RENTAL PLANET PART II

“The monthly rental rate for large excavators (hydraulic shovel) … has declined the most; the current rental rate is approximately 55 percent of the rate 10 years ago.”

Although the industry still has along way to go in the Mediterranean countries and Eastern Europe, the year 2000 may come to be seen as significant in the creation of a truly pan-European rental industry.

“The smaller companies tend to be more adaptable. They do tend to go the extra mile, and they do tend get closer to the customer. However, that customer is changing.”

“Eleven years ago when we opened Atut Rental, you could rent equipment at rates bearing no correlation to the value of the equipment — for example, a bottle of vodka! This thankfully has changed.”

With Yuichi Takayama,
Kanamoto Co.,
Hokkaido, Japan

RER: How has the equipment rental business in Japan changed over the last decade?

Takayama: The equipment rental business in Japan has changed in three ways over the last decade.

First, the percentage of rental equipment used by construction companies at job sites has increased dramatically. The percentage of rented construction equipment used by general contractors increased nearly 25 percent from 1990 to 1999, and the average for all construction firms including subcontractors rose 11.5 percent.

The second change has been the decline in rental rates. Although there are large variations in the size of this decline depending upon the region, season and type of equipment, if we take the monthly rental rate for large excavators (hydraulic shovel) as an example, which has declined the most, the current rental rate is approximately 55 percent of the rate 10 years ago. Please note there are also many types of equipment whose rental rates are nearly unchanged from 10 years ago.

The third change is the increase in rental demand accompanied by a sharp drop in construction equipment sales, putting pressure on construction equipment manufacturers' revenues. To counter this trend, many manufacturer-affiliated dealers have entered the construction equipment rental business since the mid-1990s.

The economy is slowing in America and many say that will encourage people to rent rather than buy equipment. Has the slowing of the Japanese economy hurt or helped rental businesses?

As in the U.S., the construction industry in Japan is greatly affected by the trend in construction investment. The question of how to overcome the decline in revenue that is resulting from the review of public works spending is a major issue today for all construction industry-related firms in Japan.

Currently, there are large differences in scale among Japanese construction companies, and construction companies are making all-out efforts to rationalize management, such as reducing the bad debts that they have been holding or reducing assets. Against this backdrop, companies are utilizing, outsourcing and lightening their balance sheets rather than investing in equipment. As a result, the percentage of construction equipment that is rented has been climbing quickly.

So we can say that the current economic situation in Japan has been a boon for the expansion of the construction equipment rental business.

What is the most difficult part of operating a rental company in Japan?

The most difficult parts are computerized management, the presence or lack of a broad-area branch network, and capital strength.

All of the information concerning construction equipment used for rentals should be managed at each point. It is meaningless if a company cannot instantly know what equipment it can rent and calculate its revenue and profit. Kanamoto built its own online network in 1985, which we have periodically upgraded, connecting all of our branches and instantaneously evaluating the status of any piece of equipment.

The construction equipment rental industry is a business that requires large amounts of capital for purposes such as equipment purchases or storage yards. In other words, banks will decide how much credit they can provide to a rental company. Unfortunately, there is a limit to the size of a credit line that can be obtained from banks. Currently, there are many small and medium-sized companies in Japan that cannot even get such credit lines.

Finally, a broad-area network is required in Japan because the periods of peak demand in Japan's construction industry vary according to region and season. An equipment rental company must have a network that allows it to move assets to locations where they can be most profitably employed in order to effectively utilize rental assets and also minimize swings in profitability.

Kanamoto has been able to dominate eastern Japan where we have 120 branches. But because we have not developed our own branches in western Japan, we are building a system to supply our assets there by concluding alliances with the equipment rental companies that are strong in their respective regions in western Japan.

What is the outlook for Japanese equipment rental during the coming years?

Although Japan's economy will continue its slow recovery, one key uncertainty will be the uncertainties in the political situations in both Japan and the U.S. When added to the fact that still more time will be required for personnel adjustments by Japanese firms, full recovery remains a number of months away.

With regard to the environment surrounding the construction equipment rental industry, the central government's second supplementary budget approved in November will ensure robust business expenditure during the first half of our company's fiscal year ending in October.

On the other hand, changes such as a decision to cancel 210 public works projects and reduce expenditures by 2,500 billion yen [$21.4 billion] mean that, as expected, the overall direction will undoubtedly be toward large cutbacks in public works spending.

We do however expect the percentage of construction equipment rentals by construction firms will continue to increase annually as companies strive to maintain profitability.

At the same time, the intensifying competition to survive the shakeout in the rental equipment industry is becoming more severe each day, calling for extraordinary efforts to maintain profitability. The industry now finds itself in an era of survival of the fittest.

What role does the Internet play in equipment rental in Japan?

A number of large general contractors in Japan recently established a Web site called Construction-ec.com for receipt of construction equipment rental orders, so the industry has finally begun to test this medium for business.

The Web site is expected to further simplify the procurement of construction materials and provide low prices and also handle construction equipment rentals.

