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If you've got an eye
for used equipment, there's seldom been a better time than now to
find good values in late-model machines. At many equipment dealers,
in fact, the supply of used machines has reached surplus proportions.
Major rental fleets own large numbers of used machines and are selling
at least some of them, making for one huge volume of used iron.
The result: lower prices.
"There is still
a huge inventory of late-model, two- and three-year-old equipment,"
says Doc Madsen, used-equipment manager for Scott Machinery Company,
a Salt Lake City, UT—based dealer with eight stores. "My
dealership owns it, and a lot of other dealers own it. One of the
items everybody got overstocked with is rubber-tired backhoes. There's
a lot of everything out there.
"The national numbers
say we grew the amount of equipment through 1997 and 1998 by a huge
amount," continues Madsen. "A lot of it was put into rental
fleets. For the amount of equipment it takes for every outstanding
housing permit, we're probably 30% above the level of equipment
we need. There are not enough behinds for the saddles."
Adds Mike Kelleher, a
vice president at Wolverine Tractor & Equipment Company, a dealer
in Southfield, MI: "We have about 100 pieces of used inventory.
It's always too much. For us the ideal number would be 50 or
less pieces."
Ritchie Bros. Doubles
Sales
Another indicator comes
from Ritchie Bros. Auctioneers (RBA), the big British Columbia—based
auction firm, where used-equipment sales have doubled over the last
seven years. In 1995, total RBA sales were $634 million. The company
does not disclose sales by country, but United States sales represent
about two-thirds of its volume. And in 1999, 2000, and 2001, RBA's
total gross sales rose from $1.17 billion to $1.23 billion to $1.29
billion, respectively.
Ritchie Bros. attributes
that rise to "a growing supply of used equipment in the marketplace,
increased popularity of the auction channel, and increasing market
share by RBA as we expand our operations," states Bob Armstrong,
vice president of Internet services. Also, he says RBA has expanded
its sales force, facilities, and infrastructure (see sidebar on
online auctions).
Counting both dealer
inventories and rental company fleets, says industry analyst Frank
Manfredi, "That inventory holding place looks to be enormous.
It's worth a huge amount of money. And there is a terrible
fear by the dealers that rental companies will sell off their fleet
and create a huge glut of equipment.
"I have argued that
won't happen because the rental companies would have to reduce
their rental revenues," he points out. "And if they reduce
their revenues, they won't be able to service their debt [on
their new equipment]."
There's no doubt
that through the late '90s, the major equipment rental companies
bought large volumes of new equipment. Take United Rentals Inc.,
for example. In 1999, the company spent $718.1 million for new rental
equipment, and in 2000 the figure was $808.2 million. In 2001, spending
dropped to $449.8 million, and for 2002, United Rentals estimates
it will have laid out $395 million for rental equipment.
As capital spending has
dropped, United Rentals has sold less equipment and allowed its
fleet to age–from 25 months in 2000 to an estimated 37 months
at the end of 2002. Used equipment sold by United Rentals dropped
from $347.7 million in 2000 to $147.1 million in 2001.
"Our business strategy
for a difficult economy was to generate significant free cash flow
and pay down debt," notes Fred Bratman, United Rentals's
vice president of corporate communications. "We also realized
that we could age our fleet with little impact on our customers
or on our maintenance costs. Even by aging our fleet to 37 months,
we will still have one of the youngest fleets in the industry."
Have the rental companies
helped cause a surplus of used equipment? "The total used-equipment
market runs into the many billions of dollars, and the amount that's
sold into it by the rental companies has minimal impact," says
Bratman.
Used-equipment inventories
are not high everywhere. In terms of used inventory, "We're
right where we want to be," states a Caterpillar dealer in
California. "Our used inventory rose in 1997, 1998, and 1999,
and at about the middle of 1999 we started buying down the level
of used-equipment inventory. It's been about where we want
it since 2000. From 1999 through current months, we have just been
selling off used equipment and not going out and making big expenditures
on large iron."
"We started trying
to reduce inventory in 2000, and now it's close to what it
should be," relates Tom Wilson, president of Memphis, TN—based
United Equipment Inc., a division of Equipment Support Services
in Houston, TX. United Equipment is a dealer for Case Construction
Equipment. "If you're trying to have inventories of not
more than 25% to 30% of your annual sales, we're getting close
to that," says Wilson, who also is senior vice president of
the Associated Equipment Distributors. "And if 65% utilization
on rental equipment is your target, we're getting close to
that." He adds that his company has cut its rental fleet back
by 15% over the last couple of years.
