Picking Your Partner’s Pocket is Not the Answer

Always candid and not afraid to be outspoken, Terex CEO Ron DeFeo offers thoughts about the value of private equity investment, the future of Genie, relationships between manufacturers and rental companies, and more.

RER: Last year you spoke about the importance of rental companies keeping their rates up to enhance profitability. How much did this occur in 2006 to your knowledge, and what do you expect to see in 2007?

DeFeo: Rate increases have meaningfully improved the profitability of rental companies and I look for this to continue, although at a slower pace in 2007. Pricing discipline is a marketing tactic that is well known to businesses. It applies to this industry but retail pricing is almost always local. This is what makes understanding this and planning it for many rental companies very hard.

What trends do you expect to see in the rental industry in 2007?

Rental companies have attracted independent capital. Some call it private equity, and these investors expect a return. This is healthy for the industry. How the returns are achieved however might not be healthy for the supply chain or customer base, however. Unlike many businesses this is one that can be bled for a while without killing the patient. The trick is to know when you must bring in fresh capital because without fresh assets to rent, the business model goes out the window. This is a “watch out” area for 2007.

When Terex acquired Genie a few years ago, many in the industry were skeptical about whether Genie would fit into the structure of a larger company and maintain its unique strengths. However, it seems to have prospered under Terex. What are the strengths of the Genie brand, how has it integrated and what plans can you share about its future?

Many have been skeptical of Terex over my 15 years now. This is healthy, and I welcome this as it demonstrates we are trying new things and bringing change to the industry. This is how value gets created. I agree with your assessment of Genie. It has flourished under Terex ownership and I expect even greater things. Look for continued great customer service, more products and a better global representation.

Last year you said Terex, after growing by acquisition, was transitioning more into organic growth, integration of its divisions and operational improvement as a path to growth. Was 2006 successful in this respect and is that likely to be the continuing direction in 2007?

2006 was the best year we have ever had. Wow. However, 2007 looks to be even better and the impact of building a deeper operating capability is still in the very early stages for us. We are really fortunate to have attracted some terrific new leaders to team up with an already first-rate leadership group. We feel the best is yet to come.

Telematics systems are becoming commonly used by rental companies as a means of operating fleets more efficiently. I expect that in the next few years manufacturers will be expected to offer telematics systems as standard or as value-added options. Any thoughts on this?

We do not want to be a leader here but will be a fast follower if appropriate, and listen to our customers.

What are some of the pressures currently effecting manufacturers that you would like customers — particularly in the rental and distribution businesses — to understand better?

I want to emphasize that rental is not just a channel. It is a method of ownership and usage that is growing because of economics. Just as certain economics favor rental, there are also circumstances where ownership makes sense for the customer (and not rental). We need to decide: Are we in the business of selling what we do or are we in the business of meeting customer needs? I think the latter.

What are some of the trends you expect to see more of in the rental market in the foreseeable future?

Stay focused on the fundamentals and make customer intimacy a way of life not just a slogan. Rental companies need to have better fleet management and partnerships with manufacturers that are built on trust and mutual respect.

What changes do you expect to see in the relationship between manufacturers and rental companies?

It is hard to say here. I know we need common goals and alignment. However, so many relationships are transactional in nature that this is worrisome. This is not how the industry will grow. There are top-tier brands and then there are others. Rental companies and their manufacturers need to stop non-customer value-added activities. You do not make money picking your partner's pocket. You make money working and collaborating with that partner.

Any changes you expect to see in the manufacturing process in the foreseeable future?

Lean processes will continue to grow and more global sourcing will be prevalent.

I'm glad you mentioned lean processes. What do you think of the concept of lean manufacturing, and is this part of the Terex philosophy?

We introduced the Terex Business System (TBS) in 2005 and we will stay on this journey for the next decade at least. We are changing a culture and moving to eliminate muda (waste) and this is the mission at all levels in order to be much more customer and investor responsive.

Do you foresee continuing acquisition activity by Terex in the coming year? Do you foresee continuing acquisition activity among manufacturers overall?

Terex has believed in acquisitions since our beginning. This will be a core part of our future as it has been our past. Other manufacturers will continue to do the same but perhaps not in the same way as Terex.

What do you expect from the economy in 2007 and how that relates to our industry?

I think we will have more choppy markets than in 2006 but the fundamentals still favor growth over recession. We must not just judge the economy by the trends in North America, which in the short term will be somewhat negative due to the housing slowdown. In 2007, rental companies in North America should have a very positive cash flow experience.

Any additional thoughts you'd like to share?

Yes. We need to keep making our industry an attractive place where young people can seek a great career. We need better outreach to universities and skill-based learning institutions. We have a future to build.