The American Road & Transportation Builders Association (ARTBA) recently concluded an analysis of the relationship between federal highway spending and the market for major construction equipment. The analysis concluded that there was approximately a $300 million increase in sales of construction equipment associated with each $1 billion increase in highway capital investment.
The Transportation Equity Act for the 21st Century (TEA-21), signed into law by President Clinton on June 9, provides a 40% increase in federal highway and transit funding over the next six years.
In this installment of our six-part series on TEA-21, ROADS & BRIDGES gauges highway construction equipment association and manufacturer reaction to TEA-21’s potential effect on the highway construction industry.
The goal of a construction equipment industry association is to provide leadership among the construction equipment manufacturers in a variety of matters, including governmental issues. Therefore, it was no surprise that construction equipment associations were heavily in favor of the authorization of TEA-21.
“The passage of TEA-21 will be a tremendous benefit to the equipment sales of our members who make most of the equipment for highway and bridge construction,” said John Smiley, vice president for Equipment
Manufacturers Institute (EMI). “EMI was very supportive of the bill and encouraged President Clinton to sign the authorization.”
Al Cervero, Construction Industry Manufacturers Association (CIMA) vice president told ROADS & BRIDGES, “The impact of the recently passed highway bill, TEA-21, will certainly be a significant boost for the manufacturers of road-building equipment and related equipment and products.”
According to ARTBA, all states, except Massachusetts due to a funding reduction because of the Central Artery program, will receive significant increases in federal highway funds during the next six years, portending large increases virtually everywhere in purchases of construction equipment. Good news for construction equipment manufacturers.
“The bill will help sustain us, but I think it will help us in the area of consumer confidence,” said Kim Robinson, vice president of sales and marketing for Daewoo Heavy Industries America Corp. “It gives equipment users one more reason to be optimistic.”
Bill Swisher, member of CIMA’s Board of Directors and chairman and CEO of CMI Corp., manufacturer of asphalt production and recycling equipment, added, “TEA-21 is a very fine thing for CMI Corp. For the first time, we know what to expect as far as highway spending goes. The six-year rate of growth and what it provides is very beneficial to the industry.”
With the increase in federal funds for the highway program, contractors may look to buy or upgrade their construction equipment to meet the growing demands they may face.
Pat Reilly, marketing manager for Hitachi Construction Equipment said, “TEA-21 gives us the opportunity to continue a strong construction equipment market for the next few years. TEA-21 ensures a business current that maintains the level of business no matter what happens in the other construction market indexes; it’s a good foundation.”
John H. Marrifield, senior vice president of sales and marketing for Sterling Truck was optimistic about TEA-21’s impact on the nation’s infrastructure, the true beneficiary of TEA-21. “First, it puts a record amount of money to work building and repairing the U.S. transportation infrastructure.
“The second major way TEA-21 benefits our business happens once the construction is completed,” Marrifield continued. “At that point, our highways and bridges should be more efficient conduits for trade and freight transportation.”
According to ARTBA, between FY 1997 and FY 2003, federal highway spending is scheduled to increase by about $8 billion to $8.5 billion. This means that sales of construction machinery in 2003 could be as much as $2.5 billion higher than in 1997, if past relationships hold.
CMI’s Swisher told ROADS & BRIDGES, “As far as a sales standpoint, I expect an increase in activity between 40 and 50%. Greater volumes of equipment may be manufactured as a result of the bill. TEA-21 is very positive from an equipment manufacturer’s standpoint.”
“At Caterpillar, we can expect to see increased sales of motor graders, tractor scrapers, paving products and articulated tracks,” said Rita L. Castle, issues analyses manager, corporate government affairs for Caterpillar. “And our newly announced compact construction equipment will certainly benefit from the program funding.”
Additionally, there also is a state matching requirement for most highway programs. The state match is generally 25% of the federal contribution—for an additional $2 billion of highway spending—or a total increase of $10 billion to $10.5 billion by FY 2003. The net impact of TEA-21 on sales of construction equipment could be as much as $3 billion by 2003, according to ARTBA.
