The construction equipment rental industry is racing to catch up with its counterparts in Europe and Japan
The construction equipment rental industry is racing to catch up with its counterparts in Europe and Japan. Roughly one in five pieces of construction equipment in the U.S. is rented instead of bought. Rentals’ share of the market in Japan is around 50%. In the U.K. it is closer to 70%.
The U.S. rental market is growing, though. The consensus is that the boom in the U.S. rental business was set off by a change in tax laws in the early 1980s, while Ronald Reagan was president.
"At the time, rentals in the construction industry hadn’t really started that much," said Jerome Meier, president and CEO of Rentmaker Inc., Waltham, Mass. The investment tax credit had made it advantageous to own equipment¾ or at least it had hidden the real cost.
"There were tax advantages for people to own equipment that didn’t exist in other countries," explained Bob Miner, vice president of strategic planning at United Rentals, Greenwhich, Conn. "So the economic advantages of renting over owning for people who are not using equipment full-time were less apparent here than they were in other countries. When the investment tax credit laws were taken off the books in the ’80s here, that’s really when you started to see the growth of rentals, so we’re several decades behind but we’ll get there eventually."
Meier noticed the growth in rentals (about 24% per year, he said) and that the U.S. market was still underpenetrated. He decided that the World Wide Web was the perfect place to bring together contractors and rental houses and then let them work out the details.
Meier’s web-based service (www.rentmaker.com) bills itself as "the leading online marketplace that bridges the gap between renters and rental centers."
It was launched in February 2000.
Companies in the pulp and paper, chemical and oil industries used to have large fleets of aerial lifts and other kinds of mobile equipment, Meier said. When the investment tax credit was cut, those companies starting selling off their equipment and looking for rental opportunities.
For a contractor, the big disincentive to owning is the cost of buying, maintaining, storing and insuring a piece of equipment. The big incentive to renting is getting a bargain price. And the economic force that drives the dealmaking is a characteristic that equipment rental has in common with the airline industry¾ perishability.
"If when the plane took off they didn’t sell that seat, that revenue’s gone forever," explained Meier. "It’s the same in rental equipment. At the end of the day, if they didn’t rent out that equipment, that’s it. That revenue’s gone forever." A perishable service is a strong incentive for making a deal to move the equipment out the door.
Perishability also is a strong incentive to cast as wide a net as possible. The rental house wants to make its products available to as many potential renters as possible, and the contractor wants to get quotes from as many rental houses as possible to find the best price.
Rentmaker has built a base of 7,000 rental houses and a correspondingly big base of contractor customers.
"At the beginning, few want to participate," Meier recalled, "because you’re just getting started and there aren’t too many contractors using it. As more contractors come on board, more rental houses come on board."
Rentmaker may need its size to compete, by some estimates. "I think big companies have a clear advantage," stated Martin Moore, president, GE Energy Rentals, Schenectady, N.Y., at the second annual Construction Industry Manufacturers Association (CIMA) Rental Roundtable in summer 2000. Martin said he had changed his opinion from the previous year, partly because big companies have the resources to move customers to online ordering. Moore said that 1% of his company’s orders were received via the Internet in 1999, but that number catapulted to 70% in 2000.
The CIMA roundtable gathered representatives of the large equipment rental companies to discuss developments in the industry. One of those developments was the growth in online business.
"I think the Internet is going to change this industry more than the consolidations in 1997," offered Dan Kaplan, consultant, Dan Kaplan Associates, Morristown, N.J.
Moore said he thought, in the future, his entire business would be conducted online: "Both our customers and our suppliers are going to be driven that way. And if you’re not there, you’re going to be left behind."
John Milne, vice chairman of United Rentals, said that about one-third of his company’s 150-person technology staff was working on Internet initiatives.
Other members of the panel thought the transition to e-business would be more modest. Charles Snyder, president, AMECO, Greenville, S.C., predicted that the Internet would continue to change the industry, but that it would be an alternative way for customers to do business, not the only way.
The 75% solution
The main characteristic of the equipment rental business is that it is about the short term. If a contractor does not have some item in inventory or does not have enough of an item in inventory and needs it for a specific project, renting makes sense.
The rule of thumb in the industry is that renting will cost less than buying for any piece of equipment that will be in service less than 75% of the time.
"Unless you have a use for a piece of equipment roughly nine months of the year or greater," said Miner, "then the cost to buy it, maintain it, store it and insure it is going to be greater than the cost to just rent it."
United Rentals carries "everything from large earthmoving equipment (bulldozers, excavators, graders) down to small hand tools," according to Miner. If a contractor needs an aerial lift for two months or a compressor or a backhoe for a short time, United Rentals can supply it.
From a financial standpoint, renting removes that equipment from the company’s balance sheet.
"You convert a fixed cost to a variable cost," said Meier. "You don’t have to maintain the equipment anymore. You don’t have any licensing costs, and you only pay for what you use."