Values in Used Equipment
Wolverine's Kelleher
observes that used-equipment prices are stable but lower than a
year ago. "Prices today are probably at their lowest level
for used equipment. The values are there for anybody who wants to
buy. They're not going to get a better value. We don't plan to lower
prices because the next several months make up our best season,"
Kelleher says of the summertime.
"I've been
told that used-equipment prices are down 10% to 15% on some product
categories, compared to [last] year," notes Manfredi. In general,
he says, the used-equipment market has not been depressed by rental
companies selling off volumes of machines. "If they sold off
used equipment, they would have to replace it with new, and they
don't want to spend the money."
The California Caterpillar
dealer reports a problem in competing on price with gray iron: imported
equipment not specified for sale in the US. Gray iron usually consists
of new or low-hour machines that come from Europe or Asia. "Brokers
go overseas and buy a machine for $5,000 or $10,000 more than what
an overseas customer will pay, and then he can afford to import
it to the US and sell it at a $2,500 or $5,000 profit and still
beat our pricing," says the dealer, who declined to be identified.
"When an overseas currency is weak against the dollar, it hurts
the ability of the foreign buyer to compete with a US price.
"Gray iron just
bastardizes our pricing structure," continues the dealer. "If
we tried to buy those machines it would just create more demand.
They have no warranty, but that doesn't seem to be a deterrent
to buying. Caterpillar is trying to get it stopped by pointing out
that the engines are not EPA [Environmental Protection Agency]-certified."
If the construction business
were better, more equipment would be selling, believes Madsen. "We
just put some stuff on a sale here, and our customers didn't
have a problem with the price, they had a problem with no need.
We had a sale on some wheel loaders and some dirt and asphalt compaction
equipment. This was all late-model equipment. We were successful
with selling some of it, but on the bigger wheel loaders and larger
compaction equipment, everybody said those are good prices but that
they don't have the need for it.
"With the current
levels of economic growth and confidence in the construction industry,
nobody's willing to invest the money in good used equipment."
And because the heavy-construction business is slow in Utah, Madsen
says start-up contractors–who typically invest in used equipment–are
missing in action. "We don't have the start-up guys who buy
a $50,000 or $60,000 used excavator."
Another factor in the
equation: Used equipment must compete with new equipment in the
marketplace. And manufacturers have been offering very low or 0%
interest on new equipment, reports Madsen. So a new backhoe priced
at $62,000 with 0% interest for three years becomes a very competitive
deal with a late-model backhoe for $55,000 and 8% interest. "Guys
will say, ‘I'd just as soon buy the new one,'"
he says.
Many contractors always
prefer to buy new equipment over used. "We don't very
often buy used machinery," remarks Jim Bruner, president of
United Contractors Midwest Inc. of Springfield, IL. "We don't
like to buy other people's problems." United Contractors
owns earthmoving and paving equipment worth hundreds of millions
of dollars and is the result of a recent merger of Freesen Inc.,
Illinois Valley Paving Company, and R.A. Cullinan & Son Inc.
Bruner says he often
has rented a new piece of equipment, then bought it if the firm
had a need for the piece and it had performed well. In general Bruner
prefers that kind of a deal to a rental-with-purchase option (RPO),
by which the purchase price is negotiated upfront. At the end of
a rental, the dealer or seller still has the risk of the machine
being returned, "and you can negotiate a better price at that
time," he adds. "But if you agreed on a price in the RPO
deal, that purchase price is set from the start and may not be as
good a price as you can get if you just rented the machine."
This year's equipment
sales will be somewhat better than 2001's, predicts United
Equipment's Wilson. And demand will pick up in 2003. "There's
a good chance it'll bump on up there to where GNP [gross national
product] will grow at closer to 5%, instead of 2% or 3%," he
estimates. Another key indicator comes from United Rentals: The
firm plans to buy an estimated $850 million in rental equipment
in 2003–up from $395 million this year.
Frequent contributor
Dan Brown is the owner of TechniComm, a communications business
based in Des Plaines, IL.
GEC
- November/December 2002
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