Since the Great Recession, many middle market companies have been waiting for demand to come back before they refresh their equipment and expand their facilities. There are some that are doing it where it's opportunistic, but the normal refreshes that we used to see haven't come back yet. At some point, this pent up demand for large capital equipment is going to come to fruition.
Executives have been very cautious in their growth plans. We've seen companies levering up their balance sheets and taking on more debt, but they are reluctant to do anything beyond that as they retain older equipment that could be replaced to improve efficiencies. Newer equipment with better technology enables companies to be more productive while reducing their costs over time.
A great example of realizing efficiencies comes from a customer that prints labels. This company had outdated equipment when they got a large order from a multinational consumer products company. They soon realized that an investment in new equipment would allow them to fulfill this order. The purchase of a new printing line not only doubled their capacity, but did so while costing them less money over time.
Pre-crisis, manufacturing took place predominantly outside the U.S. in Mexico, India and China. However, today this is beginning to change, as the economies in these countries are growing and the advantages of having something manufactured abroad and shipped here is thinning. As a result, we're beginning to see manufacturing returning to the U.S.
Any sector that touches manufacturing is likely ripe for new equipment upgrades. From auto manufacturing, which once conjured images of Detroit, has taken root in the southeast, to maritime and other general manufacturing industries, including aerospace and defense, printing, media and broadcast, healthcare, construction and the food and beverage sector.
Bigger and Faster
There's always opportunity for companies to expand their business by upgrading to equipment that drives efficiencies. Successful new equipment manufacturers are continually updating their products; everything is becoming bigger, stronger and faster. An analogy I love is that new equipment is like professional football players. Today we are seeing 300-pound lineman running the 40 yard dash much faster than the old pros. New equipment generally allows for greater capacity and better throughput than older equipment that were once deemed state-of-the-art.
I think you're going to see manufacturing continue to move and expand. There are certain states that are offering incentives to bring in more manufacturing, particularly in the southeast. As a result, you're seeing manufacturing moving from New York to Alabama and Tennessee where they are replacing and updating their equipment to create state-of-the-art facilities. These new facilities, equipped with new equipment, are creating more capacity, better utilization, better throughput and realizing more efficiencies for their owners.
Eric Miller is Group Head and Managing Director of
CIT Capital Equipment Finance where he is responsible for overseeing financing activities for large ticket equipment leasing and lending, as well as project finance related activities.
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