Fewer Bells and Whistles

Jan. 1, 2006
RER: How will China and Chinese construction products affect the United States rental market? Johnson: Having been in the material handling business,

RER: How will China and Chinese construction products affect the United States rental market?

Johnson: Having been in the material handling business, MMD has seen and evaluated a number of forklifts from China. The products were not far from being competent, but it seemed that the Chinese manufacturers were not obsessed with quality, nor were they mindful of customer support, the way Japanese and German companies have been for the past 20 to 30 years. Until the Chinese, as a whole, begin to understand that they cannot just drop a fairly technical product into the U.S. market without strong support, they will not be a factor in many of our more sophisticated industries. They must invest in a support infrastructure for their products as well. However, it is my belief that they will eventually learn to do what is necessary to be a player here, particularly considering their desire to produce automobiles for the U.S. market.

Consider these two interesting facts from Ted C. Fishman's great book, China, Inc.:

First of all, 300 million rural Chinese, a group equal in size to the population of the U.S. today, will move from the countryside to the cities in the next 15 years, looking for jobs that will lead to a higher standard of living. China must build infrastructure equal to Houston every month in order to house, feed and service these masses.

Secondly, China has somewhere between 100 and 160 cities of one million or more people, depending on official estimates, compared to nine in the U.S. and 36 in all of Eastern and Western Europe.

These two facts alone indicate that China has the labor force, and presumably the desire, to be productive enough to supply the entire world with a variety of products, including machinery for rental. China's hunger, literal and figurative, will keep them competitive for years to come. And they will do whatever is necessary to be world players. They are extremely intelligent people. We should not underestimate them.

We are already seeing many components of Chinese origin being sold to U.S. rental centers. And, a number of traditional U.S. and Japanese companies are beginning to produce some parts of their whole goods product lines in China. Even the Europeans are getting in on the act of outsourcing to China. So, there is already some penetration in the U.S. rental industry, even if it is indirect. But, the most important question is, when will traditional Chinese companies be able to produce world-class products on their own, without help from U.S., Japanese or European companies? My guess is that they are between two and five years away.

Do you expect to see more expansion from the larger players in the rental market?

Based on Sunbelt's aggressiveness over the past year, I think we will see further expansion by national rental companies in 2006. But, I think there might be a greater emphasis on the purchase of higher quality rental companies, rather than the acquisition of just bricks and mortar. I don't see an arms race like we have seen in previous rounds. I think some lessons have been learned. Many of us were puzzled at the types of companies acquired, and the prices paid for them in the past.

I believe larger independent companies such as Northridge in Southern California and smaller independents like Commercial Surroundings in Florida will always be desirable, because they are unique and do what they do very well. But, in my conversations with some of the younger rental company owners around the country, a number of them have expressed to me that they are always open to an offer from a national chain. There does not seem to be as big of an attachment to their businesses as with owners in the past. It sometimes makes me feel that some of the independents see themselves as “farm teams” for the larger national companies.

What economic trends do you expect to see over the next few years?

MMD is expecting 2006 to be another great year. I think most of our competitors would agree that there is a fairly large (and comforting) backlog of orders out there. I have even heard that one of the top access equipment manufacturers is already sold out for all of 2006. Furthermore, there is a shortage of some generator models, spanning a number of manufacturers that might not be cleared up until well into the third or fourth quarter of 2006. Of course, natural disasters have had a great deal to do with it.

But, the orders are real and solid. We are not even thinking about a slowdown. In fact, looking even further ahead, we expect 2007 to be a good year, perhaps still increasing, but at a decreasing rate. Gold prices are running up, which some say indicates nervousness on the part of investors. Another factor is housing. But, economists can't really agree if the housing market is in trouble. My personal feeling is that the housing market may be in for a slight correction. I don't see any kind of housing market bust during the next two years, unless mortgage interest rates get above eight percent. Early winter housing numbers continue to be positive.

What will rental companies want from manufacturers in terms of products?

We are seeing a desire on the part of rental customers to get back to more basic machines, with fewer bells and whistles. Certainly, it is less expensive to build machines that are based on sophisticated packaged electronics. But, we have found that most rental companies prefer analog to digital, just from the standpoint of customer understanding, durability and ease of repair. For example, some electronic components on certain types of equipment can never be insulated in such a way that they will be protected from pressure washing. One of the largest and most respected independent rental companies in the country recently gave us a large order because they felt that our product was simpler, more reliable and less confusing.

If a manufacturer is committed to adding features, there must be real value. Such is the case with our Electronic Fuel Prime (EFPA) system, which automatically bleeds air when a machine has run out of diesel fuel. For the most part, this eliminates the need for a field service call, which can potentially save a lot of money over the life of a machine. It is available on our compressors and towable generators. In conclusion, technology is only valuable to the customer if it enhances performance, improves reliability or reduces the cost of the product. The bottom line is that reliability has the biggest impact on return on investment. Most rental companies understand the relationship.

What kinds of products are you looking to for growth?

MMD is always interested in unique products that will give us some kind of market edge. And, because our parent company is so well positioned globally, we get a look at many different products from a multitude of manufacturers, in a number of countries. One such product is Farrow System from the U.K. It is best described as an environmentally friendly alternative to sandblasting.

Using a small air compressor tied to a unique and patented media delivery system, it can clean a variety of surfaces without doing damage, and without any major environmental concerns. It can be used to remove graffiti and in almost any other type of surface-cleaning application, large or small. It has been used in Europe to clean priceless artifacts and important historical landmarks. In our opinion, it offers many advantages compared to traditional sandblasting. Since introducing the product on the East Coast several months ago, we have experienced strong demand and rapid growth.

