Saturation Point

July 1, 2001
Unfortunately, with consolidators dumping used equipment either through auctions or trade-ins, the value of aerial products is 30 percent of what it was

Unfortunately, with consolidators dumping used equipment either through auctions or trade-ins, the value of aerial products is 30 percent of what it was four years ago.

The construction rental industry has changed dramatically over the past three years and many of the entrepreneurs that developed and grew the industry have sold their companies to the rental consolidators. No segment has changed more than the aerial sector.

Much has been written about consolidation and how it has reshaped and will continue to reshape the aerial rental industry. Many institutional investors have gambled billions of dollars. After the initial investment, many of the original investors are now wondering when and where the payoffs begin. We have seen the stock prices of these companies fall dramatically. But the question remains, is there potential for this group to regain its prominence?

In spite of the theories extolled by the consolidators' management teams, it appears that none has succeeded in enhancing investor value significantly to this point. Each claimed they could purchase products at dramatically reduced prices, consolidate costs such as accounting functions and accounts receivable, tighten credit policies, eliminate big salaries, provide new equipment, reduce physical locations and maximize rental fleet utilization. With the possible exception of two companies, consolidators have not succeeded in these areas. What this translates to is that these firms will not be purchasing enough aerial products during the next two years to keep all the aerial manufacturers profitable.

The manufacturers are now faced with the lowest pricing levels in this segment's history. And most aerial manufacturers currently have … far too much supply for a period of limited demand.
— Frank Scarborough

Several major aerial manufacturers decided, under pressure from major customers and their requirement to produce at high volumes, to take trade-in units. This is an interesting sales strategy, but has caused another major hurdle to these companies in terms of adding investor value. The consolidators did not receive maximum value for the units they traded in, unloading the inventory in massive quantities in order to buy new equipment. Couple this additional used product with the continuation of high production levels and you have more aerial product available than ever before. The manufacturers are now faced with the lowest pricing levels in this segment's history. And most aerial manufacturers currently have about six months of new and used equipment in their inventories — far too much supply for a period of limited demand.

Much of the new and used inventory has no potential market other than the U.S. rental industry. None of the major manufacturers are selling substantial quantities of equipment to the end-user market. It cannot be shipped to Europe legally because it does not meet European standards. South America limits used imports because of the high duty tariffs. Australia has imposed new restrictions on aerial equipment that mandates a 10-year life, after which the unit must be rebuilt or scrapped. Japan has never been a strong market for used equipment. Korea has absorbed several hundred units, but is approaching saturation. China and Southeast Asia are minimal markets, as is Eastern Europe. The dilemma worsens for the manufacturers and that is having a trickle-up effect into the rental channel.

The manufacturers have the inventory. But where is the sales channel to provide them with reasonable returns on their investments? Manufacturers also do not want to diminish their customers' rental fleet values, because that is what they use to find additional financing for new rental fleet products. If manufacturers are forced to dump large quantities of equipment into auction houses to be sold at reduced prices, that would adversely impact the prices rental companies could get when they sell on the used market. Unfortunately, with consolidators dumping used equipment either through auctions or trade-ins, the value of aerial products is 30 percent of what it was four years ago.

This has forced many of the independent rental companies to reassess how they fund growth. This problem will continue for several years until the industry, which is cyclical in nature, recedes to a level of manufacturing/sales/financing stability. Many considered the aerial industry to be a market with another decade of growth, but it has matured at warp speed.

Where does this industry move for a future of growth and profitability? Naturally, we will see fewer manufacturers. JLG Industries will continue to be the global leader and grow through acquisition, manufacturing expertise with a strong financial portfolio. That has already begun with Mayville Engineering eliminating a $40 million-plus business, Grove Manlift, which was a $250 million business three years ago now in Chapter 11 bankruptcy protection, and Stratolift becoming increasingly inconsequential in the marketplace. Terex continues to focus efforts on segments other than the aerial business. Skyjack's lack of European distribution will hamper its ability to survive over the next 12 to 18 months.

Genie Industries has the most to lose. It has not diversified significantly, it has a high labor cost and is not strategically located. The big question is how the company is capitalized. Genie does not have the ability to obtain capital to the degree JLG does.

A likely candidate for the No. 3 spot in the aerial marketplace, behind JLG and Genie, is Snorkel/Omniquip. Its parent Textron has the financial stability to focus on returning this product and company to an acceptable market share and profitability.

The aerial industry faces another difficult two years. The U.S. market will constrict, driving margins lower, reducing rental rates further, increasing competition. Europe is not far behind. England is in the throes of consolidation. Major regional aerial rental firms have impacted market share in Germany, France and Scandinavia. Limiting potential customers will force competitive pricing and terms that will negatively impact manufacturers.

The positive side is that the industry will eventually develop stabilized pricing, financial terms and profitability that will sustain long-term growth. Although the next two years look rocky, industries tend to level out and get back to normal. The aerial industry will never be the same but after a shakeout, there should continue to be strong return on investment. Unique products will be designed that give the industry additional growth. Handling people in the air will become safer, and that will also be a growth opportunity. But manufacturers must focus and plan if they are to maintain sales levels and grow in the future.

Frank Scarborough is former vice president of sales and manufacturing at UpRight, Selma, Calif.