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Rental Market: facing challenges and opportunities

Publish in 24 July of 2014
According to the Inter-American Construction Industry Federation (FIIC) – the South American construction market is worth some US$320 billion (€235 million).

According to the Inter-American Construction Industry Federation – Federación Interamericana de Industria de la Construcción (FIIC) – the South American construction market is worth some US$320 billion (€235 million).

Growth varies across the 18 countries the Federation draws data from, and in some cases construction output looks set to grow faster than the wider economy thanks to heavy investment in infrastructure.

For example, construction output in Chile is expected to increase by 7.5% this year, while the country’s GDP growth is around 4.9%.

Uruguay is another country where construction growth is a big step ahead of the expansion of the wider economy, and there are other countries where both GDP and construction growth is very high, thanks to industry activity.

The obvious example is Panama where GDP growth has reached around 7%. This growth is thanks mainly to the expansion of the Panama Canal, which is the biggest construction project in the world at the moment.

Colombia is another expel of a country where high GDP growth is going hand-in-hand with heavy investment in infrastructure.

But of course for sheer volume of work, it is the major economies in the region that are the most important. Consultant CG-LA Infrastructure has identified 100 strategic projects throughout the region that will start in the next 18 months or so, with a total investment value of US$145 billion (€107 billion).

Of these, 47 are in Mexico and Brazil, and with a total value of US$91 billion (€67 billion), they account for 62% of the schemes by value.


Rental markets
But as impressive as these figures are, many would still say that the region is not investing enough in infrastructure. One of these is Paulo Esteves, commercial director at Solaris – one of the top rental companies in Brazil.

Solaris has a fleet of around 3000 machines, which is dominated by aerial work platforms. As well as these machines, the company also rents telescopic handlers, compressors and generators. In total, Solaris has 14 rental locations and employs 400 people.

Last year, it reported rental revenues of BRL730 million (€224 million), up from €178 million the year before, ranking 42nd on theis year's IRN100, IRN’s exclusive global ranking of the top 100 rental companies in the world (see June 2014 issue for the full table).

Mr Esteves said, “In Brazil, the prospects for 2014 are of low growth, due to the end of a cycle of investment and lack of government resources for investment in infrastructure."

Mr Esteves added that growth in the industry in Brazil could be accelerated through the launch of several investments in infrastructure such as ports, airports, highways, oil and gas, energy and urban mobility.

“The biggest challenge will be facing an extremely competitive market in the next two years and the current volatility of the political environment,” he explained.

In terms of current demand for rental equipment, Mr Esteves said the most popular products at the moment were aerial work platforms (AWPs), "due to the increasing demand for security requirements and introduction of regulatory standards for aerial work".

And Cândido Terceiro, commercial marketing director at rival Brazilian rental company A Geradora, echoed Mr Esteves’ concerns about slow growth in Brazil.

“The projection for this year is of moderate growth. Despite the large amount of infrastructure constructions in the country, the course follows the same slow pace, generating a slowdown in business, and high competitiveness among leasing/rental companies,” he said.

“We expect that the large amount of scheduled or promised construction activity will get started, so that we can continue to generate business and keep the rental sector warm. Generators, towers, compressors and aerial platforms are the most popular products because they are portable, easy to use and have wide applicability in various segments."

Mr Terceiro added that, in A Geradora’s opinion, one of the biggest challenges facing the Brazilian market was, “a lack of professionalism among some leasing companies, as well as a lack of a more active market regulatory authority”.

Jacó Alles, Volvo CE’s rental manager for Latin America, agreed. “Still missing is a greater professionalisation in the industry,” Mr Alles explained. “But we are seeing several very positive developments in this regard, such as the creation of rental associations, rental industry trade shows, etc.”

Brazilian rental association
Indeed, Fernando Forjaz, who took the reins for a two-year term as president of Brazil’s rental association ALEC (Associação De Locadoras) in December 2013, said that the biggest challenge currently facing the rental sector in Brazil was the qualification of the workforce.

