If the real economy slows down in the U.S., in all likelihood the dollar will weaken. A weaker dollar will enhance the ability of American companies to more effectively compete overseas, especially with the European Community.

Interest Rate Cuts Will Stimulate Growth

RER: The U.S. economy appears to be slowing, and there are concerns over rising inflation. How big of a concern is that for large equipment manufacturers?

Fein: Manufacturers of all sizes certainly mirror the rest of the business community by being concerned about inflation and its effect on dampening the overall U.S. economy. A slower U.S. economy means fewer construction-related projects occurring and thus fewer equipment sales.

If the U.S. economy, and likely the demand for construction equipment, slows, what is the effect internationally?

Currently, most international markets other than Europe somewhat follow the U.S. economy by several months to a few years. If we have a slowdown in equipment demand as a reaction to rental rates or utilization rates, instead of an overall economic downturn, then the international markets and their economies will most likely continue forward.

We do not have as strong a rental market in many areas, such as the Far East, the Middle East and Africa, and to some degree Latin America. Therefore, the same kind of oversupply of product will probably not be a big problem.

However, if the real economy slows down in the U.S., in all likelihood the dollar will weaken. A weaker dollar will enhance the ability of American companies to more effectively compete overseas, especially with the European Community.

Should manufacturers be wary of other concerns? How can they prepare for those?

The concerns of equipment manufacturers today fall into several areas. One is that in a presidential election year we usually see some slowdown in business as people take a wait-and-see attitude on who will be elected. That has already happened in 2000. Usually, the uncertainty dissipates in the first quarter or so after the new president is in place and policies are being developed.

Another factor that can impact equipment business levels is the lag in completing state engineering bid processes for highway projects and its effect on the release of federal funding under TEA-21 legislation.

We feel that by mid-2001 this will be less of an issue than it is today and that equipment should be in demand as the projects are awarded and the money continues to be released.

One of the larger, more recent issues for construction equipment manufacturing involves distribution. In 1980-81, manufacturers recognized that they were supplying product to the marketplace without a great deal of understanding on what the channel looks like. Manufacturers through equipment associations instituted more detailed reporting processes to understand the flow of equipment into the channel and equipment usage.

Today, primarily with the rental consolidations, there is a significant equipment oversupply and reduction of residual values, which turns to slowing the equipment marketplace. We don't have a good sense or reporting process that can take into account what that rental supply is with dealer supply and manufacturers' inventory to get a more accurate economic picture of equipment utilization and supply. Getting a handle on a total industry supply is an emerging issue as rental companies continue to discuss partnerships.

What is the outlook for the construction industry?

In our annual “business forecast” that was released in the fall of 2000, the perception for the industry overall was slight growth, though not at the rate of the past few years. Now we have revised that downward somewhat, as the survey was taken when conditions were a little more optimistic.

It really depends on what type of market a company is in. Some have told us of expected declines in the 10 percent range, and others in the 15 percent range. However, some companies, especially niche markets, talk about a positive year. So the overall market for 2001 may be down, certainly if you talk in terms of actual dollars. That's primarily because the large equipment in earthmoving is a major area where the market will be down, and that's where the dollars are.

However, you will find many companies looking to the international marketplace or looking to other markets, like mining, where some product that's been in the marketplace is fairly old and needs to be refreshed.

Companies will look for new markets and new opportunities. They will continue to revise their products and their efficiencies, their supply chains and their vendors to create as good of an opportunity as they can.

Factors that will continue to affect the actual growth for the industry are stability for interest rates, the timely release of federal transportation funding under TEA-21 and getting a better handle on the equipment supply chain and equipment supply in general.

How will equipment manufacturers and CIMA members be able to expand their business in the future? International expansion?

Companies will look for new markets and new opportunities. This certainly includes untapped international markets as well as niche markets. They will look to increase their reach with new products that they currently do not have, whether through consolidation and acquisition or through new product development.

They will also look to increase the efficiency of their channel, including traditional distribution networks, and they will look to e-commerce and e-information and how this aspect can be integrated for best utilization.

They will also look to find more profit opportunities down the channel in product support, used equipment, in service information and support. I think that those will all be ways that they will look to use to increase their business.

(Part II of RER's interview with Fien will appear in an upcoming issue.)

Bob Fien 2000 chairman of the Construction Industry Manufacturers Association (CIMA) and CEO and chairman of Stone Construction Equipment, Honeoye, N.Y.

The name of the game today is national coverage. Tomorrow the name of the game will be international coverage.

Manufacturers Will Own the Rental Channel

RER: You have raised the issue of manufacturer consolidation frequently in recent years. What is driving this trend, and how much more are we likely to see?

Kaplan: The rental giants began to rationalize their vendor base about a year-and-a-half ago, causing tremendous problems with manufacturers that were not awarded supply contracts from the major rental companies. The five largest rental companies have a combined market share of more than 20 percent and spent more than $2 billion on equipment in the year 2000. These five rental companies have acquired hundreds of rental companies that previously ordered equipment from many suppliers.

For example, in the area of access, there are today essentially three manufacturers who sell to the rental giants; previously, the hundreds of independent smaller rental companies purchased their access equipment from more than 20 access manufacturers.

Consolidation of manufacturers is in the early stages, and many manufacturers are struggling for survival. Some manufacturers today are in cost-reduction modes, eliminating certain product lines. In the next phase, many manufacturers will sell out to their stronger competitors. Or they'll go out of business.

Consolidation has slowed considerably among rental companies. Is it essentially over, or will we see more consolidation during the next few years?

Consolidation, as the RER reader understands it, is over. Next we will see the strongest consolidators acquiring other, weaker consolidators.

Many smaller independent rental companies continue to fare relatively well. What are the keys to their success during the coming years?

Service at the local level. The product mix offered by the small independent is different than the larger rental company. I predict the small independent will fare well. The smaller rental company serves a different customer base than the large industrial/construction-oriented rental giants. The smaller rental companies, however, will not enjoy the business of the larger sophisticated customers and national account customer firms.

There is a lot of concern now about a potential slowdown. How do you see the overall economy developing in the immediate future?

The rental industry can handle a soft landing; overall economic conditions remain positive, just a little softer. What concerns me is not the economy but rather the amount of equipment out there, owned by the larger rental companies and dealer rental fleets, chasing the customer. What also concerns me is the rental rate decision, which is delegated to the branch manager, whose focus seems to be to get the equipment out on rent at any cost.

If it's true that we're about to go through a slowdown, or even a recession, how will this affect the rental industry? What are the keys to survival and profitability for rental companies during a slowdown or even a recession?

I think there will be significant construction activity in 2001; however, relative to the last couple of years, 2001 could cause a problem for the rental industry. The rental industry is fleeted for a growth year in 2001, not a pullback. The winners will be the low-cost producers — specifically, the rental giants who can manage and control their costs and organizations.

Nobody in the history of rental has ever managed rental companies of the size we see today in other than the most positive economic environment. We will see how well the “hub-and-spoke” strategy works.

Many people are concerned about a glut of relatively new equipment on the used market. Might this overabundance of equipment bring great opportunities for smaller rental companies to obtain good used equipment at good prices?

This is a great opportunity for the smaller rental company to acquire late-model, quality used equipment from the larger rental companies directly, from auctioneers and from manufacturers who have good-quality, reconditioned used equipment taken in trade packages.

There has been much discussion of the softness of rental rates throughout the industry during recent years. Can this situation change?

I see two opportunities for stabilizing rental rates: One, a larger rental company acquires another large rental company, thereby increasing market share. With market share, one can go for rate.

Two, rental companies get fed up with their returns, use their software to better understand time utilization, costs and the return on investment they require, and on their own increase their rental rates.

During the recent wave of consolidation over the past few years, most multistore regional rental companies were acquired. Will smaller companies grow into a regional role?

I do not see any smaller rental company emerging as a large full-service provider. The owners who sold out and re-enter the business will never compete with the giants with broad geographic coverage. The name of the game today is national coverage. Tomorrow the name of the game will be international coverage.

It will be extremely difficult, if not impossible, for a small rental company to challenge today's rental giants.

You probably have visited more rental companies than anyone else during the past couple of years. What are the most common weaknesses you see, or, better stated, in what areas do most rental companies need to improve?

The weaknesses I see are common: poor overall sales effort, poorly trained counter people who are basically little more than order takers, a basic lack of and use of computer software, and a lack of a formal business planning process.

Rental companies need to approach their business on a professional basis rather than waiting for the phone to ring.

What strengths do you see most often?

Strengths I see at the local level include service at any cost, knowledge of the local customer base, good store location and dedication of the owner.

