The term ‘plant and machinery’ is used to describe any equipment essential to the running of a business, although it typically refers to larger equipment, especially in the construction sphere. Leasing Life speaks to industry experts about changing attitudes to leasing these products, developments in technology and financial products, and how shifting economic factors in Europe are affecting the sector.
Due to the scope of the sector, each individual and finance provider can approach and define plant and machinery in subtly different ways.
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“Our definition is mobile and static equipment in all sectors of the construction and recycling industries, including agriculture and green energy,” says Andy Sagar, managing director for construction and recycling at Close Brothers Asset Finance.
Richard Gendreau, head of markets and partnerships, equipment and logistics at BNP Paribas Leasing Solutions, says: “For the plant and machinery market, 2018 was a record year in terms of sales. While the industry is known to be fairly traditional in terms of its financing choices, it is gradually moving towards newer, service-driven models.
“At BNP Paribas Leasing Solutions, the equipment and logistics solutions division, in charge of plant and machinery, is a market leader in Europe in industries like agriculture, construction, material handling and transport.”
Kevin Bovington, vendor relationship director at Société Générale Equipment Finance (SGEF), says: “I am responsible for our global vendor programmes in the construction, agriculture, materials handling and industrial equipment sectors, including machine tools and printing. This broadly represents how I define plant and equipment.”
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By GlobalDataChanging Attitudes
Attitudes within the plant and machinery leasing industry are being influenced by economic turmoil in the UK, according to industry experts – particularly by continual political shifts and ongoing uncertainty around Brexit.
Market players are anticipating a higher demand for the leasing of these products in the future, which is dependent on politics, the sector they are in and rise of the subscription economy.
Sagar says: “Every time there is an election – and all the signs point towards one happening soon – there is a spike in capital expenditure. All the main political parties have strongly indicated a commitment to infrastructure projects including house building, roads, rail, hospitals and schools.”
He adds: “We also anticipate an additional spending on flood defences and plastic recycling initiatives.”
In terms of political uncertainty affecting the industry, the demand for construction projects awaiting Brexit has risen, according to Bovington.
“In some sectors we can see markets like Southern Europe, Eastern Europe and Russia have increasing demand for industrial equipment and financial solutions.”
With the rise of the subscription economy, Gendreau says he anticipates the rate of leasing equipment to increase.
“Having said that, it will also depend on the sector. For instance, in the construction equipment market, we do not expect an increase in 2020 as big rental companies have already invested a lot in 2019 and have a more restricted budget in 2020.”
Benefits of Leasing?
Leasing over purchasing comes with a range of benefits including a quicker return on investment, easier upgrade to new technology and some potential tax benefits.
“If you lease, you spread the debt (up to a seven-year period) with immediate returns from such a large investment, and with limited impact on cash flow,” Sagar says.
Bovington explains that it is rare for end customers not to use finance in some form or another to acquire equipment.
“It is important for them to manage cash flow by balancing revenues earned from contracts and equipment payments or rentals. It is important for companies to have alternatives to their own bank facilities for funding of asset related finance including leasing. For vendors, the customer relationship may cease after a sale. With leasing, it will continue for the lease duration and beyond into the next transaction.”
Plant and machinery markets have historically been quite traditional in their financing choices with significant parts based on loan arrangements, according to Gendreau, who explains that the material handling market is different as it has always been more advanced than others in trying the rental services model.
“Leasing is quickly catching up because of the multiple benefits it represents,” he says. “One of these benefits is streamlined budget management with fixed recurring repayments spread across the life of the asset.”
In addition, Gendreau notes that there are no ownership risks like equipment becoming obsolete, repairs and maintenance, stating: “The benefit of plant and machinery is clearly the use and not the ownership.”
The ‘Digital Age’
In recent months, plant and machinery leasing has seen a range of technological and financial developments ranging from autonomous ‘smart’ equipment to intelligent machines and battery-powered equipment.
‘Smart’ equipment involves remotely controlled or telematics-based equipment that will improve efficiency in the industry.
“Smart farming will change the market landscape over time with improved efficiency, and the reduction of water or fertilisers usage, while smart excavators and bulldozers have a built-in ability for improved accuracy of digging or grading in,” Gendreau predicts.
The equipment finance market follows the same trends with smoother client journeys, according to Gendreau, who adds: “These combine automated decisions, electronic documentations and e-signatures.”
Sagar says the last 12 months have seen growth in smaller plant equipment becoming battery powered, typically at the expense of diesel – a trend that includes solar generators to recharge batteries.
“We have a customer who’s working in rail, and recharging their generators during the day for the night shift,” he explains. “We also see solar night lights that are charged during the day to allow for overnight work,” he adds.
