Prepared for the Storm

Aug. 15, 2008
As part of an ongoing series of interviews on how manufacturers and rental companies are coping with increased costs in the middle of a market slowdown, RER recently interviewed Gary Bernardez, CEO of AMECO, Greenville, S.C.; Dean Smith, vice president for the global asset management group; and Mark Murfin, vice president of sales and strategy. Bernardez, Smith and Murfin spoke with RER’s Brandey Smith about what the company is doing internally to offset the higher costs passed on by OEMs, the importance of fuel efficient construction equipment to its rental customers, and what AMECO expects from its manufacturing partners.

As part of an ongoing series of interviews on how manufacturers and rental companies are coping with increased costs in the middle of a market slowdown, RER recently interviewed Gary Bernardez, CEO of AMECO, Greenville, S.C.; Dean Smith, vice president for the global asset management group; and Mark Murfin, vice president of sales and strategy. Bernardez, Smith and Murfin spoke with RER’s Brandey Smith about what the company is doing internally to offset the higher costs passed on by OEMs, the importance of fuel efficient construction equipment to its rental customers, and what AMECO expects from its manufacturing partners.

RER: Equipment manufacturers are being hit with major cost increases, including steel, tires, components, copper and more. Are you feeling the pain of these increases in the total cost of equipment? If so, how is this affecting your buying decisions?

Bernardez: Seventy percent of our revenue is outside the U.S. We have a fairly global perspective — probably 75 percent is not in the U.S. Over the last couple of years Dean’s had the responsibility of improving and getting better integration with our key manufacturing relationships and making sure that we were working with people who could support us globally and that’s a big difference than some of the standard rental companies in the U.S.

Smith: I would say they are trying to absorb as much as they can, but they are also passing along as much as they can get away with. Where it sometimes gets us is not necessarily in the hard cost, where it gets us sometimes is the availability. Crane manufacturers, for instance, will have cranes built and ready to go out of the factory, ready to be put on a truck and be shipped, but they don’t have tires. That causes an availability issue for us, being able to get them when they say we can get them, or when we need them and we may lose some revenue because we don’t have the machine on a project when we think we’re going to have it, and we may have to rent it from somebody else while that machine sits there and waits on tires.

Bernardez: The other thing that we’ve experienced on tires is replacement issues. We’ve got some fairly large machines, especially in South America, and the ability to find those tires a lot of times we’re responsible for the maintenance of that unit on the customer’s jobsite, so it’s our job to facilitate the incorporation of higher costs into our customers’ offering. We try to do a lot of the maintenance on our own machines on site and that gives us a little better control over all that stuff.

Smith: Addressing the overall cost of equipment has caused AMECO to really analyze all of its equipment categories and determine which ones should remain within our core fleet of offering, meaning that if prices continue to rise 5 to 10 percent a year on rough-terrain cranes, do we want to continue to offer those within our core package of equipment because manufacturers, when they increase their price, it’s one thing, they’ve got a captive audience. For us, to go to our customers and increase price is a little bit of a different situation. We can’t always recoup the 5- to10-percent cost increase of the equipment to our customers so we’re going to have to analyze whether those items that have large price increases should continue to be a part of our core fleet or not. That’s currently one thing we’re doing right now in North America, analyzing those categories and seeing which ones that we’ll continue to offer as core categories.

There are rental companies in North America that will only carry up to a certain size excavator (45,000-pound) for example because of the rising cost of that larger equipment and they don’t think they can recoup the cost with their rates. Everybody has to decide what their core equipment is going to be, and that’s what we’re looking at and, with the rising prices, you really have to look at it right now and make some decisions.

What we’re really trying to do — since 70 percent of our revenue is outside the U.S. — is doing global sourcing agreements with some major manufacturers around the world that will allow us global pricing benefits, rebates, and also availability of equipment through dealers, meaning that we might have a relationship with a Volvo Construction Equipment, for instance, what they would do if they didn’t have any equipment available at the factory is they would find the local dealer, whether it be in South Africa or the Middle East, and tell them what our global pricing structure is and they would honor our pricing structure.

That sounds like a huge benefit.

Smith: We’re getting there. It’s something we’ve been working on. It took us awhile to figure out who our global partners were going to be. And it’s a two-way street to find out if they can deal with us and if we can deal with them and we’re really narrowing it down to a couple of key suppliers.

If you do decide to discontinue carrying a particular type of equipment will you still serve those customers on a re-rent basis?