Is a lack of analysis of costs and return on assets a major weakness at many rental companies? What about a lack of a well-defined equipment disposal policy?

I have yet to meet a small rental company that actually understands time utilization and ROI and manages its business accordingly. How to manage time utilization and ROI are the key tools to making decisions and improving profitability in a rental business.

Forget about a well-defined disposal plan. Most smaller rental companies lack a well-defined equipment acquisition plan, often relying on show specials. What they really need is a fleet plan, a formal document prepared for a full calendar year, by month, that lays out planned equipment acquisition, disposal and utilization considerations.

Do you expect to see more manufacturers become directly involved in the distribution channel, particularly in rentals, i.e., manufacturers such as Atlas Copco buying rental companies, or manufacturers such as Caterpillar and Komatsu developing their rent-to-rent capabilities?

I predict that the manufacturers will own the rental channel in years to come; they have no choice. Many manufacturers are at the mercy of the 10 large rental companies. That is who is buying the equipment today. The manufacturers need a secure channel to market.

How do you see the distribution channel — involving manufacturers, dealer/distributors and rental companies — evolving during the coming years?

The 100 largest rental companies buy directly from the manufacturer. The manufacturer drop-ships and pays the local dealer a service fee. The dealer is not selling the equipment; the manufacturer's national accounts are. That's a fundamental change in channel to market.

I question the role of the dealer in the channel, as the dealer is not selling the equipment to the rental company.

You've traveled to many countries as a consultant. What kind of development do you expect to see in the rental markets during the coming years, particularly in Latin America? Are more North American companies likely to explore involvement in those markets?

The future of the rental industry is global. I expect to see in the coming years all the major rental companies operating globally for two reasons. One, to compete with Cat. Two, because the customer will demand global coverage.

Daniel Kaplan Daniel Kaplan Associates, Morristown, N.J.

I'd like every analyst conference call to begin with a discussion of ROIC versus the prior period.

Only the Fittest Will Survive

RER: Consolidation has slowed in terms of the acquisition of platform-type companies. What do you see as the next phase in consolidation of the rental market?

Molner: The consolidation phase of the rental market has been finished for about one year. Relative to 1998 and 1999, there were very few significant equipment rental acquisitions during 2000. Now it's all about which of these consolidators can earn an attractive return on assets for investors in a difficult rate environment. The winners in this phase will need to have exceptional local management, sophisticated fleet management processes, operational cost controls in place and rate discipline.

How much consolidation of manufacturers do you expect to see during the coming years?

Equipment manufacturers will not escape highly competitive pressures that will be exacerbated in a decelerating growth environment and a trend toward increasing fleet age targets by the largest rental channel players. Darwin's law — that only the fit survive — applies: Consolidation will continue in this industry and many others as large customers limit their number of supplier relationships. The pace of change in this industry is likely to be much more gradual than we experienced in the rental market. Some change will come from acquisitions. Other companies will fail. And strong, well-managed, evolving independent companies can prevail in defined market niches.

What is your assessment of the economy during the next couple of years, and how should rental companies approach their operations during this period?

There's no question that investors believe we've entered a slower period of economic growth than we've had over the past eight years. Anyone with a 401(k) plan understands that.

The fallacy in the equipment rental industry was the emphasis on internal growth. After Prime, RSC, NationsRent, United Rentals and Neff went public, each company underscored its internal quarterly revenue growth rate — a number that often exceeded 20 percent. What these companies didn't highlight was that internal growth for well-managed fleets often was simply a matter of additional capital investment. Now, what's the difference between buying an additional $1 million in fleet for one location — and showing “internal annual revenue” growth of, say, $500,000 — versus simply making an acquisition of a small, single location with $500,000 in annual revenues for $1 million?

In other words, every company in the industry paid for growth — either through acquisitions or by increasing fleet investment.

Once you accept that internal growth rate (at least as used in this industry) is a loaded term, you naturally focus on what's important: return on invested capital. I'd like every analyst conference call to begin with a discussion of ROIC versus the prior period. Next, the management team should review capital spending and fleet sales in the quarter. And finally, we can look at growth in light of these other trends.

It seems as though analysts and investors on Wall Street have lost interest in the rental industry after a brief flirtation. What is your assessment of this, and how do you expect attitudes toward the rental industry to change during the next few years?

Investors lost interest in many exceptional companies and attractive industries over the course of 2000. So in this respect we are certainly not alone.

There are some things we can control — and there are many other variables in the capital markets beyond our influence. Let's focus on the few things that we can control. I think the leading equipment rental companies need to focus on prudently managing the assets they have acquired. These companies must also clearly communicate their management priorities and execute on their plan.

I've already stated that I thought the emphasis on internal growth rates was, at best, misleading. Every public rental equipment company missed their earnings' targets during 2000. So for starters, these management teams need to put together credible budgets, communicate these plans to investors and execute on their plans. Also, many of these firms must demonstrate to investors that they can generate cash flow and, accordingly, pay down high levels of debt.

Many rental executives say they are much better equipped to deal with a slowdown or a recession because they have better information technology systems, enabling them to spot slowing trends quicker. Do you agree with this assessment, and will this information make much difference if there is a significant lessening of demand?

Yes, I agree, but we'll find out this year.

From your observation of rental companies, what are some of their principle deficiencies? What are some of their biggest strengths?

Major concerns include declining rates and low return on assets in many markets. The greatest strengths are the enduring benefits of renting equipment for most users versus owning. I also believe the industry has attracted very talented national and local managers who should be able to address the challenges ahead.

What are some of the biggest challenges ahead for rental companies, e.g., finding qualified people, obtaining sufficient capital, managing costs, keeping rates up, etc.?

While these are all challenges, the final test will be whether these firms will be able to provide sufficient returns on capital to attract required investment from public debt and equity investors.

There has been much talk that former owners who sold their companies to consolidators will invest back into the rental industry once their noncompete agreements expire. Do you expect to see this occur?

A few owners may elect to get back into the equipment rental business after noncompete agreements expire. However, most of these agreements run for five years, which suggests that many of the owners of previous RER 100 companies won't be eligible to get back in the game for another year or so. In light of the existing competitive landscape, versus three to five years ago, it's hard to see how these individuals could gain significant market share and earn an acceptable return on their own invested capital.

Do you expect to see more manufacturers attempting to control the rental channel?

It's pretty clear that capital market investors do not need a choice of five or six publicly traded equipment rental companies. At some point the strategic value of the distribution network of some or possibly each of these companies may likely be more valuable to diversified equipment manufacturers than the value assigned by investors. If so, we'll see some acquisitions.

Additionally, large financing companies with substantially lower costs of debt capital and strong asset-management skills may find these companies very attractive.

John Molner general partner Brown Bros. Harriman New York

Wanted: Infrastructure Report

RER: What will be the impact of the new Congress and new president on the construction industry?

Obadal: In a word, limited. There are strong advocates for transportation infrastructure programs in both parties. They will continue to hold key committee positions on Capitol Hill. But there will be threats. Media allegations that there is too much “pork” in the water bills and TEA-21 can weaken support for key industry programs.

RER: Are there bills or programs in particular that the construction industry should be watching?

With a Bush presidency, we have a great opportunity to repeal or substantially reform the federal estate tax. Liberal Democrats may make repeal a rich-vs.-poor issue. Already there is some talk about the need to reduce estate tax rates rather than eliminating the tax entirely — perhaps replacing it with an expanded capital gains tax. What we'll have to worry about then are new environmental regulations imposed to limit growth.

There are signs that the economy is cooling. What impact do you think this will have on the construction industry?

Nobody is happy in a slowing economy. It is my job at AED to look to the stimulus that infrastructure programs can provide. Currently, estimates are that the Highway Trust Fund will have revenues this year of $35 billion. Under TEA-21, all that money must be used for the federal highway program. Prior to the enactment of TEA-21 in 1998, the highway program was only about $20 billion per year. This spending increase should provide some cushion.

Housing starts are perhaps even more important for the industry. The problem now is high interest rates that drive new home construction down. The industry can work to reduce those rates through pressure on the Fed and by encouraging Congress to pay down the national debt. If government debt is reduced, the upward pressure on rates is also reduced.

What is the prognosis for equipment exports?

We need a strong national commitment to free trade. It is unwise to use trade as a lever to alter the policies of foreign governments on noneconomic issues. Neither China nor Russia will allow themselves to be bullied. Both represent tremendous market opportunities for our manufacturers. We'd better take advantage of those markets, or other nations will.

What is the general outlook for the industry during the next year?