A recent trial in Sheffield saw a local waste-collection firm convert two diesel lorries into electrically powered vehicles, according to Sagar. “The scheme will repurpose existing waste lorries, turning them into electric vehicles powered by energy made from burning the rubbish they can’t recycle,” he explains. “Household waste collected by these new lorries will be taken to the Energy Recovery Facility, and will be burnt in the incinerator situated underneath a large boiler which generates steam to power a turbine.”
Bovington agrees that ‘intelligent’ machinery, much like the smart equipment that Sagar discusses, puts us in the “digital age” where leasing is concerned, providing data on their performance, location, maintenance and serving requirements.
He continues: “Similarly, the finance industry has developed a range of digital tools to improve efficiency, to enhance point of sale delivery, to quote, to credit score, to approve and to finalise the document with e-signatures.”
Value and Resale
The strength of the resale market in plant and machinery has been positive recently, according to Bovington.
“Fewer insolvencies and liquidations mean most resales are completed in an orderly fashion at the end of the lease.
“Well-maintained equipment continues to retain strong value in the resale market. We work very closely with our vendor partners, which is key for us and the vendor to protect equipment values when remarketing equipment.”
For more specialised equipment, Bovington explains that it generally takes longer to sell, and therefore decreases the marketing value.
“Our asset management team are regularly assessing the market data to monitor trends in depreciation values, and the market values have been positive in our recent experience.”
Mobile equipment has strong residual values in Europe, mainly because of the value of sterling as auction houses offer extremely high prices.
Explaining why the resale market remains buoyant, Sagar says: “Equipment is generic across the globe. The price of yellow metal has gone up, but the capacity isn’t there.”
Most assets in the equipment and logistics markets have strong resale values, such as bulldozers, excavators and dump trucks.
Gendreau adds: “At BNP Paribas Leasing Solutions, we monitor the value line of each asset in order to define the residual position we take at the end of the lease and help the vendors in defining the appropriate moment for an equipment change.”
He says the resale market is strong, as it is a liquid market in which the assets have long life-cycles with easy maintenance, and little or no technology disruption is expected, adding: “There are more second-hand assets sold in the market than new.”
Alternative Finance
“It is important to support the whole value chain in equipment procurement and rental products, including maintenance, through remarketing of assets,” Bovington continues.
SGEF has developed a series of pay-per-use products with vendors, demand for which is increasing.
According to Bovington: “Rapid online credit application and approval technology supports the flow of businesses, as speed and efficiency are key to the service demanded in today’s market.”
Close Brothers Asset Finance has been involved in various projects, including building a 100% carbon-neutral leisure complex that uses state-of-the-art technology to heat water.
For BNP Paribas Leasing Solutions, Gendreau says the firm has always had the ambition to move up the value chain.
“We are still at the start of the service-based model with value-driven solutions that will be scalable and will impact the business models of vendors and lessors.
“The asset-as-a-service notion covers many different realities, and we will keep on working with vendors to develop tailor-made solutions which will be strategic sales enablers and help grow customer value in a service-minded approach with operational efficiency.”
The business has also launched the industry’s first B2B marketplace, Kintessia, where professionals from the agricultural, materials handling and transport sectors can buy or rent machinery among professionals, promoting the sharing economy.
Economic Pressures
Brexit, US trade and political risk in the Middle East were cited by Gendreau as the main economic factors affecting the market. “Globally, the market does not like uncertainties,” he notes.
Brexit uncertainty in particular has been affecting the plant and machinery sector, as vendors are seeing a deferral of decision making on buying until the terms of the ‘deal’ become clearer.
“Dealers in general have important stocks in Europe, while in retail, incoming orders are reducing. That being said, the level of activity in BNP Paribas Leasing Solutions has been very strong in the first half of 2019, with growth in the equipment logistics, plant and machinery field,” Gendreau adds.
Bovington agrees that global influences from the Middle East and Brexit have been affecting the market. One example that Bovington touches on is that Europe has seen higher demand for improving “energy efficiency, sustainability and recycling”. This is changing the way equipment is sold, as operators need to be more aware of the impact their equipment may have on the environment.
“Methane-powered vehicles, more electric rather than diesel engines, and use of solar and wind power are all high on the industrial agenda following government initiatives,” explains Bovington.
Sagar adds that high street banks have also readjusted their lending criteria and risk indicators, which make funding more difficult to get hold of. Despite the changes, however, Sagar believes the market remains strong. “While Brexit has somewhat slowed the market, it remains buoyant, and we’re seeing a spike in our sector lending,” he says.
Prospects
While political shifts and Brexit uncertainty may be causing ripples in the plant and machine leasing industry, it is clear that the sector is holding firm, making technological leaps with the introduction of new smart equipment and intelligent machines.
Meanwhile, industry developments such as battery-powered equipment and the concept of smart farming will, with time, improve efficiency and environmental consciousness.
Although the political situation affects the sector’s future, the most exciting prospects in the industry lie in reducing its carbon footprint and fuel dependency to help mitigate the ever-growing financial crisis.