Other than that, construction equipment rental companies are selling their used rental assets on their company home page or through Web sites of specialized companies, but most activity with regard to rentals consists of inquiries via e-mail.

Greater use of the Internet has not developed because there are many small and medium-size firms among both equipment rental companies and construction companies, and these firms have not yet created the computer infrastructure to utilize the Internet effectively.

With Paul Conalty,
Hire Centres Dublin North,
Dublin, Ireland;
and John Coyne,
Hire Association Europe,
Birmingham, England

RER: In recent years, the North American rental industry has changed dramatically, primarily in the areas of consolidation and acquisitions with the larger national chains purchasing smaller family-run businesses. What are some of the major changes occurring in European rental?

Conalty: Europe is not that different with regard to acquisitions, particularly in the U.K. and Ireland, where we have seen massive growth in the presence of nationals. More recently we have seen the acquisition of medium to large multibranch depots, mostly in the construction industry. At the moment there are about five national companies controlling some 1,200 depots throughout the U.K. and Ireland.

The rental (“hire”) market has seen many changes over the years. Due to a fairly buoyant economy for the last four years, the skylines are filled with tower cranes; earthmovers are getting bigger all the time; and large plants tend to be winning out on the long-term rentals.

The standard of corporate hospitality is certainly a major player in the industry.

How have the euro and strengthening of the European Union affected rental?

Conalty: Since its inception the euro has traded weakly against foreign exchange. This has obviously made purchasing expensive for euro state members to purchase outside the euro zone. The U.K., on the other hand, has not yet entered the euro, and therefore purchasing has been a bit easier, but exports seem to suffer.

Interest rates have remained quite low in the euro zone, and [that] has helped smaller rental firms finance larger equipment. It is expected that Europe will sustain strong economic growth in 2001, and the view expressed by the European Central Bank is that robust growth in the euro zone can sustain interest rates at their present level (4.75 percent).

What role does rental in Ireland play in the overall European picture?

Conalty: In Ireland, we have experienced the longest-ever sustained boom in the residential and commercial market. Construction figures show that we have doubled residential output since 1994. This represents a 100 percent increase over the number of homes being produced five years ago. In the same period, house prices have taken the same step; the average new home in Dublin costs well over £200,000 ($290,000+). Not good news for first-time buyers, but with the trend set to continue, the construction rental market will continue to invest in new equipment to meet the demands.

What is the outlook for European equipment rental during the coming years?

Coyne: The outlook for rental in mainland Europe is very healthy with continuing development and acquisitions. Although the industry still has along way to go in the Mediterranean countries and Eastern Europe, the year 2000 may come to be seen as significant in the creation of a truly pan-European rental industry.

Hertz Equipment Rental Corporation made steady progress acquiring major rental companies in Spain and France and is now claiming to be the number two renter in France and number one in Spain. Caterpillar believes it will have around 250 Cat Rental stores in Europe with the majority of these renting before mid-2001. One byproduct of all this consolidation is the impact it has on small and medium-sized companies. In the aerial platform industry in particular, groups of small renters are getting together to seek ways to compete with the rental giants. No doubt 2001 and onward will see the full acting-out of the logic of consolidation.

What role does the Internet play in equipment rental in Ireland and Europe?

Coyne: The Internet impacts us more each day, and yet in the U.K. and Europe the rental industry lags behind most other businesses in its use of Information technology. A recent survey by rental software company MCS revealed that less than 10 percent — mainly the national companies — were already developing e-business as part of their business offerings.

Another 20 percent, particularly small rental operations, had no immediate intention of looking at e-business, while the remaining 70 percent knew that they had to offer some form of e-business service but didn't fully understand how to go about it or were unsure about its benefits.

With Mark Sinclair,
Hire Industry Association of New Zealand,
Auckland, N.Z.

RER: In the U.S., family-run rental businesses outnumber national chains. Is that the case in New Zealand as well? Is it changing one way or another?

Sinclair: In New Zealand, there are no publicly listed rental companies; they are all privately owned or owned as part of a public company. Virtually all companies began as a private family business. As in the U.S., private family companies far outnumber the larger players. I would estimate, however, that the eight largest companies in New Zealand have 45 percent to 50 percent of the market with the remaining 200 sharing the rest.

The larger companies are growing at the expense of the smaller ones. However, whereas this was almost all by acquisition through the ’90s, in the last two years there has been a slight shift towards greenfield startups by the larger companies as they develop what they perceive as unique selling propositions and ways of doing business [that] former owners may have difficulty with if they are employed as managers.

Many family-run U.S. businesses stress the value of long-time relationships with their customers and great personal service and think the larger chains cannot provide the same service. What do the family-run businesses in New Zealand offer their customers?

The same “personal service” is claimed as being the major benefit of the smaller family business, and in many areas this is true.

The smaller companies tend to be more adaptable. They do tend to go the extra mile and they do tend to get closer to the customer. However, that customer is changing. Sales agreements and contracts mean staff are allowed less discretion. Nowadays, the head office will dictate where the equipment is to be hired rather than leaving the decision to local supervisors or managers.

