Eye on Equipment

Weak economy undermining heavy equipment dealers

Contractors who do decide to purchase new equipment are asking a new set of questions.

By Mary Lou Jay

Demand for steel has increased prices for construction equipment such as the Volvo excavator, above.

Distributors of loaders, excavators, haulers and other equipment used in heavy construction in Texas are feeling the effects of the national economic slowdown on their showroom floors.

“Outright purchases are down significantly the past two or three months,” says Howard Hicks, vice president of marketing at HOLT CAT, which sells Caterpillar equipment in South, Central and North Texas. “In other parts of the country, dealers have been hurting for a year, but it’s just beginning to hit here.”

David Fitch, vice president of sales and marketing at ROMCO Equipment Co, which operates eight branches throughout Texas, agrees. “Expenses such as gas and materials have gone up for contractors, and the volume of work has declined,” he says. “The contractors have less work, so the demand for equipment is less.

Fitch adds that he believes Texas is still strong compared to the rest of the country.

“We’re fortunate here because there’s a lot of money being brought into the western part of our territory by the oil and gas industries,” says Dennis Howard, general manager for RDO equipment in the Dallas/Fort Worth area. “I look for Dallas and Fort Worth to dip but not drop dramatically.”

Andy Tewell, president of Central Texas Equipment in Round Rock, says the slowdown hasn’t been as palpable in the San Antonio/Austin area. “Building seems to continue on,” Tewell says.

advertisement

He adds that CTE’s business in the first six months of 2008 was slightly ahead of last year, in part because of diversification in the equipment it sells and the markets it serves. “We’ve seen a pickup in business from quarries overseas–South America, Central America, even Africa and Europe,” Tewell says. “We’ve also sent several cranes to South America for oil-related businesses.”

The overseas market has also benefited Reynolds, a scraper manufacturer based in McAllen. “Our orders have decreased 30 to 35% since November,” says James Hausner, vice president of marketing. Another 30% of the company’s sales are made to overseas contractors, and the decline in those markets has not been as dramatic, he says.

Hausner says Reynolds has brought in OEM, or original equipment manufacturer, work. “That helps us sustain employment and keep the company running,” he says.

Costs driving equipment decisions Contractors who do decide to purchase new equipment are asking a new set of questions. “Fuel consumption is something that our salespeople have talked about,” Howard says. He says that’s something that “the customers really wanted to analyze and address.”

Tewell adds, “People are starting to take note if an excavator can save them $10,000 to $15,000 in fuel costs.”

And Hicks says, “Fuel efficiency is having a stronger and stronger impact on purchasing decisions, but it’s difficult because many manufacturers claim fuel efficiency that they don’t necessarily have.”

Distributors of heavy equipment such as the Volvo L220F, shown, report fuel cost plays a major factor in impacting business choices and buyers’ decisions.

Distributors are also finding that more customers are choosing alternatives to purchasing. “We’re seeing more rentals purchases,” Howard says.

Some heavy equipment dealers are benefiting because their customers are taking better care of the equipment that they do own. “Our parts and service business is staying strong,” Hicks says. “That tells us that [equipment owners] are keeping their equipment and trying to keep it up rather than turning it as often as they used to. When they’re making money, it’s worthwhile to turn it to get the tax advantages of purchasing. But when they’re not making as much money, that’s not an advantage, so they’re keeping the equipment longer.”

But Howard has seen a decrease in service business. “Our belief is that the fleets have grown so much over the past years that as the demand for the fleet lessens, owners are parking the older machines instead of running them, so they don’t need as many repairs,” he says.

Survival strategies Like their contractor customers, equipment dealers are looking for ways to reduce expenses until the economic situation improves. “We’re trying to be as cost conscious as possible during these times,” Fitch says. “You review expenses a little more and try to manage your business a little more accurately than you do when times are very strong.”

Hicks says his firm is “trying to do more repairs ourselves, outsourcing fewer things. We are now reviewing the size of our two-ton service trucks to see if we can work with some of them not being as large so we can reduce fuel consumption. We are developing some of our own fuel-storage facilities so that we can buy more fuel in bulk.”

HOLT CAT is also spending money to build new locations closer to customers.

There’s some disagreement among dealers about the length of the market downturn. Tewell says he hopes to see a boost in sales at the end of the year due to tax savings available through an accelerated depreciation program.

“I tell contractors: ‘If you intend to stay in business, you’re going to need to upgrade your equipment and if you are making a profit the ideal time to do it is now, while you can take advantage of these depreciation packages.’

“Historically, an election year is where things kind of slow down. The year after an election year, when a new president comes in, things usually start to pick up.”

Hicks is not as optimistic. “We don’t think the tax-incentive programs are going to have as much impact as we had hoped because you’ve got to be making money in order for the accelerated depreciation to be an advantage,” he says.