There's no crystal ball here. Predicting the economy is [Fed chairman Alan] Greenspan's forte. What I do know is that our industry has to continue to work to build support for road, airport and clean-water infrastructure programs. We need to work for sensible tax laws that don't destroy incentives for entrepreneurship. We can't let the government planners get their claws into the global economy. We'd better be careful with our international treaties and the impact of global-warming agreements that require production cutbacks. If we use government to take care of basic infrastructure needs but keep government out of the way of commerce and free competition, then we should do OK … in fact, better than just OK.

Tony Obadal Washington counsel Associated Equipment Distributors

Most people think working with the rental industry means focusing on the large national chains, but there is so much more to the rental industry.

Supplemental Coverage

RER: Is the old distribution system, i.e., the manufacturer sells to the dealer who sells to the rental center, still effective for Ditch Witch?

Andrews: I call it the “current” distribution system. It is still very crucial to have this kind of distribution system especially when you have ground-engaging products that need the value-added services of a dealer.

It is effective for us with the global/national market because it takes all of our effort to succeed in the rental business. Rental companies don't want to do business with eight different companies, and they don't want every seller cutting them a separate deal.

We would be at a loss without a distribution system where the dealer does more than just tell you how to service the machine. Dealers help recommend the right machine for the job, provide training on how to sell a rental, refer business, and provide service and parts on a local basis. [Having dealers] is a value-added service for our customers.

Does it present problems in an age when many companies are choosing to cut the dealer out of the loop?

It isn't us that would choose to cut the dealer out of the loop. The market will cut out what doesn't help the customer. If [customers] don't feel the dealer is giving them value, the dealer will not be wanted in the sales chain.

What is your outlook for the rental industry?

Rental is a very strong industry, and it is a changing business. I see more and more contractors choosing to supplement their own fleet with rental products.

In the event of an economic slowdown, would the rental industry benefit because consumers are less likely to buy new equipment?

Times like that are good for the rental industry because it takes the risk out of buying, and owning, your own equipment as long as there are jobs being done. If there's a serious downturn, when the work isn't there, then it's not going to be good for rental or many parts of the construction equipment industry. As long as there is work, the rental industry will continue to grow.

What will it take for manufacturers to expand their business in the rental industry further? At some point, isn't there an oversupply of equipment on the market?

There's always a saturation point in any industry. Most people think working with the rental industry means focusing on the large national chains, but there is so much more to the rental industry. As manufacturers, you have to be aware of the industry as a whole. Our products will fit into any rental center.

When working with the larger chains, though, we're going to have to be more efficient online. The days of us sending out invoices in the mail are over. We must be better-linked because our customers need to be able to do more than just look at a machine online. If you don't get online in the next 12 to 24 months, you'll be locked out.

Kurt Andrews director of marketing Charles Machine Works (Ditch Witch) Perry, Okla.

We believe the overall industry ill likely grow in the mid-single-digit range [this] year.

We anticipate our free cash flow next year to be about $390 million, significantly greater than the $90 million we had projected.

United Rentals discourages rental rate cutting in most situations as a matter of policy.

Boosting Cash Flow

RER: It seems that United Rentals began making the transition from a growth-by-acquisition company to a growth-through-internal-operations company? How would you measure United's progress in making that transition?

Jacobs: From day one, United Rentals has established the operational infrastructure necessary to generate strong internal growth. This includes our substantial national accounts program, industry-leading safety programs, employee skills training, superior information technology and a companywide commitment to equipment sharing. As a result, we do not consider this to be a transition process for United Rentals; rather, a situation where internal growth is contributing a greater share to overall growth.

Over the past 12 months, we have continued to make our branch operations more efficient with the objective of increasing cash generation on our asset base. We believe we can continue to improve our returns by driving more efficiencies, by continuing to look for ways to operate more intelligently (including a broad range of technology-driven improvements) and by emphasizing a fundamentally sound corporate culture focused on increasing services and decreasing costs.

You've referred to United's now earning actual returns from sharing equipment among branches. Could you elaborate on how that's occurring and how much progress United has made in improving utilization and bringing in actual revenue from equipment sharing?

Our branches achieve significantly greater equipment utilization by sharing equipment within clusters of locations. Currently, we generate about 10 percent of our rental revenues, or more than $200 million, from shared equipment. We attribute our success in this area to two factors. All our branches operate on the same state-of-the-art information systems, giving them access to inventory availability information at neighboring branches. And our employees are fully committed to equipment sharing as a way to serve customers better.

How do you see the economy in 2001, and what effect will a changing economy have on United Rentals?

We are anticipating a slowdown in the economy, with growth in construction cooling off considerably. We believe that the impact on equipment rentals will be somewhat mitigated by increased spending in public works/transportation projects as well as by the general tendency of the equipment end-user to rent rather than buy capital equipment in a soft economy. While we're prepared to take on an expanding marketplace, our view is that it is prudent to structure our business for reduced expectations. Our broad geographic footprint was established, in part, to allow transfer of equipment from weaker areas to stronger ones, on the assumption that economic weakness would impact certain parts of North America more than others.

We believe the overall industry will likely grow in the mid-single-digit range [this] year. While equipment rental will continue to represent a larger percentage of all equipment usage, the overall use of equipment will probably slow down in tandem with the slowing of the economy.

The combination of a slowing economy and reduced access to capital should have a residual positive impact on our business. Concerns about over-fleeting have diminished as most larger equipment rental companies have substantially cut back on fleet additions. This has also resulted in a more rational business environment as companies become less preoccupied with gaining market share or simple top-line growth and focus more on improving margins. This bodes well for the future of the industry.

United doubled its number of national account customers in 2000 and grew its national account business. Could you elaborate on that and explain the value and importance of national accounts business for United during the years ahead?

We now have over 1,100 national account agreements in place, with roughly half of these initiated in the past 12 months. National accounts is our most rapidly growing customer segment, both in terms of number of accounts and revenues generated per account. We generated more than $250 million in revenues in 2000 from our national accounts program, and as the equipment rental industry matures, we believe more and more large industrial, manufacturing and construction companies will turn to renting. We also think that they will prefer to deal with a small number of national rental companies that can provide consistent levels of service across North America.

To what do you attribute Wall Street's apparent cooling in interest toward the rental industry?

The equipment rental industry is looked on as being quite cyclical, and Wall Street believes we are headed into an economic downturn. Conversely, so-called cyclical stocks tend to do very well when sentiment changes about the overall direction of the economy.

United has invested heavily in the traffic safety rental sector. How do you view this sector's prospects in the near future?

We anticipate good growth for the traffic control sector, assuming that some of the administrative difficulties in fully implementing the TEA-21 funding for transportation infrastructure rebuilding can be overcome. It appears that much of the difficulty in getting TEA-21 to “hit its stride” has been due to personnel shortages within the respective state engineering groups, leaving some projects on hold while plans are being reviewed and approved. This is a situation that should ease over time.

United made fewer acquisitions in 2000 than in previous years. What kind of acquisition activity do you project for 2001?

United Rentals is likely to make fewer acquisitions in 2001. Those that we do pursue will need to be strategically important, financially attractive and result in equal or improved credit statistics. Our main focus continues to be on maximizing the overall return on our $3.4 billion of fleet and generating more cash. We anticipate our free cash flow next year to be about $390 million, significantly greater than the $90 million we had projected before we cut back our spending plans. Most of the excess cash flow will likely be used to repay debt, further strengthening our balance sheet.

Last year you established a goal to raise rental rates — or, as you called it, “Project RRR.” How are you progressing?

Our company culture drives our branches to expect and attain reasonable and fair rates reflecting the total value of what United Rentals offers. In 2000, we've seen overall rental rates improve by 1 to 2 percent. We believe this is a result of our customer diversity, our broad geographical footprint and our fleet composition mix. Our branch managers are responsible for setting rates, and they have continual access to good analytical data upon which they can base their rate decisions in the field. We augment this with sales training, sharing of “best practices,” a strong intranet and multilevel management support.

How do your branch managers raise rental rates and still maintain expected volume levels when there is downward pressure on rates in the marketplace?

United Rentals discourages rental rate cutting in most situations as a matter of policy. Our branch managers have access to a wealth of utilization data for each type of equipment, so they can constantly balance demand with fair and equitable rates. We have worked hard with our sales force, both in the field and at the counter, to communicate the value of our products and services to our customers.

A piece of equipment that isn't right for the job or is late in getting to the job site or breaks down in the field is not a bargain at any rental rate. We are renting solutions to meet customers' needs. While a certain percentage of potential customers will simply rent the equipment at the lowest rate, most customers understand the actual and potential costs of the rental and will differentiate in their renting decisions to justify rates based on value.