The bigger companies try to make up for the lesser personal touch with a bigger range of gear that is generally more modern. An interesting development has been to see many smaller companies develop arrangements with “big brother” for rehire of larger plant items. At the same time, the larger companies will use the smaller firms for specialist gear or in areas where it would be uneconomic to open a branch.

Has the general population in New Zealand warmed to the advantages of equipment rental?

This is a complex area. Most rental companies started from small beginnings in the DIY or small contractor area. As equipment has become cheaper through the bulk merchants, especially power tools, there has been a trend toward ownership of this type of gear by the home handyman.

The process of changing public perception toward rental is really in the hands of the rental companies. To date, attempts to promote rental on an industry-wide basis have not been successful in New Zealand.

In the heavy construction area, people are aware that rental may be a more economic option. However, there also has to be a greater participation by rental companies in the overall logistics of equipment supply to major contracts, i.e., a total package. To date, this concept has not been developed to its full potential in New Zealand.

What are the major issues and challenges ahead for New Zealand rental companies both large and small?

• To change the image of rental from a basic equipment yard to specialist “know-how centers,” i.e., we don't sell drills, we sell holes.

• To maintain rates at levels [that] permit the upgrade and replacement of gear over much shorter periods than was the case in the past. Rental companies have all too often become price takers rather than price setters.

• Safety of the end-user. The liability of the rental company in the case of an accident is now more clearly defined in law. As a result, rental companies are required to make greater efforts to ensure that the customer uses their equipment correctly and safely.

• Disposal of excess equipment. In a small market the size of New Zealand (4 million people), the ability to sell excess equipment without depleting the total market for rental is limited. Companies and suppliers need to develop better markets for surplus equipment.

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

The New Zealand rental industry has a great future if it is prepared to change and adapt to the requirements of modern customers. This will require greater sophistication in all areas from administration through training and equipment quality.

The fundamentals of the rental industry are strong in that it is essentially a domestic service industry that can respond to local market demands in a short time. Rental is really only a different way of selling equipment over a different life cycle.

The rental climate here is very much affected by gross domestic product growth in the domestic economy. Today, the outlook is not strong. In the medium term we can expect to see the process of rationalization continue either by acquisition or by competitive failure, the outcome being that the overall market is not expected to grow significantly and as such a large number of rental businesses will compete to increase their share of a pie that is not growing.

With Margaret Felicka and John Monaghan,
Atut Rental,
Warsaw, Poland

RER: In many countries, convincing people to rent equipment instead of buying it is difficult. Is that true in Poland?

Monaghan: Yes, but the attitude to renting is changing. The perception in Poland for many years was that it was better to own than rent. With the restrictions on available capital and the diversity of construction work available, rental is seen as a sensible option.

How has the rental industry in Poland changed over the last five or 10 years?

Monaghan: Eleven years ago when we opened Atut Rental, you could rent equipment at rates bearing no correlation to the value of the equipment — for example, a bottle of vodka! This thankfully has changed, although our rental rates do not match those in the U.S. During our first five years, we had a struggle to invest sensibly to meet the broad range of customers' requests.

About five years ago, our competition increased, mostly from companies outside of Poland. The changes have been for the better with increased competition resulting in increased awareness of the rental concept.

How have all the recent changes in Eastern Europe affected the rental industry in Poland?

Felicka: As we operate solely in Poland, the external economies of other East European countries do not greatly concern us. However, the financial crisis in Russia discouraged foreign investors [from] taking the step of investing in Poland as a “toe in the water” or staging post to Russia. This impacted on the construction industry and saw an end of the boom of ’96-’98.

Do you see the industry improving or declining during the next five years?

Felicka: The industry will definitely improve in the next five years, and the trend to rent will increase. Already large rental companies from Holland and Scandinavia are acquiring or opening Polish operations. The pre-membership stage and joining of the European Group will [bring] and is bringing significant opportunities for rental.

What is the most difficult part of running a rental company in Poland?

Monaghan: The most difficult part of doing business in Poland is doing business in Poland! We have a new economy, new people and a history of foreign domination and invasion. Difficulties we encounter are no different from other countries — finding good people, getting paid and combating fraud and theft. Combine this with the fact that many proven systems and solutions must be with a unique Polish slant, and you have a big need for a partnership of Pole and rental operator.

How closely do you follow the industry in other countries, and does that affect the way you do business?

Felicka: We attend ARA, Hirex and the German Bauma exhibitions. The ARA is particularly helpful, and we note the trend of consolidation in the U.K. and USA. We have close contacts with the GAP Group in the U.K., [which is] a great example of a small company growing to be a major player while having competition from huge rental companies. This experience is what we now have in Poland.

Atut Rental does not reinvent the wheel. The impact of these exhibitions and contacts impact us in the most positive way. They open me up to new job methods, contacts and provide personal growth opportunities to our team members in each of our three locations.

PQ: “Eleven years ago when we opened Atut Rental, you could rent equipment at rates bearing no correlation to the value of the equipment — for example, a bottle of vodka! This thankfully has changed.”

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