, factory work is quite repetitive. People, therefore, can be easily trained and so they are expendable. Under these conditions there is little risk in laying people off and then, during recovery, hire others who can be easily trained. In a just-in-time manufacturing environment the situation is entirely different. Just-in-time manufacturing requires massive cross training and investment in skill development. People are taught to assemble, weld, paint, fabricate and machine. They become critical assets rather than items of expense. During downtimes then, just-in-time manufacturers would be foolish to downsize because they would be losing their major assets. They use other techniques to protect their bottom line while at the same time keeping their labor force intact.

Therefore, during an economic downturn, assembly-only manufacturers might take a temporary hit on customer service but they can recover quickly. Just-in-time manufacturers have a higher probability of maintaining customer service but the management challenges to do this are considerable.

I’d Rather Be in Rental

Gary Stansberry Hageman, Stansberry & Associates Cameron, Calif.; and Arlington, Texas

RER: What is the acquisition environment like in the United States now that the major consolidators have, for the most part, filled out their national footprint, and capital would appear to be somewhat limited and expensive?

Stansberry: First off, there still is acquisition activity going on out there. Three of the majors are doing acquisitions as we speak and we look forward for it to continue in 2002. But it’s not occurring with the frenzy of the past, it’s with a very selective approach. The acquisition has to fit their mode. If a company has five or six criteria, it has to satisfy all the criteria, such as product mix, geographic importance, and others.

National companies are still doing them on a limited basis and I see some local companies looking to expand their footprint in local or adjacent markets, looking to gain strongholds in one or two metropolitan areas within a roughly 150- to 250-mile radius of where they operate. Some smaller players are also doing selected acquisitions.

They are very focused and operate at a much slower pace. A few years ago companies were buying with a frenzy, trying to grab whatever they could, making one acquisition and asking “what else have you got?”

Now it’s with the attitude of “let’s digest it and integrate it within our fold, let our capital have time to recover, let our people have time to recover. Maybe six months to a year from now we’ll do another.” If they want to add three to five locations, it’s not all within one year, it is more likely going to be one this year and then integrate it and then another next year and another the year after.

RER: Are you seeing a lot of involvement from people not currently affiliated with particular companies?

Stansberry: Yes we’re seeing them looking to buy smaller to single stores in the $750,000 to $1.5 million range, often attracted to “mom and pop” stores that haven’t aggressively marketed themselves or maybe have slipped a notch or two. They tend to be attracted to stores with a homeowner base, and they usually want to go in and be aggressive with marketing and build them up. We have had some people with no rental experience, but the general profile is a guy who worked for a mom and pop that was acquired by a national company. Things didn’t work out so well for them after the national acquired them, so they’ve decided to do it themselves.

Typically such buyers qualify for SBA loans, or they have funds from a family inheritance or their wife’s retirement account, and they are going into business with a single store.

RER: Will a slow economy contribute to acquisition activity?

Stansberry: What we see is that usually there are a number of factors that go into a decision to sell. An owner nearing retirement age knowing that the business has to change and he doesn’t have the energy and the desire to make changes and incur debt. Such owners typically don’t have a son or daughter that want to come up in the business. If the owner is nearing retirement, he may not want to keep fighting because he knows that to make it work he would have to work harder the next five years when he wants to do the opposite.

Or maybe there’s a divorce going on. In the case of death or divorce, it almost forces the family to sell. Those are drivers more than the economy, I don’t see that driving the decision to sell as much as age and family and divorces and death.

During a strong economy, you see some strong multiples and you get people who wouldn’t have sold otherwise wanting to sell because the numbers get crazy. We won’t have that now. I see a steady flow of potential sellers out there, but not a glut of companies on the market. I see a market on the other side that is able to absorb most of the inventory of businesses that will be available. I expect 2002 to be a similar acquisition market to 2001.

RER: It seems that the current market is somewhat of a buyers’ market?

tansberry: Fred [Hageman, my partner] and I say it is a buyers market, except — and we’ve seen this on a few occasions — where the buyer has strong strategic reason for wanting a particular store. That levels the playing field. But right now conditions favor the buyer. When we talk to sellers, we evaluate their financials, we give them an estimate price range between X and Y. Earlier in 2001, we’d get an offer at X and hope to work it up to Y, the higher end. Now we’re getting offers below X and we’re negotiating them up to the lower end of the acceptable scale. But we do have some cases where the company always coveted certain locations, or some other strategic reason out there, and in those cases they can be driven up to a higher range. If it really makes sense for a particular buyer, they’ll pay a little more.

RER: Is this down market a good time to expand?

