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A Big-Picture Look at Issues in the Equipment Market.

After two consecutive years of solid growth, equipment and software investment growth is likely to slow in 2019 to 3.9%, down from 4.5% in the second quarter, according to the third-quarter update to the 2019 Equipment Leasing & Finance “U.S. Economic Outlook” released by the Equipment Leasing & Finance Foundation.

Business conditions for the equipment finance industry softened in the first half of the year as the U.S manufacturing sector weakened, and investment growth in several key verticals is expected to slow or contract in the second half of 2019.

Jeffry D. Elliott, Foundation chairman and senior managing director of Huntington Equipment Finance, said, “Consumer confidence has eased this year while consumer spending has moderated. Large businesses are showing signs of pulling back, though small businesses remain upbeat. In light of stronger-than-expected growth in first quarter, the economy is expected to grow 2.5% in 2019, up from the previous estimate of 2.2%.”

Highlights from the report include:

Capital spending slowed in the beginning of 2019, consistent with declining macroeconomic fundamentals. Business investment faces further downside risk if the industrial sector continues to fade, and trade relations remain turbulent. Although banks continue to tighten lending standards to consumers amid waning credit demand among businesses and consumers, overall credit market conditions remain mostly healthy. Financial stress remains relatively low by historical standards, though both delinquencies and charge-offs are on the rise.

After achieving 2.9% growth in 2018 – tied with 2015 for the strongest year of growth of the current business cycle – the U.S. economy expanded at a healthy 3.1% pace in the first quarter, exceeding expectations. However, trade frictions are undoubtedly contributing to the softness in the U.S. manufacturing sector, which continued to struggle in second quarter and does not appear to be on the verge of a rebound.

Though domestic oil production has been a key bright spot for the U.S. economy and the increasingly dovish Federal Reserve has helped buoy financial markets, there are several risk factors that merit close attention for the rest of the year. Risks include the efficacy of China’s efforts to stimulate its economy, the divergence between small- and big-business optimism, and the potential for a protracted slowdown in consumer spending later this year.

The Foundation produces the Equipment Leasing & Finance U.S. Economic Outlook report in partnership with economic and public policy consulting firm Keybridge Research. The economic forecast provides a three-to-six-month outlook for industry investment with data, including a summary of investment trends in key equipment markets, credit market conditions, the U.S. macroeconomic outlook, and key economic indicators. The third-quarter report is the second update to the 2019 Economic Outlook and will be followed by one final quarterly update before the publication of the 2020 Economic Outlook in December.

The Foundation-Keybridge U.S. Equipment & Software Investment Momentum Monitor, which is included in the report, tracks 12 equipment and software investment verticals. In addition, the “Momentum Monitor Sector Matrix” provides a customized data visualization of current values of each of the 12 verticals based on recent momentum and historical strength. Several equipment verticals should expect their growth outlook to remain steady in the second half of 2019. Over the next three to six months:

  • Construction machinery investment growth is likely to weaken further and potentially stall.
  • Materials handling equipment investment growth is likely to weaken and may turn negative.
  • All other industrial equipment investment growth will likely weaken and may stall.
  • Mining and oilfield machinery investment growth is likely to remain steady.
  • Aircraft investment growth is likely to remain negative.
  • Ships and boats investment growth may remain sluggish and may stall.
  • Railroad equipment investment growth is unlikely to improve and may worsen.
  • Trucks investment is expected to grow moderately.
  • Computers investment growth will likely continue to weaken, potentially into negative territory.
  • Software investment growth should remain solid.

Aggregates Equipment

With a continued hope for a new federal infrastructure bill, producers plan to spend some money in 2019, building on 2018. Just over 43% of respondents to Rock Products’ Benchmark Survey, released earlier this year, said they increased capital spending last year.

This year approximately 29% of the survey group plan to spend up to $500,000. Another 29% of the survey group planned to spend $5-10 million, a nice jump from last year when 23% picked that range. About 23% plan to spend $1-5 million this year. Approximately 18% planned to spend $500,000-$1 million.

And what do they plan to buy?

