The construction-equipment industry is talking about suicidal rental rates, major rental companies in bankruptcy, and equipment dealers and manufacturers acting like rental companies. Because rental usage continues to grow despite the turmoil, it seems one question captures the attention of the users of machines, dealers, rental companies, manufacturers, and stockholders: Will most of the horsepower at work in North America eventually be rented?
Rental companies press the point at every opportunity. For credibility, they note that 50 percent of the equipment working in Europe is rented. The statistic is 80 percent in the United Kingdom. Annual reports and seminar speakers say North-American rental-industry revenue has grown at 15 percent compounded annually since 1982. The same sources have repeated for four years that their industry generates $25 billion in annual revenues.
Evidence of rental growth is apparent. If you haven't seen it in your own fleet, check out the local building sites and industrial users. How many of the tools and small machines around you were rented in 1990? How many are now?
It's not too hard to imagine that there may be enough rented compressors, cut-off saws, skid-steer loaders and aerial-work platforms that, based solely on the number of units, some day one could say that half of the equipment in this country is rented. But that doesn't constitute the kind of change that causes a construction-equipment owner to rethink his or her allocation of assets. The value of rented tools and utility equipment is a fraction of the value of the total U.S. equipment population. The work that all the small equipment in this country does is a fraction of this nation's vast equipment productivity.
Construction Equipment's 2003 Universe Study indicates that rental may be scratching, but it's not cutting into user ownership of heavy equipment. The Universe Studies measure the population and use of 29 categories of primary equipment (everything from skid-steer loaders and backhoe-loaders to bulldozers, motor graders and scrapers—rollers, asphalt and concrete pavers, rough-terrain forklifts, and some types of cranes are also counted). The number of these larger machines populating America's rental fleet certainly has increased—by 6.5 percent since 1999 and nearly 20 percent since 1991. But the rented machines are just keeping pace with the total machine population. The rental fleet has remained at about 23 percent of all machines since 1999, and actually declined 2.5 percent since 1991.
Of course, rental companies serve a valuable purpose renting a growing inventory of tools and small equipment—everything up to backhoe-loaders and aerial-work platforms, and probably including small excavators and wheel loaders if they develop their markets properly. Luckily for them, this small equipment tends to be higher-margin rental merchandise. Luckily for users, it also tends to be difficult to maintain and manage. A few rental survivors might even get rich if they can manage to stop what's shaping up to be a nationwide pricing crisis.
Leaders of all the major rental organizations say that raising rates is among their highest priorities. Unfortunately, most of them break down into one of two categories: They're either servicing such heavy debt that they've pulled out all the stops in order to keep cash flowing; or they're on reasonably sound fiscal footing, but some continue to match unsustainable rates to buy market share.
No single rental company holds 30 percent of the market. Any industry so decentralized, once it starts to consolidate, is due for serious change. Some of the ten biggest names are not going to survive. We won't recognize others when we get to the other side.
That raises an important concern for equipment professionals who see economic advantages in renting some of their hardware. Which rental vendors can we count on to be in business when the construction economy heads toward the next peak in the cycle?
The competitors have shaken off the hangover of the late 1990's binge and they're getting smarter. Industry leaders—some companies just a handful of years old—are accumulating enough operating data that they can make objective fleet choices. RSC, for example, has invested in training local operations people to understand and employ the financial pillars of the rental business. Sunbelt and NES have invested within the past year in management systems that could help them run more profitably, too. If they survive to full implementation, they'll know a lot more about what kind of rates they can afford to offer.
United has asked its rental-industry veterans to distill their experience into best-practices advice. The content is then massaged by professional training-program developers and presented to UR's work force. The company's 14,000 employees received 69,000 hours of training in 2002.
"In this time when customer demand is down and business profitability has been reduced, training is the one area we have not cut and which continues to increase at more than the inflationary rate," says John Milne, president of United Rentals. "This organization has hired a lot of rental-industry expertise, and it's important to make sure everybody has the opportunity to benefit from their experience."
Milne points to UR's national accounts program as evidence of the company's value to customers. He says United's national-accounts revenues grew 72 percent from 2000 to 2002, to a total of $422 million. And he expects the maturing program to grow at least 10 percent this year.
If you value a particular rental vendor's service or if you're shopping for a vendor with which you can build a high-value relationship, it's probably important in today's rental economy to support them with rental dollars. Before you start investing, though, consider your prospective business ally's staying power.
Bob Currie, president of equipment-distribution specialists Currie Management Consultants, says vendor viability is not too hard to assess. The company's liquidity and history of profitability say a lot. If you're considering a long-term alliance that will require extensive service support, Currie also recommends comparing revenues from sales to revenues from parts and service.
"Those dealers who are 90 percent equipment sales, and 10 percent aftermarket have a different capability to provide service than those who are 50 percent sales and 50 percent parts and service," Currie says. "If their revenue mix doesn't match their service claims, their service infrastructure is probably not set up to support you."
The bright side of today's tough economic conditions is that rental companies with staying power eventually must attract customers by improving the value they offer. Few can survive a prolonged rate war.
The downside of this rental-service renaissance is the near certain end to the $800 backhoe-loader. When rates start to rise, the difficult question to answer will be: How much can they go up before renting is no longer the most economical choice?
|Rental Fleet Changes|
|Number of Units*|
|2003||% Change since 1999|
|*These product types make up 90 percent of the heavy equipment in rental fleets.|
|Source: Construction Equipment Universe Studies|
|Large, growing populations of backhoe-loaders, skid-steer loaders and hydraulic excavators expand rental volume, but don't guarantee that users are replacing owned machines with rentals. The percentage of the total U.S. populations of these machines that are owned by rental fleets has actually dropped a few points in four years.|
|Rollers and compactors||12,377||-4|
|RT telescopic forklifts||12,295||-6|
|RT vertical mast forklifts||11,608||+12|
|Articulated motor graders||6,674||+38|
|Total Rental Units||293,963|