The trend towards construction machine rental in Europe

First published in Global Report: Construction Equipment 2016 as The rental trend in Europe

The versatile backhoe loaderThe versatile backhoe loader is the machine around which JCB grew and is a popular rental unit in some European markets

Over the past decade or more, there has been a clear trend among many European construction and engineering companies to rent, rather than buy, major items of equipment for the worksite. Is the traditional practice of writing off the cost of capital equipment over the course of a project dying out? And what does the future hold? Alan Dron spoke to international rental specialists Loxam to find out more

Stéphane Henon, managing director of French equipment rental specialists Loxam, believes there are particular reasons why the company’s domestic market is moving towards hiring, not buying. National determinants are also responsible for the rental market in neighbouring Germany being much slower to take off.

Long-term trends in Europe favour Loxam, according to Henon. “We can see that in many, if not all, European countries, the penetration rate [for rented equipment] is increasing, whatever the trend in construction. You see more and more construction companies are changing from ownership to rental.”

That degree of penetration varies considerably; the UK and Scandinavia are “quite mature” in terms of renting equipment, whereas Switzerland and Germany lag, mainly because major German construction companies, in particular, still prefer to own their machinery.

There is a cultural reason behind this, said Henon: “The German entrepreneur is used to buying his fleet. You still see big construction companies owning and working with their own machines.” Only during peaks of construction activity do they tend to turn to the rental market to fill needs that their own inventories cannot meet.

“What is also different is the market trend. I would say that the French construction market is a little bit depressed since the [worldwide financial] crisis. Even in 2015 the construction market has decreased, especially in civil engineering. From next year there’s a kind of recovery expected for the building sector – residential and non-residential – but civil engineering is expected to decrease again. “The outlook for other countries, including Germany, was better, especially for 2015. And yet we must say we’ve been a little surprised by the weak performance of the German market.

Komatsu short tailswing excavatorThere is growing rental demand for short tailswing and zero tailswing excavators for use on road jobs or in congested urban areas

“We base our expectations on the European construction statistics. If you look at Germany for 2015, they expected back in June 2015 that the market would grow by 0.9%. This has been revised recently to 0.4%. It’s not been dynamic.” Henon said he is uncertain of the reason behind the insipid growth, as the German economy overall is “quite strong”.

The French construction market has suffered ever since the onset of the global financial crash. However in a classic example of every cloud having a silver lining, the French construction industry’s problems have favoured rental companies such as Loxam.

“When there’s a crisis, our customers have very little visibility of their pipeline of orders and activity. Their first reaction is not to invest massively in their own fleet [of equipment] but to go to rental because it’s flexible and cheap.” The plus-points of rental are well-known: construction companies have access to virtually any type of equipment, for any length of time. “If they need a two-tonne excavator for two days and then have to have a five-tonne excavator on Thursday and Friday, they can change it. With the development of rental, they can get it cheaply.”

Construction companies also know that maintenance and any statutory safety checks will be taken care of by the rental company, so they do not require as many maintenance personnel or workshops. Furthermore, the administrative burdens of ensuring that vehicles or other items of equipment meet the necessary legal requirements for safety are removed. “That’s a lot of comfort for our customers.”

Ownership nevertheless still retains some advantages: as well as some fiscal benefits, some highly-specialised or very large items of construction equipment, such as road resurfacing or finishing vehicles, are unlikely to be available from rental firms. If such vehicles are fundamental to the core business of the construction company, it can make more sense to own them outright.

For smaller equipment, however, Henon said, they have largely decided to rent – especially if the need for certain items is brief. “Most of our business is made up of very short-term hires, less than a week. That means that Loxam…is dealing with hundreds of thousands of customers and millions of small-value contracts. That means we have a lot of volume, with machines coming in and out, which involves a lot of washing and maintaining.”

New European safety regulations are also pushing customers towards the rental market. Over the past decade, for example, stepladders have increasingly been ruled unsuitable for work at height, which has led to an increase in the demand for powered access machinery. “That’s really been a plus for our industry, to develop that kind of equipment.”