Will you continue to lower the age of your rental fleet in 2001, even in the face of potentially softer demand?

Our company has worked hard over the last three years to lower the average age of our fleet in order to be prepared for the eventuality of a slowing economy. Because our fleet is very young, we can reduce our capital expenditures for new equipment without sacrificing equipment quality or customer service. In our plan for 2001, we project that the average age of our fleet will be extended by four to six months.

Do you expect to see increased consolidation among manufacturers during the coming year or so?

We anticipate increased consolidation among manufacturers. As in any economic slowdown, many manufacturers will be under intense pressure to improve their cost structures, and mergers are one way of accomplishing this.

What role will electronic commerce play in the equipment rental industry during the next few years?

We believe e-commerce will play an increasingly important role in the equipment rental industry as contractors and industrial renters become more comfortable with renting over the Internet. At the moment, e-rental availability exceeds market demand. From an operational standpoint, we foresee using the Internet to realize efficiencies in e-procurement, communications to field operations, distribution of information, etc. These capabilities are expanding very rapidly now and will help significantly improve margins in the future.

With Brad Jacobs CEO United Rentals Greenwich, Conn.

Competition on a global scale will continue to keep pressure on manufacturers to be competitive.

The Supply Side

RER: Is the rental equipment market presently an attractive one for equipment manufacturers? Will this continue?

Nennemen: Yes. It is a good market for retail, an excellent market for exposure of product to potential purchasers. It will continue to be good — it may have ups and downs — and will change and evolve, but there will always be customers who prefer to rent.

Do you find the old distribution system (i.e., manufacturers selling to dealers who then sell to rental centers) more or less effective than selling directly to rental centers? Why?

Dealers are an important part of the process of delivering and providing customer satisfaction to the rental industry. The dealership's technical expertise is needed long-term.

The U.S. economy appears to be slowing, and there are concerns over rising inflation. How big of a concern is that for large equipment manufacturers?

A slowing economy is a concern for all manufacturers, large or small. Inventory control will be an important part of management for 2001-2002 for both the manufacturer and the rental industry.

Kubota and other large foreign-owned equipment manufacturers such as JCB obviously think there is a demand for more products than U.S. manufacturers can provide. Do you see that continuing?

The equipment business is a global business — the strong U.S. economy has shifted distribution of product from a global perspective. The continued belief that the U.S. market will support sales has led to increased manufacturing and marketing presence in the U.S. by foreign-owned companies. We believe there will be fluctuations in demand, but there is a solid base for the Kubota-type products.

Is there any interest in manufacturing alternative-fuel equipment, or is it still unreliable and inefficient? Will gasoline and diesel machines always be the most effective?

There must be continued awareness of alternative-fuel equipment or systems. At the same time, considerable work is being done to make gas and diesel engines more efficient and cleaner for the environment. Durability or long life and performance, along with manufacturing cost, continue to be the challenges to making alternative systems acceptable in our industry.

In terms of pricing, will the cost of products rise with the advent of new technology, or will increasing competition keep prices at a competitive/affordable level?

Costs will certainly continue to rise. However, engineering and manufacturing are constantly challenged to compensate for these important factors. Competition on a global scale will continue to keep pressure on manufacturers to be competitive.

Larry Nennemen director of marketing Kubota Tractor Torrance, Calif.

Find Common Ground

RER: What changes do you expect to see in the rental industry during the next few years?

Christifulli: I believe we are going to see rental centers diversify to become single supply sources for their customers. You could call it diversification through specialization. Rental centers in the future will offer everything a contractor needs to get a job done, all from under one roof, but geared to specific construction processes. The contractor will think of it as one-stop shopping.

What changes in the manufacturing process do you expect to see during the coming years?

With the consolidated distribution channels less inclined to stock inventory, we will adapt by working with channels in demand replenishment as opposed to inventory replenishment. This readily ties in to and supports vendor-managed inventories, which, in turn, reduce channel inventory costs.

You and the rest of Wacker management have devoted a lot of time to analyzing where the industry is going and the refocusing of the company for the future. Please talk about the restructuring and refocusing within the company.

Wacker concentrates on constant planning and technological innovation, focusing on the ultimate customer, the end-user. When the pace of consolidation began to pick up in the early '90s, Wacker was prepared.

What changes do you expect to see in relationships between the manufacturers, distributors and rental centers?

It's critical that the manufacturers develop intimate business relationships with rental dealers and distributors to better understand each other's business processes. When we have a better understanding of each other's processes, it will help us find more ways to achieve the mutually common goals such as streamlining the business process, improving customer service and lowering warranty costs.

How do manufacturers today have to evolve to keep up with the needs of rental companies as well as end-users?

Today's manufacturers have to eliminate everything that does not add value to the product, the channels and the customer. This should be augmented with high-technology products, training, customer service and improved support throughout the construction process.

How do rental companies have to evolve to keep up with the needs of their customers?

The successful rental company of the future will be the business that understands its customer. They will need to support the needs of their customers with quality products offering the latest features and innovations that will make their customers more productive. To do this they must take advantage of their manufacturers' resources such as training, customer support, service support and marketing assistance.

There is much talk these days about the impact of electronic commerce. What kinds of expectations do your customers have of your company in terms of meeting their needs electronically? In turn, what do you expect from your customers and suppliers?

In the future we see a movement toward a paperless business environment, and rental companies of all sizes will need to evolve toward total electronic commerce. Key suppliers will be partnered and linked, conducting as much business as possible electronically. The ultimate goal of the industry will be a paperless business process.

What kind of economy do you expect in North America in 2001?

Although I have heard the sluggish growth forecasts, we are excited about the growth opportunities in certain segments of the industry. The smart rental center operation will do well to listen to its customers and not the news services.

As equipment evolves during the next few years, specifically the types of equipment your company manufactures, what kind of developments do you expect to see in areas such as ergonomics, engines and diagnostics?

We expect our machines to be designed and manufactured to meet global standards for quality and safety and customer requirements. In general, we will see products with state-of-the-art technology resulting in very high productivity, reduced weight-to-power ratios and new materials for extra strength and durability. And of course, we are going to see a new level of operator-[friendly] and environmentally friendly equipment.

David Christifulli vice president Wacker Menomonee Falls, Wis.

Act Locally

RER: Consolidators account for a minority of the rental establishments across North America (compared to the mom-and-pops). Do you see the consolidators' share continuing to grow?

Gladis: The consolidators' market share should continue to grow, the pace of which will be determined by returns experienced within the industry.

The mom-and-pops have always prided themselves on being able to offer better service than the larger chains. Is that just a myth, because rarely can they can compete with price, selection and the latest technology?

Neff Rental takes pride in the quality of its service offerings, as do smaller, private rental companies. I believe that there will always be room in the market for independent rental firms to succeed by being able to provide special service to niche accounts.

At some point the market could be saturated by rental stores, both family- and corporate-owned. Is that in the foresee-able future, and if so, what do the Neffs and others envision happening?

Saturation in any given market is more related to the total fleet investment available as opposed to the number of locations. All players in the rental industry need to place special focus on ensuring that any given market can sustain returns before committing additional capital investment.

What are some of the main issues and challenges ahead for the large rental corporations?

To me, the greatest challenge within the industry is making local-level management more focused on improving returns on investment. Other major challenges involve pricing discipline and the recruitment and training of all positions.

Is the rental climate still a good one? Will it continue in the future?

The demand for rental equipment from our customers remains strong. The shift from ownership of equipment toward rental continues and is likely to continue as the rental industry matures. However, for the rental industry to generate the success it would expect from these two strong dynamics, focus needs to be placed on pricing discipline and return on investment.

PQ: I believe that there will always be a room in the market for independent rental firms to succeed by being able to provide special service to niche accounts.

Pete Gladis CEO Neff Corp. Miami

Because of the growing trend of manufacturers toward selling through mass merchandisers, there will be fewer dealers in the future.

Standing in the Way of Progress

RER: What are some of the key issues in outdoor power equipment markets during the coming year(s)? Are those issues different from in years past?

Harley: In the coming years, the OPE industry will be faced with many ongoing issues, and several new ones will emerge. The ongoing issues include emissions, and the biggest one we are currently facing is in California. The California Air Resources Board (CARB) is developing problematic regulations that will require equipment fuel tanks to be “sealed” with one-way venting mechanisms and to be treated with impermeable coatings.