Stansberry: When the economy is down it could be a good time for sharp operators to look to expand. I know here in the Dallas /Fort Worth area, one of best operators during the recession of the mid-1980s was Don O’Neal’s A-1 Rentals. There were several companies of around the same size. A-1 expanded during the recession, and later dwarfed its competitors. But not a lot of them out there are in a position to do that, maybe 1 in 10.

RER: What are some of the other keys for rental companies to survive and prosper during a recession?

Stansberry: For the other companies, and we do a lot of operational consulting, one of the things we tell our clients is that when you look at a revenue and expense statement, payroll is usually the largest portion of it. So you’ve got to look at payroll, look at your maintenance costs, your delivery and pickup charges, the cost of operating your delivery fleet, and make sure you are covering those types of expense.

If you have 20 employees, can you get by with 16? If you do that, make sure you boil it down to the best group, and then focus on three or four really core employees that will stay and focus on training them and developing them. Avoid cutting sales and marketing and customer relations, maybe even increase those areas, really focus on developing a core group of employees, people who, when the economy is turning around, can go out and open branches for you and lead you into expansion. You develop loyalty to each other and they can help you expand when things turn around.

We’ve also seen that national companies need to be very careful with capital spending. Run that backhoe an extra year, let the fleet age as long as it doesn’t kill you on maintenance. It’s tempting to cut the marketing budget, but we recommend you stay put in that area or even increase.

RER: What does the economy look like for 2002 and how do you expect rental companies to fare during this year?

Stansberry: We are looking at a decline, but the rental industry in the past has held up fairly well in hard times. I’d rather be in rental than equipment sales business, which will take a big hit. The trend of the customer towards rental will help soften the blow. I’d expect a single-digit decline, maybe 0 to 5 percent decline for well-managed companies, others more like 7 or 8 percent to low double digits in harder hit regions. Revenues may be same as 2001, with a decline in the first part and a better second half.

That’s in the general rental and contractor rental areas. Aerial specialists, throw out all bets on that, it looks like a really tough year, maybe a 10 to 25 percent decline. The good news on that is that on late model used equipment market and the new equipment market, they can buy equipment cheaply right now. There’s an oversupply of equipment, rates have dropped, and there might be 10 or 15 people visiting for every aerial rental opportunity, whereas there will probably be only four or five for an earthmoving rental opportunity.

RER: As you visit numerous rental companies, what are the primary areas you think rental companies need improvement in?

Stansberry: I see a need to present a more professional appearance. Some small independent companies have a big sign with their name out front, but visible from the street is this boneyard of broken-down equipment and piled-up tires. You go inside and see a coffee area for customers and it doesn’t look sanitary. They open their doors for business every day and they don’t realize how dirty bathrooms have gotten. I suggest they take a step back and look at their location and think: “If I was entering the store for the first time, what would I see.” There is more of a retail type business environment now and we have to be aware of our perception. Even rental companies that don’t do a lot of walk-in business, remember, customers do come in at times, they do drive by your facility and they will form an opinion based on what they see.

Second, there is a general lack of marketing of the rental business. Many companies don’t have professional looking price lists, they don’t hand out promotional literature, they have antiquated ads in the Yellow Pages, they don’t have salesmen to sell their services. They need to professionalize the marketing of the business.

I’d say nine of 10 companies need to improve in one or both of those areas.

RER: In what areas have you noticed the most improvement, compared to the way the industry was, say, 10 to 15 years ago?

Stansberry: Ten or 15 years ago, rental companies were hand-writing tickets. If they wanted to figure out if a piece of equipment was available, they would need a big window to look outside to see if it was there. Computerization has done wonders in this industry, almost 100 percent of the businesses are computerized now, although there are different levels of sophistication in using that equipment. They make better purchasing decisions, they are able to provide better information to their customers as to whether equipment is available, they provide better maintenance, they make better financial decisions.

These days I see a lot of independents able to buy at almost the same rate as big national firms. So purchasing power has improved, and the gap between what a small independent is paying and what a big national chain is paying has decreased significantly.

RER: Is capital going to be more difficult for rental companies to obtain in the coming year, for acquisitions as well as for rental companies that need capital for equipment purchases, branch expansion or other general improvements?

Stansberry: Nations and United raised a lot of capital through equity markets, it wasn’t asset-based lending, it was equity-based capital. That’s going to be very difficult if not impossible to attract. That said, the asset-based side is still very strong and available. They can get 180-days-to-pay terms, manufacturers are teaming up with finance companies and offering lower rates, finance companies are becoming more liberal in their credit practices. There is plenty of capital available and now you find two or three manufacturers or finance companies competing for a rental company’s business.