“We compete with industries and builders that are good at procuring professionals. The Brazilian market has grown significantly in the last four years, but skilled labour is in short supply. A training programme, which is what ALEC is doing, aims to fill this need for rental associates.”

Training will focus on rental management, fleet maintenance, commercial operations – including how to calculate a profitable rental price – and legal and safety topics.

Mr Forjaz also emphasised the importance of ALEC’s annual FELOC Rental event. This meeting brings together rental companies and suppliers, and Mr Forjaz described it as, "the only show in South America dedicated exclusively to the rental segment.”

This year's FELOC Rental is scheduled to take place in São Paulo from 23 to 24 July, 2014.

At the same time, Mr Forjaz gave a bullish forecast for prospects in Brazil’s rental market this year. “The rental market for construction equipment will have an estimated growth of 35%. The launch of new homes fell in 2014, but the units under construction since 2011 will provide continued growth,” he said.

He added that rental equipment used in the masonry and finishing phases of buildings that are 60% completed was the most in demand. "We also highlight the power tools used in the electrical phase, hydraulic systems and air conditioning,” he added.

"The equipment rental industry is growing in Brazil, because the advantages are great for builders when they choose to lease rather than purchase equipment,” Mr Forjaz continued, explaining, “We have the problem of high interest rates in the market; and that new equipment has a high tax burden. All this has just increased the price of the equipment, compared with those on the international market.”

Meanwhile, Volvo CE’s Mr Alles pointed out that finance was another issue affecting the Latin American rental market as a whole.

“The rental segment needs a lot of credit,” Mr Alles said. “We often hear the segment needs more money, but it is necessary to understand is not just money, but credit, which obviously have a very close relationship.”

But Mr Alles highlighted that this is not yet a mature rental market, and the fact that it still has a lot of growth and development to undertake was an opportunity, not necessarily a problem.

“The biggest obstacle that still exists for rental growth is precisely the lack of continuous growth, or maintaining a pace in the countries and regions,” he explained.

“Another point that still hampers the expansion of rental is the uncertainty of availability. We’re talking about a continent with vast distances between the construction sites and the headquarters of the rental stores (and dealers). Often, with the difficulty of obtaining rental equipment at the time and by the time they need, the contractor opts for the purchase.

“I wouldn’t say anything needs to change, but rather to better understand the natural evolution of the market. The market as a whole is not yet 100% mature. The rental sector will grow, but we will see some companies adjusting the focus, and others were in the market waiting for the best time to invest and increase their fleet.”

Mr Alles said excavators and wheeled loaders were proving popular rental equipment in Latin America, with rollers and motor graders also showing promises. However, he said access equipment was proving to be the strongest market.

Access opportunities
Indeed, Jim Roest, Riwal director general in Brazil, told IRN’s sister publication AI that the aerial work platform rental sector in South America was becoming increasingly well organised and safe. However, he said that the big players held a vast majority of the equipment.

He explained, “We see some start-ups that operate locally and a few mid-size players setting up branches elsewhere, but still around 5% of the companies have more than 50% of the supply.”

Mr Roest forecast that by the end of this year, there would more than 150 powered access rental companies in Brazil, South America’s biggest access equipment market, with a total fleet close to 25000 units.

But he tempered this outlook by highlighting concerns that manufacturers were not doing enough to support rental companies in Brazil, and visa-versa, echoing ALEC’s Mr Forjaz’s point about a lack of skilled labour.

“The co-operation between manufacturers, suppliers and rental companies is a challenge,” Mr Roest said. “With an inadequate infrastructure that creates logistic difficulties, and constantly relying on a handful of skilled professionals, support is limited.

“Finding and keeping the proper people and business partners is perhaps the most difficult challenge in South America. It is important to train your staff and coach them to work as a team, making them aware that rental is a service," he said.

Mr Roest continued, “Rental companies are depending on the suppliers to bring local expertise to solve the common and unexpected problems. But we feel the energy among all of them and the willingness to bring the industry to a higher level.”

