The Boom in Volume in Used Equipment

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How the industry is handling a record volume of used equipment.

Not long ago, Mike Wolff, vice president of Lake County Grading in Libertyville, IL, auctioned off most of his equipment fleet. Sold through Ritchie Bros. Auctioneers, the fleet included scrapers, haul trucks, excavators, and compactors and brought more than $2 million-a "very good sale value," remarks Wolff. Was Lake County Grading going out of business? Not at all, he replies.

"We converted our fleet to leased construction equipment," explains Wolff. Now Lake County leases its fleet of equipment, including eight Caterpillar 627 scrapers, from Patten Tractor Inc. in Elmhurst, IL. "With the lease program we eliminated most of the maintenance of our equipment. We cut back on mechanics, we cut back on lubrication personnel, and we have brand-new equipment." How much will leasing cost compared to owning? "Leasing should work out to be equal or better," Wolff replies.

By contrast, Kokosing Construction Company, a $400-million-per-year contractor based in Fredericktown, OH, maintains one of the largest equipment shops in the state, says Jack Butler, Kokosing's field equipment manager. While the company usually sells off smaller equipment at 7,000-8,000 hours, "We usually keep larger equipment for a second life," says Butler. Dozers that are D-5 size and larger and excavators of Cat 235 size and up, get completely rebuilt.

"We do most of the work ourselves," says Butler. "It just depends on our workload-whether we do the work or take it to our dealer. We've got some Cat 245 excavators that are at least 20 years old."

If Kokosing chooses to sell equipment, the company first tries directly selling the machinery itself. If that doesn't work, it's off to the auction block. Either way, Butler says Kokosing strives to protect the integrity of its used equipment. "Some contractors will dump problem equipment into an auction. We don't knowingly sell somebody a problem."

The Big Picture

The mid- to late '90s marked a sustained growth period in terms of new-equipment sales. Now, obviously, all that new equipment is being turned into used machinery. Construction demand is still healthy, but there are some signs that new-equipment sales are slackening as dealers cut back on inventories.

The used-equipment business is huge-it annually racks up sales of $100 billion worldwide, estimates industry analyst Frank Manfredi. He says sales in the United States account for about $25 billion of that.

And if the business of Ritchie Bros. Auctioneers is any indicator, the volume of used equipment is healthy and growing well. Last December, Ritchie Bros. announced it had achieved gross auctions of about $1.17 billion for 1999, a record high. The company held 114 auction sales in seven countries around the world. More than 116,000 registered bidders attended Ritchie Bros. auctions in 1999, compared to 109,000 in 1998, which represents a 6.4% growth. In 1999, the number of successful buyers rose 15% to 39,000.

Meanwhile, national and regional rental-equipment fleets have grown rapidly and are larger than ever. At the end of 1998, says Manfredi, numbers for five of the largest rental-company fleets totaled $2.9 billion in rental equipment. Clearly, rental companies are taking on more of the risk and expenses involved with equipment ownership-risk and expenses that contractors used to assume.

Similar to contractors, rental companies strive to maintain high utilization rates on the machines. Because equipment has fixed costs, such as depreciation and insurance, a machine can only make money if it's working. So when rental companies get their big fleets rented, cranked up, and working sustained long hours, they can generate high-dollar cash flows.

What happens when all this growth levels off? New equipment sales will level off as well, yet there will exist a huge volume of used equipment in the marketplace. Some industry officials reason that, to some extent, equipment manufacturers and dealers will find a significant volume of new business in rebuilding and reselling equipment.

If the aerial lifting-equipment business is any indication, a trend toward rebuilding is already on, construction equipment experts observed that as some aerial-lift manufacturers have seen new-machine sales flatten, they're offering to help large rental companies comb their fleets to find candidates for remarketing and rebuilding. In that way, finding machines for remarketing and rebuilding creates opportunities for replacements with new machines.

Meanwhile, JCB Inc.'s (White Marsh, MD) vice president of direct sales, Gary Walter, emphasizes that JCB's primary business is building and selling new machines. He points out that the company recently completed a new factory in Savannah, GA, for loader-backhoe production. Nevertheless, says Walter, "We are being pressured by the rental companies to consider trade packages-deals where they would offer used machines against the sales of new ones. These would be purchases of multiple [used] units-25 or more. We are investigating setting up a remarketing department. That would allow us to begin working closely with the rental market to help them resell machines, either to our dealer organization, to other parts of domestic [channels], or overseas.

"We're a new-machine manufacturer and we're not in the used machine business, but the dynamics of the market might lead us in that direction. As we look at other players, there is a significant practice by the aerial work platform companies to take used machines in trade. That trend may have an impact on [our business]. To date, JCB has not decided whether, as a company, it wants to get into the business of rebuilding machines for resale. The new-machine business has been very strong."

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