For acquisitions, every transaction has a certain amount of blue sky or good will involved. If you have $2 to $5 million acquisition costs and revenue is $1.2 million, it’s not hard to get $1.2 million in financing. The blue sky is not as easy, you need to get a combination of capital from old funds, or have the seller finance some of the blue sky. It’s tougher for acquisitions than it was, but it’s still doable. I haven’t lost a deal yet because the buyer was not able to get financing.

RER: There has been much discussion of former owners who sold out during the consolidation years returning to the industry as their covenants expire. Do you expect to see much of this?

Stansberry: Very little. We stay in touch with some of the former sellers and often the primary motivation that led them to sell is that they are nearing retirement age. They aren’t coming back in for the same reason they sold. Many of them are in their late 50s or early 60s, they’ve made money and don’t have the desire to work so hard any more. I think it’s a minority. Some have sons or daughters that may want back in and they help finance them. We’re seeing a bit more of that than former owners themselves.

Some of the key employees they were mentors to are getting back into the business and they had longstanding relationships with those former owners. With the support and encouragement of former owners, and in a few cases some financial backing, they are trying to create that atmosphere they had before the old company was sold.

RER: A few years ago there was a lot of interest in the rental industry on the part of investors and venture capitalists. Is this interest still as dynamic? And what kind of people and businesses are likely to invest in this industry in the coming years?

Stansberry: We see a lot of tire kickers. They come and want to talk for hours on end about the industry, but in the final analysis, they usually don’t do anything. Probably some will, but 1 in 10 is probably what we’re looking at. There may be some individuals from outside the industry who always wanted to live near the beach or in the mountains and there’s a store for sale. But as far as capital companies looking to do roll-ups, we’re not seeing investment groups looking for ROI getting into the business right now.

RER: The consolidation era led to the disappearance of most regional multi-branch chains of significance. Do you expect to see other small rental companies replace them by expanding to a regional level?

Stansberry: I don’t think we’ll see any get as big as Sunstate, for example. But companies that might operate in two or three focused markets in metropolitan areas, within a 250- or even a 500-mile radius, in one or two states rather than five or eight, we might see a few of those expanding within a smaller geographic focus they can keep their arms around.

Situational Demand

Roger Brown vice president North American sales Genie Industries Redmond, Wash.

RER: What kind of an economy do you expect to see in 2002?

Brown: We at Genie hold with what is developing to be a consensus of economists across the country that the U.S. economy, which is currently in recession, will revert to very moderate growth by the second quarter of 2002, and that the second half of the year should show real positive growth.

RER: How would a soft economy affect the rental market?

Brown: A soft economy has been affecting the rental market for approximately the last 15 months, from the manufacturers’ perspective. Manufacturers appear to have suffered inordinately during this economic softening. The effect has been a reduction in the number of viable aerial work platform manufacturers serving the rental industry as we enter 2002. In 2001, deliveries of AWPs to the rental industry were off by better than 30 percent. While a modest recovery is anticipated in 2002, particularly in the second half of the year, there appears to be plenty of capacity between the two major manufacturers serving the rental industry, Genie and JLG.

RER: Did most of your rental customers age their fleet in 2001 and therefore buy less? What kind of sales to the rental market do you expect in 2002?

Brown: Speaking for our company, we had many customers expand their fleets in 2001, and others aged their fleets over the course of the year. Every rental company is in a slightly different position, whether they are public or private, so our experience has been that demand on an account by account basis has been highly situational over the course of 2001. Looking ahead to 2002, we see the marketplace continuing its current trends for the first six months, however, we do not see a further slowing of sales to the rental industry. It’s our belief that we are at or near the bottom, and that on balance deliveries will pick up over the course of 2002.

RER: Most manufacturers these days are downsizing, scaling back production, laying off employees. Isn’t there a danger of losing too many good people and therefore diluting the services you are able to offer to your customers?

Brown: Virtually every manufacturer serving the rental industry in North America has downsized over the course of 2001. Manufacturers are like any other business, however, in that they must set capacity levels to meet anticipated demand. Certainly this has meant scaling back in 2001 and there is always a danger when downsizing that good people and important services will be compromised in the short term. Genie Industries is fortunate, however, to do a significant portion of our business overseas, which has helped to counter balance the shrinking North American marketplace. Our efforts to downsize and rationalize expenses have therefore not been anywhere as severe as other companies that do not offer as broad of product range or serve the international markets.

RER: Should rental companies expand or contract in times of recession?

Brown: Expansion rather than contraction in times of recession is a risky strategy, as it implies that a company employing this strategy has timed the economy and clearly sees the turn. What’s different about this recession is the low level of inflation, 40-year lows in interest rates, and very modest unemployment figures, a lagging indicator, relative to the state of the economy. Rather than time the economy, anticipating the turn, we think the far more prudent strategy is to be nimble and to be in a position to rapidly expand when there are positive signs of resurgence in economic growth.