  • Equipment upgrades, 58.75%.
  • New equipment, 57.50%.
  • Mine development, 33.75%.
  • Plant additions, 32.50%.
  • Permitting and bonding, 32.50%.
  • Technology upgrades, 32.50%.
  • Exploration, 20.00%.
  • New plant construction, 22.50%.
  • Quality control, 17.50%.
  • New mine start up, 16.25%.
  • Used equipment, 11.25%.
  • Reclaim systems, 10.00%.
  • Other, 5.00%.

Over and above consumables, such as oil, safety supplies, maintenance equipment, tires and replacement parts, the top equipment areas being considered for 2019 are:

  • Material handling/conveying equipment, 49.35%.
  • Pick-up/Utility Vehicles, 45.45%.
  • Excavators/loaders/dredges, 44.16%.
  • Screening and sizing equipment, 44.16%.
  • Motors, 37.66%.
  • Pumps, 37.66%.
  • Drilling and blasting suppliers/services, 32.47%.
  • Washing and classifying equipment, 27.27%.
  • Automation products, 23.38%.
  • Portable crushing/screening plants, 23.38%.
  • Scales, 22.08%.
  • Haul trucks, 22.08%.
  • Crushers, 20.78%.
  • Breakers, 18.18%.
  • Energy management, 16.88%.
  • Drones, 11.69%.
  • Frac sand equipment, 5.19%.
  • Other, 3.90%.

Tariffs

With tariffs continuing to take a toll on U.S. businesses, farmers, communities, and families across the country, a new report by IHS Markit outlines the impact of tariffs on the equipment manufacturing industry and the broader U.S. economy.

“This report shows that tariffs continue to take a toll on U.S. equipment manufacturers, who will pay significantly more to manufacture equipment in the United States in the coming years,” said Dennis Slater, president of the Association of Equipment Manufacturers (AEM). “Tariffs on steel, aluminum, and Chinese imports, as well as the potential for additional tariffs, are driving up the cost of production, delaying capital investments, and impeding job creation for our more than 1,000 member companies.”

“While we agree with the Trump administration’s concerns regarding China’s unfair trade practices, including weak intellectual property protections, restrictions on foreign investment, and policies that limit competition, tariffs only hurt America’s businesses, workers, and families,” said John Garrison, chairman of the board, president and CEO of Terex Corp. and an AEM board member. “We urge the Trump administration to negotiate solutions to these long-standing issues with China, de-escalate economic tensions, and remove broad unilateral tariffs.”

The report, “The Economic and Industry Impact of Protectionism Tariffs on the Off-Highway Equipment Sector,” estimates the impact of the Trump administration’s Section 232 and Section 301 tariffs. Several of the report’s key findings speak to the significant, long-term impact on the U.S. economy, including:

  • Placing tariffs on about $265 billion of imports will hurt the U.S. economy, largely from the direct effect of higher prices, yielding average lost GDP of $29 billion a year for 10 years.
  • The effect on employment is negative; the tariffs will suppress domestic job gains by 260,000 over 10 years.
  • Consumers will pay higher prices and reduce their real spending by $23 billion per year throughout the forecast horizon (ending in 2027).

The report also highlights specific impacts on the equipment manufacturing industry:

  • Tariffs will increase costs of producing U.S. agriculture and construction equipment by 6%; with its higher steel-related product content, the costs of producing U.S. mining equipment will increase 7%.
  • Total loss in employment related to diminished output of all off-highway equipment is projected to end the forecast period with a loss of 20,700 jobs.  

Equipment manufacturing executives have attributed the increasing costs of manufacturing in the United States to the Trump administration’s tariffs. In fact, Tariffs Hurt the Heartland – a campaign backed by AEM – found that the Trump administration’s tariffs are costing businesses up to $2.7 billion each month and have caused exports of American products to plummet by 37%. Tariffs Hurt the Heartland has also issued state impact reports for several states, including Wisconsin, Pennsylvania, Ohio, Michigan and Indiana.