As a New Orleans native, Hurricane Katrina was of great concern to you, even though you no longer reside there. Any thoughts about New Orleans and its future?

Frankly speaking, I am not as optimistic about New Orleans as some native New Orleanians are. New Orleans was in considerable trouble even before Katrina arrived. It was crime- and poverty-stricken, with a poor primary educational system, and it was heading for a disaster of some kind, natural or otherwise.

If New Orleans is to be meaningfully rebuilt, it will have to be done with federal money, starting with the strengthening of the levees. New Orleans relies on the tourist industry for most of its commerce. But, unfortunately, most of the tourism-related jobs do not pay well enough to provide a catalyst for economic growth.

On the other hand, tourism must return in a big way before the most important assets of the city can recover, and be preserved as they were before the storm. Locals cannot alone support expensive French Quarter restaurants and hotels.

I commend ARA for committing to New Orleans for the 2007 ARA Rental Show. They showed a lot of compassion and courage. Many companies and organizations will have to make similarly tough decisions.

I went through Hurricane Betsy in 1965. While the flooding was not as wide-spread or severe as it was this past summer, it was devastating to many of the residents of the lower 9th Ward and St. Bernard Parish who had 6 to 8 feet of brackish water in their homes for almost one week. Interestingly enough, the levee broke in almost the same spot in 1965. So, some lessons still must be learned. It is my feeling that the levees must be rebuilt to stand at least a Category 4 storm before many of the residents will return. And few companies would locate new businesses there, knowing another Katrina could be right around the corner. Therefore, if New Orleans is not committed to the fundamental idea of protecting its people, why should anyone else care?

I believe New Orleans will get the help it needs if it sends the message that it is willing to help itself. The culture will eventually return if the city is rebuilt competently.

Yes, FEMA did a poor job in a very tough situation. But, no one associated with the aftermath of that disaster is in a position to point fingers or gloat. It looked to me like tag-team failure. It seems like the private sector, including rental companies, did the best job of distinguishing itself.

How much will you be affected by the rising costs of materials?

At one point, our steel prices had risen by 80 percent and freight costs, because of escalating fuel prices, were increasing on a daily basis.

China was part of the problem, because of its incredible consumption of raw materials. But, our ravenous consumption of natural resources here in the U.S. contributed as well.

Fortunately, we were able to engage in strong negotiations with suppliers to keep price escalation to a minimum. Like other suppliers, we passed on some increases to our customers. But, we were always mindful that we had to do our part in the equation. It was only after we did everything possible to cut costs that we passed anything on. We absorbed most of the additional expenses, banking on the proposition that the inflation would be temporary.

What is happening at MMD with regard to addressing an expanding market?

First of all, MMD got out of a very active forklift business last year to concentrate on the construction equipment market sector, with a particular focus on the rental industry. Like many companies in this economy, MMD is growing very fast.

Five years ago the forklift business contributed about 70 percent of MMD's total revenues. At the end of our fiscal year in March of 2006, we will be about equal to last year in sales, even without the forklift business. Other areas of growth have made it exciting.

We signed an agreement with Komatsu's Utility Division a few months ago to market and sell a selected line of Komatsu compact excavators to certain segments of the U.S. rental industry. Given the growth projections for the compact excavator market, we are excited about this opportunity.

First and foremost, we are looking for a number of people, mostly sales and sales-administrative related, to help us to interface more effectively with more customers. We have several new product lines to develop.

How has selling to rental companies changed?

Selling has always been and will always be based on relationships. The difference is that the relationships are much harder to build today. People are busier and more distracted. Staffs are smaller and people have more overall responsibility. There is less time to talk. It seems that it is harder to build market share, mainly because it is hard to find the time and opportunity to make strong points with a potential customer. But, even though things have changed, I would rather be doing business in this market than any other market in the country.

What will rental companies be looking for in 2006?

Good value, strong after-market support and excellent financing, leading to a strong return on investment. It is fairly simple. Customers are looking for suppliers they can trust. And, they want to be treated fairly.

Rental customers want inventory, when they need it and when it is promised. They want a great piece of equipment that stays on the job. And, since rental companies are sometimes “cash-flow businesses,” they need excellent financing.

MMD is supplying some after-market parts for various competitive machines. This is not something that is necessarily expected from a supplier. But, it solves an additional problem for our customers and keeps them out of the tedious task of finding difficult-to-source parts. Maybe we can even save them some money along the way.

Other than your own, which products have been the most important to the rental market over the past 25 years?

Not including some of the products we sell, I would say it would be the skid-steer loader. Rental companies continue to enjoy strong revenues from these machines and continue to add them to their fleets in fairly large numbers.

The U.S. market is in excess of 60,000 machines, so skid steers are certainly well entrenched, so to speak, in the fiber of the rental market.

The latest trend in this area seems to be track machines. But, the traditional rubber-tired skid-steer loader appears to have a tremendous run still ahead.

Suppliers have done an excellent job of keeping these products viable, with strong products and useful attachment packages.

Many rental companies claim skid-steer loaders as their most important and most profitable products. Conversely, I believe that compact excavators may be one of the top rental items in the future. In only three years, we have seen the U.S. market grow from about 14,000 units to approximately 25,000 units in 2005.

The Japanese market for compact excavators has already reached 60,000 units, equal to the number of skid-steer loaders that are sold in the U.S. So, I feel that my opinion is on fairly solid ground.