Venting restrictions on gravity-fed, non-hand-held engines will have a direct adverse impact on constant fuel flow to the engine. Consequently, these venting mechanisms would likely need to be physically linked to the engine so that the vent mechanism opens to the appropriate degree when the engine is operating. CARB is also seriously considering requiring very expensive carbon canisters at least on commercial equipment. Finally, CARB envisions a compliance program that would require the OEM to “shed test” the final configured product.

We are also facing ongoing emissions issues nationwide. California Phase II regulations currently apply to newly manufactured hand-held and certain non-hand-held engines. Similar U.S. Environmental Protection Agency (EPA) Phase II regulations for hand-held and non-hand-held equipment will start being implemented in the next few years. These issues will continue to have major impacts on the industry market.

Noise is another big issue, and it is primarily focused on leaf-blower bans in California and Europe. The European Noise Directive will have an impact on all manufacturers who ship lawn mowers to Europe because of required reductions in noise limitations.

Looking ahead, the impact of the Internet on how business is conducted within the industry is likely to be enormous. The trend toward B2B commerce has begun and is growing daily among manufacturers, dealers and distributors. Also, more and more companies are promoting and marketing their products to consumers through their Web sites. Because of the growing trend of manufacturers toward selling through mass merchandisers, there will be fewer dealers in the future. The ones who survive will have active service departments for all products, even those that were not purchased at their dealership. And lastly, industry consolidation will continue in the years to come.

There have been many advances in equipment technology during the last decade. What can customers expect in that field during the years ahead?

Technological advances resulting in new, improved equipment will benefit customers in several ways. Customers can expect products with engines that will be more durable, more fuel efficient, and cleaner (currently, engines run 70 percent cleaner than those manufactured in 1990, and further reductions are expected in the future).

The EPA has recognized that the new cleaner, Phase II-compliant products will cost more to manufacture and therefore will be more expensive at retail level. However, in general, the consumer may, in the long run, save money because the new cleaner engines will be more fuel-efficient.

Will federal and state standards and legislation, whether they be air-quality standards, noise restrictions, etc., limit the development of new technology?

We are concerned that the CARB's equipment fuel tank regulations could have an adverse impact on constant fuel flow to the engine and, in turn, have an adverse impact on engine operation and performance. And, as mentioned above, EPA has recognized that higher manufacturing costs will be a consideration for all new cleaner, Phase II-compliant products.

Is the OPE market growing? Nationally? Internationally? Do you see that continuing?

The OPE industry and its market are closely tied to the general economic well-being of the country, and several important indicators affect sales and growth. These are weather patterns, disposable income, housing starts and, in the case of commercial equipment, changes in the interest rates. According to OPEI's shipment reports, all key consumer-type lawn-and-garden products showed growth in model year 2000 (September 1, 1999, to August 31, 2000) with an increase of 4.2 percent over 1999. Commercial turf-care equipment realized even more growth with an increase in shipments of 11.3 percent over 1999, and commercial riding units grew by 24.4 percent. However, because rising mortgage rates are having an impact on housing starts, OPEI's forecasts predict declines for consumer equipment and certain commercial equipment for both 2001 and 2002. This industry has a favorable balance of trade overseas, and we expect this to continue.

Bill Harley president Outdoor Power Equipment Institute (OPEI)

Going Going … Sold

RER: There is a sense among many rental companies that when it comes to selling used equipment, retail is the way to go to get the best prices and that auctions are “the method of last resort” where prices are not as good. Why do you recommend using auctions?

Prevost: In many instances, the perceived retail value of equipment is exceeded at an auction. Many rental companies think of us as convenient because we take care of the advertising, the presentation of the equipment, attracting the bidders and eventual buyers, repair and refurbishing if required. Certainly most rental companies have their own sales force, but the sheer quantity of equipment that they need to sell often requires them to look outside their own methods of sale. The sales force tends to go to the same customers in the same region repeatedly, so purchasers are often exhausted.

We see a lot of late-model equipment because we attract buyers from outside the normal sphere of customers. By placing equipment in an auction where buyers include manufacturers, contractors, transport companies, people from the mining, logging, agricultural and many other industries, we can attain a higher price that would transcend the local market that has been, historically, the one the rental companies try to sell to.

There are many costs involved in retailing equipment, including what it costs to put the salesman in a car and make the calls. We also handle collection of the funds, we screen the buyers to make sure they have the money, so there are many cost savings to putting it in an auction that aren't readily seen if you strictly look at the price comparison.

What other services does Ritchie Bros. offer?

When a piece of equipment comes into our yard at an auction, we offer an appraisal of its condition and a budget to bring that piece of equipment into the optimum sales condition. We have facilities that allow us to do repairs at a low cost to owners of equipment, including painting, repairing or replacing tires, reupholstering seats, fixing the glass, mechanical repair. We obtain repairs at a low price because the subtrade is giving us a price based on refurbishing hundreds of machines in an auction.

We offer buyers a very large selection of equipment; we could be their one-stop shop. We offer transportation companies that are available on-site to give competitive quotes for the movement of the equipment after it is purchased, customs services and freight-forwarding services for offshore buyers.

Ritchie Brothers also offers a lot of functions for the buyers. We guarantee clear title; we have a search department to search equipment by owner and serial number to guarantee that whatever is purchased is clear of liens and encumbrances. The buyer can purchase with the knowledge that he's the legal owner and there won't be a sheriff knocking on his door seizing it. We also guarantee Environmental Protection Agency compliance; we check every machine in regard to EPA regulations. If machine does not comply, we contact the manufacturer on behalf of the seller and attempt to get EPA certification. If we can't get it, we won't sell the machine because we don't want the buyer to be saddled with problems because of EPA noncompliance.

On our Web site, we offer buyers a method to compare sales prices; we list all equipment we have sold in the past two years. We also offer online bidding, broadcasting many of our auctions live on the Internet.

In the current market, it seems more equipment is available than ever before, and used equipment is going cheap because there is a glut. Is this a correct assessment?

There is a glut in certain categories. For example, there are a lot of aerial work platforms available for sale because of a large supply and decreasing demand, so there's a softening of pricing in that category. But we are seeing pricing maintaining itself at a reasonable level for good, late-model, well-specked equipment. For example, a four-wheel-drive tractor/loader/backhoe with extend-a- is bringing in very good money, yet there is a softening for two-wheel-drive units without extend-a-hoe capabilities.

If equipment is well-maintained and well-specked and put in an auction with drawing power that attracts people from other industries and other locations bidding against each other, it will get world fair-market price.

Will electronic/Internet auctions play an important role in the sale of used equipment in the future? What impact will this have on the market?

Internet auctions are becoming more commonplace. Whether or not they are attracting the same types of buyers as physical auctions, I can't say, but the key to getting good prices on equipment sold by auction is to have enough buyers bidding against each other. Eventually Internet auction sites may attract large quantities of buyers, but we're not seeing major successes in strictly Internet auctions right now. Eventually it will be more accepted, but people still like to see, touch and feel equipment.

Ritchie sells a considerable quantity of new equipment through its auctions. Why is new equipment sold through auctions, and what kinds of values are available?

We get it from many sources. Sometimes a dealer has new equipment he can't sell in the local market, so he'll expose it to the large variety of buyers an auction attracts. Sometimes we'll receive it directly from a manufacturer because the manufacturer wants to increase its market share by going to end-users his dealers don't have access to. Our exposure through our advertising can be valuable to increase customer awareness of their product. In many cases, we get higher pricing than they can when they sell to their dealers because dealers will be at the auction and bid up to the price they'd normally pay and then stop, but the end-user is prepared to go higher.

The benefit to manufacturers and dealers is that if an end-user buys their equipment through the auction and is satisfied, he becomes a new customer, and when he wants another, he might call the dealer. Also, the dealer gets more parts and services, and the manufacturer increases market share.

What changes do you expect to see in the distribution channel between manufacturers, distributors and rental companies?

Manufacturers are being increasingly forced to take trades, and we're getting a lot of this used rental equipment from the manufacturers rather than from the rental companies. Manufacturers are forced to maintain their market share by dealing with these rental companies. With the purchasing power and clout these rental companies have, they can demand certain pricing and availability programs, so the manufacturer is being forced to deliver it when the rental company wants to accept it rather than when they want to build it. Distributors are becoming more of a parts-and-service supply channel rather than a source of new equipment.

What changes and trends do you expect to see in the equipment rental industry during the next few years?

Rental companies are forced to show increased revenue through good operation of the company, not just through acquisitions. Those who have good programs in place will succeed and survive. Rental companies that lack the systems to operate their companies profitably are becoming less of a force in the market. Companies with relationships, I believe, will survive in the long term. It's a people business.