For a range of reasons rental companies such as Loxam now account for 80% of access machinery sold worldwide, said Henon.

“Customers only need powered access for a limited period of their jobs and they’re expensive. Additionally, sometimes you’ll need a 20m boom, then a 12m scissor lift.” Rather than have costly, occasionally-used items on their inventories, rental becomes a much more sensible solution for rental companies’ clients.

Powered access unitPowered access units are popular rental items as they are costly and less likely to be in a contractor’s fleet

That pattern of very short rentals is aided in Loxam’s home territory by its dense network of depots. It has nearly 500 branches in France. This proximity to customers’ sites facilitates such short hires, with vehicles capable of being hired out and returned rapidly.

In a few cases, where Loxam has a contract on a major job, such as a motorway construction project, it will go so far as to set up a temporary branch on-site, complete with mechanics who can react quickly to any breakdowns of machinery.

Henon contrasted this with the position in markets such as the US, where the much lower density of hire company branches makes construction companies lean towards much longer contracts for equipment. “If your rental company is, let’s say, 300km from your site, you won’t take a machine for one day you’ll have it for a week or a month.”

Transatlantic differences also extend to disposal policies. In the US, rental companies’ policy is to de-fleet after three to five years, whereas in Europe the typical life of equipment is eight to nine years.

The reason for the difference is partly financial and partly, according to Henon, cultural. Culturally, a rapid turnover of equipment means that US equipment hire companies can offer their customers younger machines, and their shorter lifespans with the rental companies means that they spend much less time in workshops being repaired.

The other big difference is that the US has an active second-hand market in construction equipment and disposing of a three-year-old machine will obviously tend to bring in more money than an older one (although that market is price-sensitive and can fluctuate considerably).

In Europe, the picture is different. Loxam’s policy is to maintain a machine for as long as possible. It de-fleets at the end of what it considers to be the end of the equipment’s operational life, either because it is broken and repairing it is not cost-effective, or because it has become technically obsolete. If Loxam does sell on equipment after eight or nine years, it may not make as much money as its US counterparts, but it has a clearer idea of how much cash it will recoup, as the secondhand equipment market in Europe is much more stable than in the US.

Founded in 1967, Loxam says it is now the owner of the largest fleet of rental equipment for construction and industry in Europe, with some 200,000 items on its inventory.

Given its size, Loxam has a degree of purchasing power with equipment manufacturers, together with some input into the design and operation of new kit: “When we say something to [equipment manufacturing] companies, they listen to what we have to say.” Additionally, when Loxam issues a tender to purchase new equipment, its specifications often exceed the legal requirements.

Smaller compaction machineSmaller compaction machines are commonly rented, although larger units will tend to be contractor-owned

The company sometimes inserts specific requirements for its own equipment, both in terms of additional safety measures and for the benefit of the eventual end users.

“What we’ve seen is that some of the features that we specified for Loxam in the past are now becoming a standard in every machine.

We tend to believe we’ve had some sort of impact in their evolution.” As a member of the European Rental Association, it also participates in various working committees, including one looking at the specifications of forthcoming equipment that tries to reach common ground with manufacturers as to what should – and should not – be on new equipment.

This can lead to some tension between equipment manufacturers and rental companies, commented Henon.

“The manufacturers are trying to develop the most sophisticated machine for the end user and we, as a rental company, want to purchase the most basic machine. We want machines that are strong, without a lot of sophisticated electronics, as our customers aren’t specialists in operating that sort of thing.

“It’s always a struggle with the manufacturers to agree on what should be standard, and why.” Loxam’s size certainly gives it some clout in this respect. It had a 2014 turnover of €812 million, more than 600 branches and close to 4500 employees.

