Equipment Management:: Out on a Limb

Jane Rethmeier isn’t one to exaggerate. When talking about equipment finance, the CEO of Harbor Capital Leasing describes situations in a matter-of-fact manner and often has anecdotal or statistical information to back them up. But here’s what she says this year about the current state of equipment management: “It’s crazy! I’ve been doing this a long time, and I’ve never seen so many customers hanging onto equipment much, much longer than usual. We’ve written more renewals this past year than we have in the past five years combined, and in talking with other equipment managers, it doesn’t matter whether we’re dealing with IT, rail and marine, plastics or renewables—we’re all seeing pretty much the same thing across markets.”

Not only are supply chain issues continuing to slow the delivery of new equipment; Rethmeier says customers are also cancelling orders for new equipment because they’re uncertain about the economy. “All of these renewals and extensions are really good for our business,” she admits. “But at some point, this equipment is going to come back with a lot more hours and a lot more use, leaving us with even older equipment that has less remaining use.”

One year after the waning of the Covid-19 pandemic, many suppliers of parts as well as new equipment are having trouble meeting demand. But the virus shouldn’t get all the blame. Wade Whitenburg, Strategic Accounts Manager at Ritchie Bros. Auctioneers, says he recently learned that most of the wiring harnesses used in heavy-duty trucks traditionally came from Ukraine. “Because of the war, suppliers now have to realign to get these components—and not all of them have the physical or financial capacity to do that,” he says.

Tony Gordon, Manager of Asset Management and Remarketing at Farm Credit Leasing, says a farmer who ordered a new tractor last August has been told he “might” be able to take delivery in January. Meanwhile, pickup trucks are being delivered without backup monitors and/or cameras, and the wait for starters, seven-pin connectors and GPS devices can be longer than the wait for the asset itself.

“We’ve written more renewals this past year than we have in the past five years combined.”

Jane Rethmeier, Harbor Capital Leasing 

“Waiting months for equipment is pretty common in the agricultural sector now, and it’s putting a premium on high-quality used equipment,” Gordon observes. One example: agricultural tractors with more than 7,500 usage hours, which are typically remarketed to under-developed nations. “Not anymore,” says Gordon. “If they’re in good condition, there’s a strong market for them right here in the U.S.”

No one knows how long these delays and shortages will last, but Gordon makes a salient point: “Most new equipment is more highly automated than its replacement, and that requires more semiconductors,” he says. “I think there will be equipment shortages until there’s a readily available supply of semiconductors.”

Ripple Effects

Consequences of the shortages run broad and deep. Rethmeier says many manufacturers are now in the unusual position of having to choose whether to put the parts they have in stock into new equipment or use it to keep older machines running. “We’ve never had to deal with this before,” she says.

In the trucking market, Whitenburg says parts shortages are particularly hard on small fleets because repairs to a downed truck can take months instead of days. “So the fleet gets downsized but the bills stay the same, and smaller companies have to ask their finance companies what to do,” he explains.

At the same time, Whitenburg says the dearth of new equipment deliveries is hurting the freight transportation market. “Smaller companies usually bid on one-time, less-than-truckload jobs, and because there’s not as much inventory to move, these ‘spot’ rates are dropping precipitously,” he says. As a result, carriers too small to negotiate fuel prices or other costs need financial help or risk going out of business.

Nick Coscia, Equipment Portfolio Manager, Asset Management for Construction, Transportation and Industrial at DLL, says low availability of new equipment has caused many DLL customers to keep their equipment longer or buy it, creating positive outcomes on residual values. “But some customers are having trouble getting their equipment repaired at lease end, because it’s hard to find parts,” he says, adding, “It’s even harder to find mechanics.”

A Residual Balancing Act

The good news is that companies like DLL and Harbor Capital Leasing are realizing the residual values they booked three to five years ago. But the scarcity of new equipment has caused prices to soar for certain types of good-quality used equipment, and some customers buying it are seeking financing to help pay for it. Rethmeier describes the challenge: “Some used pieces previously worth $40,000 now cost $120,000—but what will they be worth three to five years from now? I’m very aware of not getting sucked into today’s used inflated values for residuals on three- to five-year deals, because we don’t know what the economy will look like in three to five years and we probably won’t get those values. People want to finance a used asset, but they don’t understand that it won’t be worth the same as new equipment in three to five years.”

