March 13, 2017

CONEXPO - Improving Demand Queues Up Competition

6301 JP, 6395 JP, CAT, KMTUY, MTW, TEX
By Jarrett Harris
Construction equipment distributors question which manufacturers will be able to deliver equipment in a reasonable time frame and at what price as demand begins to improve.

Positive Tone Reflects Recent Momentum
Many of the trends OTR Global has picked up since late 2016 continued to be evident at CONEXPO:

  • Used equipment pricing is improving as availability is tightening and activity is increasing, in line with trends first identified in the Jan. 20 Used Equipment report.
  • Lead times on new equipment orders are beginning to stretch out – as OTR Global first reported in the Dec. 20 Heavy and Power Equipment report.
  • Many equipment distributors are petitioning OEMs to increase production levels as supply is beginning to lag demand, as OTR Global reported in the Feb. 17 note on Florida auctions.

In short, there weren’t a lot of surprises at CONEXPO given the momentum of activity that’s been evident for several months.

Focus Turns to Production
With demand activity picking up and inventory issues seemingly under control, distributors’ focus now pivots to OEM execution – who can produce equipment in a reasonable amount of time. “We’ve been giving Caterpillar [Inc.] the signal to ramp production since November, but they’ve been slow to respond,” one dealer said. While some indicated the manufacturer has grown more amenable to production adjustments, many lamented Caterpillar’s reluctance to move quicker.

Komatsu Ltd., on the other hand, appears to be taking more tangible steps to respond to market indicators. “We’ve noticed that Komatsu is securing build slots with a number of their component vendors,” one manufacturing source said. “Cat doesn’t seem to be making as many moves yet.” Komatsu distributors interviewed at the show seemed less concerned with machine availability than their Caterpillar counterparts, and several said the difference is a function – at least in part – of vastly different corporate cultures. “At its heart, Komatsu is truly a manufacturing company. It’s run by engineers,” one source said. “Caterpillar is really more of a marketing company.”

New Pricing Still Competitive
Though market conditions seem to be improving – and used prices are increasing – sources said new equipment pricing remains competitive. “There are still a lot of aggressive leasing offers out there,” one distributor said. And while dealers like to point fingers at their largest competitors, many acknowledge that OEMs of all colors remain focused on closing deals and protecting or expanding market share. Beyond the traditional large players, a number of distributors said Kubota Corp. (6326 JP) and Doosan Corp. (000150 KS) are expanding rapidly, with quality products at very competitive prices. Volvo AB, on the other hand, is often cited as losing its footing. “I don’t know what’s happened to Volvo, but we really don’t run into them any more.”

Liugong May be Cracking the Code
OTR Global has attended every CONEXPO event since 2005. And every year, one of the big questions that comes out of the show is whether the Chinese manufacturers might finally be taking a bigger step into the U.S. market. There have been multiple head fakes in the past, and a sense that “this is the year.” But year in and year out, the competitive threat from the Chinese manufacturers to entrenched players in the United States has remained limited. The exhibits of Caterpillar or Deere & Co. or any of the major U.S. manufacturers are often abuzz with dealers proudly wearing dealership polos. The exhibits from Sany Heavy Industry Co. Ltd. (600031 CH) and Zoomlion Heavy Industry Science and Technology Co. Ltd. (000157 CH), by contrast, featured little such connection to the U.S. market.

Of the three major Chinese manufacturers, Guangxi Liugong Machinery Co. Ltd. (000528 CH) appeared to have the most deliberate focus on what a U.S. buyer might be interested in. Machines on display sat behind large signage prominently pointing to which mainstream engine manufacturer provided power to each machine. The manufacturer also boasted a best-in-industry warranty on many product lines. The intent is clear: Assure the U.S. buyer that the machines have a reliable power source with readily available parts and a warranty that would absolve the owner from major expenses – all at a price 15%-20% lower than the competition. The target audience appears to be independent rental shops. Sources interviewed for the March 6 Rental Show note said higher acquisition costs of main line equipment may prove challenging for independent rental houses. In such an environment, the Chinese strategy seems sound, at least on paper.

Crane Market Improves at an Inopportune Time for Manitowoc, Terex
At CONEXPO 2014, OTR Global’s most significant finding was the lack of momentum in new crane orders due to an overhang of used crane availability. It’s incredible to think that it’s taken nearly three full years for much of that inventory to work its way through the system. (OTR Global changed the read on the crane market from negative to mixed in the Dec. 9 report as declining new crane orders began to moderate.) This year there are signs the worst in the crane market may finally be over.

Industry participants note upward momentum in used crane prices. One large independent distributor – whose business is oriented around buying used cranes for rental or resale – reported less ability to find compelling deals as there are more interested buyers and fewer quality cranes coming to market. Several sources said used crane pricing at Ritchie Bros. Auctioneers Inc.’s February auction was strong, even on the rough terrain category that’s been depressed for the past several years. Others even said they’ve worked through enough inventory to begin placing more orders for new cranes.

But while the crane cycle seems to be turning a corner, the question is whether domestic producers The Manitowoc Co. Inc. and Terex Corp. can benefit as much as their international competitors. In the past few years OTR Global’s sources have reported a clear shift in market share, as Liebherr Group and Tadano Ltd. (6395 JP) have emerged as dominant players with superior technology and a currency advantage. Source commentary at the show continued to illustrate that trend. In fact, several sources said manufacturing consolidation – particularly at Terex – is further opening the door to competitors as crane quality appears to be deteriorating further. One source – a large U.S. rental and distribution house – said he’d recently finalized a sale of two large rough-terrain cranes, only to have a service call from the end user within 24 hours of delivery due to a manufacturing deficiency. Sources have referenced receiving “brand new broken” cranes from Terex in the past, and the shift in production facilities doesn’t seem to be helping.

Sources do seem to think highly of the new Terex management team (and that’s not an issue many distributors always have an opinion on), citing the company’s renewed focus on core, legacy brands – like Demag – as a step in the right direction. But sources said the timing of the production move from Iowa to Oklahoma and continued quality issues could limit the upside the manufacturer experiences as general market trends improve.