Disruption is the Norm for U.S. Heavy Equipment Manufacturers

September 2019

Todd Hinz, Senior Manager – Fixed Assets – Valuation & Business Analytics, BDO USA, LLP
 
Between the rapidly shifting geopolitical and macroeconomic landscape and the growth of Industry 4.0, disruption is the new status quo. The highly globalized manufacturing industry is susceptible to changes in international economic conditions that affect imports and exports across sectors. Steel prices, which have experienced significant volatility during this period, have significant impact on revenue and profitability. At the same time, savvy manufacturers are capitalizing on the opportunity that Industry 4.0 provides to both improve their bottom line and spur top-line growth—regardless of the market conditions. The heavy equipment manufacturers that will thrive are taking a bird’s eye view of their industry—and that of their customers. To weather disruption, it’s not only about seeking opportunities to drive greater efficiency and profitability; it’s recognizing a fundamental shift in customer demand that can’t be met by traditional manufacturing methods. 
 

Navigating Market Volatility

Particularly during times of economic and geopolitical uncertainty, being lean and forward thinking is more important than ever before. The American heavy equipment industry is expected to see continued pressure from international manufacturers and input costs, primarily due to increasing demand for construction materials from improving international construction markets. In these international markets, as the U.S. dollar further appreciates, U.S.-made products become comparatively more expensive, depressing demand and stifling revenue growth. The U.S. industry revenue is forecast to rise at an average rate of 1.7% over the next five years[1]. While the industry is already experiencing a high level of competition from international producers, profitability is expected to remain steady as steel prices grow and domestic demand increases—provided that companies are able to move with agility to compete both domestically and abroad.
 

Manufacturing Innovation

Across the heavy equipment manufacturing spectrum, the technologies ushering in this fourth industrial revolution are already here and boosting efficiencies for manufacturers and their customers in a number of ways. For example:
 
In the construction industry, time consuming tasks such as inspections and surveys have been sped up using drones that can allow a single inspector to “walk” through a structure from a safe location. Construction Automation recently released a robot named SAM 100. The robot, whose name stands for “Semi-Automated Mason”, can place between 300 and 400 bricks an hour, compared to a human which can only lay around 60 to 75 bricks an hour [2].
 
In another case, Built Robotics has developed retrofit kits to create autonomous dozers, excavators, and skid steers for use on construction sites. The retrofit kits allow operators to quickly switch between automated tasks and where manual operations is preferred. The autonomous dozer can handle finish grading, spreading and pushing material, and ripping and track walking. On the excavator, the primary jobs are foundation excavation, trenching and loading trucks[3].
 
At the same time, the mining industry has seen a boom in automation ranging from robotic drills to self-driving trucks. Large autonomous haul trucks have been deployed in Australia and can run for 23 hours a day. In fact, autonomous haul trucks lugged over one billion tons of both ore and waste material across five sites in Western Australia. With more than 80 autonomous Komatsu trucks currently operating and plans in place to increase this to more than 140 by the end of 2019, the pace of automation is accelerating rapidly[4]. It should be noted that there have been zero injuries attributed to autonomous haul trucks since deployment, highlighting their significant safety advantages. 
 
Manufacturers attuned to these market shifts are not only changing their machines, they’re altering their financing and business models. Longer lead times for new equipment orders are the new normal, as machines become more complex and digitally integrated. Sixty-day waiting periods are no longer realistic for new machines; depending on the manufacturer and machine—six to nine months is now the typical lead time for a piece of new equipment. As a result, operators in the heavy equipment industry are increasingly looking to buy used equipment rather than purchase new machinery. Quality pre-owned machines were scarce in 2018, which is good news for those looking to sell but challenging for those interested in buying—whereas in the latter half of 2018, more used machinery was available at auctions. That’s expected to hold true in 2019, great news again for those looking to invest in used machines[5].  
 
One example of this new model in action is Caterpillar’s 2017 acquisition of Yard Club to help facilitate deal rentals and sales—changing how their equipment ends up in the hands of operators. Yard Club will begin to work with Caterpillar dealers to help them sell and rent heavy construction equipment to contractors and construction crews. In this challenging environment, the acquisition has created new ways for Caterpillar to expand its distribution network.   
 
The future performance of the heavy equipment industry will continue to experience some ups and downs, but for now it is still bright. According to IBISWorld, over the next five years, business conditions are expected to strengthen in the machinery manufacturing industry. Improvements in domestic economic factors are expected to bode well for U.S. manufacturers as construction companies demand more equipment. However, companies can’t get too comfortable—an organization doesn’t necessarily need to exhibit poor performance to be at risk of falling behind. According to BDO’s Middle Market Industry 4.0 Benchmarking Survey, middle market manufacturers are most concerned that failure to adequately invest in Industry 4.0 will lead to encroachment from non-traditional competitors. Companies without traditional manufacturing roots have the potential to disrupt manufacturing as technology lowers costly barriers to entry. Adequate Industry 4.0 planning and investment is non-negotiable—it’s crucial to a manufacturers’ survival and success. Manufacturers that don’t start their Industry 4.0 journeys today risk falling behind tomorrow.  
 
[1] https://www.ibisworld.com/
[2] https://www.cnbc.com/2018/02/17/construction-robotics-bricklaying-robot-five-times-faster-than-human.html
[3] https://www.equipmentworld.com/built-robotics-brings-full-autonomy-to-dozers-excavators-with-aftermarket-kit/
[4] http://www.riotinto.com/media/media-releases-237_23991.aspx
[5] https://www.rdoequipment.com/rdo-news/used-equipment-outlook-for-the-first-half-of-2019