According to a chart of factory shipments of industrial trucks in the United States compiled by the Industrial Truck Association (ITA), most would conclude that the industry, like the economy, is cyclical. Just going back 15 or so years, shipments were up in 1994 and 1995 before falling slightly the next two years to come back with a vengeance in closing out the decade. Then in 2001, as the economy took a dip, so too did shipments for industrial trucks, before again rising to high levels in 2005 and 2006. But then 2007 hit, and with it the worst economic downturn since the Great Depression. That year showed shipments starting to drop, continuing a decline to less than 30,000 each for electric riders, motorized hand trucks and those with internal combustion engines in 2009.
In order to further understand just how closely tied the industry is with the economy, as well as to gain knowledge on where the industry is going this year and into 2011 and beyond, we spoke with Jeff Rufener, vice president of marketing at Mitsubishi Caterpillar Forklift America Inc. (MCFA), and president of the ITA, and Eric Gabriel, the manager of fleet operations and financial merchandising at MCFA.
With an overall 43% decline in shipments in 2009, would the slightly growing economy of 2010 have an effect on materials handling trucks? Rufener explains, “Month-to-month demand picked up at the end of 2009 and grew consistently through the first half of 2010. We expect a full-year number [in 2010] to be 25% to 35% better than 2009. We expect the growth to continue.”
He is quick to add that a number of things accounted for the decline, namely the recession. “Certainly the recession was a long one, the longest one in many years and so we expect the replacement cycles to dictate that some equipment will be replaced and that will be part of the growth curve. Our expectations for overall economic growth still remain fairly positive. I know there’s some question now about double-dipping, but our perspective for GDP growth in 2010 and 2011 is sufficient to cause lift truck industry demand to grow.”
Gross domestic product growth is a major indicator for lift truck growth, but only to a certain extent, Rufener says. “Like all capital goods, we’re very much tied to the state of the general economy. Our business is very cyclical. A decline of 43%, then growth in a following year of perhaps as much as 35% is highly cyclical. And as you look at GDP growth and try to correlate that to our industry demand, GDP growth alone is not sufficient to stimulate lift truck demand. We need it to be in the 2.5% to 2.6% range. Most people predicted that growth number to be full-year at 3%… So if you look at historical data, GDP growth is a very strong indicator.”
Aging equipment, another strong indicator of growth, is connected to GDP growth. “Through the recession, customers have held on to their equipment longer than normal and now need to upgrade their fleets,” Rufener explains. A final incentive for growth exists in the impact of new and proposed government regulation and the potential financial incentive to buy that the government is offering. “Increasing emissions control regulations, the availability of subsidies and tax incentives for certain types of equipment … all of these things are likely to help encourage customers to upgrade their fleets.”
Bring on the Green
Shipments of environmentally friendly lift trucks have also felt the ups and downs of the industry and the economy, but trends show that their drop isn’t quite as substantial as their gas-guzzling counterparts. The ITA noted in its shipments report that internal combustion shipments were off 53.7% year-over-year versus a decline of 37.4% for electric riders year/year. A sign of the green times perhaps?
Customers’ concern for the environment is one factor, Rufener notes, but the difference is also related to the recession. “We’ve seen this in past recessions. Manufacturing sectors are more impacted than distribution centers in our business. Of course, our economy in general is moving toward more of a distribution-based than manufacturing-based economy. Distribution tends to use electric products, so their businesses have held up better than the manufacturing sector, therefore electric truck purchases have held up better than combustion. I think also, electric trucks tend to be used by some of the largest customers in our economy. And those larger, more diverse customers hold up in recessionary times better than small businesses.
“In addition, you have the environmental factor coupled with the cost of fossil fuel and the concerns related to that. Finally, advancements in electric truck technology have improved electric truck performance. All of these things have come together to cause this fairly dramatic shift… Prior to 2005, electric products made up about 55% of our market. Last year, they made up 67% of our market — that’s a pretty significant change.”
As the economy recovers, he adds, the percent of electric truck purchases has declined but not as much as expected. Rufener notes that as the economy comes back to “normal” lift trucks will move back toward a more traditional mix, but “the other changes are more lasting. We don’t think that electric trucks as a percent of the total industry will ever fall below 60% again,” he says.