Smith: Yes. Right now there are certain items that are not part of our core, but one of the things that makes AMECO unique is that we will rent you everything — from something that may cost us $2 to something that may cost $3 million and everything in between. Not everything in that broad range is core equipment for us, but one of the things that differentiates us from every other rental company in the world is that we will rent you everything that you need on that project. It may not be owned by AMECO, but that’s one of the good things because as a customer if you go to a rental company and they will not offer you everything, then the next thing you know you look at your desk and you’ve got 10 contracts with 10 different rental companies. The beauty of AMECO is you have one contract with AMECO and we provide you everything whether it’s re-rented or provided by AMECO.

Bernardez: We can leverage our re-rent power to get the best price for the customer. Each deal is a little different but there’s just more options today than there ever has been.

Smith: For us, we feel like we can obtain some of the best rates from some of the other rental companies because of the volume we’re doing in North America. Our rates we get from rental companies are very competitive and probably some of the best in the market.

How much is the high cost of fuel affecting your business?

Murfin: It’s certainly affecting the business. I can’t quantify how much it’s affecting it. One of the things we have found, we expect manufacturers to do things to be more competitive in the fuel efficiency. One of the places that is more dramatic to us is when we deploy equipment we always do it to a site where we have a presence, so we really don’t send the equipment without us being there to supervise and maintain, and in many places, operate it. And all that goes around that has had a dramatic effect over the last year particularly.

Everything from us having security on a site, to making sure that the bulk fuel that is stored there that we utilize is safe. That’s one of the places where there’s really been an uptick in the chance of vandalism and theft. And also to operating the vehicles, whether it’s our operators or the customer’s operators to understanding what the fuel efficiency is that you’re getting out of the machines. And having systems available to measure and monitor that and share it with both the manufacturers and our customers to make sure that the machines are being operated in the most effective and efficient way.

Smith: Another area that fuel affects us is in our logistics department. We ship equipment all over the world via ocean freight and air freight, and you can imagine the cost of fuel significantly increases those freight charges. What we’re seeing in some situations is a base freight rate with a fuel surcharge. That logistics part gets us and it gets us inside the U.S. too. Moving equipment from Greenville to Louisiana — the freight is much higher today than it was 12 months ago.

Bernardez: We need to make sure we communicate with our customers to make sure they have a good estimate on what freight will be. The rest of the time where it’s internal freight cost, that’s one of the benefits of being a very regionalized company. We have four primary regions and they all have a core fleet for their region. It is becoming more prohibitive to ship it all over the place to squeeze another few percentage of utilization points out of it. We are trying to minimize cost internally.

Murfin: Particularly as the U.S. comes out with new engines based on the emissions regulations, when you do business in as many markets as we do, it’s challenging to make sure we’re acquiring equipment that has the right engine for the fuel that’s available in the countries we’re working in. It has given us additional challenges as we historically have moved equipment from one market to another to meet a customer need, sometimes now we’re finding out that we cannot do that. That does impact our prices sometimes.

Are you looking to your suppliers to modify their equipment to be more fuel efficient?

Smith: There are things happening today in terms of hybrid technology that will change the industry. Volvo, for instance has introduced a new hybrid wheel loader, which is very interesting. In my opinion, that’s the wave of the future. Everything’s going green.

Volvo is really the first that I’ve seen to have a wheel loader actually in the market with some type of hybrid engine. And they’re looking to take that further and get more fuel efficiency out of it. Would that influence our decisions? It probably would because we operate in some countries that look to us as a U.S. company to give them new innovative ideas in the way they do things. And if we can introduce to them some fuel efficiency and some cost savings, then that would be huge for them, so I would say that, yes, we are definitely looking for our suppliers to modify their equipment to be more fuel efficient. And the biggest thing is the hybrid engines right now.

We are definitely looking for our suppliers to continue developing more hybrid alternatives. Offering hybrid equipment that saves fuel without losing any of the horsepower and actually picking up some horsepower through an electric engine rather than from the diesel engine is definitely the way to go.

Bernardez: We work for a lot of large global contractors and they have mega projects where a few percent savings here or there on a lump sum project is something that’s important to them. So as a service company to those large players everything we can bring, whether its new technology or a more cost-competitive way of doing it, that’s where we leverage that vendor base and determine how marketable is that advantage, and can we extract some value out of it too. There’s a lot of work going on globally and our customers are all looking for a penny to save every time, so anything that we can do to help them achieve that savings is an advantage for us.

How have your expectations of equipment manufacturers changed over the past few years? How have those relationships changed how you do business?

