Grant Collinson reports on an established and mature market holding its own during difficult times
With the construction industry faltering throughout Europe, the yellow goods leasing market has suffered contraction almost across the board. Almost, but not quite.
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The materials handling sub-sector has proved its "resilience" to the global economic downturn and continued to grow despite its considerable maturity – boasting a finance penetration rate of up to 95% in some countries.
Benoît Chenu, head of sales and marketing at Société Générale Equipment Finance (SGEF), says, for his firm, the materials handling sector means forklift trucks.
"And the forklift market," he adds, "is a very resilient market much more robust that the [rest of the] yellow goods market."
Chenu puts this resilience down to the diverse make-up of the forklift truck end-user market.
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By GlobalData"[You get forklifts] nearly everywhere; as long as you have goods to move, manipulate and manage within a factory or storage facility, then you need a forklift truck.
"This gives [the market] very good resilience," he says.
Diversity a boost
De Lage Landen’s Natalia Grigoreva, strategic marketing director of hard assets for the EuroAsia region, agrees the diversity of the customer base for materials handling is a boost for lessors operating in the area.
"We will aim to serve any customer the manufacturer wants to sell to," she says, "anything from retail to manufacturing to automotive.
"Obviously all these sectors are performing differently now, but we find they still all need refreshment equipment," she adds.
Grigoreva says end-users related to the building and construction sectors performed slightly behind others, such as the supermarkets and big retail chains, which had a "stable" year in 2012.
The wide range of end-users in the forklift market also creates a strong second-hand market for the assets, which SGEF’s Chenu says allows lessors to cultivate a strong lending appetite.
"You can rely on [the asset’s] collateral and usually the end-customer is good," he says, adding the customers tend not to be SMEs.
Evidence of the sector’s resilience can be found in its quick recovery from the 2008 financial crisis, and Chenu says the sector has been in positive territory since 2010.
Chenu says he is unable to disclose SGEF’s latest figures for materials handling because of the large proportion of deals which go through the firm’s major vendor partnerships.
Nonetheless, he does say market growth as a whole in 2012 may have been slightly down following a strong 2011, but the sector is "still performing well."
De Lage Landen enjoyed a strong year in 2012 with some of the programmes within the materials handling sector up nearly 30%, according to Grigoreva.
"We are segmented, not just by country, but by some of the manufacturers we work with and we had some segments of the business which grew by 28% which was a good improvement," she says.
Grigoreva agrees. However, she says, despite the sector’s resilience, 2012 slowed slightly for the wider materials handling market and uncertainty is affecting demand, especially in the eurozone.
"There was decline in Western Europe, while Eastern Europe was slightly better, mainly due to the Russian market," she says.
In the UK market, Aldermore Asset Finance doubled its materials handling business volume from £25m in 2011 to £50m last year, only its second year in the sector.
Andrew Woodward, Aldermore’s head of materials handling, says the firm is targeting further growth in 2013, on the back of a timely renewal cycle.
"2013 will be an important year within the industry," he says, "as it will be five years since the pre-recession peak of forklift truck sales and, as the average term financed is five years, there should be a large number of renewals due."
Grigoreva agrees and predicts replacement demand will be the main driver for demand in Europe, particularly Western Europe, but is sceptical of overall growth.
"This year will still be difficult because of the economic situation is still uncertain," she says.
"We have looked at our economic projections and we see growth will come towards the end of the year but it will not be high enough to see immediate rebound in the forklift market. It will probably be flat. In some countries there will be small growth, in some countries there will be small decline."
SGEF’s Chenu is more optimistic while still remaining cautious and says it is difficult to say what the year will bring because materials handling won’t necessarily react normally to economic forces.
"As we saw, the forklift truck market does not follow typical reaction to the market," he says.
"In an economic downturn the sale of trucks, for example, will go down; construction equipment will go down, but the forklift truck market is much more resilient," he says.
"In the forklift truck sector, the magnitude is far less important than in other sectors – there may be an increase of 3% or a decrease of 3%. Either way, it will not be very dramatic."
Both Grigoreva and Chenu put the success of their firms’ materials handling businesses down to their vendor programmes.
De Lage Landen’s Grigoreva says most of the manufacturers her firm works with performed well and actually gained market share in 2012.
Vendor finance is De Lage Landen’s main sales model and supporting manufacturers’ sales is always the company’s focus, Grigoreva says.
Nonetheless, she adds the firm does operate direct sales in some select markets, particularly the US, where it is targeting some key accounts. Even then, this actually ends up supporting manufacturer partners because De Lage Landen can bring these clients to the manufacturers, Grigoreva says.
For SGEF’s Chenu, the forklift truck market is one driven by brands with a few major manufacturers dominating global sales.
