Increasing construction demand improves rental outlook
Emerging markets will propel rentals and potentially stress aftermarket service organizations.
By Gary Brooks
The heavy equipment rental industry is projected be worth more than $110 billion by 2019, and its growth potential is particularly intriguing when it comes to emerging markets like Asia.
With labor costs continuing to rise and slow economic growth in major economies like China and India, renting equipment instead of buying new machinery is a good way for construction firms, builders and subcontractors to reduce overhead costs. The Asian equipment rental segment is set to hit $24 billion by 2019. Furthermore, given the relative scarcity of major construction equipment manufacturers in Asia, the rental market could grow far more quickly than expected as more companies jump into equipment rental.
In 2017, expect the “power by the hour” model to be more common.
Essentially, this is an agreement that allows a company to lease equipment for a certain number of in-use hours, buying the functionality rather than the actual piece of equipment. For manufacturers of heavy equipment, this means they must maximize equipment uptime in order to maximize revenue.
Maximizing uptime will require manufacturers to optimize their after-sales service organization to deliver high service levels and spare part availability. By optimizing service parts inventories throughout the entire service chain—from central stock locations to dealers—manufacturers can reduce service parts inventories by as much by 20 to 60 percent and increase gross profits by five to 20 percent, while maximizing the uptime of rental equipment to deliver top line improvements.
Growing focus on emerging markets creates distribution headaches.
Although single-family home construction has doubled in the U.S. since the spring of 2009, construction activity continues to be notoriously volatile and slow growing in established markets such as North America and Europe. This means that original equipment manufacturers (OEMs) operating in these territories will need to look beyond their immediate markets and towards emerging ones to drive growth.
To do this, shifts will need to occur in the way distribution is handled in order to meet the inventory, repair and equipment demands that crop up in each new market. This will be particularly difficult given the distribution infrastructures in markets such as Asia and Africa are either nascent or nonexistent. OEMs moving forward will need to lean more heavily on solutions that can help them gain greater visibility over performance and general demand. This will help them establish themselves firmly in new markets where competition is becoming increasingly fierce.
Market conditions place more emphasis on the aftermarket in established markets.
Given the unpredictable nature of construction and building in established markets, after-sales service organizations will draw more attention from OEMs in 2017.
A high-margin opportunity, after-sales service presents a reliable, continuous and high-margin revenue stream for OEMs based in stagnant building markets. In fact, per McKinsey, 56 percent of European based OEMs say that the service delivered after the initial sales of equipment will be of increased importance to them moving forward.
This largely mirrors a trend in other categories as well, as companies across the board will look to leverage the aftermarket as a way to boost revenue as competition and consolidation begin to increase.
Gary Brooks is CMO at Syncron, the only aftermarket service provider that exclusively focuses on service parts management and pricing for the world’s leading manufacturers. Its award-winning SaaS solutions enable companies around the world to transform their aftermarket service operations by dramatically increasing profitability, cash flow and customer loyalty. For more information, visit syncron.com.
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