There are currently tariffs on $250 billion dollars’ worth of imports from China as a result of the Trump Administration’s use of Section 301 of the Trade Act of 1974. This amount equals half of the total amount of goods imported into the U.S. from China in 2017. Separately, Section 232 tariffs or quotas on steel and aluminum imports have raised the cost of manufacturing equipment in the United States. Equipment manufacturers need free and fair trade, but as a result of tariffs they are currently at a competitive disadvantage in the global marketplace.

Progress toward a U.S.-China trade deal during the G-20 Summit in Osaka, Japan, raised hopes by equipment manufacturers for a prospective deal to end the ongoing trade war between the two economic superpowers.

“We’re encouraged by the return to a more constructive dialogue between the United States and China. Pumping the brakes on any further tariffs is good news for U.S. consumers, American farmers, and our industry’s 1.3 million men and women,” said Kip Eideberg, AEM’s vice president of government and industry relations. “While we support the administration’s efforts to encourage long-term structural reforms to China’s trade and industrial policies, the protracted trade war fueled by dueling rounds of tariffs has so far not accomplished anything other than making it more expensive to manufacture in the United States. The best way to ensure that equipment manufactures are successful and continue to create jobs in America is to immediately put an end to all tariffs.”

The United States has already placed tariffs on $250 billion in goods from China, including many different types of construction and agricultural equipment and parts. In response, China continues to put in place reciprocal tariffs targeting a variety of U.S. products including manufactured goods and agricultural products.

Before the G-20 meeting in Japan, President Trump had threatened to expand those tariffs to additional $300 billion of imports from China or about all Chinese imports to the U.S.AEM continues to highlight the economic damages caused by these ongoing tariffs and is pressing the administration to find alternative ways to pressure our trading partners for unfair trading practices.

The Future

With the advent of electric vehicles entering the construction, agriculture and mining sectors (CAM), what does the future hold for the industry, and what effect will this have on the used machinery market globally?

According to Peter Clarke, founder and CEO of heavy machinery auctioneers Yoder & Frey, the Kyoto Protocol is the objective of the United Nations Framework Convention on Climate Change (UNFCCC) to reduce the onset of global warming by reducing greenhouse gas concentrations in the atmosphere. In order to comply with this, globally, the industry is striving to cut emissions, making road transport cleaner by setting strict new carbon dioxide emissions standards for all vehicles, passing new legislation on the engine emissions on Non-Road Mobile Machinery (NRMM).

This paved the way for new emissions standards for carbon monoxide, nitrogen oxides and particulate matter from all NRMMs ranging from hand tools to construction machinery, with the aim to ensure that from 2030 onwards new vehicles will emit on average 37.5% less CO2. These initiatives have paved the way for new technologies to drive road-going and non-road going vehicles, such as cleaner fuel, hybrid fuel systems and battery power.

The on-road electric vehicle industry is heading for a vicious fight with private cars set to see a collapse in sales as more people move to cities using more shared transport, rather that running private vehicles. In contrast, off-road electric vehicle OEMs are looking ahead to prosperous growth, in particular, for the construction, agriculture and mining sectors, known as CAM.

Compound Growth

In the next 10 years the electric vehicle market in the CAM sector is predicted to burgeon. The sector has already been employing robots, drones, hybrid and pure electric vehicles, with approximately 15% of CAM vehicles rolling off the production line being electric. Over the next 10 years that number is expected to increase, when in 2029, the numbers are predicted to be close to 100%.

With such a huge demand for new clean electricity to power for those vehicles, further demands will be put on new technology to generate that power, on and off grid, with delivery of that power requiring new infrastructure. The CAM market is projected to grow at a compound annual growth rate (CAGR) of 4.52% with a market size by 2029 of in excess of $200 billion from $146.17 billion in 2018.

The CAM vehicle business will grow more than six-fold in value by 2029 grabbing records for both the highest volume electric vehicles (EVs) and the highest unit value. OEMs are innovating at a frenetic pace, with some of the minor players innovating faster, than many of the giants, of which a few seem to be sleeping through this future proofing period.

Which technologies win? Which sectors go straight to pure electric and which need the hybrid interim stage? With even 300kW mining trucks working well as pure electric what is the place for fuel cells?