If a contractor has a job repaving a stretch of highway, for instance, he might need message boards and other traffic control equipment, but only for the four-month duration of the repaving project. A rental company like Street Smart Rental Inc., St. Paul, Minn., can provide the traffic control equipment, such as message boards, portable traffic signals, truck-mounted attenuators, arrow boards, speed monitor trailers and video surveillance cameras.
"The rental business in the traffic control industry has been growing moderately," said Mike Granger, owner of Street Smart. He said the trend is toward government agencies requiring more sophisticated traffic control measures at road work zones, where safety is a major issue.
Most of Street Smart’s equipment is solar powered and easy to use and maintain, but the company also provides sophisticated intelligent transportation systems (ITS) equipment.
"In the past, this type of equipment has typically been purchased by the particular project," Granger said. "The problem with that is, from a financing standpoint, who’s going to own it at the end of the project. How can we absorb all these costs to purchase this, when in fact we really only want to use it for four months while we do this bypass?"
Where’s the "on" switch?
For a construction project, the solution appears to be to rent it for the short term that it is needed, but ITS equipment is not as simple as putting up an arrow board to direct travelers to a detour.
"Unlike renting an arrow board or just a plain old message board, this type of stuff has to be set up ahead of time," Granger stated. "We send out our engineers and technicians to the site, and there’s a lot of preliminary work that’s done ahead of time," including setting up radio links between ITS components.
Then Street Smart spends from a few days to a week to test the system before turning operation over to the construction contractor. Even then, sometimes Street Smart stays involved, depending on the level of participation the contractor feels comfortable with.
"At any level they want to participate, we have to be in the background on an emergency basis," noted Granger. "Typically these are in a critical situation. These need to be monitored and maintained."
That monitoring can be handled through a contractor’s liaison or through a regular maintenance plan, in which Street Smart goes to the site to check the parameters of the hardware, software and communication links. Street Smart can monitor some of the equipment through its own computers, or the company might assign a person to be at the site all the time, or it might hire a local engineering firm to have a person present or on call.
United Rentals does not have to provide that level of participation after the equipment is out the door. The company does offer training, but the vast majority of the people who rent from United Rentals are experienced operators.
"As a matter of fact," commented Miner, "we make sure that the person who is renting the equipment is trained in it, because we don’t want to be liable for an accident."
According to Rentmaker’s Meier, many rental houses provide some level of training.
"It’s a value-added service that they can provide to lock in the customer," he said. Some rental companies, when renting a crane, will even go as far as to send a crane operator with the machine.
The products that are best suited to renting are those that are most like commodities, according to Meier, such as generators, compressors, dozers and backhoes. "Different makes and models are pretty similar. People already pretty much know how to use them. But if it’s sort of complex equipment that either has a high potential liability associated with it, like a crane, or it’s pretty complex, like a paver," then the contractor is more likely to have his own equipment or to hire a specialty subcontractor.
Keep it up
Of course, the manufacturer’s dealer has extensive maintenance facilities. That is a selling point for dealerships over rental shops.
On the other hand, renting should be headache-free. What usually happens when a piece of rented equipment needs maintenance is that the rental company sends a person to make minor repairs in the field or sends a new machine to replace the one that has been broken down. The rental company has to be responsive.
"The longer they take the more the project gets delayed, which gets very expensive," said Meier. "The contractor, when he rents, shouldn’t have to care about maintenance, storage, upkeep or any of that kind of thing."
The renter also does not have to worry about how to dispose of the equipment when its useful life is over. The renter simply gives the equipment back to the rental house, which sells or otherwise disposes of old equipment.
Industry authorities said that a contractor usually must have its own liability insurance before renting equipment. Even so, sometimes things go wrong, and sometimes there is a dispute about who is responsible.
Said Miner, "But you have to understand this is a litigious society that we live in. We’re a deep pocket, so we’re always going to get pulled into every kind of claim whenever there’s an accident."
On the up side, Miner noted, "There are not a lot of accidents out there."
Shifting power, or two to tango
With the increasing popularity of renting comes increasing buying power for rental companies. That buying power might manifest itself in the form of price pressure on equipment makers, especially if mergers and acquisitions reduce the number¾ and increase the individual volume¾ of rental houses in the industry.
"We buy millions of dollars of equipment," said Miner, "and as a result we expect to get discounts for the volume that we buy."
It also is possible that manufacturers will see the rental market as another distribution channel that they and their dealers can participate in. A manufacturer might buy all or part of an existing rental company or start its own rental operation.
Members of the CIMA Rental Roundtable said that some construction equipment makers and rental companies were already forming partnerships.
"I think that we will get more closely affiliated with our manufacturers," said United Rentals’s Milne, speaking of developing a relationship with a strategic, or preferred, supplier.
Such a close relationship would be made possible by Internet technologies. Such a close partnership also would make it difficult for competitors to break into the market. Companies that don’t pair up with a partner could find themselves standing on the side, excluded from the dance.