Smith: When I’m looking for a supplier there’s really five key things that I take into play:

1. Partnership: When I say a partnership, manufacturers have to rely on us to tell them what it is that we want and how we do business. Then we have to tell the manufacturer whether they can assist us or not. They have to look at it honestly and there are some manufacturers who just can’t support us globally.

2. Trustworthy. Partnership and trustworthy go together. I consider our relationships with our vendors to truly be a partnership.

3. Availability. Having the equipment there when we need it. A lot of our projects happen pretty quickly and we need the equipment available right away.

4. Aftermarket support and service. That’s where we really feel the manufacturer through their dealer network, that’s where we really feel the manufacturer’s job starts. We need to make sure that manufacturers have aftermarket support and service around the world. We have to make sure that the manufacturer can support us in country X. We have to rely on them to tell us if they’re dealers can support us there.

5. Price. Price always comes into play, but to me, it’s last on that list. When I sat down and came up with what makes a key supplier for us and what makes me want to pick one supplier over another, price is not the determining factor. Sure, it’s important, but manufacturers are pretty close.

Bernardez: Our primary business is supplying some type of service at a facility or a construction project, so we’ve got to figure out how to recoup any price increases that we would normally have, we have lots of different ways to do that, but we also have to be careful because it’s easier to pass those increases from the vendor to us, than from us to our customer. It’s just the nature of the rental business.

Smith: We’re striving to develop these relationships, not to say these relationships didn’t already exist, but one of our really big pushes over the past two years has been developing these relationships both locally and globally. You really have to develop those local ones as well because they’re the ones who are going to help you when you arrive on a site. For my group that has been our largest focus for the past two years —vendor relationships and partnerships, and really finding the right ones around the world.

What we really try to do is help them understand who we are and how we do our business. That allows them to determine if they think they can help us or not. Then we rely on them to tell us how they do things and how they do business and how they’re set up. The key thing for us because we are a global company is having one main point of contact. Now, that one key point of contact may put us in touch with another key point of contact in South Africa for instance, but he facilitates every deal. They will contact another person in each country and that’s where our contact will go through those people, but it all starts with one key point of contact, and without that I just don’t think you could do it.

Murfin: One of the things that makes that challenging is that there’s been a tremendous amount of consolidation. Manufacturers are finding it challenging to have that one main contact. It’s a challenge and it will continue to be a challenge.

Smith: A lot of manufacturers like to think of themselves as being centralized, but for us, we truly do have a global procurement department located right here in Greenville that can structure deals all around the world. Just as we have one point of contact with our manufacturers we have one point of contact at our company as well. That’s the way the relationship works. If you get too many people involved you’ll never get it done.

Bernardez: We’ve got to give our manufacturing partners better visibility on the expectations and requirements we have coming up in the next 6, 12, 18 months — much better visibility on that than we have in the past because one of our key competitive weapons is quick, global response, mainly responding to places that other companies don’t play in.

We support some government-related work around the globe, and that’s very quick-hitting and we’ve got to have vendors who are able to help us. One of the things we’ve had to change is giving them better visibility in what those requirements might be versus just phoning them up and telling them here’s what we need, give us a price, and that’s caused us to be more transparent, so when we do call on short notice we get the best service we can get.

Smith: Make sure your strategic suppliers know that they are your strategic suppliers not that they’re just thrown into a hat and one day you call them.

Do you expect those manufacturer relationships to change again over the course of the economic slowdown?

Smith: The global economy doesn’t know there’s a slowdown. The markets that we concentrate in and do business in are oil, gas and power, and those are the hottest markets alive today, especially in other parts of the world. For us, yeah there’s a slowdown in North America, but outside of North America, us and our parent company are pretty busy right now.

Bernardez: We reorganized to be involved in some of those global markets about three years ago. So we’re seeing that that three-year investment has put us in a position for some of those global markets that some of those others are just starting to explore.

Are there any keys for you to staying loyal to your equipment suppliers? What do OEMs need to do to keep your business?

Bernardez: If we find key suppliers that can show consistent performance in those five areas we talked about, they‘re going to be a pretty important supplier to us because, remember, the other side of that coin is showing a very consistent brand across the globe. In other words, you work with us in the Middle East or Mexico City, or Greenville, S.C., or in South Africa … We’re trying to show a very consistent face to our customers who can trust what we tell them we’re going to deliver in the areas that we work with them. One of the keys to that is having that very consistent supplier base do their part for us. If they can do the five or six things that Dean said on a very consistent basis, they’re going to get a lot of our business.