Although memories of a weakened U.S. material handling industry are all too recent, the future is one of renewed strength. However, headwinds, such as the fragile economic recovery, uncertain monetary policy and Chinese brands entering the North American market, present challenges.
Michael O. Russell, President & CEO, Russell Equipment
Manufacturing activity in the U.S. has been a bright spot in the recovery that is taking place. Companies that once sought overseas bastions of inexpensive labor are reevaluating labor, energy and transport costs and in some cases, which is beginning to become a noticeable trend, beginning to re-shore manufacturing operations. This is noticeable not only in the roughly 300,000 manufacturing job openings nationwide (according to a Bureau of Labor Statistics October 24, 2013 news release), but also in the resurgent demand for forklifts. The Industrial Truck Association (ITA), which tracks U.S. factory shipments by forklift classification, has recovered from a low of roughly 84,000 units in 2009 to approximately 152,000 in 2012. A combination of consistent labor costs, shorter transportation distances and most importantly low energy costs are driving this trend, which is flowing through to lift truck manufacturers in the way of increased orders for new equipment.
Aiding this trend of increased new equipment orders is the availability of inexpensive financing, which is driving consumer and corporate appetites. Individual household spending is up 3.5% over 2011 (based on a Bureau of Labor Statistics September 10, 2013 news release) and businesses continue to reinvest in the efficiency of their operations.
A very noticeable shift in the material handling industry is the consolidation of dealers with their manufacturers. The majority of major original equipment manufacturers (OEMs) have been on a visible buying spree of dealerships across the country. Taking advantage of reinvigorated bottom lines and cheap credit, this consolidation has accelerated into 2013. To support the vertical integration of OEM and dealership, the captive financing arms of the major manufacturers have also taken advantage of low interest rates and created perhaps the most competitive leasing and financing market in recent memory. Low lease rate factors and interest rates are incentivizing manufactures and distributors to invest in new fleets of equipment.
Whether one purchases, leases or finances a forklift, the decision to acquire new equipment comes down to cost. Beginning in 2010 the industry began to see new shipment figures recover. This started slowly at first, with only the strongest companies, fiscally speaking, investing in new fleets. Now, three years later, credit is available to more entities, pricing on new equipment has remained largely unchanged and the business outlook in the country is on a more solid footing. Levels of new industrial truck shipments are still not back to the heights of pre-recession levels. We must ask, what does this mean and how will it impact figures in 2013 and beyond?
It signifies that there are still aging fleets of forklifts in use today. It also signifies that credit and the willingness of some corporations to invest in new fleets have not completely recovered. In many ways, this is a positive sign because forklifts wear out. When forklifts near the end of their useful life, the cost to maintain them increases dramatically. We are experiencing an environment of improving credit availability, low interest rates and largely constant new equipment sale prices. In many ways, it is the perfect time to invest in a new fleet.
Money is plentiful among financial institutions and the need for those institutions to put those funds to use is high. Subsequently, residuals placed on leased fleets are climbing ever higher and payments are drifting ever lower. Large companies negotiating to reduce or eliminate end-of-lease return conditions with their lender and the trend of lowering monthly payments are continuing to increase the incentive to reinvest in a new fleet.
In addition to financial and service costs playing a role in the decision to invest in a new forklift, so is technological innovation. Electric forklifts have made significant strides in energy efficiency through the use of mainstream components such as regenerative braking, opportunity charging and AC electrical systems. The current production models are noticeably more efficient than even their predecessors from four years ago, let alone aging fleets from eight or more years ago.
It is also important to analyze what the current trends are in regard to rental fleets. Due to a consistent increase in demand for new trucks, manufacturers’ lead times have remained extended. A three- to four-month lead time is common for the most popular units in 2013 and for larger equipment in excess of 20,000 pounds. Some lead times stretch out longer than one year. This, combined with aging fleets, has placed a high demand for short- and mid-term rental equipment. Dealers are actively investing in new units for their rental fleets, taking advantage of both high product demand and low interest rates to fund their purchases. These factors have combined nicely to increase the demand for forklifts in 2013 and for the foreseeable future in 2014 and beyond.
A commonly overlooked aspect of the material handling industry — but one that ties in financing, dealer rentals and overall market demand — is used equipment. A lot can be learned from analyzing the type, condition, quantity, use and market value of used equipment. The majority of used equipment in the U.S. comes from either off-lease finance arrangements or retired rental fleets. Lease terms are typically three to five years; however the average off-lease term has historically been four to six years due to lease extensions and delays with new equipment deliveries. If we look back five years to 2008 ITA figures, we see a decline from the high levels of 2006 and 2007. There was a dramatic drop in shipments in 2009. During the recession, companies cut back on their fleets, used less equipment for more hours and kept their units longer.
Fast forward to today, and it has resulted in a market that is relatively constricted in supply of used equipment and created a scarcity of low hour equipment. This has driven the price of used equipment to historical highs, compared to the cost of a similar new unit. As the cost of used equipment increases, it incentivizes dealers to sell rental equipment and purchase new equipment. It also incentivizes end-users who may have been considering a used unit to buy new. Both of these factors have led to increasing shipments of new equipment in 2013 and will continue to drive market demand for new equipment in to 2014 and beyond until the market can normalize on a long-term trend.
There are many market forces at play lending themselves to producing an environment conducive for end-user investment in new forklifts fleets. While the majority of inputs bode well for the material handling industry in 2013 and 2014, there are also some headwinds to pay attention to.
The most evident is the still fragile state of the economic recovery and somewhat uncertain monetary policy at the Fed. Despite low interest rates and a recovering jobs market, many companies have still had a difficult time finding credit and many lenders have been reluctant to offer the same credit terms as they had pre-recession. In many ways, stricter lending practices will be good long term but in the meantime serve to govern demand. Until policymakers can convince the market of stable and consistent policies, demand will be hampered by uncertainty.
Another transformation that looms on the horizon is the introduction of Chinese brands to the North American market. An interesting case study on how Chinese brands could potentially impact the U.S. market is the country of Chile. Once seen as unreliable, unknown and unwanted, Chinese brands are now in high demand in that country.
Service technicians will admit that while somewhat still less reliable than their Japanese and American counterparts, great strides in quality have nonetheless been made and come with a price approximately 30% lower than non-Chinese brands. Quality or not, it is difficult to justify spending $25,000 on a Japanese or American brand when you can spend $7,500 less on a Chinese brand in the Chilean market. If lower priced new Chinese equipment finds a way to eventually penetrate the North American market on a large scale, the result would be a rebalancing of the used and new markets, although overall forklift demand would most likely remain largely unchanged. As an industry we must pay attention to our nation’s trade agreements and the imminent introduction of global brands into the North American market.
Overall in 2013 the material handling industry has continued to make product innovations and promote the sale of new equipment through factory discounts and low financing rates. This has led to a consistent percentage increase in new factory shipments — a trend that will likely continue in to 2014 and beyond, short of an unforeseen macro-economic shock. The status of the industry has moved from weak just a few years ago to one of renewed strength and with a bright outlook to the future. Consolidation between dealers and OEMs has added an interesting market dynamic and one that is sure to continue in to the future. Economic recovery will continue to positively impact the health of the American material handling industry.
Michael Russell is president and chief executive of Russell Equipment, which specializes in material handling portfolio guidance, asset valuation and remarketing, fleet management and inspection services.
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