In addition, said Mr Roest, poor road infrastructure, coupled with great distances, meant delivery of equipment was expensive and challenging; and local differences in working methods could make it difficult to provide a standard service.

Another challenge was highlighted by Sérgio Kariya, director of rental operations at Mills Estruturas e Serviços de Engenharias, Brazil’s largest access equipment rental company in terms of fleet size. Mr Kariya pointed to the cost incurred while bringing a new machine into the country, including import duties.

“Adding all the freight forwarding costs, inland forwarding costs, bureaucracy in the US and Brazil and import duties, the net dealer price of AWPs is 40% more than the same machine bought in the US,” Mr Kariya told AI.

Meanwhile, improvements to the road network are underway, albeit at a relatively slow pace. “There are a lot of things going on, but it’s not as fast as we would like. Brazil is working hard to gain productivity as a country, but companies are still affected by having these extra costs.”

The devaluation of the Brazilian Real against the US Dollar is another issue for Brazil. This, combined with the Brazilian government’s move to increase interest rates and the costs associated with importing equipment, is pushing companies like Mills to consider rate increases.

“Of course this will affect the small companies. But the market will adapt to the new scenario, and it will probably mean an increase in rental rates to keep the same margin that we have had in previous years,” explained Mr Kariya.

Mills ranked 48th in this year’s IRN100 table, with rental revenues of BRL 674 million (€207 million) in 2013. It has 51 rental depots and employs nearly 3000.

New technology
While the challenges associated with doing business in South America must be considered, they do not seem to be outweighing the opportunities that companies foresee. Indeed, competition is hotting up in the region’s rental sector, with new technology being introduced to equipment markets.

At this year’s Expomin mining equipment exhibition in Chile, for instance, Morris Site Machinery presented some of its latest lighting tower technologies. These including LED and solar models, which the company said were some of the first to be seen in the South American market.

Morris Site Machinery international sales director Nick Avill said the company was targeting new overseas markets including South America.

In particular, Mr Avill said Chile was in the company's sights – a country which he said had made major strides in recent years, driven by primary sector growth in mining and, lately, the emergence of secondary industries including production and construction.

He added, “Innovation and sustainability were key factors as many delegates were looking for products to help businesses remain sustainable over time, competitive on a global scale as well as help to improve efficiencies.”

Morris Site Machinery reported a huge amount of interest in its SMC Solar-2 solar lighting tower at Expomin. The company said the tower provided 100% fuel saving with zero noise, zero C02 emissions. It is said to offer over 50 hours on a single charge and up to 200 when supplemented with solar power.

Clearly the rental industry in South America is still developing, but the challenges that companies are encountering could in many ways be seen as typical among fledgling industries in emerging markets.

As far as the bigger picture is concerned, there is no doubt that there is the will to invest in infrastructure in countries throughout the region, and for now there are projects making it through to completion.

The question for South America is how can it maintain and increase these investments, and how its maturing rental industry can continue to position itself for growth.

Rental: a growth model in South America
Jose Protko, Caterpillar rental consultant for South America, said the rental model was growing throughout the region.

"While growth started with the demand generated for commodities, we are now seeing a fast-tracking movement toward more value-added products and services as well as into technology and this is driving the next wave of growth," he explained.

“Hot sectors include infrastructure, urban expansion, industrial, energy, hydrocarbons and mining. This means a need for more diversified rental products,” Mr Protko said.

In Latin America, Cat dealer rental coverage includes 72 Cat Rental Store branches in 13 countries, offering. Depending upon demand, equipment on offer could includes the full range of Cat earthmoving, material handling and compaction/paving machines as well as Cat Rental Power solutions. Most dealers also offer a variety of allied equipment such as aerial work platforms, light towers, pumps and compressors.

Mr Protko said, “Our dealers monitor the customer experience regularly, gathering feedback and allowing us to continue developing new products and services, which is pretty much what we have been doing for more than 80 years in the region. One example is a micro-financing project in Peru, where the dealer is currently piloting a leasing solution for smaller rental customers.

Source: International Rental News (KHL Group)

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