Used equipment, chapter 2: a very big business

Diesel Progress North American Edition, March, 2004 by Charles R. Yengst

Last month, we looked at the many ways in which used equipment is sold. Now lets examine the more nebulous side of the business, the size of the used equipment market. No one really knows how big the used equipment market is, and no one will likely know the answer to this never-ending question until we get a system of vehicle registration and licensing. Only then will we be able to understand how long equipment stays in the real world and where it is. But the government would have to mandate it and someone would have to pay for it, so don't hold your breath.

My studies, while not perfect, suggest that for most construction and industrial equipment, the market is likely in the range of $10 billion to $15 billion annually. I looked at one small segment of the market in detail and had an estimate of more than $5 billion in sales, covering only eight pieces of equipment. If other major types of equipment had been added, the total amount would have at least doubled and then some.

My analysis covered excavators, mini-excavators, wheel loaders, skid-steer loaders, rigid haulers, backhoe loaders, articulated haulers and lattice boom cranes.

Of the products covered in my analysis, about 80% of the unit volume was found to be sold through dealers of one sort or another, while about 15% were sold through auctions and 5% through direct sales and other disposal methods. Auctions are the fastest growing segment of the used equipment market. We have all heard of Ritchie Bros. and look at their success over the past 10 years, with gross auction revenues in 2003 exceeding $1.6 billion compared to about $500 million in 1993. And Ritchie Bros. is not the only game in town.

On the dealer side, OEM dealers--those representing manufacturers for the sale of new and used machines--were found to sell the largest percentage of machines in fire used machine market. There are at least 1000 OEM dealers in North America, with 5000 to 7000 branch operations. These are the people that do the most in selling used equipment, and it is here that we get the biggest volume of sales every year. Considering all dealers (those unaffiliated with manufacturers and the large group that are OEM affiliated dealers), OEM dealers account for 80 to 90% of all dealer sales.

In making an analysis of how many machines are sold in the used market, field population, the lifetime of the average machine and the estimated level of turnover rate of a machine had to be considered. Obviously, some of this information is highly subjective and most of it is not even available and had to be estimated. Population analysis has long been a part of my basic market analysis for any product, so I feel reasonably comfortable using the field population numbers for products that have been estimated over the past 10 years. On equipment lifetime, again, our population analysis work uses product lifetime to measure the population, something we check and recheck with manufacturers and dealers in our regular activities.

Taking backhoe loaders as an example, we used a turnover rate of two to four times during the typical machine life and a machine life of 12 to 15 years as reasonable. The current estimated population of backhoe loaders (including compact backhoes rated under 60 hp) is about 243,000 units. While estimated retail sales of new backhoe loaders in North America ranged near 21,500 units in 2003, the estimated market for used backhoes was closer to 29,000 units, about 37% higher than the new machine sales. In dollar terms, the 2003 level of sales fell just short of $1 billion.

One conclusion that I came to is that the used equipment market is just as cyclical as the new equipment market. The two markets may not be in total sync from a timing standpoint, but both have strong years and weak years depending on the economic situation and other factors affecting markets. During an economic downturn, sales of used machines hold up much better than new machine sales. Why? Because users needing to buy a machine will look for bargains and buy used machines rather than new ones when capital is tight or budgets are being cut.

Of the eight machines I studied in detail, the total market value in used equipment sales was $5.5 billion in 2003. Crawler excavators rated over six metric tons represented the product with the largest sales volume at $1.9 billion followed by wheel loaders at $1.4 billion. Surprisingly, skid-steer loaders and mini-excavators had lower estimated used sales compared to new sales in 2003 and for the years leading up to 2003. Sales of used mini-excavators, for example, totaled about 85% of new machine sales, with a value of about $140 million.

The used machine market will probably expand in 2004, but not as quickly as the new machine market, as more money heads for the new machine side now that the economy is moving along at a better rate.

www.yengstassociates.com--cyengst@yengstassociate.com

CHARLES R. YENGST IS PRESIDENT OF YENGST ASSOCIATES, WILTON, CONN.