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The
auxiliary equipment market has never been very efficient in distributing
to the construction industry, but now at least two developments
are possibly changing that. By Charles D. Bader |
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Suppliers of auxiliary construction equipment (pneumatic compressors, light stands, pumps, welding rigs, generators, specialized tools, and the like) have always fulfilled a pressing need for the construction industry. However, largely because of the geographic sprawl of the contractors and their job sites, it has been difficult to get the equipment into contractors’ hands without time delays and cost surcharges–either overt or hidden in the equipment price. Traditionally the construction industry has "solved" this problem by purchasing and maintaining fleets complete with the auxiliary equipment and full maintenance capability. Bud Howard, executive vice president of Prime Equipment Sales and Rentals in Houston, TX, describes how this was routinely done as recently as 10 years ago. "At that time, there was a pride of ownership issue," he recalls. "Not only did the ownership of a large fleet of equipment build tangible equity in the business, it was the way many contractors measured their success among their peers. But then came the advent of computers and financial measuring systems that provided a means of evaluating the costs of owning equipment. And at the same time, their sons were coming into the business armed with degrees from Harvard Business School and an urge to put their stamps on operations. "As a result, contractors began–many for the first time–to look at alternative uses of their capital and more profitable ways to invest their money. And this led them to assess the cost and risk of owning their big fleets of equipment. With it came a realization that the tail might be wagging the dog. In many cases, contractors realized they had been skewing their businesses, shifting their focus from building bridges or buildings to doing things just to keep their huge fleets busy and thereby recover their investment. And that, their educated sons were likely to point out, was a drain on capital, wasteful of executive time, and diverting the company from what it did best." There had to be an alternative, though, and for many contractors that alternative proved to be renting. Jake Stout of Sunbelt Rentals in Charlotte, NC, points out that the advantages of renting are numerous. "A contractor can get exactly the equipment he needs. He doesn’t have to worry about repairs and maintenance–the rental company takes care of that–and renting doesn’t drain his financial resources. When the job is done, he simply turns the equipment back, freed from ownership hassles like storage, utilization, and insurance." Steve Michaels of Miami, FL—based Neff Rentals puts it more bluntly: "More and more contractors are confirmed outsourcers these days. They tell us, ‘I don’t want to own a thing, not the equipment or the repair parts on the shelf or the delivery trucks. I want to make one call and have the equipment delivered to any job site I specify. If it breaks down, I know they’ll deliver another one. When the job’s over, I simply make another call and the rental company comes and takes the equipment away. It’s off my hands. And I’ll have all this convenience without any equipment liability on my balance sheet.’" But Howard points out that contractors couldn’t safely commit to a significant policy of renting unless they had safety of supply. Since the rental industry was quite fragmented as recently as five years ago, a contractor probably couldn’t depend on his local rental company to have an outlet–much less a repair capability–near all of that contractor’s job sites. As a result, few contractors had the security of supply they needed for an aggressive renting program.
The rental industry’s response to that shortcoming was a binge of takeovers in the late 1990s that continues today. Such companies as Prime Equipment now have literally hundreds of stores and scores of repair depots around the country, convenient to job sites in the many remote areas. Such companies as Sunbelt achieve the needed concentration as they grow. For example, Sunbelt has fewer outlets (150 in 26 states), but as its name implies, it perfected its business model in the Sunbelt states and thereby quickly achieved the necessary concentration there. Moreover, Stout notes, "Sunbelt serves major metropolitan markets by ‘clustering’ up to 12 strategically located facilities in each area. This provides convenience for customers throughout the area as well as good service and support. We have now expanded coast to coast and extend this business model as we enter each geographic market." The net result of all this consolidation has been a convenience and security of supply that greatly increased the amount of renting by the construction industry. Neff’s revenues from rentals grew to approximately $200 million by 2000. Equipment manufacturers also report a significant growth in rentals to the construction industry. Larry Outtrim of South Carolina—based Chicago Pneumatic says his company is rapidly becoming a rental business supplier. "Already 30% of the sales of our handheld pneumatic impact tools are to rental houses. And while the remaining 70% are to distributors, these distributors are starting their own rental operations now. Therefore some of our sales to these distributors are actually rental sales." Outtrim believes that his firm’s sales to rental houses would be even higher except for the high inventory levels currently at rental houses. "Ironically, the inventories are high because of the consolidation," Outtrim says. "Because they have been buying up the small rental houses, they are not currently making capital expenditures for our type of equipment. Therefore our sales to rental houses may go down before they go back up. But they will go up. The trend is definitely there." Jerry Greenquist, vice president of sales and marketing for Allmand Brothers of Holdrege, NE, hasn’t seen the same pattern for his company’s light-tower business. Similar to Chicago Pneumatic, Allmand Brothers sells to both distributors and rental houses, but Greenquist believes his distributors’ rental fleets are such a large part of their business that 90% of Allmand Brothers’ light-tower sales go for rentals of some kind. "Of course, light towers have always been a rental item because they are seen as just a necessary evil. Contractors use them only so that they can work at night and thereby make more money with their ‘real’ machines, the earthmoving equipment. Even so, our rental business has never been what it is today. Rental rates have become so competitive–down 50% in just 10 years. It’s the consolidation. The big rental houses now keep continual pressure on manufacturers to come up with more economical products. And that, of course, has benefited the contractors and caused more of them to rent–and to rent more," Greenquist observes.
