Association Roundtable Discusses Equipment
Industry Trends

Older Fleets, Expanded In-house Maintenance Cited

Compared to previous years, construction equipment rental is now more likely characterized by older fleets, increased in-house maintenance operations, lower profits on used equipment sales, and a move toward international operations and broader product ranges.

These observations come from a recent "rental roundtable" conducted by the Association of Equipment Manufacturers (Chicago, Ill.). The AEM international trade group first conducted roundtables of key rental industry players in 1999 to provide construction equipment manufacturers with insights into the changing rental marketplace. Here is a summary from the latest roundtable discussion.

Although it depends on the type of equipment, some rental companies at the AEM roundtable said that to keep rental rates competitive with ownership costs, they have to age their fleets longer than in the past. Equipment such as aerial work platforms and telescopic forklifts was cited as an example of product. For many of the larger rental companies that are coming off of high growth, high acquisition periods, average fleet age has declined as these companies have moved to slower growth periods.

Companies that were growing in the high double digits two to four years ago were adding a wide spectrum of equipment to their fleets - including a lot of new equipment - which reduced their fleets' average age. Then as companies consolidated suppliers and moved to a period of less-frequent acquisitions, the average age of equipment stabilized. Now, particularly for large equipment, the age at which it needs to be replaced tends to fall between six and eight years, on average.

Many rental companies are seeing an increase in the third-party maintenance business they do. One company noted its third-party maintenance business - typically in the form of extended warranty products it offers on sales of used equipment - increased 18 percent in 2001. While the business was not a substantial amount compared to total revenue, it did provide some incremental, high-margin revenue, according to the company.

The type of maintenance varies by rental company. Some do light maintenance, while others have capabilities to rebuild 2,000 units a year and do other heavy repair and maintenance work. Some maintain a central parts warehouse; other rental companies want dealers to stock parts so they don't have to tie up capital for that purpose.

There was some disagreement on whether used equipment is less of a profit center than in the past. Depressed prices and different depreciation policies have hurt profitability, said one participant. Another participant said it still received good margins on used equipment, but conceded that used prices declined three percent to five percent in 2000 and 2001.

Auction sales have decreased substantially from about three years ago, but auctions were still seen as a valuable way to dispose of equipment a company deemed less desirable for its operations.

The decision to sell a piece of rental equipment depends on the rental demand for the equipment versus the sale price it can command, according to rental companies. Consequently, with a high enough purchase offer, anything's for sale at any time. But other companies choose not to emphasize sales because they don't want to invest resources in the process; they want to invest resources in getting the longest rental life out of the equipment.

Globalization of the equipment rental business is inevitable, although right now and for the foreseeable future it will pose challenges, according to the roundtable. For example, different operational and organizational structures across borders but within the same customer companies can make global business difficult for rental firms. And, government regulations prevent moving some equipment from the United States to other countries.

Nonetheless, national and international customers, equipment manufacturers and the rental companies themselves will drive globalization, most of the focus group members agreed.

Rental companies are also expanding the range of products they carry to include more specialized, low-volume equipment. These product offerings allow rental firms to offer more products to keep customers happy, although they add little to overall profitability. When asked what new products should be available at rental companies, equipment that makes a contractor's work simpler and more efficient or that lowers a contractor's costs was cited.

The AEM roundtable included representatives of large as well as regional rental business companies.