One of the toughest decisions shops face in this current economic downturn is also one of the toughest in good times. It’s about buying new shop equipment.
Maybe we should be more precise and say it’s more about investing in new shop tools. It usually works like this: shop owners have the idea rolling around in the back of their head for quite some time before actually pulling the trigger. They know the pros and cons, but are still reluctant to either take that money out of the bank or sign that loan.
It’s no easy decision, so we talked to shop equipment manufacturers for information that can help.
Slow is Good
With the current soft economy, is now a good time to upgrade shop equipment? Manufacturers say yes.
“I believe slow periods are when companies should position themselves to take market share once things turn around,” notes Ed Kiebler of Rottler Mfg. “I can tell you Rottler has purchased several large pieces of CNC equipment to better-serve our customers. Aside from that, now is the time to look at equipment that can increase productivity, machine parts more accurately and possibly reduce floor space requirements. It is important a company is situated to take advantage of opportunities when the economy does turn around.”
The key, he believes, is to prepare now.
“There will be tremendous pent-up demand for machine work,” he says. “By being prepared to handle the extra work, you have the opportunity to take market share from a competitor that decided to ride out the storm and worry about job turnaround later. It is also a good time to be able to do the complete job the customer requires, or possibly expand what the customer requires by educating them on other machining operations they could do to keep from having catastrophic engine failures. In slow times the little extras-quicker turnaround or the ability to be more productive-can mean the difference between a growing and shrinking business.”
It’s the understanding that spending some now can result in extra profits later.
“Upgrading your equipment must be tied into increasing three areas of you business: improving profit, improving accuracy and minimizing labor costs,” says Randy Neal of CWT Industries. “All businesses are affected by increased cost and if you are limited by your selling price, then improving your efficiency is the only tool available that will increase your net profit. New technology investment is the best path for any business.”
Adds CML USA’s Kim Stevens: “Our customers seek cost-effective solutions for existing markets and to extend their current capabilities. Fabricators offering tube and pipe bending services often increase their market share and importance to their customers.”
And while new equipment is a substantial investment, suppliers are doing what they can to help.
“With the current economy, manufacturers are feeling the pain of slow sales, so we are offering special incentives to buy now,” says Jerry Kroetch of Scotchman Industries. “The incentives may be free tooling or a discounted price on tooling. Tax incentives are also available through the Federal government; contact your accountant for details. When you upgrade equipment, usually your efficiency increases as well as your productivity.”
It’s a chance to save money as well.
“With companies looking at bottom-line expenses now more than ever, newer equipment that utilizes inverter technology is much more power-efficient and costs a great deal less to operate,” says Andy Weyenberg of Miller Electric. “The inverter welding machines also have the ability to adjust the arc better than older technology, giving the operator more ways to fine-tune the machine to his liking.”
Time to Grow
For shop sin it for the long haul, now is the time to get a jump on future expansion.
“Investing in productive and repeatable machinery has never been more important,” says Stevens. “The current market demands higher quality delivered with less lead time. The proper equipment increases shop capacity and helps meet deadlines.”
The first question is whether you feel comfortable committing to the long-term health of your business.
“Great technology does not come cheap and jobs that require the use of these machines do not sell cheap,” notes Neal. “Simply put, if you are the owner of machinery that can handle close tolerance and diverse applications, then you will set yourself apart from less-capable shops. Then you will be acquiring the better, high-paying and cool jobs that command more profit.”
It’s a chance to get better and do more, says Weyenberg.
“Newer tools and equipment technology generally grows the capabilities of a shop to better-serve its existing client base,” he says. “This also enables entry into other lateral or even vertical markets, which before might not have been accessible but are good sources of additional revenue.”
Scotchman’s Kroetch says, “By making the correct investment in a larger machine, which makes it possible to increase your capacity (not only in volume, but in size), it will allow you to pursue different and larger market areas.”
And Rottler’s Kiebler adds, “A perfect example of this would be a CNC block machining center. Not only can a shop expand on the block work and head work they are doing, but also in machining parts of all shapes and sizes. I constantly run across shops that are doing a project or production run of parts for some other business that they happened to run across or met through a business function or mutual friend. These types of jobs often cover the costs of purchasing this type of equipment.”
Do the Math
But even shops that have no plans to grow or take on new markets can benefit from the amenities of today’s modern equipment.
“A new machine first gives you the benefit of accuracy and capabilities along with tax incentives,” says Neal. “It also has a known cost per year that is easily factored into your business plan. Your labor force is the largest variable in your business plan, due to changing cost and skill levels. Most successful business people have learned to ‘automate, not populate’ their businesses.”
