MONITOR: Last year, many businesses chose to defer equipment acquisitions due to the uncertainty that characterized the year. How did this affect your vendor business in 2016?
BERG: We definitely saw deferment of equipment acquisitions in the U.S., with new business volume showing flat to nominal growth. We did well in certain sectors such as healthcare, construction, industrial and office technology, but others (such as food and agriculture) continued to struggle. Overall, 2016 was as we expected it to be — another year of single-digit growth.
The beauty of our vendor model is that we can pivot with our partners. If business is stagnant in the U.S., our global footprint enables us to support our partners in other geographies. Despite the uncertainty in Europe, the continent had a strong year. Globally, markets grew. Our global presence and capabilities put us in a position to assist our partners in developing and higher-growth markets.
HILL: We definitely saw businesses deferring equipment acquisitions due to economic uncertainty in 2016. We also saw some companies delay their equipment acquisitions by a quarter or two, and others downsized their spending, particularly in the software and services space. In this sector, we saw companies move forward, but with smaller, shorter-term engagements than originally planned. I think the election removed many of the uncertainties that drove these market trends, and we have seen an uptick in Q1/17.
KELLY: Our business in 2016 was strong despite political and economic uncertainty. Our volume was up 6% year-over-year across multiple industries including construction, material handling, office imaging/automation and IT. We saw deferments most prominently in construction with many end-user customers waiting on the sidelines for parts of the year. We heard this sentiment from our OEMs and dealers and observed this through external market data.
Moving into 2017, we see even brighter horizons across the industries we serve. Wells Fargo published its annual Construction Industry Forecast this past February. In it, we note that optimism in the construction industry is near the highest it has been in 20 years. In addition, as we see once struggling industries stabilize, there could be a net positive impact on spend within the material handling, information technology and office technology segments. Our dealers are expressing confidence and ready for a great year. I see this renewed optimism and activity likely to continue for the next several quarters and into 2018.
MONITOR: In our last vendor roundtable, a participant noted that in today’s environment many manufacturers and dealers no longer rely on a primary finance provider, but work with several finance suppliers instead. Having said that, what are some of the pros and cons of participating in a relationship that is shared on some basis with others who bring something unique to the table? For example, to what extent, if any, have the fintechs emerged as a factor in the vendor space?
BERG: We understand that manufacturers and dealers sometimes want to work with more than one finance supplier, especially after the financial crisis. We offer a variety of partnership models to meet the specific financing needs of our customers, and each allows us to bring something different to the table.
Whether “sharing” these partners with other financiers is a pro or a con really depends on the intent of the manufacturer/dealer. If they are using multiple providers in order to get the very best each has to offer, then it’s a pro. If everyone has a level playing field and a clear understanding of how each lender provides value, then having multiple partners allows each to do what it does best and keeps us all at the top of our games.
On the other hand, if manufacturers/dealers are simply bringing in multiple lenders in hopes of starting a price war, that’s a con. When financing becomes commodity-based rather than quality-based, a true partnership is impossible to achieve.
That said, in our experience, the most fruitful partnerships result from a true collaboration, where our partners include us as an integral part of their business strategy. When our partners invite us to have a seat at the planning table, we are able to customize our approach and focus our resources and attention on deploying the right tools to ensure success, however they choose to define it. For instance, if we know a partner is looking to expand its footprint in other countries, we’ll offer a different set of solutions than we would if that partner’s goal was to increase market share in the Southeastern U.S. or drive digital adoption.
So, while we are capable of providing value under any model, fully integrated partnerships allow us to serve our customers to the fullest.
HILL: There are many cases where working with multiple finance partners can be beneficial for everyone involved, particularly when the various partners have different specialties, for example in government, managed solutions, mid-ticket, small-ticket and other specific areas of expertise. Few banks can be all things to all people, and we welcome opportunities to be part of a thoughtful, strategic financing team comprised of companies that bring different specialties to the table. In these cases, we can all focus on our core competencies with less pressure to do business that is outside of our comfort zone. When the skills and specialties of the finance partners complement each other, everyone wins.