RER: What advice do you have for rental companies during this uncertain economic period, both large and small companies?

Brown: I think the best advice for rental companies, both large and small, during uncertain times, is to tenaciously manage expenses, and focus on those products, processes and customers that contribute the overwhelming majority of profitability and cash flow over time. It’s difficult for a rental company to be all things to all people. The slow down in the economy is a time for rental companies to really focus on those things that they do best, and work aggressively to maintain their key customer relationships.

RER: Do you expect to see companies -- rental companies, dealerships, and manufacturers -- facing critical survival issues in the years ahead? What companies face the gravest dangers and what measures should they take?

Brown: We have already seen rental companies, dealerships, and many manufacturers either go into bankruptcy, shut their doors, or significantly rationalize productive capacity and existing products. The survival issues facing the industry next year will be the very same issues that the industry has battled in 2001. The companies in the gravest danger will continue to be those companies that have failed to lean-out their companies, maintain and improve current customer relationships and differentiate their product and service offerings. The companies in gravest danger are those that are overly dependent on a particular business niche, whether it is geographical, product related or customer related.

RER: Will your company face problems obtaining capital in the year ahead? Do you have any suggestions on how to approach lending institutions and what sources of capital are likely to be favored by rental companies and manufacturers?

Brown: The capital markets, specifically the debt portion, have become more restrictive with respect to credit quality and lending capacity. This very conservative approach will impact both manufactures and rental companies. There is no simple solution to the market constraints. Therefore, companies must take the initiative and optimize their capital structure. There are many alternatives to relying merely on a revolving credit facilities that should be explored to include asset-based financing, subordinated debt, mezzanine financing, receivable discounting securitization programs and an assortment of equity or equity-related solutions. Companies that have a proven business model with quantitative results will find the capital markets challenging, but not totally reasonable.

RER: Can electronic commerce provide solutions that can help during this period? What kind of electronic services do you expect to see more of?

Brown: Yes, electronic commerce can provide solutions that will help during periods of the slowdown. Anything that can eliminate paper and speed transactions, improving their accuracy in timeliness, is a benefit to everyone. At Genie our customers currently do their warranty registration and warranty claims on-line, they enter parts orders and check product availability, and they access a wealth of product service information. More is on the way and more means better, more timely information and less expense for everyone engaged in e-commerce.

Positives in the Downturn

Brad Jacobs CEO United Rentals Greenwich, Conn.

RER: What prospects do you see for the rental industry in the coming year?

Jacobs: 2002 should be a positive year for rental companies that have paid careful attention to their balance sheets, cost structure, employees and customer service — the last being the most important.

RER: What is your prognosis of the overall economy in 2002 and how do you expect it to impact the rental industry?

Jacobs: We are preparing for a continued downturn but are looking forward to the inevitable recovery, whether that happens at the end of 2002 or in 2003.

There can be positives in this downturn. We’re using the recession as an opportunity to enhance our frontline sales and customer relationship-building skills through several important training programs. Our branch managers are taught that customer satisfaction is inseparable from profitable asset management, and ultimately impacts their own compensation.

We’re also intensifying our sales blitzes and holding more customer appreciation day events. Our people are really trying to reach out to hear what the customer has to say. This includes more customer satisfaction surveys, focus groups, and direct mail and e-mail campaigns.

RER: Have TEA-21-related highway projects slowed down this past year or in recent months because of the economic slowdown and how has your traffic-safety division been affected by this economic downturn? What is your prognosis for 2002 in this regard?

Jacobs: I think TEA-21 has delivered what it promised this year. We didn’t see it kick in until the summer but when it did kick in, it was at full throttle.

There have been some spending delays in those states that don’t have enough money to provide the matching funds required for TEA-21 implementation. However, the money is flowing very satisfactorily in the states where we have most of our exposure — such as Texas and Illinois, for example. We expect to see this continue throughout 2002.

RER: Has the character of the current downturn been in any way different than what you expected? Some economists have characterized it as less regional and more across-the-board than past recessions. Would you agree and if so, what affect has it had on United Rentals?

Jacobs: This recession has affected the whole country at once. Most people had expected it to be regional in nature, as we’ve seen in past recessions. Nevertheless, we do see some pockets of strength around the country. These are mostly needs-related rather than geography-related. For example, if you look at our highway business, you wouldn’t even know there was a recession.

RER: Has the growth of your national accounts efforts surpassed your expectations and what does it indicate about the future of your company and the industry as a whole?