“Waiting months for equipment is pretty common in the agricultural sector now, and it’s putting a premium on high-quality used equipment.” 

Tony Gordon, Farm Credit Leasing

Calculating residual values for new equipment is tough, too, not only because of current inflation but because technology is advancing so quickly. “New equipment definitely costs more than what it’s replacing, and an asset manager needs to project what a new piece will be worth several years down the road,” says Gordon. “But that value has to factor in future economic conditions and the fact that still newer gear will replace the equipment currently in use. The more expensive the equipment gets, the longer the customer will probably need to pay for it.” Gordon says new reports he’s seeing on replacement equipment make him think financing may soon need to extend for five to 10 years. “But our typical lease is 36 to 48 months,” he says.

Hot Markets

Of the new equipment now on order or being delivered, however, equipment managers see opportunity. Coscia says aerial work platforms are strong, as are cranes and forklifts. “This has to do with commercial construction starts and supply chains, which have pent-up demand and backlogs,” he says. Also showing strength are robotics used in the healthcare space and any equipment having to do with electric mobility.

“Some customers are having trouble getting their equipment repaired at lease end, because it’s hard to find parts. It’s even harder to find mechanics.” 

Nick Coscia, DLL

 In the near term, though, Coscia says DLL has seen some price softening in used trucks and trailers as well as in certain construction verticals. “In some cases, we’ve noted that inventory is going up, so asking prices are going down,” he says.

In the agricultural sector, Gordon expects innovative products that increase efficiency and reduce costs for farmers to be hot throughout 2023. Examples include smart spraying systems that install on chemical applicators to limit their spray to weeds only, thereby reducing the chemicals used and the resulting run-off. Also gaining more acceptance: autonomous tractors that follow combines, and robotic weed-pullers. “Think about organic produce, which costs more because many of the processes, like pulling weeds, involve manual labor,” Gordon says. “Now small pilot machines are being sold that pull or chop two rows of weeds at a time—and if you can make a two-row machine, you can make a 24-row weed-puller or a swarm of robots that eliminate the need for chemicals altogether.”

Automation is also making gains in the material-handling space. “Most material-handling equipment is used in manufacturing or distribution centers, and we’re seeing more customers trying out automated guided vehicles and robotic order-pickers,” Rethmeier says. Not only do such centers have room to test self-guided machines; “If they aren’t able to hire enough people to do the work, they’ll have to rely on robotics,” she observes. “I don’t think the shift to robotics will be fast growing, but I do think we’ll see more of it in the next few years,” she adds.

Whitenburg has a different perspective. “A lot of markets are hot, but not for the right reasons,” he says. “Equipment values aren’t being driven by growth, but by lack of supply, and I don’t think prices will come down until supply increases substantially.”

“Equipment managers who’ve seen economic cycles know not to set residuals based on today’s prices, because they’ll be unsustainable over the long term.” 

Wade Whitenburg, Ritchie Bros. Auctioneers

Outlook

Clearly, fluctuations in the economy and equipment availability will keep equipment managers hopping in 2023. “We’ll be managing through this next year, and if there are increased repossessions or lease returns, we’ll be working to maximize returns and minimize losses,” says Coscia. “This will be a very big focus.”

Gordon believes the pressure to produce ever more food will revolutionize agricultural equipment and operations. “I think in five to 10 years, farming will look completely different,” he says. “The need to reduce chemical use and soil compaction are hot spots that will drive changes.”

Whitenburg also expects continuing residual value challenges due to new technology. “Equipment managers who’ve seen economic cycles know not to set residuals based on today’s prices, because they’ll be unsustainable over the long term,” he says. “But the industry has lost a lot of gray hair, and if you run your calculations with old-style modeling, you’ll come up with numbers well above where they should be. A lot of effort is needed now to bring in data to support what future values will be.”

Rethmeier is guardedly optimistic. “If you’d asked me in October, I’d have probably said I think the economy will tank soon,” she reflects. “But as of late November, nothing has changed dramatically, and I’m hoping we’ll ride out the current environment through 2023.” Rethmeier’s hope is a good one, because staying out on a limb requires very good balance.