Consolidation Is The Game To Play In 2010
While the Olympic Games are held every four years, in the machinery world there is an activity that takes place about every 10 to 15 years that might best be called the Consolidation Games. As has been noted numerous times in the past, OEMs have an overcapacity problem, one that will not go away any time soon. It’s time to sell, close or squeeze for the next two years, maybe longer. It is something not a lot of companies are ready to do just yet, although a few of the big guys have been working at it for months. Demand for products has gone com- pletely over the edge during the past two years, and now most OEMs are faced with the headaches of figuring out what to do with empty factories and 15 to 20 models of machines in each of their product lines. I cover a lot of machine types in the indus- try and have watched production levels of earthmoving machines plummet from roughly 200,000 units in 2007 to an esti- mated 50,000 units in 2009. That’s about 75% off the output in two years. No com- pany can drop 60 to 70% (or more) in pro- duction terms over a two-year timeline and not have excess capacity. The question may be just how long that excess capacity will exist? If 1000 widgets are being made at a fac- tory and one or two years later the total is down to 300, that’s a big problem. It’s a bigger problem if widget demand is going to recover only 5 or 10% in a year or
maybe 50 to 75% over the next five years. That is the scenario we are facing. In 2010, it is coming home to a number of organizations that demand may not come back quite the way it was before. Even though costs have been reduced through layoffs and cutbacks, excess capacity is the long-term problem and solving it is the key to how well the industry will fare three to five years from now. I have used the term “bathtub curve” in previous columns. I still use that term in addressing the kind of market we are looking at for 2010 and 2011. Sure, both years may be modestly better for sales of machines at the retail level, at least for many of the prod- ucts offered by the multi-line OEMs. But we are in a giant demand canyon and we are not going to get out of that canyon until we see “real” unemployment (today sitting around 17 to 18%) shrinking and construc- tion of any kind getting stronger. What can the manufacturers do to over- come overcapacity? Consolidation is the word and it is the game to play for 2010 and 2011. All companies have to look at their global assets and start figuring what is needed to cope with the next five to 10 years both for the North American market as well as global needs. We are in a new ball game and those OEMs sitting on their hands feeling that everything will come back to “normal” soon are going to lose. Others thinking ahead right now are planning on how they can close facilities, move products from one place to another and free up space for moth- balling until a better day. Others might be looking at divestments of businesses like the recent move by Terex to offload its mining business segment. Those types of changes are fairly big and don’t happen easily or CHARLESR. YENGST IS PRESIDENT OF YENGSTASSOCIATES, WILTON, CONN.