Jacobs: Our broad footprint — 740 branches and a presence in 50 percent of the top 300 MSAs in the United States — is an important advantage in attracting and servicing national account customers. National accounts make up a fast-growing, profitable segment of our customer base. We have 37 professionals on our National Account team who focus primarily on Fortune 1000 and ENR 400 and ENR 600 companies. On a year-over-year basis, we’ve grown our national account revenue from $245 million last year to an estimated $350 million this year, a more than 40 percent increase. More than 1,600 customers have national account agreements with us today. I wish all of our sectors were growing at 40 percent!

RER: NationsRent has filed for bankruptcy protection and Neff has been de-listed by the NYSE. You’ve expressed in the past that you would not want to see any public rental company fail, because that would cause potential investors to view rental companies with hesitance. Can you offer any insight into the problems of those companies and if the investment climate is being adversely affected by their difficulties?

Jacobs: For a fast-growing company to come out ahead in the rental industry, it must pay careful attention to the following: maintaining a properly capitalized balance sheet; not overpaying for acquisitions; rapid integration of acquisitions; a company-wide IT system; the right fleet mix; a disciplined corporate culture with strict accountability; a customer-focused mindset and careful financial planning. This is a business that has a lot of pieces to the puzzle — it can be extremely profitable if you have all the pieces in place, but companies that fall short, not surprisingly, have found themselves in difficulty.

RER: How do see the capital markets over the next couple of years? Will it be more difficult for companies such as United to obtain capital? How about for smaller local or regional rental companies?

Jacobs: Capital markets work in cycles — the floodgates are usually either wide open or closed shut. I anticipate that the capital markets will be relatively bifurcated over the next several years; there will continue to be ample capital available for companies that are doing well, but little or no capital for those companies that are not performing up to snuff. There will always be sources of capital for well-managed, professionally run companies.

RER: With same-store growth slowing down because of a slower economy, do you feel more inclined to pursue acquisitions over the next year?

Jacobs: We have always been inclined to energetically pursue sensible, fairly priced acquisitions. The desire to grow by acquisition hasn’t related to our same-store growth rate as much as it has to our stock price. If our stock price is higher — and thus our cost of capital is lower — it’s easier for us to make acquisitions that are accretive to our earnings. Our 20 percent same-store growth rate of a couple of years ago is down to low single digits, but that’s still respectable considering that equipment manufacturers are showing negative 10 to30 percent same-store sales at a time when the rental industry is growing. Therefore, customers are responding precisely as expected during a recession: they are nervous about buying new equipment, and instead are renting their equipment or buying it used.

RER: Do you expect to see increased manufacturer consolidation over the next year?

Jacobs: Yes, many OEMs will be required to consolidate in order to take costs out of their manufacturing processes. Manufacturers are under a lot of pressure to lower their prices to rental companies and other large customers. Consolidated vendors are more likely to be able to achieve the efficiencies needed to be a low-cost provider.

RER: As you continue to age United Rentals’ fleet, will that lead to greater maintenance costs and will your service department be able to respond to that challenge?

Jacobs: Our service capability has increased dramatically over the last year and a half. Not only is service profitable, it’s what customers want — it increases customer loyalty, and they like the convenience of one-stop shopping.

United Rentals still has one of the youngest fleets in the industry, ending 2001 at an average fleet age of only about 31 months. We’ll probably age our equipment a few more months in 2002, but our fleet will still be noticeably younger than our competitors’ and far from the age where repair and maintenance costs start to increase appreciably.

RER: How are your customers viewing their prospects for 2001? Are you expecting slowdown in demand based on their feedback?

Jacobs: In customer focus groups, we’ve heard a wide range of views on what business will be like next year. Those customers with long cycles, such as our aerial customers, don’t see a downturn in the near future because they’re in the middle of big projects that will continue on no matter what. Our smaller general contractor and sub-contractor customers are more nervous because their backlog is smaller and tends to be short term.

Our planning anticipates a slight decrease in rental demand in the first half of 2002 compared to 2001’s first half. We’re not sure if recovery will come in the second half of 2002 or if it will drag into 2003. Our goal is to remain agile and responsive to our customers’ needs. We won’t get over-fleeted, but we are committed to a level of fleet that will maintain our position as a one-stop equipment shop, capable of satisfying all of our customers’ needs.

RER: Will the rental industry continue to grow?

Jacobs: The rental business is almost unique in the sense that its historical growth rate is quite strong. How many other industries have had a 15 percent compounded growth rate over the last 15 or 20 years? Almost none. And there’s plenty of growth still ahead. The equipment rental industry will keep expanding. The same old rule of thumb still applies — that unless you have a more or less full time use for a piece of equipment for at least nine months out of the year, it just doesn’t make good economic sense to purchase it.

Rental In Demand

Lynne Woodworth president and COO Stone Construction Equipment

RER: What kind of an economy do you expect to see in 2002?