Denis Prevost vice president, major accounts Ritchie Bros. Auctioneers Richmond, British Columbia

PQ: Rental companies that lack the systems to operate their companies profitably are becoming less of a force in the market.

RER: Does it present problems in an age when many companies are choosing to cut the dealer out of the loop?

Andrews: It isn't us that would choose to cut the dealer out of the loop. The market will cut out what doesn't help the customer. If [customers] don't feel the dealer is giving them value, the dealer will not be wanted in the sales chain.

RER: What is your outlook for the rental industry?

Andrews: Rental is a very strong industry, and it is a changing business. I see more and more contractors choosing to supplement their own fleet with rental products.

RER: In the event of an economic slowdown, would the rental industry benefit because consumers are less likely to buy new equipment?

Andrews: Times like that are good for the rental industry because it takes the risk out of buying, and owning, your own equipment as long as there are jobs being done. If there's a serious downturn, when the work isn't there, then it's not going to be good for rental or many parts of the construction equipment industry. As long as there is work, the rental industry will continue to grow.

RER: What will it take for manufacturers to expand their business in the rental industry further? At some point, isn't there an oversupply of equipment on the market?

Andrews: There's always a saturation point in any industry. Most people think working with the rental industry means focusing on the large national chains, but there is so much more to the rental industry. As manufacturers, you have to be aware of the industry as a whole. Our products will fit into any rental center.

When working with the larger chains, though, we're going to have to be more efficient online. The days of us sending out invoices in the mail are over. We must be better-linked because our customers need to be able to do more than just look at a machine online. If you don't get online in the next 12 to 24 months, you'll be locked out.

PQ: Most people think working with the rental industry means focusing on the large national chains, but there is so much more to the rental industry.

Boosting Cash Flow

* With Brad Jacobs, chairman and CEO of United Rentals, Greenwich, Conn. [please unbold]

RER: It seems that United Rentals began making the transition from a growth-by-acquisition company to a growth-through-internal-operations company? How would you measure United's progress in making that transition?

Jacobs: From day one, United Rentals has established the operational infrastructure necessary to generate strong internal growth. This includes our substantial national accounts program, industry-leading safety programs, employee skills training, superior information technology and a companywide commitment to equipment sharing. As a result, we do not consider this to be a transition process for United Rentals; rather, a situation where internal growth is contributing a greater share to overall growth.

Over the past 12 months, we have continued to make our branch operations more efficient with the objective of increasing cash generation on our asset base. We believe we can continue to improve our returns by driving more efficiencies, by continuing to look for ways to operate more intelligently (including a broad range of technology-driven improvements) and by emphasizing a fundamentally sound corporate culture focused on increasing services and decreasing costs.

RER: You've referred to United's now earning actual returns from sharing equipment among branches. Could you elaborate on how that's occurring and how much progress United has made in improving utilization and bringing in actual revenue from equipment sharing?

Jacobs: Our branches achieve significantly greater equipment utilization by sharing equipment within clusters of locations. Currently, we generate about 10 percent of our rental revenues, or more than $200 million, from shared equipment. We attribute our success in this area to two factors. All our branches operate on the same state-of-the-art information systems, giving them access to inventory availability information at neighboring branches. And our employees are fully committed to equipment sharing as a way to serve customers better.

RER: How do you see the economy in 2001, and what effect will a changing economy have on United Rentals?

Jacobs: We are anticipating a slowdown in the economy, with growth in construction cooling off considerably. We believe that the impact on equipment rentals will be somewhat mitigated by increased spending in public works/transportation projects as well as by the general tendency of the equipment end-user to rent rather than buy capital equipment in a soft economy. While we're prepared to take on an expanding marketplace, our view is that it is prudent to structure our business for reduced expectations. Our broad geographic footprint was established, in part, to allow transfer of equipment from weaker areas to stronger ones, on the assumption that economic weakness would impact certain parts of North America more than others.

We believe the overall industry will likely grow in the mid-single-digit range [this] year. While equipment rental will continue to represent a larger percentage of all equipment usage, the overall use of equipment will probably slow down in tandem with the slowing of the economy.

The combination of a slowing economy and reduced access to capital should have a residual positive impact on our business. Concerns about over-fleeting have diminished as most larger equipment rental companies have substantially cut back on fleet additions. This has also resulted in a more rational business environment as companies become less preoccupied with gaining market share or simple top-line growth and focus more on improving margins. This bodes well for the future of the industry.

RER: United doubled its number of national account customers in 2000 and grew its national account business. Could you elaborate on that and explain the value and importance of national accounts business for United during the years ahead?

Jacobs: We now have over 1,100 national account agreements in place, with roughly half of these initiated in the past 12 months. National accounts is our most rapidly growing customer segment, both in terms of number of accounts and revenues generated per account. We generated more than $250 million in revenues in 2000 from our national accounts program, and as the equipment rental industry matures, we believe more and more large industrial, manufacturing and construction companies will turn to renting. We also think that they will prefer to deal with a small number of national rental companies that can provide consistent levels of service across North America.

RER: To what do you attribute Wall Street's apparent cooling in interest toward the rental industry?

Jacobs: The equipment rental industry is looked on as being quite cyclical, and Wall Street believes we are headed into an economic downturn. [LP1]Conversely, so-called cyclical stocks tend to do very well when sentiment changes about the overall direction of the economy.

RER: United has invested heavily in the traffic safety rental sector. How do you view this sector's prospects in the near future?

Jacobs: We anticipate good growth for the traffic control sector, assuming that some of the administrative difficulties in fully implementing the TEA-21 funding for transportation infrastructure rebuilding can be overcome. It appears that much of the difficulty in getting TEA-21 to “hit its stride” has been due to personnel shortages within the respective state engineering groups, leaving some projects on hold while plans are being reviewed and approved. This is a situation that should ease over time.

RER: United made fewer acquisitions in 2000 than in previous years. What kind of acquisition activity do you project for 2001?

Jacobs: United Rentals is likely to make fewer acquisitions in 2001. Those that we do pursue will need to be strategically important, financially attractive and result in equal or improved credit statistics. Our main focus continues to be on maximizing the overall return on our $3.4 billion of fleet and generating more cash. We anticipate our free cash flow next year to be about $390 million, significantly greater than the $90 million we had projected before we cut back our spending plans. Most of the excess cash flow will likely be used to repay debt, further strengthening our balance sheet.

RER: Last year you established a goal to raise rental rates — or, as you called it, “Project RRR.” How are you progressing?

Jacobs: Our company culture drives our branches to expect and attain reasonable and fair rates reflecting the total value of what United Rentals offers. In 2000, we've seen overall rental rates improve by 1 to 2 percent. We believe this is a result of our customer diversity, our broad geographical footprint and our fleet composition mix. Our branch managers are responsible for setting rates, and they have continual access to good analytical data upon which they can base their rate decisions in the field. We augment this with sales training, sharing of “best practices,” a strong intranet and multilevel management support.

RER: How do your branch managers raise rental rates and still maintain expected volume levels when there is downward pressure on rates in the marketplace?

Jacobs: United Rentals discourages rental rate cutting in most situations as a matter of policy. Our branch managers have access to a wealth of utilization data for each type of equipment, so they can constantly balance demand with fair and equitable rates. We have worked hard with our sales force, both in the field and at the counter, to communicate the value of our products and services to our customers.

A piece of equipment that isn't right for the job, or is late in getting to the job site or breaks down in the field is not a bargain at any rental rate. We are renting solutions to meet customers' needs. While a certain percentage of potential customers will simply rent the equipment at the lowest rate, most customers understand the actual and potential costs of the rental and will differentiate in their renting decisions to justify rates based on value.

RER: Will you continue to lower the age of your rental fleet in 2001, even in the face of potentially softer demand?

Jacobs: Our company has worked hard over the last three years to lower the average age of our fleet in order to be prepared for the eventuality of a slowing economy. Because our fleet is very young, we can reduce our capital expenditures for new equipment without sacrificing equipment quality or customer service. In our plan for 2001, we project that the average age of our fleet will be extended by four to six months.

RER: Do you expect to see increased consolidation among manufacturers during the coming year or so?

Jacobs: We anticipate increased consolidation among manufacturers. As in any economic slowdown, many manufacturers will be under intense pressure to improve their cost structures, and mergers are one way of accomplishing this.

RER: What role will electronic commerce play in the equipment rental industry during the next few years?

Jacobs: We believe e-commerce will play an increasingly important role in the equipment rental industry as contractors and industrial renters become more comfortable with renting over the Internet. At the moment, e-rental availability exceeds market demand. From an operational standpoint, we foresee using the Internet to realize efficiencies in e-procurement, communications to field operations, distribution of information, etc. These capabilities are expanding very rapidly now and will help significantly improve margins in the future.