Weyenberg says, “Newer equipment that utilizes inverter technology is much more power-efficient and costs a great deal less to operate, saving shops money on the bottom line on an annual basis.”
And advancements are making that more true all the time.
“The technology on today’s machine tools far exceeds what you could buy in the past,” says Kroetch. “Today’s machines are faster, more diverse and may run unattended. All of these advantages reduce your overhead and labor costs.”
A main question to consider is if your business is in a position to succeed.
“Customers looking for new equipment should always consider the investment long-term,” Stevens says. “Investment in equipment brings new and greater opportunity to interact with current customers as well as creating a market for new customers. Investing in the future while improving capacity is paramount to success and business longevity.”
You can now do more with less, while charging the same.
“Any type of equipment that improves productivity should make the customer more money in the long run,” Kiebler explains. “Of course, that is only if they maintain their pricing structure and don’t lower the price of the job because they can do it in half the time they used to be able to. I have seen machines cut up to two-thirds of the machining time it takes to machine blocks or heads. If a shop can save that kind of labor time, it may prevent having to hire another person once business picks up and obviously it also lets the present staff get more accomplished in a given day or week.”
Given the many good reasons to upgrade, what about financing?
Kroetch explains. “There are several lease companies that will finance machinery. However, all lease companies are in the business to make money on the interest they charge. Pay close attention to the interest rate and whether there is a purchase payment due at the end of the lease.”
He notes that Scotchman Credit Corp is offering a 0-percent 12-month lease and other favorable rates, with a $1 buyout at the end of the lease term.
Similarly, Weyenberg says that Miller is running its PowerLINE 0-percent, 12-month financing program through the end of the year to qualified borrowers for purchases of Miller-brand arc welding and plasma cutting equipment and accessories. Since July 2009, he says, the program has helped more than 60 companies gain access to capital.
The suppliers try to do all they can to help ease the purchase process.
“Ercolina product pricing is within the range of most lease companies,” says Stevens. “Financing equipment can be a challenge in today’s big market. However, customers with good credit may find better lease rates and overall lower lease costs.”
Kiebler says Rottler has several companies it works with to help customers finance their purchases.
“These companies have been in business for years and understand our customers and the challenges associated with running a machine shop. They are very good at helping customers. They are also more than willing to lend money at this time. In fact, we have had little trouble in getting customers financed on equipment purchases in the past year,” he says.
Despite what some reports might lead one to believe, money is available.
“Suppliers who manufacture good products are not having a problem arranging financing for their products,” says Neal. “And for companies that have a decent credit history, the money is available. Also, every business can benefit from their tax obligations when purchasing new equipment. Federal tax laws give great offsets to taxable income. So you can either give your money to Uncle Sam or you can buy yourself an income-producing asset that will generate income for years.”
And trade-ins can work to a shop’s advantage as well.
“Some dealers offer trade-in credit for older welders,” says Weyenberg. “(In some cases) it may be better in the long run to sell them outright. There are auction sites similar to eBay or companies like Netmachinery.com that specialize in used industrial machine sales.”
In fact, used equipment is currently very desirable.
“The market for used equipment increased during the recent economic slowdown,” Stevens notes. “Ercolina tube and pipe benders generally hold their value well. In addition, machines used for demonstration purposes are always in high demand because of potential savings to the customer.”
Kiebler adds yet another option: “There are plenty of opportunities to get rid of the older, slower, less-accurate equipment. Many sales organizations will take used equipment in on trade or help you sell it outright. There are a number of Internet sites now, along with certain magazines, that will list your used equipment for sale. Prices have come down substantially for some of the older equipment, but there is still a market for most pieces.”
Neal says go old school.
“Old equipment probably has given you years of income and has probably been written off your taxes. Some people sell their equipment without realizing that they will have to show that as income and thereby pay taxes on the sale. And if they sell the equipment and it ends up being used by a competitor, then you have shot yourself in the foot twice. It is probably better to consider donating it to the school system and take a taxable deduction from your income. Now you are helping the educational system and helping yourself. Remember, your next employee may come from the school that you donated the equipment to, and the instructors will remember who their best students are with a little more enthusiasm.”
Finally, Kroetch adds, “The used equipment market is very hot at the moment. A lot of smaller shops that cannot afford new equipment are shopping on eBay and craigslist for a good, easy purchase. Also, many machinery dealers will take used equipment as a trade-in on new machines.”
The decision about buying new shop tools will always be a serious one. Having the right facts can make it a little easier.