However, when a vendor brings in multiple players with the same core competencies just for the sake of negotiating a lower rate, the relationship becomes more transactional and less strategic. The reality of this is that companies choosing to work with banks on a purely transactional basis are sacrificing a long-term, strategic partnership with their financing partners.
As far as fintechs go, we haven’t seen much impact on our business. At Key Equipment Finance, we excel at mid-ticket transactions, managed solutions and government partnerships, whereas fintechs seem to generally be more focused on consumer and small-ticket transactions. We tend not to compete in the same space.
KELLY: While there may be certain benefits to the multifunder model, there are distinct advantages to working with a primary supplier that deeply understands the industry and the unique opportunities and challenges that manufacturers and dealers face. At Wells Fargo, we pride ourselves not solely on providing competitive pricing but with other intangibles that differentiate us. Our deep domain expertise in the industries we serve allows us to be fully integrated into the sales, credit and equipment management components of the transaction lifecycle. We intimately know the equipment we are financing and thus can provide a better end-of-term experience for the dealer and customer.
We learn from all of our industry peers and partners and continue to explore the fintech model. What we have been learning from the fintechs is that they have an entrepreneurial mindset, an approach that I encourage my team to be mindful of as we think about our own innovation and growth.
MONITOR: What is your outlook for the vendor finance market in 2017? What are the greatest opportunities, challenges and concerns that you anticipate?
BERG: I think 2017 will be a stable year. Overall, we’ll likely see more of the same small or low single digit growth. Continued pressure on margins and rising rates could slow things down a bit.
Of course, some industries will be hotter than others — we’re seeing some strong opportunities in our construction, transportation and industrial business unit as well as in the software/tech space. The commodities super-cycle continues to be challenging for food and agriculture, but we’re adjusting to those dynamics.
The state of the healthcare industry — as well as numerous other heavily regulated industries — remains to be seen. There are still a lot of unknowns regarding how the new administration will prioritize spending and allot funds. For instance, big infrastructure projects could mean a boom for construction, transportation and industrial and changes to environmental policy could impact the clean technology sector.
That said, I’ve never seen all four of DLL’s industries negatively impacted at once. They ebb and flow. That’s the nature of the market, and our business model is designed to handle these fluctuations. DLL’s diverse portfolio and global footprint enable us to ride out these waves. If one industry or region slows down, we can focus more attention and resources on others.
HILL: I’m upbeat about the market for this year. Although the economy is not what I would describe as robust, it is chugging along and we expect to see our portfolios perform well throughout the rest of the year. We haven’t seen an uptick in credit issues, and we’re seeing more confidence in the overall economic environment. The jury is still out in terms of tax reform. Clients want to understand the changes coming in tax laws before they make equipment decisions, so we will have to see how this plays out over the coming months. But at the end of the day, the outlook for the remainder of 2017 is strong. The vendor market is huge and presents a lot of opportunity. At Key Equipment Finance, we are in a good position because we have financing capabilities across multiple segments and verticals, so if there’s softness in one segment, there’s plenty of opportunity for us elsewhere.
The vendor finance business, where financing companies help manufacturers and dealers sell more equipment, remains a solid industry. And while advances in technology or source consolidation may occur, the overall model and approach with OEMs and dealers will be around for a long time.
KELLY: At Wells Fargo, our vendor financial services team has some of the broadest capabilities in the market. We provide the full spectrum of offerings from full captive outsource, to manufacturer and dealer programs, to wholesale programs and inventory financing programs, as well as relevant products and services that meet customer needs. Underlying all of this is our domain expertise, long-term relationships across multiple industries and fast, efficient technology. We feel that this combination of capability and ability is a true differentiator for us and allows our customers to go to one source for all of their equipment financing needs.
One of the challenges we anticipate is the rising interest rate environment and how financing providers will respond. We feel that an industry-wide increase in rates should not have a detrimental impact on overall volume. In addition, the regulatory environment continues to pose challenges. While there are signs that the new administration may scale-back some of this regulation, we don’t yet have any indication as to what form or when these changes will occur.
Finally, managed services, or usage-based products, present both a challenge and an opportunity. Understanding how we develop these products to meet this market demand presents a unique growth opportunity for all financing providers.
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