A rapidly changing global construction equipment market is creating challenges for the way manufacturers and distributors operate.
Construction equipment manufacturers and dealers must be prepared to make fundamental changes in the way they do business in response to customer expectations, according to Neil Dickinson, UK and Ireland managing director of Caterpillar distributor Finning.
He has identified some crucial shifts in the construction equipment market that are dictating that the age-old model of simply selling machines to customers is no longer viable.
Speaking at a recent Construction Equipment Association conference, Dickinson said that, among these changes are a move from general “one size fits all” equipment into specialist machines for specific markets, and a desire for “financial engineering” solutions to replace cash purchases and traditional lease deals.
“The trend is from general to specialist, so we have to specialise,” says Dickinson. “Customers want specialist solutions, so, as distributors, we have got to have a very segmented approach. Each different segment needs something different - they want niche machines. We need to expand our scope to ensure we have a range of different machines coming through.”
“Customers want specialist solutions, so as distributors we have got to have a very segmented approach”
Neil Dickinson, Finning
He says this need for specialist machines is already evident in the waste sector, but is set to become the norm across construction.
At the same time, the machine itself is only one part of the equation, according to Dickinson. “Customers don’t say ‘send me a digger’, they want a solution,” he says, adding that distributors will have to offer far more than simply a good deal on the price of a new machine as the market for construction equipment gets increasingly competitive. “How are we going to differentiate ourselves against Chinese products? The answer is to offer solutions not products.”
The European construction equipment sector is, understandably, concerned that its market share is under threat from Chinese manufacturers.
Last year around 150,000 units were produced in Europe – 34% of which were built in the UK – down from a peak of around 200,000 units in 2006. Over the same period production in China increased from around 200,000 units a year to nearly 500,000. Although the bulk of these machines has been sold into the booming domestic market, Chinese manufacturers are establishing strong footholds elsewhere in the world, and are beginning to eye up Europe (see box).
“It’s not their priority at the moment,” says Off-Highway Research senior consultant Colin Timms.
“They will become established in the Far East, Middle East and South America, but then they will start targeting Europe and North America.”
Dickinson’s advice for UK-based manufacturers and distributors is to ensure they are offering customers solutions that fit their needs exactly – whether it is in the way the deal is financed, the after-sales service or extras like machine monitoring and advice on improving productivity and fuel efficiency.
He predicts that, in the post-recession world, many customers will be looking for new ways to fund their construction equipment fleets, with straight cash purchases becoming a thing of the past.
“We need our dealers to be thinking about what they can offer,” he says.
“I see it as partnership between dealers and manufacturers, so we have to have a clear strategy between us.
“Customer needs are changing – they’ve got no cash,” he adds.
“That’s the real issue. They don’t want to buy any more; they don’t want to invest cash in mobile equipment, so we need to find financially engineered solutions.
“They need to get it off balance sheet, and to do that they can’t buy products, they have to buy services.”
Dickinson says each customer may want a different solution, from a 100% flexible rental deal that allows them to take all their plant off balance sheet with zero risk to a fleet or asset management package.
“They don’t want to invest cash in mobile equipment, so we need to find more financially engineered solutions”
Neil Dickinson, Finning
“We have to be able to respond to a whole range of customer demands,” he says.
The increasing sophistication of the equipment itself is also forcing distributors and dealers to change.
Emissions legislation, a move from mechanical to electrical drive and the incorporation of advanced technology are all dictating that dealers employ better skilled mechanics - something firms like Caterpillar and JCB are addressing in the UK with their own academies and apprenticeship programmes.
The importance of these skills is emphasised by Dickinson’s admission that, during the recession, Finning did not lay off a single mechanic, while there were 25% cuts in the rest of the workforce.
“Skills and talent are the biggest thing I worry about,” he says
“We’ve got to invest in these guys, and we’ve got to invest in tailored solutions and specialist equipment.”
Analysis of global construction equipment sales by specialist consultant Off-Highway Research, unveiled at the recent Construction Equipment Association conference, shows that the industry has recovered to above 2007 levels.
Recovery comes after a dramatic dip that saw the value of sales halve at the depth of the recession in 2008/09. However, the recovery is not in the traditional markets, and UK construction equipment manufacturers will have to look further afield if they are to retain market share.
Off-Highway Research says the total value of global construction equipment sales in 2011 was $109.3bn (£70.6bn).
However, five years ago Europe accounted for around 20% of demand, North America for 28% and China 18%, whereas now China is the biggest single market - at 42%, with Europe and North America accounting for just 12% each.
The company predicts that this pattern will remain over the next five years, as Europe stagnates and the North American market grows slowly at best.
By 2016, it says, demand in China will have reached around 475,000 units a year, while North America will need around 180,000 and Europe just 125,000 machines – in both cases fewer than were sold in 2006.
“What we’ve been used to, we can’t expect to see over the next five or six years,” says Off-Highway Research senior consultant Colin Timms. “Today, Europe is our domestic market, but we can’t rely on that because the European market is not going to expand over what it is today.”
Timms says the Chinese market is so big that it is affecting the entire global market. “If you’re not doing business in China, you’re not going to grow at the rate the industry is growing, and if you’re not producing at economies of scale, it will come back and bite you.”
Over the last five years, production in China has increased from around 200,000 units a year to almost 500,000. “One country is producing almost what the world was producing five years ago,” says Timms.
If you’re not doing business in China, you’re not going to grow at the rate the industry is growing
Colin Timms, Off-Highway Research
The figures include output from global companies like JCB, Komatsu, Caterpillar and CNH that have set up manufacturing facilities there.
But Off-Highway Research predicts that Chinese firms will grow rapidly as they expand into the global market.
“Over the next five years we will see more of their products on sale in Europe and one or two manufacturers established over here - probably through the acquisition of European companies,” says Timms.
“We have already seen it in the concrete pump industry, and we will see them targeting the excavator market and the wheeled loader market in the next five to 10 years.
“China will dominate, and what they do will have a huge impact on every other country and manufacturer.”