Editor's Note: This is part 2 of an editorial that ran in the July 2001 issue of RER.
Are you planning to purchase aerial lifts for the upcoming spring 2002 rental season? You may want to consider an early purchase, because the timing is right now and on into the first quarter of next year.
The two Goliaths of the aerial industry, JLG and Genie, are continuing to suffer with record levels of finished goods inventory. The aerial industry has more than 11 months of finished goods inventory, not including used. Some units have been sitting in their inventory yard for nearly a year. Manufacturing capacity within the industry is now just beginning to seek a level of demand that will allow these companies to survive this current downturn in the industry and the economy.
But rental companies are somewhat sheltered from this crisis the manufactures are facing. The rental rates feel some downward pressure, but utilization remains generally good throughout North America. Europe is just starting to experience the business contraction and unfortunately the major publicly financed aerial rental companies have seen their share prices drop significantly over the summer months.
Fortunately that has not happened in the United States where United Rentals, Hertz and Atlas Copco have remained stable and have increased, even though their percentage growth is less this year than in recent years. As long as the construction industry remains strong, the American rental companies may actually see an increase in rental utilization as this segment relies even more on the rental source for aerial equipment.
If one reflects on the downturns in the late 1970s through early 80s and then in the late 1980s through the early 1990s, rarely did we hear of a rental company closing its doors because of the business downturn. Most simply reduced or eliminated new equipment purchases, and cut down on unnecessary expenditures. Both downturns were followed by long periods of profitable growth. Rental fleet demands exceeded the combined manufacturers' capacity, so additional discounts quickly disappeared and pricing stability became the standard business practice. That was with at least six strong, viable high-reach manufacturers. Now there are two — possibly three.
With the current lack of demand and the changes that have taken place in this industry, here are some reasons why you should plan and schedule your purchases now. The consolidators control at least 60 percent of the aerial fleet. Much of that fleet is between 27 to 36 months old. They simply do not need to purchase additional rental fleet for the time being because they can age their fleet without seriously compromising their ability to serve their customers effectively.
The manufacturers simply cannot afford the past special incentives and inducements to sell products to satisfy shareholder demands. The consolidators will continue to quote and purchase retail sale units. Plus they are limited as to the additional financing available to them, regardless of interest rates.
That said, it doesn't mean the consolidators will not continue to be aggressive. They will gain profitability by keeping their rental fleet utilized and not by dramatically adding additional units. They will learn how to cost effectively move products throughout regions economically to maximize rental revenues and strategically eliminate excess, overlapping, nonprofitable rental locations.
What does all this mean for the smaller dealers and independent rental companies? During the next 12 months, the aerial manufacturers will be attempting to find the level where production meets demand. They will be forced to downsize with more layoffs, furloughs, facility closings and extended vacations until the industry finds its level. We have been seeing that through the first three quarters of 2001.
That is why now is the time to negotiate, as pricing levels will never be lower. Extended terms are available with most manufacturers, with deliveries pushed into 2002. Possibly you can obtain that equipment now, start developing a rental stream, with payment terms beyond July 2002. Also consider negotiating for extended warranty terms well beyond one year. Two years parts and labor, plus an additional third year parts only might be available.
The other opportunity is to negotiate and purchase a blend of new and used aerials that have been refurbished or remanufactured. During the past five years the technology has not changed dramatically to where there is a true obsolescence, as the industry once experienced. There are always improvements, but essentially, a 20-foot scissor lift elevates to 20 feet, drives at full height, has a roll-out deck, nonmarking tires, smooth controls and adequate platform capacity. This is similar for 40- or 60-foot telescopic booms and articulated booms.
The top companies essentially have very similar market offerings. Quality issues of the past are essentially nonexistent; parts and service capabilities are relatively equal as is warranty.
The opportunity is now because the major companies are in a dramatic oversupply situation of both new and used finished goods inventory along with high inventories of raw materials and work in progress. Attempts have been made to extend long-term parts purchase/delivery guarantees. All those equate to the need to sell and ship products and generate cash. With further consolidators likely to be quite limited during 2002, now is the time.
The present circumstances will not last beyond 2003. Now is the time to position your company for the future to compete at the highest level. Smaller, second tier manufacturers have faced a difficult year and are likely to continue to have difficulties possibly into 2004. Ask if they will be here next year? Can they support you with adequate parts and service? Is their liability insurance adequate to protect your company? What is their true financial stability? Get the facts on the second tier companies before finalizing deals with them.
No matter what size manufacturer you are buying from, now is a good time to make deals. Take advantage of it.
Frank Scarborough is a veteran of more than two decades in the aerial industry. He can be reached at [email protected]