Tight Credit or Low Demand?
In the past year, C&I loans have declined dramatically and it’s attributed to much tougher credit standards but also a lack of demand. According to Gabriel, it’s a bit of both. “Certainly tighter credit has played a role, but it’s primarily a lack of demand that’s affected our business. I think we’re fortunate with an industrial base — we have a large, well-diversified customer base. We also have [relationships with] strategic partners that I think has helped minimize the impact of the tougher credit standards. I’ve seen it more as a deterioration of the customer’s credit worthiness than a lack of available financing.”
And aging fleets have been an influencing factor. Gabriel explains, “During the recession, customers obviously were tending to hold onto their fleet longer than they normally would. We’ve seen over the past couple of years that customers have opted to extend their existing leases and bear the expense of maintaining an older fleet rather than replacing it. This is starting to change a little bit — the expense of maintaining their existing fleet is beginning to exceed the cost of replacing it. So slowly but surely, we are starting to see the replacement of those aging fleets, but it has been a pretty dramatic trend toward extending existing leases.”
Government Tries to Boost Investment
Recently, the Obama Administration announced a stimulus proposal to provide a 100% tax deduction through 2011 in order to motivate equipment investment. Rufener notes that not only will this help investment in the lift truck industry, but it may be coming at the perfect time as lift truck demand is on the rise. “If the economy continues to show signs of improvement and the administration and Congress … pass that legislation, we absolutely believe that an additional generous tax deduction could motivate incremental purchases.”
He also suggests that it might spur people to invest more quickly than they otherwise would have. “If someone had planned to replace equipment in 2012, will it pull that purchase in 2011? Yes. Do I also think it will generate incremental purchases? Again, yes I do.”
Recently, Congress passed and President Obama signed a bill designed to encourage lending to small businesses — and that may, in turn, help to improve financing for potential customers. “It certainly can’t hurt,” Gabriel says. “But I think it remains to be seen what affect it will have on our business.” Since lack of demand has played a bigger role for MCFA’s customers than tight credit, Gabriel notes, “I think the credit is out there for our credit-worthy customers, where I think it might help though — is any injection of capital to these small businesses, which certainly has to have some positive impact on demand.”
Rufener adds, “Any government-sponsored lending to help small business grow would be helpful to our industry. What percentage of overall demand would that impact? It’s hard for us to say. It depends on the particular business segment that our respective members are strong or not so strong in. It also depends on the demographic of the customer.”
The Power of Leasing
No matter what incentives are given to financing materials handling equipment, leasing is an important part of it. MCFA knows that having competitive financial products available to its customers gives it a leg up in the industry. “At MCFA, we’ve always believed we have one of the most competitive financial merchandising programs in the industry … so it always has been and will continue to be an integral part of our overall sales and marketing efforts. I don’t think any of that is going to change,” Gabriel says. “Customers still want convenient one-stop shopping that includes a combination of the equipment, competitive maintenance solutions and a financial structure that’s tailored to their needs. It’s always going to be an integral part of how we go to market with our equipment.”
With the proposed changes to the lease accounting rules, many aspects of the financial structure could change. For Gabriel, since the proposed rules are still a distance away, the full impact can’t be fully realized. “It hasn’t been determined what the final standard’s going to be… It’s generally expected that the final standard is not going to be issued until mid-2011 and may not be effective until 2012. I don’t know if we know the full impact it will have on the leasing industry, but it’s certainly going to create a significant impact on how we account for leases. Undoubtedly, some of our customers’ behaviors are going to change as a result of the proposed accounting rules.”
However, Gabriel will always believe in the power of leasing. “I still believe that at the end of the day, leasing is going to have advantages. It’s still going to represent a valuable source of capital — it will provide 100% financing at a fixed rate with level payments. The residuals will still result in lower monthly payments, and the lessees are still going to have the flexibility to return the asset. But, there’s no doubt it’s going to be a dramatic change, and it’s a little concerning what the overall impact might be.”
Amanda L. Gutshall is associate editor of the Monitor.
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