One such contractor is PBM/Limbach Group, a mechanical, plumbing, and electrical contractor in Lanham, MD. According to Tool Inventory Manager Brad Tresak, the company rents virtually 100% of the equipment it uses on jobs. "At this point in our growth, we don’t even consider buying equipment," he explains. "Our facility is simply not large enough to house and maintain the amount of equipment we use, so we rent everything. The rental house takes care of the capital costs, the home and field maintenance, the transportation to and from the job sites, and the storage between jobs. We devote our new facility to a full-blown welding shop and a full-blown plumbing shop where we do all the prefabrication. Those are value-added operations, and they are what we specialize in. So we do that instead of renting equipment for the field; it’s the best decision for a young, growing contractor." Does this mean that auxiliary equipment is no longer being sold as opposed to being rented? Remember, Chicago Pneumatic is still producing two-thirds of its products for eventual sale to contractors. And there is a break-even point where purchasing can make more economic sense than renting. Howard of Prime Equipment believes the traditional 70% criterion is still valid. That means if a contractor’s expected utilization of a piece of equipment is 70% or more and he has a support capability anyway, it might make more sense to buy. Mike Thompson, purchasing agent for Clark Construction Company (see sidebar) goes further, saying, "If the rental cost is 60% to 70% of the purchase price [usually an eight- to 10-month rental], then buy it. Under this formula, we rent 60% of our large equipment, but only 10% to 20% of our small tools costing $500 or less." Actually, all these statistics are somewhat muddied by the fact that the "sales" suppliers and rental houses reports include used-equipment sales as well as new-equipment sales. And used-equipment sales generate significant revenues, representing what Howard calls "the background music to the rental business." Additionally, Howard explains, "A rental company couldn’t exist if it couldn’t sell its used equipment. At Prime, we turn our equipment at least every three years. In other words, we have to sell one-third of our $2 billion fleet every year. After all, it’s our equipment: We own it, so we have to move it." Stout concedes that this is true. "We stress superior service at Sunbelt," he maintains. "Not only does this involve quality emergency service in the field, it also includes a comprehensive preventative maintenance program to keep Sunbelt equipment in peak operating condition. Eventually equipment wears out, though, and we don’t want to rent equipment that no longer meets our standards of quality. At that point, we sell it at retail or to an auction broker." Neff also sells used equipment with its sales force or at auction but, in addition, disposes of used equipment via trade packages with some of its suppliers. As a result, Michaels says, "probably 20% to 25% of our total revenue comes from the sale of used equipment." Stephen Paradis, CEO of Louisville, KY—based Ironmax.com, which provides an Internet-based business-to-business marketplace for the construction industry, reports that the equipment disposed of through his company’s system has been 40% rentals, 30% sales of new equipment, and 30% used equipment. This variance might well be the result of the second great improvement in the efficiency of the auxiliary construction equipment market. The Emerging Internet Marketplace Although still in its infancy, the Internet marketplace, with its equipment information products and services, might well become as important to the efficiency of the auxiliary construction equipment marketplace as the rental company consolidation has been. States Paradis, "It’s time to provide the construction industry a better way to buy and sell equipment. We are giving buyers and sellers an easy, low-cost way to find each other and do business together." Through a strategic alliance with Primedia, Ironmax has an exclusive, perpetual global license to enhance and electronically publish Primedia’s printed guides and references for construction equipment. By accessing these databases, contractors who become members can obtain the up-to-date comprehensive information they need for informed buy and sell decisions. Currently, there are three of these databases available, although Paradis says there are a number of others under development. "The three currently available from our Web site are our Last Bid database, our Green Guide, and our Blue Book," Paradis points out. "The Last Bid database offers frequently updated auction records that provide a contracting firm with an accurate indicator of the current market value of its used equipment. The Green Guide provides comprehensive information on construction equipment values, including resale values, quick sales values, original list price, equipment specifications, and new-equipment list prices. Users can automatically calculate value adjustments for age, region, and equipment options. The Blue Book is the industry’s largest ongoing survey of actual ownership and operating costs. Users can search, sort, and calculate rates for more than 20,000 equipment listings." These databases provide a contractor in the market for equipment with a complete picture of equipment values so that he can make an informed buy or rent decision. Then he is in a position to take full advantage of Ironmax’s transactional database called RFQ. It provides a convenient equipment quoting process that enables a contractor to obtain competitive bids from suppliers and/or rental houses for the exact equipment he needs. Thus, they can get an increased number of quotes and can purchase or rent the equipment on-line without the time and travel that might otherwise be needed. What’s more, buyers and renters pay nothing for the transaction. "RFQ is easy as well as convenient for a contractor," Paradis remarks. "Following the prompts on his computer screen, he defines the equipment by name and model number, indicating whether he would consider "approved equal" equipment. In addition, he indicates such things as location radius limits, rent-or-buy decisions, new-or-used decisions, and the like. In other words, he creates an RFQ using the prompts and then transmits it to us. Our system culls our supplier registry and forwards this RFQ to the suppliers offering equipment that satisfies the RFQ requirements. In turn, the suppliers submit quotes that include price, delivery, terms they will accept, and any changes or amplifications to the equipment specified. Ironmax transmits these quotes to the requesting contractor who reviews them and selects the one that best fits his needs. He then issues the order electronically through Ironmax." Although Ironmax has only been in business for two years, its growth and the acceptance of its services already surpassed its projections. According to Paradis, the RFQ service has been experiencing stable, double-digit growth, and its information products, just introduced in December 2000, appear to be growing even faster. He also believes that the use of Internet-based construction equipment services will accelerate as contractors and suppliers become more familiar with them. The Internet marketplace is still in its infancy, and Ironmax and its competitors are busily developing new products and services that will extend the usefulness of the Internet to contractors even more. Paradis speaks for the fledgling industry when he says, "It is evident that the Internet is becoming a dominant platform for people to do business in the years ahead, and we want to take advantage of the opportunity to deliver better solutions to solve the construction industry’s problems." Charles D. Bader is with Dateline II Communications in Los Angeles, CA.
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