Woodworth: We anticipate a slow recovery in 2002 with the first and second quarters relatively flat, and the third and fourth ramping up. There has been a tremendous amount of talk about the economic stimulus package, but it will take some time for the parties to agree on a direction. Some encouraging indicators for economic recovery continue to be low interest rates, stable to lowering oil prices, improving consumer confidence and the amount of cash on the sidelines waiting for investment.

RER: How would a soft economy affect the rental market?

Woodworth: Contractors look to equipment rental for a wide range of product solutions.

When there is uncertainty about construction, contractors are likely to postpone equipment purchase commitments and rent instead. Although the economy is expected to be somewhat soft — especially in the first half of 2002, most construction sectors report average job backlog. Therefore, I think the outlook for rentals in 2002 continues to be moderately strong. The concern, however, is in the age and selection of rental fleet. Many of the nationals [rental chains] have not purchased equipment in 2001 and have instead focused on purging their fleets. Unless they invest soon, contractors may have difficulty sourcing rental equipment in some markets. We have already experienced this in 2001.

RER: How will that affect your company’s strategy?

Woodworth: Frankly, we believe that the rental companies are prime for restocking fleet in 2002 if they hope to capitalize on contractor rental demand. In addition, the small “mom & pop” stores have benefited in some markets from the national’s recent moratorium on buying. Our philosophy has always been to maintain a healthy rental base, and partner with select nationals whose business philosophies and approach are in keeping with our own. That strategic business approach will continue in 2002.

RER: Most manufacturers these days are downsizing, scaling back production and laying off employees, etc. Isn’t there a danger of losing too many good people and therefore diluting the services you are able to offer to your customers?

Woodworth: It’s true, many manufacturers have been forced to lay off during 2001 to adjust to shrinking product demand. At the same time, many manufacturers have adopted “assembly only” processes, which can greatly reduce labor costs, by outsourcing most manufacturing processes — barring assembly. However, this approach can also wreak havoc with inventory costs and ability to supply customer demand and further dilute services offered to the customer.

Fortunately, throughout the economic slowdown in 2001 we have not had to ramp down in this manner, and have been able to retain our core of skilled workers and delivery of value-added services. Cross training strategies and flexible just-in-time inventory and manufacturing techniques have enabled us to continue to meet customer demand consistently throughout our product line. While other manufacturers have adopted assembly only initiatives to control costs, we, on the other hand, have retained all elements of manufacturing from fabrication to machining to assembly. This allows us to be less reliant on our vendors and provides more control over inventory levels.

Because this manufacturing method facilitates a “build to order” approach, we have not had excess inventory issues and have been able to move people to the product lines with demand.

RER: Is it wiser to focus on expansion during a recession, or does a more conservative approach make sense?

Woodworth: Boosting marketing efforts while others are pulling back can result in increased share of mind, and increased market share depending on the dynamics of the market or economic slowdown. During the recession of the 90’s, business virtually stopped, and most market segments were overbuilt. Therefore, it might have been more prudent just to keep up with modest marketing exposure. However, now the U.S. economy is in reasonably good shape, with very little overbuilding. Therefore, if a company is in the financial position to invest in marketing expansion and recognize the possible long-term gain versus the short-term costs, this type of expansion strategy should be seriously considered.

Growth through an acquisition strategy might be more immediate, but acquisition purely for the sake of asset growth can be tricky and dangerous over the long term. A real focus on corporate culture as well as product and service synergy must be addressed to be effective over the long term. Many businesses, in particular those who have immediate stock performance pressures, find acquisition growth attractive because it can immediately boost share price. However, sustaining performance over the long term, without sensitivity towards corporate culture can weaken the ability to consistently service the customer base.

RER: Do you expect to see companies — rental companies, dealerships, manufacturers — facing critical survival issues in the year ahead? What kinds of companies face the gravest dangers and what measures should they take?

Woodworth: Companies with loosely defined management disciplines, ambiguous core competency strategies and undefined long range strategic differentiation initiatives can find themselves reacting to immediate economic and competitive pressures in ways that can undermine growth and survival. Without a solid differentiation position that adds value, companies are more vulnerable during economic downturns. If a customer has a choice in dealerships, rental companies or brands, they will tend to stick with the one that delivers the most customer satisfaction and where they have the most affinity.

During the soft times, I believe you should build on your strengths and focus on delivering customer satisfaction to build loyalty.

RER: Will your company face problems obtaining capital in the year ahead? Do you have any suggestions on how to approach lending institutions and what sources of capital are likely to be favored by rental companies and manufacturers?

