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Capital Spending Report

Checkbooks Still Open Despite Rates

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MCN Editor Karen Zajac-Frazee Service centers continue to be in growth mode as the need to automate operations is holding back higher cost of capital. 

Conventional wisdom suggests the higher interest rate environment should be a deterrent to major capital investments, but service centers seem to be bucking past trends. This is happening even though activity has already been robust in recent years. 

Dean Linders, vice president of marketing and sales, Red Bud Industries, Red Bud, Ill., says the last three years, in particular, have all been near-record years. “It’s still at historic levels and the only thing really holding us back today from selling even more are buildings and people. We’ve added on to our building again and we’re adding lots of machining centers but getting people is tough. We could probably use 50 people right now, so that’s hurting us a bit and holding us back somewhat.”

Burke Doar, TRUMPF Inc., executive vice president, agrees that business was great in 2023. Globally, the company reached more than $5 billion in sales, and here in North America, TRUMPF’s sales revenue exceeded $1 billion. “It was a record year for TRUMPF and we’re really grateful to so many customers for their confidence in us, not only here in the United States, but also in Mexico and Canada.” 

Together, two main business units – machine tools and laser technology – helped propel TRUMPF into a record year. Doar says the company is also boosted by its business in the EUV market, where it builds lasers which are used in the production of chips for the semiconductor industry.

Likewise, Fabian Kunz, sales and marketing manager, Burghardt+Schmidt, Remchingen, Germany, says, “Overall, our customers’ business activities were excellent in 2022. I believe it was a record year for nearly every customer we spoke with. Although 2023 differed from 2022, it was still a successful year overall.”

“Manufacturing was crazy busy in 2023, especially with equipment service, consumable parts and maintenance parts because of the recovery from all of the supply disruptions from COVID.  There was still a lot of discretionary money available from the two PPP program and ECR program so cash was not an issue starting the year,” says Steve Murray, president, Jet Edge Waterjet Systems, St. Michael, Minn.

“I think some of our customers are seeing a slowdown. Some of them are still very busy but coming into 2024, it’s now an election year so where 2023 was really strong still coming out of COVID, this next year you’re going to see a slowdown,” says Hank White, laser product manager, Mazak Optonics, Elgin, Ill.

That opinion is not universally shared.  “Through this calendar year specifically, we continue to see things moving very aggressively forward,” says Jim Sugars, business development manager, The Bradbury Group, Moundridge, Kan.  “Capital spending is always a challenge because every plant is fighting for their share of the pie from corporate. We see that the corporations are really trying to invest in their operations to carry them forward into the future. I really think the onshoring is obviously a big part of what we are seeing within our industry.” 

Linders says 2024 is basically a continuation of the last three years. “We all keep hearing that there’s going to be a recession and there’s going to be a soft landing. Historically, when interest rates go up or people are worried about recession, our business drops like a rock, but the last several years it hasn’t happened. It’s really been an anomaly.”

There has been a little softness to start the year, but activity remains at historically high levels, he adds. “The strength of the market, even though I say it has ebbed a little bit, it’s still way, way higher than it has ever been.”

Linders says Red Bud has already booked a number of orders and its backlog remains at that same high level the company saw over the last three years. “It would probably grow more if we could simply get more people, but we’re very optimistic. The real strength that’s pushed us to these higher levels is the North American market. When talking to the presidents and owners of these companies, for the most part, they all feel actually quite bullish and positive for their businesses.”

“We’re on the same pace as far as bookings so far through this year so we anticipate a year around the same levels. Inquiries have been slightly lower than maybe at their highest point last year but I would say on pace for a pretty normal Q1.  The capital cycle, where we’re at in the year, I would say it’s pretty much on pace,” Zeb Edgerly, sales and marketing manager, Butech Bliss, Salem, Ohio, says. 

Doug Matsunaga, managing director, Braner USA, Schiller Park, Ill., says 2024 has been a continuation of 2023 and the company expects a repeat of last year.  Braner does not anticipate meaningful movement up or down.

However, a few people think 2024 might be different.  Shane Herendeen, vice president of sales in the fabrication division, MC Machinery Systems Inc., Elk Grove , Ill., says his company is conservatively optimistic as 2024 started off definitely busier than expected. “It’s always tricky when it’s an election year – we’re watching to see what it does, but we’re busy. Our customers are busy.” 

Herendeen was further encouraged by the recent FMA Conference, where the mood was generally optimistic among the 300 to 400 attendees. 

The ongoing political campaign has some executives worried. “I think this year we’re definitely going to see a little slowdown. Election years are always pretty rough as people get nervous as they don’t know what the next president is going to do or say or if they’re going to be pro this or pro that,” White says. 

He thinks people will be cautious on their purchases, a condition affecting everybody in  manufacturing, so it doesn’t really matter which industry a company participates in. “I think they’re all going to get hit a little bit and then once the elections are over, I think things will kind of go back to normal. I think it’s more human nature than anything else. I definitely expect a little bit of a slowdown this year.”

Murray concurs, “We are starting to see signs that manufacturing is slowing to a more normalized rate.  We still think there is high equipment demand, but buyers will take more time to evaluate their investments and it might get a little more competitive from a pricing perspective.”

Herendeen says an election years typically come with a “wait and see” slowdown around the middle to end of the year. He believes a lot of customers are interested in what policies will be put in place or removed. “For example, the 179 tax depreciation is an important item in our business. The 179 policy sets a large amount of capital spending with major deprecation benefits, it’s great for the manufacturing industry.” Herendeen continues, “When incentives like the 179 get reduced, it makes it harder for manufacturers to justify new investments into capital equipment.”

Other than that, Herendeen says his company is busy and MC’s customers are busy as well.  The company has seen a slowdown from its clients that did a lot of work in industrial automation space for large warehouse buildings going up everywhere, but this started in early 2023.

