After years of dealing with machine shortages, heavy equipment dealers now have the exact opposite problem—at a time when having excess inventory can be the costliest.
Dealers have been facing an “inventory bulge,” in 2023, said Darren Grahsl, manager of commercial finance at BOK Financial® and treasurer of the AED Foundation. In some cases, dealers have been receiving six to nine months’ worth of machine deliveries in just a two-to-three-month span.
Fortunately, demand for heavy equipment continues to remain high, thanks to the federal infrastructure legislation and homebuilders trying to supplant the dearth of available homes with new construction. But even this increased demand can’t meet the influx of machines, such as excavators and wheel loaders, finally arriving on back order.
The imbalance between inventory and demand would be a problem even in the best of times, but it’s even more challenging now because of higher interest rates, as dealers typically use debt to acquire new machine inventory, Grahsl noted.
“First and foremost, the higher interest rates have had a very meaningful impact on companies’ earnings. The cost is real, especially when you consider where interest rates and dealers’ inventory levels were in 2021,” he explained.
A backlog of orders
It’s not that manufacturers are delivering orders they shouldn’t or that dealers have overordered. The current situation is yet another after-effect of the pandemic. Here’s what happened, according to Grahsl:
Like many other areas of the economy, the pandemic created supply chain disruptions in the heavy equipment industry. Machine dealers’ inventories kept shrinking at a time when demand for the equipment was surging due to the booming housing market and the 2021 passage of the Infrastructure Investment and Jobs Act.
These disruptions in the supply chain meant that many of those orders couldn’t be delivered in a timely manner—sometimes not even until this year. Since interest rates have risen dramatically since the orders first were placed, dealers now receiving inventory on back order have to pay the current higher rates on this debt.
Industry remains ‘durable’
Even with these challenges, Grahsl said the heavy equipment industry is still in a “fairly durable position.”
Manufacturers and dealers alike have responded to current conditions by adapting their strategies. Manufacturers typically offer “free flooring” programs to their dealer networks, in which the manufacturer pays the interest on a dealer’s loan to a financial services provider on the dealer’s behalf for a certain number of months. Additionally, some manufacturers are now offering attractive retail financing terms to further stimulate sales, Grahsl said.
Meanwhile, some dealers who weren’t previously offering much in the way of equipment rentals may be finding opportunities there, while others are increasing the size of their rental fleets, Grahsl continued.
Altogether, dealers are keeping a watchful eye on both the purchasing and sales sides of their businesses, being sure not to become overstocked in any specific category where there isn’t enough demand to match. “Everyone is going to need to be on top of their game to work through this situation effectively,” he said.
What’s ahead
Looking forward, the heavy equipment industry faces a lack of skilled workers, with an estimated shortage of 2.4 million heavy machinery technicians (HMTs) by 2028, according to the AED Foundation’s (AEDF) 2022 report.
The Foundation’s Vision 2025 Campaign has pledged $10 million to accredit 100 college programs and 150 recognized high school programs by 2025. This work would enable an additional 10,000 skilled technicians, 5,000 AEDF-certified technicians and 500 AEDF-certified managers to enter the workforce.
And with all that going on, heavy equipment manufacturers and dealers still must deal with economic uncertainty, including fears of recession that haven’t fully abated.
“We’re still not in a recession yet as the economy seems to just keep plugging along in spite of higher rates, but I think there are already signs out there that it’s starting to turn a little,” Grahsl said. “I think the construction and the equipment distribution industries will ultimately be affected, just maybe not to the extent other industries will.”
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