The Expanding Market

The earthmoving equipment category is the largest segment of the CAM market, by category, with much of construction equipment used to carry, dig, spread, or move earth or materials. In comparison, the material-handling equipment category is the fastest-growing segment in the market, including machines that manufacture, store, stack, distribute, deliver and recycle.

Road rollers of all size and specification are the fastest growing single item of equipment in the market, with increasing use attributed to need for highway infrastructure in developing countries such as India and China. Large road development projects such as the China–Pakistan Economic Corridor (CPEC), which aims to connect China with Central Asia, creating a modern ‘silk route’ is also a contributor to this factor.

Upcoming infrastructural projects and increased government spending have led to an increase in construction activities globally. With the advancements in technology, CAM equipment is becoming more fuel-efficient with lower emission levels, with enhanced safety and better-handling features.

The Rise of the Machines

The “Internet of Things” (IoT) phenomenon will be the next factor the will determine how machines best serve the industries. The definition of IoT, is the interconnection via the Internet of computing devices embedded in everyday objects, enabling them to send and receive data.

This emerging technology will mean that machines will become self managing, and reshape the CAM machinery sectors, in as much as they will be potentially capable of: driving autonomously, self-driving in such a way to be highly fuel efficient, using GPS to navigate, out-put more efficiently, record operating data to produce delivery invoices in the haulage sector, be more secure, and in time will be able to self-order spare parts for routine services and then telling the operator that they need fitting.

Robot Farming and Mining

The industry is currently moving from the old electric drive designs to full hybrid and pure electric. Electrification is also crossing over with the journey toward automation and ultra-precision agriculture. With issues such as demographic pressures, and ageing populations, farmer’s may be driven toward “robot farming.”

These factors, along with increasing environmental concerns over the use of herbicides may mean that in 10 years, the best-selling EVs in numbers are likely to be robot-weeding machines! Meanwhile, the most expensive EVs will be in the mining sector, where monster autonomous load-haul-dump machines, with the electricity to power these vehicles also becoming cleaner, with massive, renewable generation sites set up off grid, right next to the locations where these monster EVs operate.

Emissions Regulations

Engines conforming to Tier-5 emission regulation are projected to have the largest market share of all current construction equipment, in use, by 2029. North America, Canada and Mexico are speculated to have enforced these regulations by 2025. Additionally, it is speculated that Japan will also follow these regulations once they are in place. Selective Catalytic Reduction (SCR) is projected to be the largest segment of the construction equipment market by aftertreatment devices, due to the stringent emission regulations that are speculated to be implemented in the Asia Pacific region.

Construction equipment with 200- to 400-hp output are projected to be the fastest-growing segment, with the market in Asia Oceania expected to grow at a faster rate as the requirement for infrastructure development, China and India are growing steadily.

Infrastructure is not only the largest, but also the fastest-growing segment of the construction equipment market by application. Equipment such as crawler excavator, wheeled loader, motor grader, crawler dozer, asphalt finisher, and road roller are used to develop bridges, roads, and tunnels. Due to the increase in infrastructure projects, the demand for this equipment will also increase.

Market Domination

Asia Pacific is the largest market for rental construction equipment, with increasing population and urbanization, the demand for infrastructure development, housing, and office space in this region is projected to increase significantly over the next few years, thus it is expected to be the largest market for the rental market.

The Asia Pacific region is estimated to dominate the OEM construction equipment market and is projected to remain the largest market for construction equipment in 2029. This growth can be attributed to the improving socioeconomic conditions in emerging economies such as China and India.

The Middle East region is expected to grow at the fastest compound annual growth rate during this period because of the large infrastructure projects planned in Qatar, the UAE, and Saudi Arabia.

The construction equipment market is dominated by a few global players and comprises several regional players. Some of the key manufacturers operating in the market are Caterpillar, Komatsu, Terex, Volvo Construction Equipment and Hitachi Construction Machinery.

Caterpillar has been the dominant global player in the construction equipment market for a long time, with a wide portfolio of products that are innovative and technologically advanced. During the next 10 years, it is expected to remain the largest player in the markets. Asian players such as XCMG and Zoomlion are expanding into developed markets to diversify their revenue streams.