Woodworth: Unfortunately, the majority of lending institutions tend to be fair weather friends. Capital is readily available during the good times, but when you need it the most, in the poor times, lenders tend to tighten up. One strategy that can lessen this tendency is to treat your lender as a partner. Include them in your long-range and short-range strategy justifications and rationale. Provide them with regular financial statements. Keep them appraised of changing market and company needs on a regular basis. Work on developing a relationship so that you have an internal advocate in key decision making positions.

RER: Can electronic commerce provide solutions that can help during this period? What kinds of electronic services do you expect to see more of?

Woodworth: I strongly believe that effective use of technology can help lower the cost of doing business. Obviously, innovative technological product features like self-diagnostic read-outs found on many of our products, can greatly aid in troubleshooting and help reduce service and maintenance costs.

But e-commerce, too, can help lower the cost of doing business by reducing back-end administrative costs. This past year, we have made a significant investment in developing and using technology to help our customers lower their overall cost of doing business with Stone. Our e-commerce site allows access (to password protected customers) to on-line order entry for parts. It allows a configure-to-order capability for equipment, and the ability to file warranty claims. Visibility to service and operating manuals and access to marketing art is all available with the push of a button. Just imagine the savings in time and transaction costs by utilizing this functionality.

RER: What advice do you have for both large and small rental companies during this uncertain economic period?

Woodworth: A continued focus on profit protection strategies would be a priority. Because rental rates over the past few years have been driven down, many rental dealers have experienced severe margin pressure. It might be time to adjust rental rates.

Exploring niche product expansion can also provide excellent growth opportunities.

A Resilient Industry

Ron Johnson President and CEO Mitsui Machinery Distribution Bridgeport, N.J.

RER: What kind of an economy do you expect to see in 2002?

Johnson: I expect 2002 to start off a little slow, despite a more bullish stock market. But, I expect things to improve quickly as we get into the second quarter. By the middle of the third quarter, we should be back to within 5 percent of 2000 levels, on an annualized basis. 2002 will not be a record-setting year, but it should serve to mend some of the ills of the industry.

How would a soft economy affect the rental market?

The rental industry is resilient. I like to say that I can count the legitimate failures of rental companies over the past 25 years around the U.S. on one hand. Rental centers play to the strength of a weak economy. As long as cash flow is adequate, rental companies can survive and thrive. And as long as money is as cheap and available as it is now, rental centers can weather some dramatic downturns. The rental business is not without problems, but it continues to be a great business. There are also some great businesspeople in the rental industry. I have a lot of confidence in the sector, in general.

During the 1990s, most manufacturers preferred to scale back inventories and a just-in-time approach became popular. Different manufacturing approaches, such as the focused factory approach, became more popular. What trends do you expect to see in manufacturing in the coming years?

I expect to see manufacturers and suppliers doing more partnering with dealers and distributors to determine needs and demands. Technology has given us more information, but it is only as good as the history that we have available within the electronic box. It all comes down to an analysis of needs, regardless of what you call it. There will be hits and misses. We now have a person, a CPA in fact, that spends a great deal of his time managing our inventory. We are more efficient than we have ever been. But, we still guess wrong from time to time, despite all the tools that are available to us. It all comes down to communication.

Traditional equipment dealers have had to change their business models considerably in recent years to compete with national rental companies and other forces that have affected the distribution channel. What kind of changes do you expect to see in the distribution channels in the coming years?

The big issue is service. We can sell equipment to any type of business, but who is going to add value in the form of service and spare parts availability? Many of the larger, more established rental companies do have excellent and comprehensive service departments. But, we see more and more support responsibility being shifted back to the supplier. I would not be surprised to see an entire network of independent service centers cropping up around the U.S., just like we have in the forklift industry, or even in the electronics industry. Some construction equipment manufacturers may even allow these independent firms to do warranty work. Even the best and most reliable equipment is service intensive. Anyone can market a piece of sophisticated equipment. But, who will service it? That’s the most important question. The distribution channel will not evolve much more until this question is answered.

What kinds of changes do you expect to see in relationships between manufacturers and rental companies in the coming years?

I see much stronger and more open relationships between suppliers and rental companies. As the industry evolves and heads back full circle, new independent rental operators will need more help. I think you will see a nurturing by manufacturers. You will essentially see sponsorships to help independent businessmen get back into the rental business. This will include financing, consignment and other areas of support.

Some manufacturers, faced with decreasing margins, are warning that they may not be able to provide as much service and support to rental companies and dealers in the coming years. Do you see this as an inevitable trend, and if so, why and in what ways will these services change?

It will be impossible for manufacturers to add value unless some profit is maintained. Competition is good for everyone. Putting manufacturers out of business will not be good for anyone. I have always felt that most buyers do not really understand how low suppliers’ margins really are. There is not much more, if any, to give. When we cannot give anymore, we won’t. But, we like to be challenged.

