Economic cycles are well documented and this recession could be digging the foundations of new business models in the emerging world. Consider the second hand supply chain …
The market for second hand equipment has been running at an estimated $150m a year. Given the current recession the scale is likely to grow – and this could be an opportunity to build production capacity in emerging markets. For example, to transform Indian agriculture into a global player in food processing – food processing is currently no more than 5% of the food and vegetable output whereas it is running at 70% in Brasil. So, there is considerable scope to work on.
And then, there is the downturn itself and the glut of equipment in the construction industry. It is estimated that over $200 billion of construction projects have been postponed or cancelled in Dubai in the past few months. Businesses worldwide are cutting production – Japanese car industry output has fallen by close to 50% and many more have gone into liquidation. Well conditioned equipment in everything from construction equipment to food processing have been put up for sale by those who can no longer comply with their leasing agreements or, have ceased trading. What is to be done?
As the G-20 sit down in London to thrash out a deal capable of breaking the downtrun cycle maybe they could trigger a debate on the merits of buying up second hand machinery to reduce the costs of the infrastructure projects that have been touted as the way out.
Under normal conditions a crane depreciates in value +/- 10% per annum – so, you could buy one for 50% of listed price after 5 years. These deals are improving all the time as the business downturn triggers discounts to clear stocks. This could be the time to explore ways to build production capacity at an affordable price. After all, in many countries second hand machinery can be imported duty free – which could increase market penetration.
Go further – this could be the tipping point for businesses to move from buying machinery to leasing it. This will increase utilisation levels and reduce waste of materials. Or, better still, it could be the moment that complex parts of the supply chain are outsourced to specialists routinely. For example, in the Gulf many construction projects would be completed by purchasing the equipment outright and hiring operators as needed. A much better way of ensuring maximum utilisation from the equipment and, to guarantee global safety standards is to contract specialists for complex lifts where lifting methodlogy and safety procedures are required.
Still further – the glut of second hand machinery is likely to raise the bar on the environmental standards for new machinery as the upturn kicks in. In fact, this could be the opportunity to review the templates for future production. There will be little point in continuing to make the same designs when the current glut of second hand options will cover needs for some time. Better to drive the green agenda and produce more environmentally efficient options going forward. As Eng. Antonio Matos Ferreira, an expert in plant movement with experience all over Europe emphasises – “there is plenty of machinery out there to keep supply chains running at current levels and even enough to absorb much of the eventual upturn. So, now is the time to look hard at machinery that can build the green supply chains of the future. This will transform the carbon footprint and, could be the catalyst for training more operators in the developing and emerging world to the standards that global markets will require.”
And there’s more. OEMs (Original Equipment Manufacturers) could develop better ways to use the products they make. For example, Port Planners in many ports have commented to me that they use less than 30% of the features on the software packages they use to manage the ports. Shades of my video recorder. More seriously – what is the point of building feature rich gizmos that are never used to their full extent? It is a recipe that destroys affordability and forces design down a niche rather than opening up to mass markets. Why do OEMs allow this to happen in the ports and elsewhere? The reason – because the software providers offer basic training and additional support is far too expensive. There are many more examples of such tunnel vision. Maybe it is time for OEMs to play a greater role in the building of skills capacity rather than contenting themselves with selling units. It could be the key to developing added value services that will be hard to compete with going forward. It would certainly be more socially responsible – and that is going to count much more in the market conditions taking shape.
The second hand market could be the catalyst to build production capacity and logistics infrastructure to deliver the environmental benefits that fresh practice and regulations will demand. It will not be enough to rely on old designs to deliver future proof logistics capable of transforming economic, social AND environmental outcomes. Is this the moment to challenge the throw away culture of built in obsolesence?