Recent acquisitions of the French and Spanish businesses of Hertz Equipment Rental have increased its coverage in those two countries. Around 80% of Loxam’s business is done in France, the second-largest market for rental of construction equipment in Europe (the UK is the largest, Germany is third). It also operates in 12 other countries.

France has some peculiarities as a market, said Henon. Notably, it is unusual in having three construction companies – Vinci, Bouygues and Eiffage – that are very large in relation to the overall size of the market.

“They have a big impact on the construction and rental industry. Because of their size I would say that they are present in most projects. Most rental companies work with these ‘Big Three’ players and because they are so big and rental companies have to work with their customers, they naturally have some purchasing power. That’s a bit specific to France.”

However, even small companies are joining the trend towards renting their equipment, he added. Craftsmen who have until now been used to owning their own small items of equipment are increasingly turning to rentals for reasons of flexibility, cost and not having to worry about maintaining them, said Henon.

Stéphane Henon, managing director of LoxamStéphane Henon, managing director of French equipment rental specialists Loxam, believes there are particular reasons why the company’s domestic market is moving towards hiring, not buying

The French construction market will probably still not be fully recovered from the effects of the global recession in 2016, but over the next three to five years that recovery will be complete “and that will have a big impact on the Loxam group”.

Whereas Loxam is the market leader in France, it is firmly in the position of a challenger in Germany, where it is a regional, rather than a national player. Its interests lie in the Berlin region and in west central Germany around Mannheim, Darmstadt and Düsseldorf.

The market in Germany has different characteristics, said Henon. Apart from the cultural preference for owning construction machinery mentioned earlier, “what’s specific to the German market compared to other countries is that you have very few ‘pure’ players. Most of the rental companies are also dealers that sell new equipment. You have big players that started by being dealers and have come to the rental side.

“What’s also a little bit specific is that you have very powerful regional players – rental companies – in Germany. There aren’t so many national players.”

Loxam naturally wants to increase its representation in such an important market. The strength of regional players potentially makes this difficult, but Henon sees two potential ways forward: “If we want to grow we can open branches and grow organically, but the option of acquiring a company, whether regional or national, is a way to accelerate our development in Germany.”

If an opportunity to acquire a competitor presents itself, it is likely to be taken. “Having said that, the German rental market is very stable. There are not so many deals or companies for sale. In the last 10 years there haven’t been a lot of deals on the mergers and acquisitions side there.”

More widely in Europe, Loxam will continue to reinforce its position in existing markets, but there remains a question mark over opening new centres in Europe. Its operations are biased towards Western Europe and Scandinavia and expansion elsewhere on the continent will depend on opportunities presenting themselves. “We will probably carry on concentrating on the western side of Europe.”

Looking further afield, a severely faltering economy may not make Brazil the most obvious contender for investment at present, but it is a sign of Loxam’s confidence in the future of the South American giant’s economy that it has taken its first step into the market there.

The firm has taken a minority stake in a local rental company and is prepared to wait for the good times to return to a nation that was forecast to end 2015 with an economy that had shrunk by 3% in a year.

“We knew from the beginning that this period was not very good in Brazil,” said Henon. “It’s not been a surprise; we knew they were entering a recession. They are finishing all their [construction] works for the Olympics and have already finished for the World Cup. “But, as we have a long-term view of our industry we believe Brazil could be a point of development in the next two to three decades.

The rental market is suffering in Brazil and because of that there will be consolidation. Because it’s a big country they will need a lot of infrastructure and developing their energy sector; long-term there will be good opportunities for us there.”

While Loxam sees opportunities for expansion ahead, it is also aware that threats face the equipment rental industry. Since the global financial crisis began, rental companies have cut back on investment, meaning that their equipment is ageing. “When we look at competitors and potential [acquisition] targets, quite often we see rental companies with very old fleets that have not invested a certain amount of their capital expenditure every year.” The consequence is that some companies will have to invest “a fortune” to bring their fleets up to date.

“Generally speaking, this is not so much a problem for Loxam, but the ageing of the fleet is a big concern for the industry.”