THE RENTAL REVOLUTION

It is tempting to talk of a revolution taking place in the equipment rental market, particularly if one takes a US perspective. But in truth, a global perspective reveals it to be more evolution than revolution. In the UK, for example, contractors are well accustomed to renting equipment and for a decade or more have purchased relatively little. The rise of rental companies is not a single paced phenomenon; rates of change vary from country to country.

In the USA the equipment rental market is growing at 15% a year, and there is plenty of room for further growth; in the USA about 20% of equipment is rented, compared with 70% in the UK. It is also a fragmented market, with the top 100 companies having less than 22% of the market. The crane market reflects the general equipment market: Anthony Crane Rental is arguably the world’s biggest rental company with more than 3,000 mobile cranes in its fleet. But with a mere 25 locations, it is not even close to national coverage. Consolidation is inevitable.

It is important to distinguish between the two different concepts of crane rental. On the one hand are those rental companies that are little more than brokerage houses, offering finance solutions for crane users which either cannot afford to purchase new equipment outright, or need additional equipment at times to help manage peaks and troughs. On the other hand are those rental companies in the business of offering a more complete service, providing not just the equipment, but also the operator and perhaps even engineering input at the design stage of a project, to provide lifting solutions. These firms are perhaps best described as specialist lifting contractors, although many derive their revenue from what is little more than a taxi crane service.

Of course, much depends on the type of equipment being rented. Tower cranes and rough terrain cranes, likely to be needed on site for a certain length of time, are generally offered bare rental, without an operator. The 60t or 80t truck or all-terrain crane may do two or more jobs a day at different sites and will be supplied with an operator – turn up, do the lift, move on.

But as the rental sector has developed, the economics have moved against keeping a bare rental RT on site, to be used only part of the time, in favour of calling out a truck crane with an operator when lifts are scheduled – “just in time” plant management.

Construction contractors have re-evaluated how they run their businesses and in many cases have chosen to outsource their plant operations. Partly this is due to recognising where their real expertise lies, and partly it is to avoid having expensive plant lying idle during the all too frequent low points in the construction industry’s economic cycle.

In 1988 there were about 10 rental companies in and around Berlin with tower cranes. By 1998 there were about 60. The sixfold increase was only partly due to the amount of construction work taking place in Berlin during the 1990s.

The development of the rental sector has a self-perpetuating effect. Competition between the rental companies keeps rental prices down. In the UK, for example, a 70t all-terrain crane can be hired for £550 to £650 a day, and often for less. A 25t truck crane might cost £22 to £24 an hour. Depressed rental rates makes contractors more inclined to rent than buy.

Where the rental market is more developed, rates are generally lower. A rental company in the USA quoted weekly rates for mobile cranes in the 60t to 150t region that were 50% higher than the equivalent rates of a German rental company.

Not only does the development of the rental sector have an impact on the construction industry, it has a massive impact on crane manufacturers which helps to explain some of the differences between US and European products – why, for example, off-road RTs dominate the mobile market in North America, while road-going AT and truck cranes rule in Europe; and why simplicity is such a highly rated virtue in the USA, as in the bare rental culture an operator may have wide general experience, but limited experience with any specific model.

Rental product

The current trend in all-terrain crane design, arguably led by Tadano Faun with its ATF 60-4, has moved away from getting as much lifting power out of a machine on as few axles as possible, to win top billing of strongest crane on most compact or manoeuvrable carrier.

Instead, driven by increasingly global and increasingly strictly enforced highway weight restrictions, (weight sensors are built into the road in the Netherlands) manufacturers actually add an extra axle while compromising on manoeuvrability as little as possible. In doing so, they are offering something far more useful to buyers: an all-terrain crane that can carry all necessary equipment on board, without the need for a trailer or accompanying vehicle, and remain within axle weight limits. An appealing concept indeed for those rental companies who want a taxi crane that they can send out three times a day with minimum fuss. Hence this year and next see the launch of five-axle 100t ATs from the four major German manufacturers.

Even at the top end the scale, roadability rules: Mannesmann Dematic’s AC 650 carries its own boom and the short boom version of Liebherr’s LTM 1500 can too. The full length boom needs a trailer.

There is also a concurrent trend towards longer booms, led again by the Germans. The LTM 1500 leads the way with its 84m main boom, while Mannesmann Dematic broke into the smaller AT market by offering bigger booms lengths than were previously available.

German boom technology, particularly telescoping systems, is widely recognised – at least according to Tadano president Sakae Tadano – as being more advanced than Japanese. But US and Japanese customers prefer more rigid, ‘heavy-duty’ engineering and remain unsure about booms that show deflection.

Road regulations are different too. In Japan total vehicle weight is restricted to 45t, so if you have a big crane the boom or cab travels separately. In Europe, axles can be added to reduce the weight per axle.

With highway restrictions kicking in, an increasingly key aspect for users is speed of assembly, to minimise the time preparing for a lift and packing away again afterwards. An Illinois-based rental company reports: “We have to take the boom out of everything over 200t just to go five miles down the road, so quick disconnect is important for us.” Not only are there different road regulations in the USA than in Europe or Japan, but the regulations can vary from one state to the next. Road restrictions in Illinois are so tight that the appeal of an LTM 1500 or AC 650 diminishes somewhat. The 175 ton GMK 5175 is not so bad because “you can put the boom over the back and dolly it – so that’s okay. You can do a job in a day. But we wish we could get these bigger hydros right down to the job.” At least new technology and trailer design makes the cranes effectively self-loading; previously a 50t crane was needed just to put the boom in.

But while the growth of the rental sector drives the development of all-terrain technology, for the rental companies like the shorter chassis, and more compact frame of the AT, it can also mitigate against progress. This is because clients rarely care what crane is used – they just want the lift completed swiftly, safely and economically. ATs cost more than truck cranes and repair costs escalate as they get older. Running costs of an AT can be up to 30% higher than on a truck crane, according to one fleet manager.