This, he says, is one of the major challenges to lessors looking to enter or grow in the sector.
"[The biggest challenge is] establishing relationships with vendors; most vendors established relations a long time ago. It is a bit like the agricultural market where all the main players have a finance scheme in place for more than 20 or 30 years."
This long track record of vendor partnerships in Europe has led the market to become dominated by a handful of leasing networks, says Chenu, leaving few gaps for smaller players to fill.
This is a statement Aldermore’s Woodward wholeheartedly disagrees with.
Based on his own understanding of the market, Woodward says Aldermore is the largest independent financier of materials handling equipment in the UK, although he admits there are no published figures from which to verify this claim.
Unlike the big leasing networks Chenu refers to, Aldermore does not run vendor programmes and instead utilises its broker network.
Woodward tells Leasing Life he is yet to see a successful pan-European vendor scheme in the materials handling sector which "dominates" the market.
"[Pan-European] is a phrase which gets bandied around and does sound good, but there are issues with cross-border leasing that complicates the process and most importantly the relationships in each country are only as good as the team providing the service," he says.
Woodward says the service his department offers by being a niche team with strong asset knowledge is appreciated by the firm’s network of introducers which allows Aldermore to find growth.
"Funders in different countries have different strengths and focus – nowhere in Europe has a market as mature, in respect of finance products, as the UK," he says.
The high penetration rate in the materials handling market across Europe is something all can agree with. De Lage Landen’s Grigoreva says it is as much as 95% in some of the most mature markets.
Such a high rate makes generating business growth a significant challenge in the market, so much so Chenu says, SGEF are not even looking for growth but looking for greater sophistication.
"We don’t have a growth strategy," he says, "We don’t need a growth strategy. I think you need to take into consideration that for many players in the market, the problem is not growth but the increase of bottom line.
"We are much more interested in improving the sophistication of what we are doing – for instance moving from pure old fashioned sale and leaseback towards more sophisticated off-balance sheet structures."
It is a sentiment Aldermore’s Woodward agrees with. He says the company has a number of accounts targeted for this year but says the real differentiator in the market is service provision and adds he always seeks to offer value-adds to potential deals.
Grigoreva says De Lage Landen does hope to grow penetration in some markets but, like Chenu and Woodward, sees added services and product diversity as the best way to succeed in the market.
"One trend we are seeing is that the markets are much more volatile and customers are looking to outsource some risk and looking for more flexibility in financing options," she says. Upcoming changes in the IFRS accounting standards may also increase demand for flexibility, she adds.
"We are looking how we can provide these either through rental fleets and flexible finance options."
Looking a little further into the future, Grigoreva says the assets themselves are likely to change.
As well as a general trend towards greener assets, which De Lage Landen is looking to address by offering "carbon-free leases and carbon-free equipment options", the lessor is also exploring automated materials handling equipment. Grigoreva mentions there is a growing number of factories where the materials handling process is now completely automated with products never touching the floor or being handled by a person and says this could bring interesting opportunities.
"Obviously, this is quite a new area so we are still exploring what would be the entrance opportunities," she says.
Grigoreva also says that in the long-term there is a threat of a growing number of Chinese manufacturers entering the materials handling market offering lower-cost equipment, although she says this is so far restricted to the Asian region, with the well-established players likely to dominate in Europe for some time to come.
The potential of growth markets outside Europe is something Chenu acknowledges as an opportunity too and again says the asset class’s resilience allows SGEF to offer materials handling finance across its global network.
"We do it in all countries because it is a resilient market with good end-customers, with good vendors," he says. "There are no real barriers to entry, including in emerging countries."
AERIAL PLATFORM SLUMP
Less resilient than forklift truck demand, which comprises the vast majority of materials handling finance deals, is the aerial platform market.
Benoît Chenu says SGEF experienced such a dramatic drop in demand for this asset, mostly used in real estate maintenance and construction, following the 2008 financial crash the firm stopped investing in the sector.
Chenu says this asset market in particular has suffered because demand comes largely from rental firms and as soon there is downturn the utilisation rate of aerial platforms drops.
"Some of these rental companies are highly leveraged and would go bust very quickly as soon as the utilisation rates falls by 10 to 15%. We saw a wide range of delinquencies," he says.
The second-hand market is also highly sensitive and can "disappear overnight" when there is a downturn, says Chenu.
He says the market saw a collapse during the brief economic downturn after the attacks on the World Trade Centre on 11 September 2001 and rental activity fell by 50%.
"We had some difficulty but it also recovered very quickly," he says. "During the crisis of 2008/2009 it was totally different. Themarket level went lower and lower, even now.
"For this reason we are extremely cautious and we don’t want to be exposed in this
market.
"Most leasing companies exited the aerial platform market. I think it would be one of the more difficult markets to finance."