PQ: We believe the overall industry will likely grow in the mid-single-digit range [this] year.

Rental Market Will Continue to Be Strong

* With Larry Nennemen, director of marketing at Kubota Tractor, Torrance, Calif.

RER: Is the rental equipment market presently an attractive one for equipment manufacturers? Will this continue?

Nennemen: Yes. It is a good market for retail, an excellent market for exposure of product to potential purchasers. It will continue to be good — it may have ups and downs — and will change and evolve, but there will always be customers who prefer to rent.

RER: Do you find the old distribution system (i.e., manufacturers selling to dealers who then sell to rental centers) more or less effective than selling directly to rental centers? Why?

Nennemen: Dealers are an important part of the process of delivering and providing customer satisfaction to the rental industry. The dealership's technical expertise is needed long-term.

RER: The U.S. economy appears to be slowing, and there are concerns over rising inflation. How big of a concern is that for large equipment manufacturers?

Nennemen: A slowing economy is a concern for all manufacturers, large or small. Inventory control will be an important part of management for 2001-2002 for both the manufacturer and the rental industry.

RER: Kubota and other large foreign-owned equipment manufacturers such as JCB obviously think there is a demand for more products than U.S. manufacturers can provide. Do you see that continuing?

Nennemen: The equipment business is a global business — the strong U.S. economy has shifted distribution of product from a global perspective. The continued belief that the U.S. market will support sales has led to increased manufacturing and marketing presence in the U.S. by foreign-owned companies. We believe there will be fluctuations in demand, but there is a solid base for the Kubota-type products.

RER: Is there any interest in manufacturing alternative-fuel equipment, or is it still unreliable and inefficient? Will gasoline and diesel machines always be the most effective?

Nennemen: There must be continued awareness of alternative-fuel equipment or systems. At the same time, considerable work is being done to make gas and diesel engines more efficient and cleaner for the environment. Durability or long life and performance, along with manufacturing cost, continue to be the challenges to making alternative systems acceptable in our industry.

RER: In terms of pricing, will the cost of products rise with the advent of new technology, or will increasing competition keep prices at a competitive/affordable level?

Nennemen: Costs will certainly continue to rise. However, engineering and manufacturing are constantly challenged to compensate for these important factors. Competition on a global scale will continue to keep pressure on manufacturers to be competitive.

PQ: Competition on a global scale will continue to keep pressure on manufacturers to be competitive.

Diversification Through Specialization

* With David Christifulli, vice president of Wacker, Menomonee Falls, Wis.

RER: What changes do you expect to see in the rental industry during the next few years?

Christifulli: I believe we are going to see rental centers diversify to become single supply sources for their customers. You could call it diversification through specialization. Rental centers in the future will offer everything a contractor needs to get a job done, all from under one roof, but geared to specific construction processes. The contractor will think of it as one-stop shopping.

RER: What changes in the manufacturing process do you expect to see during the coming years?

Christifulli: With the consolidated distribution channels less inclined to stock inventory, we will adapt by working with channels in demand replenishment as opposed to inventory replenishment. This readily ties in to and supports vendor-managed inventories, which, in turn, reduce channel inventory costs.

RER: You and the rest of Wacker management have devoted a lot of time to analyzing where the industry is going and the refocusing of the company for the future. Please talk about the restructuring and refocusing within the company.

Christifulli: Wacker concentrates on constant planning and technological innovation, focusing on the ultimate customer, the end-user. When the pace of consolidation began to pick up in the early '90s, Wacker was prepared.

RER: What changes do you expect to see in relationships between the manufacturers, distributors and rental centers?

Christifulli: It's critical that the manufacturers develop intimate business relationships with rental dealers and distributors to better understand each other's business processes. When we have a better understanding of each other's processes, it will help us find more ways to achieve the mutually common goals such as streamlining the business process, improving customer service and lowering warranty costs.

RER: How do manufacturers today have to evolve to keep up with the needs of rental companies as well as end-users?

Christifulli: Today's manufacturers have to eliminate everything that does not add value to the product, the channels and the customer. This should be augmented with high-technology products, training, customer service and improved support throughout the construction process.

RER: How do rental companies have to evolve to keep up with the needs of their customers?

Christifulli: The successful rental company of the future will be the business that understands its customer. They will need to support the needs of their customers with quality products offering the latest features and innovations that will make their customers more productive. To do this they must take advantage of their manufacturers' resources such as training, customer support, service support and marketing assistance.

RER: There is much talk these days about the impact of electronic commerce. What kinds of expectations do your customers have of your company in terms of meeting their needs electronically? In turn, what do you expect from your customers and suppliers?

Christifulli: In the future we see a movement toward a paperless business environment, and rental companies of all sizes will need to evolve toward total electronic commerce. Key suppliers will be partnered and linked, conducting as much business as possible electronically. The ultimate goal of the industry will be a paperless business process.

RER: What kind of economy do you expect in North America in 2001?

Christifulli: Although I have heard the sluggish growth forecasts, we are excited about the growth opportunities in certain segments of the industry. The smart rental center operation will do well to listen to its customers and not the news services.

RER: As equipment evolves during the next few years, specifically the types of equipment your company manufactures, what kind of developments do you expect to see in areas such as ergonomics, engines and diagnostics?

Christifulli: We expect our machines to be designed and manufactured to meet global standards for quality and safety and customer requirements. In general, we will see products with state-of-the-art technology resulting in very high productivity, reduced weight-to-power ratios and new materials for extra strength and durability. And of course, we are going to see a new level of operator- and environmentally friendly equipment.

PQ: Rental centers in the future will offer everything a contractor needs to get a job done, all from under one roof, but geared to specific construction processes.

Government Regulations Could Curb Power Equipment Progress

* With Bill Harley, president of the Outdoor Power Equipment Institute (OPEI)

RER: What are some of the key issues in outdoor power equipment markets during the coming year/s? Are those issues different from years past?

Harley: In the coming years, the OPE industry will be faced with many ongoing issues, and several new ones will emerge. The ongoing issues include emissions, and the biggest one we are currently facing is in California. The California Air Resources Board (CARB) is developing problematic regulations that will require equipment fuel tanks to be “sealed” with one-way venting mechanisms and to be treated with impermeable coatings. Venting restrictions on gravity-fed non-hand-held engines will have a direct adverse impact on constant fuel flow to the engine. Consequently, these venting mechanisms would likely need to be physically linked to the engine so that the vent mechanism opens to the appropriate degree when the engine is operating. CARB is also seriously considering requiring very expensive carbon canisters at least on commercial equipment. Finally CARB envisions a compliant compliance program that would require the OEM to “shed test” the final configured product.

We are also facing ongoing emissions issues nationwide. California Phase II regulations currently apply to newly manufactured hand-held and certain non-hand-held engines. Similar U.S. Environmental Protection Agency (EPA) Phase II regulations for hand-held and non-hand-held equipment will start being implemented in the next few years. These issues will continue to have major impacts on the industry market.

Noise is another big issue, and it is primarily focused on leaf-blower bans in California and Europe. The European Noise Directive will have an impact on all manufacturers who ship lawn mowers to Europe because of required reductions in noise limitations.

Looking ahead, the impact of the Internet on how business is conducted within the industry is likely to be enormous. The trend toward B2B commerce has begun and is growing daily among manufacturers, dealers and distributors. Also, more and more companies are promoting and marketing their products to consumers through their Web sites. Because of the growing trend of manufacturers toward selling through mass merchandisers, there will be fewer dealers in the future. The ones who survive will have active service departments for all products, even those that were not purchased at their dealership. And lastly, industry consolidation will continue in the years to come.

RER: There have been many advances in equipment technology during the last decade. What can customers expect in that field during the years ahead?

Harley: Technological advances resulting in new, improved equipment will benefit customers in several ways. Customers can expect products with engines that will be

*more durable,

*more fuel efficient,

*cleaner (currently, engines run 70 percent cleaner than those manufactured in 1990, and further reductions are expected in the future).

The EPA has recognized that the new cleaner Phase II-compliant products will cost more to manufacture and therefore will be more expensive at retail level. However, in general, the consumer may, in the long run, save money because the new cleaner engines will be more fuel-efficient.

RER: Will federal and state standards and legislation, whether they be air-quality standards, noise restrictions, etc., limit the development of new technology?

Harley: We are concerned that the CARB's equipment fuel tank regulations could have an adverse impact on constant fuel flow to the engine and, in turn, have an adverse impact on engine operation and performance. And, as mentioned above, EPA has recognized that higher manufacturing costs will be a consideration for all new cleaner, Phase II-compliant products.