Since rental companies, for the most part, expanded their fleets in recent years, now that the economy has slowed, they are tending to age their fleets. Faced with the likelihood or the possibility of slower sales to the rental market in 2002, how will that affect your company’s strategy? Will it be necessary to speed up the cycle of innovation in order to continue to sell product?

Most good rental operators realize that it is essential to have a modern and reliable fleet. The days of renting a compressor or pump for 10 to 12 years is basically over. Customers demand equipment that is in better condition. The competition in any given area also dictates it. Customers have more tolerance when a newer, more physically appealing piece of equipment stops running. Equipment will always be moved through rental fleets, through rental-purchase, outright sales, accident, theft and normal attrition.

Sure, we are developing new and better products. But, we have to depend on replacement business as our core. We are also looking at more leasing of equipment to rental dealers. It represents more of a fixed cost for the dealer, and guaranteed replacement at a certain point. It also provides a lot of excellent, select used equipment for our dealers, which is a good thing.

Most manufacturers these days are downsizing, scaling back production and laying off employees. Isn’t there a danger of losing too many good people and therefore diluting the services you are able to offer to your customers?

We have had some cutbacks. But, in many cases, they have brought out the best in the remaining employees. We have tapped skill sets that we never knew we had. As our industry becomes more efficient and profitable, it will also become more attractive to people who are just starting their careers. A lot of people talk about getting out of the rental business. But, not many people really want to, or ever do. It is a good business. Layoffs are unfortunate. No one likes to see anyone out of work. But, in our case, the reduction in our workforce has made us stronger and more competitive.

In past recessions, some companies expanded by acquiring other companies or adding diversified product lines. Others increased their marketing efforts. These companies believed these efforts would help them be poised for quicker growth when the economy grew strong again. What is your view of this philosophy — expansion rather than contraction in times of recession, and what kind of financial condition would a company have to be in to adopt that kind of strategy?

Growth is essential. But, in a relatively mature industry like ours, it is difficult. Acquisition is now almost a necessity. The contraction comes from eliminating lines that are no longer profitable, and no longer make sense. While it is not so common to our industry, it has been going on for years in industry, in general. We will always re-evaluate products that are not profitable or essential. And, we will always look at opportunities for acquisition. If a strategic move makes sense, it makes sense. The economy is not usually the biggest factor in determining whether or not you should move forward to expand or contract.

What advice do you have for rental companies during this uncertain economic period?

Look closer at suppliers and the equipment they are marketing. See what they really have to offer, beyond just a personality. Ask tough questions. There are very few times when buying the best piece of equipment is not the cornerstone of a good buying experience. If a company is good enough to provide the best piece of equipment, they are probably conscientious in other areas as well. Look at the overall value, rather than just the price. It generally costs less in the long run to own the best. And, one more thing…. take a hard look at leasing in 2002.

Do you expect to see another round of consolidation on the rental side and increasing consolidation among manufacturers?

Consolidation is not a new thing. It has been going on for many years. Hertz, one of the great rental companies, began as a consolidator. Consolidation has never been a by-product of weakness, in my opinion. I expect to see more consolidation. But, I also expect to see a great deal more new independent rental centers cropping up in the coming five years. It will be the second time around for many of these owner-operators, and they will be better and stronger, with greater support from suppliers.

Will your company face problems obtaining capital in the year ahead? Do you have any suggestions on how to approach lending institutions and what sources of capital are likely to be favored by rental companies and manufacturers?

Since we are part of one of the largest corporations in the world, we never have capital problems. But, I don’t expect it to be the major problem for most companies in our industry either. We do our own financing, in-house, so we are in a position to help rental companies get financing independent of traditional sources. Our rates are competitive too. I would expect to see more manufacturers in the finance business.

How are your products likely to change and develop over the next year or so?

We are looking at more refinement. We are striving for smaller, quieter, safer, and more fuel-efficient and environmentally friendly packages. Ergonomics is also an important factor. We are always looking for new ideas. And, we have one or two that, with a little luck, may be somewhat revolutionary. In the early 1900s, a resolution was passed in the U.S. Senate to close the U.S. patent office. It was argued that everything that could be invented had already been invented. As we look for new products and tell ourselves there is nothing else out there, we remember that stupid resolution.

Are there any other issues you’d like to discuss that are important to the rental industry at this time?

I think the issue of trade shows is one of the most important for manufacturers and suppliers. We all see potential value in trade shows. But, it is difficult for us to justify the expense under the current scenario. We are simply not seeing any buying traffic at most of the shows. I am not sure that associations understand the total cost to suppliers. I am not sure they understand the thousands of dollars we spend for a limited amount of labor, just to move equipment in and out of trade shows. We want the shows to survive. And, we can help to make them more beneficial, if they will just listen to us.