ATs still represent only a small segment of the crane market in the USA, but are clearly growing in popularity. Exchange rates have decreased the price differential with truck cranes, and with the largest US-built truck cranes having capacities up to 90t, ATs above 100t are defining a new market in the USA rather than taking share from RTs or truck cranes. Axles loads on the European two- and three-axle ATs are too high for the USA and too hard to road, but the multi-axle machines are more roadable in most states.

Yield to the throne

For manufacturers a downside of the growth of the rental market is that rental yield becomes the all important figure in the purchase equation. For example, a new Manitowoc 888, costing about $1.3m, may bring in $12,500 a month, bare rental. At 80% utilisation, that is $125,000 a year. Take off $100,000 for interest payments, plus insurance and other fixed costs, and the retained profit margin is not great. But a 12-year-old 4100, the cost of which may already be written off, can achieve the same yields as a new 888.

Successful business is all about turning threat into opportunity, which Manitowoc has thus far achieved by realising that market consolidation means fewer key clients, purchasing in larger numbers. Relationship building with these customers enables products to be developed in cooperation, minimising the risk of products not being accepted by the market.

The quickest company to jump on the significance of rental yields was Terex, whose market penetration has been achieved in a large part through its pricing strategy.

Death of the distributor

The rise of the rental sector in the USA has occurred hand in hand with the decline of the distributor. Traditionally distributors were the intermediary between the production-oriented manufacturer and the end-user, be it construction contractor or crane rental company. When Tadano of Japan entered the USA by using rental houses as distributors, received wisdom at the time was that it had made a mistake. It was thought: Who would want to buy a crane from a competitor? Either Tadano struck lucky or it had 20/20 foresight, because changes in the US industry now make everyone a rental company. Distributors realised that they could not just sit on stock; the assets had to be put to work. They also discovered that renting equipment to potential purchasers was a good sales tool and a way of offering a form of financing. And so distributors became rental companies too.

Vulture capitalists

Then the venture capitalists got wind of the US equipment industry, recognising that it was ripe for shaking around and dragging into the modern age. Consolidation is just beginning, led by companies like Anthony, which is controlled by Bain Capital, and publicly-owned National Equipment Services, which has access to the money markets. Crane hire was one of the few remaining Mom and Pop industries left in the USA; it is ripe for rationalisation and was bound to be targeted.

Passports at the ready

As the rental sector consolidates, country by country, the next step is a rise in the number of international players. Few rental companies habitually operate beyond their own borders: one can think of Mammoet, Van Seumeren and Lampson. There are others who should be mentioned, such as Brambles, Sarens, Baldwins, and Marino. This list is by no means exhaustive; there are others – but not very many. So far, hire companies have concentrated their international efforts on complex or large scale projects where their expertise and equipment gives them a valuable edge, or they have travelled on the back of contractors. They are acting as specialist contractors, not equipment rental houses. It is conceivable that further consolidation will result in international crane hire corporations that have equipment in depots around the globe, providing a taxi crane service at the local and regional level, as well as acting as a specialist international contractor. Such a corporation would have a fleet of several thousand cranes, though may perhaps have a different brand name for each country or region in which it operates. This is more likely to happen by merger and acquisition than organically, for two reasons: a newcomer would struggle to break into a local crane hire market against established domestic competition; and, as Breuer found, financing rapid organic growth can be difficult to sustain.

This consolidation has a long way to go but at least one possible scenario is imaginable. When there were a large number of occasional purchasers out there, the manufacturers and distributors could call the shots. But the rise of a rental sector brings increasing muscle to the purchasers, who become more intelligent clients. Rental companies are specialists; they know as much about cranes as the distributor and want a closer relationship with the manufacturer, unencumbered by middlemen.

Manufacturers respond

Manufacturers can no longer afford to leave their client relationships to a third party. With each client taking on a whole new importance, because of its purchasing power, manufacturers need to handle their sales directly, not just to ensure that the right message is reaching customers, but also to ensure they are receiving the right messages back.

There is a lesson in the collapse of German tower manufacturer BKT which rose quickly when its cranes became the tower crane of choice of Zeppelin, whose power in Europe stems from its Caterpillar dealerships. When Zeppelin switched to Peiner, at a time when the key market of Asia Pacific was inauspiciously about to turn downwards, BKT was fatally wounded.

Manufacturers also need the local presence that an old-fashioned distributor can give. E-relationships – using the internet for ordering parts, for example – will not eradicate the importance of an actual physical presence. A Japanese or German manufacturer cannot sell in volume direct into the USA, for example, without an effective local presence.

Control over distributors can be increased by having fewer of them. Manitowoc cut back from 19 to 11 in North America in the mid-1980s, and Link-Belt has cut back more recently. It could be increased further still by taking ownership of the channels of distribution. If manufacturers do take ownership of their regional distribution outlets, to exert closer control, what role do these outlets then have in the rental business? Might crane manufacturers follow Caterpillar and Atlas Copco and move firmly into the equipment rental sector to ensure a sales outlet? Perhaps. Certain crane manufacturers are already effectively in the rental business, using it either as a sales promotion or financing tool, but they do not step over the line from bare rental to specialist lifting contractor, actually undertaking lifting work. Maybe that is the all important distinction. If rental companies are to thrive it is not enough just to offer bare rental. Perhaps taxi crane services are not enough, judging by the margins that are yielded around the world. It may be fine in markets like 1994 Berlin or 1997 Hong Kong, but any industry has its right time/right place moments.

As the rental industry matures it will have to evolve into a much more complete service industry, adding the kind of value that comes out of a sharp brain rather than a machine.