You Have to Be Problem Solvers

Jan. 16, 2009
Terex’ outspoken Ron DeFeo speaks his mind in his annual RER new year’s interview. DeFeo offers his thoughts on the state of the economy, Terex’ strategies, the need for infrastructure spending and more, including why rental companies need to be problem solvers.

Terex’ outspoken Ron DeFeo speaks his mind in his annual RER new year’s interview. DeFeo offers his thoughts on the state of the economy, Terex’ strategies, the need for infrastructure spending and more, including why rental companies need to be problem solvers.

RER: What are your thoughts regarding the current economic downturn. How long do you think it will last?

DeFeo: We are in a sharp downturn caused by multiple factors but, simply stated, we lived above our means (on credit) and now we are paying the price. Global governments are taking aggressive actions and liquidity will drive improvements in the second half of 2009. Thereafter look out for inflation, which is a better problem to manage than deflation.

What are Terex' strategies for the next year?

Adjust cost structures for the changing demand, smother customers with better support and services, and continue to diversify globally.

Is your 12 by 12 in 10 goal ($12 billion in revenue with a 12 percent operating margin by 2010) still a realistic target given the depths of the current downturn?

I have not given up but negative currency effects right now make the targets harder to achieve. Nevertheless, we still have two years to get there and our team is pretty good. I am not good at excuses so let's see.

I would imagine Terex' best opportunities over the next year or two would be in China, India, Brazil and other emerging markets. Can you give us an idea what you expect internationally?

These markets are facing some tough challenges as well. China will have a severe slowdown in 2009 and the local manufacturers will have a leg up in the domestic market. India is already negative and Brazil is a positive beacon that has the potential to dim a little. There are still great opportunities in developing markets. And as soon as credit begins to flow a little better these markets will come back quickly.

What are some of your expectations for North America in 2009-10?
What are the prospects for manufacturers, and what are your strategies towards the usual equipment channels?

North America will continue as a challenging market in '09 but I am hopeful for 2010. Manufacturers still built too much equipment and pushed too much into the distribution channels. This is a big mistake in my view. It makes the recovery take longer and depresses returns for everyone. Fortunately, rental companies and their major manufacturers have been better disciplined in this downturn, which I think will mean a better 2010.

Normally I would think this would be time for a lot of consolidation, but it seems the tight credit markets make that less likely. Any thoughts on this?

Consolidation may eventually come but the credit markets do have to return to whatever the "new normal" will be. Then people can make assessments on the cost of capital relative to the returns expected with any consolidation move. Look for less aggressive investments by private equity, but more strategic partnerships where synergy and industrial logic carry the day.

How should rental companies manage over the next year?

In my view, rental companies need to broaden their customer base. A lot of customers still want to buy or rent to own equipment. Rental companies have to be willing to offer the customer equipment in the form that the customer wants it and not just as they want to market it (daily, weekly, or monthly rentals are not enough). This means that rental companies need to sell more equipment and make service arrangements with local dealers. It means they need to offer financing.

It means they have to generate more positive cash flow after capital expenditures. In short, rental can be a focus but it is not enough. They have to be problems solvers.

Obviously most manufacturers will decrease production in 2009. What about R&D? Is there likely to be greater emphasis on research and development to stay ahead of the competition in equipment innovation and be prepared with new products when the economy turns around?

R&D will continue at the same relative pace. But remember this is not an industry that largely rewards true innovation, but rather the industry rewards improvements. The largest challenge facing this industry will be the move toward more fuel efficient and environmentally friendly engines. The Tier IV engine changeover will be a big move.

A lot of people are hoping the new Obama administration will try to put together an infrastructure spending package to stimulate construction projects, repair and expand highways, build and repair bridges, etc. How likely do you think such a package is and what would it take to make an economic difference?

Yes there will be a new package and yes it will make a difference. I have been arguing for this for a long time, having held a conference at Iona College last February with many political and industry players. My fear is that we only focus on repair and maintenance and not system-wide improvements. We need to build the best infrastructure in the world, not just repair our old one.

Any additional points you'd like to make?

Our economic prosperity depends upon our infrastructure. We need vision and will too tackle the tough challenges of how to build an America for 2050. My generation has been riding on the vision and coat tails of prior generations relative to infrastructure. We need to step it up and build an infrastructure that will be the envy of the world again, which will be the best thing for the economy as well.