“Competitors are always a threat but we all need competitors to keep us going and focusing ahead.  Outside of the global economy, I really don’t see anything [that serves as a threat],” Sugars adds.

Sugars says steel pricing seems to have stabilized and thinks that has helped. “I don’t think any of us would like to see a pandemic or anything like that where it’s almost outside of everyone’s control outside of that. I don’t really see that even here in America where we typically would see some slowdowns in an election year and I’m not seeing that.” 

“Every year, we start with a plan that generally tries to exceed the year prior by at least 10 percent. This year, we have a very ambitious plan and, of course, we’re always looking to grow in the markets we are in. Given the great year we had last year, it will be a challenge to hit that hurdle two years in a row,” Doar states. 

“In an election year, sometimes there is hesitation in capital spending, with companies often waiting to see what the potential new administration would bring relative to policies affecting their business. This uncertainty might make companies hesitate to invest this year,” he adds.

On the other hand, just by way of example, the Biden administration is looking to have U.S. companies build all the major large booms and equipment that unload cargo from ports here  because they see it as a potential national security issue. That’s interesting news for companies such as TRUMPF because their U.S. customers use their machines to make cranes and booms. Such policies would spur some stimulus to further purchases. “At TRUMPF, we are big supporters of free and fair trade, so we like to see our customers in the United States be able to export their goods and services overseas. All that said, I’m optimistic that we’re going to have a good 2024 – even with the election year and even with some of the turbulence we have seen in public policy,” Doar adds.

Linders says there are always these unknowns out there. Historically when people talk about recession or interest rates going up, it really impacts capital equipment sales, but that hasn’t happened this time around. “The leading economic indicators that we would have looked at years ago seem to be bucking the trend. Is that the new norm, I don’t know? I think we are seeing somewhat of a perfect storm in regard to equipment sales.”

Over the last few years, he continues, service centers made a lot of money and the labor market was bad. “In the past if we offered automation and things like that, companies didn’t want to spend the money. That’s all changed. Today, these companies can’t get enough of it and that’s where a lot of the market’s strengths are coming from.

“What could jeopardize that?  World War III,  uncertainty in the political realm, some kind of financial crash that we don’t foresee like we saw in 2008 that brought everything down to its knees,” he continues. “It would take something pretty catastrophic, but we’ve seen that before. I’m sure we’re going to see it again, but there’s nothing really on the horizon looming.”

Even the talk of recession has waned. The manufacturing sector has been exceedingly resilient. If the interest rates came down, that’s only going to help things even more. “Again, we need more people, so even as our customers automate, we are doing the same with a lot of our own production equipment. We’re developing more and more automation because we can’t find people. Short of a major world-altering event, I don’t think I see things changing dramatically in the next 12 months,” Linders says.

Kunz adds that in today’s world, predicting events has become increasingly difficult, especially in light of recent political crises such as those in Ukraine and in the Middle East over the past years. 
“Continued inflation and the elections will affect the general economy and will affect all businesses.  In addition, manpower and supply chain issues that have not cleared-up since COVID have and will continue to be challenging,” Matsunaga states.  

Although interest rates have ramped up in the last few years, the effects of those hikes on demand varies. Kunz says he believes it has hurt some, but perhaps not to the extent one might imagine. Companies that want to invest in capital equipment have a very long planning horizon, so changes in business conditions won’t necessarily knock them from their objectives. 

“If you’re investing in a very expensive line, obviously the planning process goes back three to five years, and if you look at the customers that we talk to, they’re planning at least three years ahead. So the issues that you’re having right now don’t really affect the investment that they’re looking at three years from now. If a customer has high demand for a certain product, they may invest in a new production line to be prepared for the end of a crisis and to be the first to deliver higher quality products,” he says. 

Doar says higher interest rates mean that customers are going to have to pay more as the cost of money becomes more expensive to borrow. “At last year’s FABTECH, we offered special financing to customers if they committed to placing their orders with us at that event, and that proved to be a successful program that could happen again.”

“Yes, that does have an impact on how TRUMPF does business, but we think it’s an important contribution to our customers. If we help them to get the equipment that they need by offering a kind of cushion to increasing interest rates, our hope is that it will also trigger more companies to go ahead and give us their orders in this first half of 2024 and into the summer.”

If the demand is there, people will pay the higher costs. “If there’s not a lot of government subsidies or programs you get into with capital equipment, you get a good tax write-off at the end of the year. It all kind of depends on that too but I think in most cases even with a slightly higher interest rate, these machines are making money and they’re paying themselves off fast. Again, people have been so busy, the ROI has  been very short on almost anything they’re buying so I think a little extra added cost per payment isn’t really affecting people too much. That honestly never even comes up in conversation that I see,” White says.

Linders adds that the higher rates don’t seem to have affected Red Bud, but perhaps they have and the company just hasn’t noticed it because it’s operating at such a high level. “There are  probably companies that would have bought that didn’t. But in the end, that’s probably not a bad thing for us because we can’t build anything any faster than we are now as it is. If companies decide to pull back and wait a little bit longer before buying new equipment, that’s OK, it gives us a bit of a breather. All in all, we have not really been impacted by it in any significant way which is actually very surprising.”

“It has not had an effect on demand, specifically speaking about our sales. We’ve had three amazing years, all during the time of the interest rate hikes. Depending on which economists you listen to or read, a lot of them say that it takes a good 16 months to see what each interest rate hike actually does to the economy. I think we’re only seeing the effects of maybe three of them so far, so I’d be curious to see if the economists are right and if that does affect us moving forward,” Herendeen concludes.

Higher interest rates have not been a major impediment to business activity in the equipment space. (Photo courtesy Mazak)

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