“We project the largest TEA-21 equipment purchasing impact to hit manufacturers in the second half of 1999 and in 2000,” said Joel Borgardt, marketing manager for Case Corp., heavy equipment manufacturer. “As such, Case plans to capitalize on the opportunity. Customers will see us launch several new products that are especially well-suited for road and bridge work, during the first half of 1999.”
TEA-21 also has the potential to make up for a recent lack in sales from markets outside the U.S.
“The expected domestic growth in the construction machinery industry fueled by the transportation bill will definitely help offset the impact of falling export sales for some companies due to the Asian economic crisis,” said CIMA’s Cervero.
Sterling Truck’s Marrifield added, “TEA-21 also aims to improve highway freight transportation efficiency by targeting cross-border traffic and improved access to intermodal facilities, both of which are crucial to economic growth in the U.S and throughout the North American Free Trade Agreement.”
While the general reaction to an possible sales increase has been positive, construction equipment manufacturers should not start estimating profits just yet.
“Our industry is thus still cautiously optimistic about business conditions,” said CIMA’s Cervero. “In a recent poll of CIMA members covering the first six months of 1998, the majority of survey respondents saw rising demand for their products as compared to the same time period last year. They indicated some slowing of that demand compared to the previous quarter, but overall the signs for growth were still positive.”
Enhancing the job market
With the increase in federal funds for the highway program, the entire country should be able to take a sip of TEA-21 in one way or another. The general public should experience a trickle-down effect from the money being invested in the nation’s infrastructure.
“TEA-21 is a shot in the arm for the economy and will benefit all Americans,” said Caterpillar’s Castle. “At a funding level of $217 billion, the bill represents a 44% increase over the previous six years. Industry estimates predict the bill will create over 500,000 new jobs and sustain the 1.5 million existing jobs in highway construction and related industries.”
Jack Lease, vice president and sales manager for Bid-Well, manufacturer of concrete paving equipment, added, “TEA-21 will provide money for equipment and our nation’s infrastructure should become better than its ever been. Overall, it will improve the infrastructure in the country. TEA-21 will be good for everyone, the general public, contractors and manufacturers, because it will generate jobs with the money spent.”
Case Corp.’s Borgardt added, “TEA-21 will give the broad construction industry and equipment manufacturers continued growth opportunities. It is estimated that for every billion dollars spent, $300 million worth of equipment will be purchased and 42,000 jobs will be supported.”
On the flip side, with the potential for an increase equipment manufacturing comes the need for finding qualified operators to fill the potential increase in jobs who are trained and qualified to operate the equipment in a safe and effective manner.
“Of course, equipment owners then have the problem of finding qualified operators for the equipment,” said Daewoo’s Robinson. “They think ‘why should I go and buy all off this new equipment when I can’t find anyone to operate it?’”
A good start
Although the need for highway funding continues to be great and enables the industry to keep pace with deterioration, TEA-21 does give some level of certainty and continuity to the industry.
“TEA-21 would have been better if it was twice the amount. Road funding was way below what it should have been and TEA-21 stepped in and put it in the right direction but it doesn’t solve the problem,” said CMI’s Swisher. “Highway funds are always at the bottom based on the rate of growth for the GDP. If you measure highway spending from 1960 to 1996 you’ll find that all segments of the economy have gone up. Highway funding went down 40% over this time. TEA-21 was a good step in the right direction.”
TEA-21, which is based on its predecessor the federal Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA), provides six years of stability with guaranteed funding coming out of the federal highway program, solidifying an industry-wide optimism.
“It’s a definite positive of shear magnitude for construction equipment in new and old highway construction and bridge building,” said Hitachi’s Reilly. “TEA-21 is a strong bipartisan measure from lawmakers to ensure the road system doesn’t crumble while growing on ISTEA. It keeps the momentum going.”