RER: Is the OPE market growing? Nationally? Internationally? Do you see that continuing?

Harley: The OPE industry and its market are closely tied to the general economic well-being of the country, and several important indicators affect sales and growth. These are weather patterns, disposable income, housing starts and, in the case of commercial equipment, changes in the interest rates. According to OPEI's shipment reports, all key consumer-type lawn-and-garden products showed growth in model year 2000 (Sept. 1, 1999, to Aug. 31, 2000) with an increase of 4.2 percent over 1999. Commercial turf-care equipment realized even more growth with an increase in shipments of 11.3 percent over 1999, and commercial riding units grew by 24.4 percent. However, because rising mortgage rates are having an impact on housing starts, OPEI's forecasts predict declines for consumer equipment and certain commercial equipment for both 2001 and 2002. This industry has a favorable balance of trade overseas, and we expect this to continue.

PQ: Because of the growing trend of manufacturers toward selling through mass merchandisers, there will be fewer dealers in the future.

Consolidators Will Continue to Grow

* With Pete Gladis, CEO of Neff Corp., Miami

RER: Consolidators account for a minority of the rental establishments across North America (compared to the mom-and-pops). Do you see the consolidators' share continuing to grow?

Gladis: The consolidators' market share should continue to grow, the pace of which will be determined by returns experienced within the industry.

RER: The mom-and-pops have always prided themselves on being able to offer better service than the larger chains. Is that just a myth because rarely can they can compete with price, selection and the latest technology?

Gladis: Neff Rental takes pride in the quality of its service offerings, as do smaller, private rental companies. I believe that there will always be a room in the market for independent rental firms to succeed by being able to provide special service to niche accounts.

RER: At some point the market could be saturated by rental stores, both family- and corporate-owned. Is that in the foreseeable future, and if so, what do the Neffs and others envision happening?

Gladis: Saturation in any given market is more related to the total fleet investment available as opposed to the number of locations. All players in the rental industry need to place special focus on ensuring that any given market can sustain returns before committing additional capital investment.

RER: What are some of the main issues and challenges ahead for the large rental corporations?

Gladis: To me, the greatest challenge within the industry is making local-level management more focused on improving returns on investment. Other major challenges involve pricing discipline and the recruitment and training of all positions.

RER: Is the rental climate still a good one? Will it continue in the future?

Gladis: The demand for rental equipment from our customers remains strong. The shift from ownership of equipment toward rental continues and is likely to continue as the rental industry matures. However, for the rental industry to generate the success it would expect from these two strong dynamics, focus needs to be placed on pricing discipline and return on investment.

PQ: I believe that there will always be a room in the market for independent rental firms to succeed by being able to provide special service to niche accounts.

Going Going … Sold

* With Denis Prevost, vice president, major accounts, at Ritchie Bros. Auctioneers, Richmond, British Columbia

RER: There is a sense among many rental companies that when it comes to selling used equipment, retail is the way to go to get the best prices and that auctions are “the method of last resort” where prices are not as good. Why do you recommend using auctions?

Prevost: In many instances, the perceived retail value of equipment is exceeded at an auction. Many rental companies think of us as convenient because we take care of the advertising, the presentation of the equipment, attracting the bidders and eventual buyers, repair and refurbishing if required. Certainly most rental companies have their own sales force, but the sheer quantity of equipment that they need to sell often requires them to look outside their own methods of sale. The sales force tends to go to the same customers in the same region repeatedly, so purchasers are often exhausted.

We see a lot of late-model equipment because we attract buyers from outside the normal sphere of customers. By placing equipment in an auction where buyers include manufacturers, contractors, transport companies, people from the mining, logging, agricultural and many other industries, we can attain a higher price that would transcend the local market that has been, historically, the one the rental companies try to sell to.

There are many costs involved in retailing equipment, including what it costs to put the salesman in a car and make the calls. We also handle collection of the funds, we screen the buyers to make sure they have the money, so there are many cost savings to putting it in an auction that aren't readily seen if you strictly look at the price comparison.

RER: What other services does Ritchie Bros. offer?

Prevost: When a piece of equipment comes into our yard at an auction, we offer an appraisal of its condition and a budget to bring that piece of equipment into the optimum sales condition. We have facilities that allow us to do repairs at a low cost to owners of equipment, including painting, repairing or replacing tires, reupholstering seats, fixing the glass, mechanical repair. We obtain repairs at a low price because the subtrade is giving us a price based on refurbishing hundreds of machines in an auction.

We offer buyers a very large selection of equipment; we could be his one-stop shop. We offer transportation companies that are available on-site to give competitive quotes for the movement of the equipment after it is purchased, customs services and freight-forwarding services for offshore buyers.

We also offer a lot of functions for the buyers. We guarantee clear title; we have a search department to search equipment by owner and serial number to guarantee that whatever is purchased is clear of liens and encumbrances. The buyer can purchase with the knowledge that he's the legal owner and there won't be a sheriff knocking on his door seizing it. We also guarantee Environmental Protection Agency compliance; we check every machine in regard to EPA regulations. If machine does not comply, we contact the manufacturer on behalf of the seller and attempt to get EPA certification. If we can't get it, we won't sell the machine because we don't want the buyer to be saddled with problems because of EPA noncompliance.

On our Web site, we offer buyers a method to compare sales prices; we list all equipment we have sold in the past two years. We also offer online bidding, broadcasting many of our auctions live on the Internet.

RER: In the current market, it seems more equipment is available than ever before, and used equipment is going cheap because there is a glut. Is this a correct assessment?

Prevost: There is a glut in certain categories. For example, there are a lot of aerial work platforms available for sale because of a large supply and decreasing demand, so there's a softening of pricing in that category. But we are seeing pricing maintaining itself at a reasonable level for good, late-model, well-specked equipment. For example, a four-wheel-drive tractor/loader/backhoe with extend-a-hoe is bringing in very good money, yet there is a softening for two-wheel-drive units without extend-a-hoe capabilities. If equipment is well-maintained and well-specked and put in an auction with drawing power that attracts people from other industries and other locations bidding against each other, it will get world fair-market price.

RER: Will electronic/Internet auctions play an important role in the sale of used equipment in the future? What impact will this have on the market?

Prevost: Internet auctions are becoming more commonplace. Whether or not they are attracting the same types of buyers as physical auctions, I can't say, but the key to getting good prices on equipment sold by auction is to have enough buyers bidding against each other. Eventually Internet auction sites may attract large quantities of buyers, but we're not seeing major successes in strictly Internet auctions right now. Eventually it will be more accepted, but people still like to see, touch and feel equipment.

RER: Ritchie sells a considerable quantity of new equipment through its auctions. Why is new equipment sold through auctions, and what kinds of values are available?

Prevost: We get it from many sources. Sometimes a dealer has new equipment he can't sell in the local market, so he'll expose it to the large variety of buyers an auction attracts. Sometimes we'll receive it directly from a manufacturer because the manufacturer wants to increase its market share by going to end-users his dealers don't have access to. Our exposure through our advertising can be valuable to increase customer awareness of their product. In many cases, we get higher pricing than they can when they sell to their dealers because dealers will be at the auction and bid up to the price they'd normally pay and then stop, but the end-user is prepared to go higher.

The benefit to manufacturers and dealers is that if an end-user buys their equipment through the auction and is satisfied, he becomes a new customer, and when he wants another, he might call the dealer. Also, the dealer gets more parts and services, and the manufacturer increases market share.

RER: What changes do you expect to see in the distribution channel between manufacturers, distributors and rental companies?

Prevost: Manufacturers are being increasingly forced to take trades, and we're getting a lot of this used rental equipment from the manufacturers rather than from the rental companies. Manufacturers are forced to maintain their market share by dealing with these rental companies. With the purchasing power and clout these rental companies have, they can demand certain pricing and availability programs, so the manufacturer is being forced to deliver it when the rental company wants to accept it rather than when they want to build it. Distributors are becoming more of a parts-and-service supply channel rather than a source of new equipment.

RER: What changes and trends do you expect to see in the equipment rental industry during the next few years?

Prevost: Consolidation has slowed down; rental companies are forced to show increased revenue through good operation of the company, not just through acquisitions. Those who have good programs in place will succeed and survive. Rental companies that lack the systems to operate their companies profitably are becoming less of a force in the market. Companies with relationships, I believe, will survive in the long term. It's a people business.

PQ: Rental companies that lack the systems to operate their companies profitably are becoming less of a force in the market.