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Equipment Makers Contend with Weak Capital Spending

As service centers and other processors tighten their belts on capital expenditures, manufacturers of coil processing, cutting, sawing and material handling products are finding ways to work through the sluggish market and position themselves for the eventual recovery.

By Dan Markham, Senior Editor

Manufacturers of metal processing equipment rely on capital expenditures by service centers and other customers to keep them busy. With companies in every industry ferociously protecting whatever capital they have, the market for machinery has taken a significant hit throughout North America.

While the steel industry experienced a massive slowdown early in fourth-quarter 2008, the downturn didn’t hit the equipment manufacturers until late in the quarter. But the impact was equally dramatic.

“This is the worst I’ve seen it in my 40 years,” says Dick Couch, founder and president of Hypertherm, Hanover, N.H.

Fortunately for Hypertherm and most others in the equipment industry, the soft market follows five years of solid performance. Record profits for many companies have given them a strong enough cash position to navigate their way through the doldrums. “The good years allowed us to fatten up and gave us the cash reserves to weather this storm,” Couch says.

As the market weakened in December, equipment makers quickly turned their attention to making the most of the downtime.

“We’re working very aggressively trying to upgrade our operation,” says Ed Bosse, marketing manager for Cincinnati Inc., Cincinnati, Ohio. “We’ve been using our time wisely in our shop.”

Equipment makers are tackling operations ranging from simple cleanup and routine maintenance to large expansion projects. All of these options become more feasible when the company has time at its disposal.

“If you’re rebuilding a column on a machine, that’s a lot of downtime,” Bosse says. “Now we can put them down and put on new controls, which you can’t afford to do in brisk times.”

“Sometimes you’re so busy that you never get to the things on your wish list—building improvements, new designs, innovations,” says Dean Linders, vice president of sales and marketing for Red Bud Industries. “You’re so busy running your business, you don’t have time to make yourself better. There’s a silver lining to this downturn, to a degree.”

Red Bud recently completed a 100,000-square-foot addition to its facility in Red Bud, Ill., so it is using the downtime to optimize use of the new capacity.

The same is true with material handling manufacturer The Caldwell Group. The company added a third building at its Rockford, Ill., campus, and is taking advantage of the downturn to best utilize the new space.

MG Systems, Menomonee Falls, Wis., recently completed installation of a larger paint booth and a new Cincinnati machining center with a 36-foot bed. “We’re obviously anticipating business coming around, and we’re gearing up for it,” says Joerg Toberna, marketing manager for MG Systems, which manufactures Messer cutting systems.

As for Hypertherm, the company completed the acquisition of MTZ Software Co. on Dec. 31 and has spent time integrating the

new company into Hypertherm Automation.

Using the time to improve operations isn’t just a physical issue. Hypertherm is putting its workers through training programs that busier times don’t allow. Other organizations see the period as a good time to introduce new plans and processes to make their businesses leaner.

While some of the equipment manufacturers have had to lay off employees, that remains an option of last resort for most. The specialized knowledge of many of their skilled machinists is difficult to replace and could be a hindrance when business improves.

Instead, companies are finding new ways to use their employees. In some cases, employees are called upon to perform maintenance and clean-up duties that had been contracted out.

Perhaps the best way to keep employees busy when new orders have dried up is through repair or refurbishing of customers’ existing equipment. While service centers may not be willing to commit to a multimillion-dollar purchase today, most recognize the importance of upkeep.

“It’s hard to sell an entirely new piece of equipment when times are tough,” says Theresa Dittbenner, marketing manager for Caldwell, “but people still need to keep their equipment working.”

The advantages of rebuilding, retrofitting or refurbishing are obvious. At a fraction of the cost, operators can improve the capabilities of their machinery. Some retrofits can be handled in just a few days.

Equipment makers are marketing this particular option. “The old push buttons, toggles and controls are not always replaceable, and there will be a day when you can’t get up and running without doing some major work,” says Doug Jamieson of Metl-Saw, Benicia, Calif. “So why don’t you beat the curve?”

For the equipment builder, the benefit is also clear. “We’d rather have a refurbishing job than nothing,” he says.

Other companies may look to expand their offerings to increase sales, reaching into other areas of business. But there’s a risk to such an approach.

Pete Swenson of Cleveland’s Formtek says finding the balance between a natural diversification and stretching oneself too thin is critical. “Some companies will get greedy, try to do everything and stray from their core competencies. They can get in real trouble with the market as it is. If you screw up, you may not have any fat in your costs to absorb the hiccups.”

Such an approach is not just a risk to a company’s margins, but also to its reputation, says Chuck Damore, vice president of Braner USA, Schiller Park, Ill. “We look at what jobs we take and make sure they are jobs we are competent and capable of doing. We don’t want to take a job that’s questionable and deliver something that just doesn’t work. That’s how our competitors have gone out of

business.”

Though business is down, equipment makers have not simply given up. Because money isn’t flowing freely, some operators are looking at creative ways to help customers finance new equipment.

TRUMPF, Farmington, Conn., has introduced TRUMPF Finance, a program started in its European operations but expanded to the United States when credit markets tightened. The finance program includes various loans or leases with favorable terms, such as delayed payments or seasonal adjustments.

“We offer a variety of financing options that enable our customers to select the type of financing that will work best for them,” says Burke Doar, vice president of sales and marketing.

HE&M Saw has introduced the HE&Mulus Stimulus, where products will be offered at a considerable discount for a short period of time. “You don’t make much, but you just try to keep the people on the floor busy and fill the hopper,” says Doug Harris, president of the Pryor, Okla.-based saw manufacturer.

Hyd-Mech, Woodstock, Ontario, is also offering a low-interest financing package as part of its efforts to stimulate sales.

While larger publicly traded companies may be belt tightening, other entrepreneurial owners see this downturn as the perfect time to expand, says Werner Rankenhohn, president of KASTO Inc., Export, Pa. Products that offer increased automation may appeal to service centers that are considering a reduction in headcount. By improving their productivity, they won’t have to restore cost to their payroll when business picks up. “Service centers are starting to realize that automation is one way to combat these types of economics. If you automate, you eliminate these peaks and valleys as far as hiring or firing,” Rankenhohn says.

While every equipment manufacturer is eagerly awaiting the upturn in the market, it’s equally crucial to be ready when it happens. One aspect of being properly positioned is to make sure potential customers don’t forget about a company’s name and brand in the interim.

“During this economic downturn, I am promoting the Behringer brand through continued advertising, show participation and PR activities,” says Rick Klipp of Morgantown, Pa.-based Behringer. “We continue to invest from a marketing perspective for the long-term, and in an effort to capture the work that is out there.”

Mike Miller, vice president of finance for Hyd-Mech, agrees that prudent use of limited marketing dollars is important. “We’re not spending like we did in the heyday, but we haven’t stopped either. We’re trying to be smarter with the marketing dollars and sales dollars we spend to make sure we generate the highest probability of orders.”

Companies that remain aggressive during downturns emerge the strongest when the market changes course, Linders says. “You watch the dollars a little closer, but you don’t turn the spigot off. The companies that continue to market and keep their names out front are the ones that rebound more quickly, and the guys who batten the hatches are much slower to rebound. Sometimes they never rebound to the levels they enjoyed,” he adds.

Meanwhile, equipment makers are waiting for a sign that confidence is returning to buyers in the service center sector. “What we do see is people holding off pulling the trigger. They are waiting for something, but nobody can really pinpoint what would constitute a change for them,” says Rankenhohn.




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