FREE SUBSCRIPTION Includes: The Advisor Daily eBlast + Exclusive Content + Professional Network Membership: JOIN NOW LOGIN
Skip Navigation LinksHome / Articles / Read Article

Print

The State of the Evolving Manufacturing Sector

Date: Oct 24, 2017 @ 07:00 AM
Filed Under: Manufacturing

As a firm that actively engages in the buying, selling, auctioning, appraising and financing of used industrial assets, the questions we’re being asked the most these days are “what is the state of the manufacturing sector? What has been happening in the past quarter? What about the past year?” Our firm’s core focus and area of expertise is strictly from the machinery and equipment market, so we couldn’t begin to comment on a manufacturer’s ability to innovate during these odd market times. However, the historical notion is that when the new equipment market stagnates there is greater movement in the used market.

It’s important to understand that any capital-intensive industry such as industrial machinery is cyclical.

On a simple and practical basis, this translates into monies being spent and invested in hard assets are with a long-term plan in place. Investments in capital assets are made to increase production or efficiency or both. So, what happens when it’s not the best of times or there isn’t a clear path? Companies squeeze and wait, buy used equipment, or replace components to keep machines running and buy new when there is no other option.

One year ago was the lead up to one of the more hotly contested and divisive Presidential elections in history. The normal trend is that in the run up prior to an election there is a collective holding of the breath and a small wait and see attitude is adopted. Last year was clearly no different than past elections. Okay, it was! The result is firms are still waiting and still holding their breath, to a large extent.

Earlier this year PwC published an article on manufacturing trends stating that the International Monetary Fund (IMF) predicts just a 3.4% increase in the global demand for manufactured goods in 2017. Here we are early in the 4th quarter, a year into this new administration, and politics is still getting in the way of business, and companies are still waiting. However, they still need to produce products, earn revenues, grow their businesses and keep innovating.

No one can wait in a vacuum, and that is why the economy is still chugging along.

What are we seeing in the marketplace?

From an appraisal perspective, it’s been noted that many firms have pushed their equipment to the very end of its replacement cycle. This continues to affect opinions of value. The value trend over the last several years has been that to retain any significant value, equipment must be newer. Generally speaking, ‘old’ used to mean a manufacture date of ten years or more, but over time that has moved to seven years, and now, in some cases, that is coming to mean five years or older. There is a value perspective wherein if equipment is expected to trade on the used market under the concept of Forced Liquidation Value or Orderly Liquidation Value, there is little value remaining for this older equipment. New equipment needs to be five years or younger from a hard components perspective. Controls/PLC’s and technology can and do move the value curve. If the equipment is kept current, maintained well and kept in use it can hold its value longer.

Repeat appraisals over the last year are showing little investment in new assets, but are showing continued investment in existing plant assets or the recognition that the equipment they have in place will need to hold up as long as possible before consideration is given to purchasing new. Obviously there are exceptions.

Almost a year has passed since the election and companies are now starting – only only very recently – to spend and invest. There is an overwhelming sense of political uncertainty in all three branches of our government, it’s likely we will see changes in NAFTA, and potentially even a wall being built. Divisive attitudes are still at play and will continue to shape the national dialogue as well as expenditures in the manufacturing space, and this will continue to be reflected in appraised values.

The equipment financing perspective ties closely into the opinion of the appraisal market, as most often the appraisal clients are either banks or finance companies. It would be bold to suggest that from a lending perspective, there have been few lessons learned from 2007 and 2008. There is an abundance of ‘dry powder’ and financial institutions are fighting to lend every dollar they can in a buyers’ market. Deals are being chased downstream. Smaller banks are lending into deals where the previous norm wouldn’t permit them to do so, but would instead be financed by non-bank lenders, and that trend now continues all the way up into the major banks.

The used industrial asset marketplace remains cautiously busy for all the reasons previously mentioned. The competition this last year has not, for the most part, been against the client choosing to purchase a new piece of equipment rather than used, but instead has been against the client waiting to purchase regardless of new or used. Activity remains steady because firms need to replace, improve efficiency and/or increase production and they are looking to do so in the most economically efficient way possible. Often the used industrial asset dealer can supply the needed asset faster than the OEM and though it may not be exactly the specs desired, it can be close enough to the desired output needed and available now for often a fraction of the cost.

Manufacturing investment became hesitant starting months before the 2016 election and it has continued to remain hesitant thus far in 2017. The sector will remain hesitant. Consolidations will continue, redeployment of existing assets will continue, plant closures will continue, squeezing out greater efficiencies will continue and the usage of assets that are at or past their replacement time won’t end anytime soon. That being said, new expenditures are just starting to occur, investment is happening, new lines are being installed, new controls to make lines more efficient are being purchased and both new and used equipment orders are happening. While there are still concerns about the financing that is available, that financing is starting to drive the industrial space.



John Hagist
Controller, VP Appraisal Services | Loeb
John Hagist is an industry professional with over twenty five years’ of finance experience within the manufacturing industry. As a Vice President at Loeb, he heads the Appraisal and Finance divisions for the company. Hagist holds a BA in from Hamilton College.

For five generations since 1880, Loeb has been a trusted provider of reliable equipment and related services that help manufacturers and financial institutions leverage their industrial assets by managing the equipment lifecycle. Headquartered in Chicago with a 150,000 square foot facility, Loeb provides: equipment sales, purchases, rentals, leasing & liquidations, certified market appraisals from Loeb Appraisal, auction services & asset disposition from Loeb Winternitz Industrial Auctioneers, and equipment financing from Loeb Term Solutions.

Loeb and all of its divisions are experts in providing equipment solutions to the: food, pharmaceutical, cosmetics, chemical, metalworking, woodworking, plastics, and printing industries.
Comments From Our Members

You must be an Equipment Finance Advisor member to post comments. Login or Join Now.