ara equipment rental penetration index - egsa...ara equipment rental penetration index 2 ara rental...

ARA

Equipment

Rental

Penetration

Index

Standards for the Equipment Rental Industry

ARA Equipment Rental Penetration Index ARA Rental Market Monitor™


Table of Contents

Acknowledgment ......................................................................................................................................... ii

About ARA .................................................................................................................................................... ii

Executive Summary ..................................................................................................................................... iii

1.0 Introduction ............................................................................................................................................ 1

2.0 Background ............................................................................................................................................. 1

3.0 Approach ................................................................................................................................................ 2

3.1 Data ................................................................................................................................................... 2

3.2 Preparation of Apparent Consumption ............................................................................................ 3

3.3 Analysis of Equipment Stock ............................................................................................................. 4

3.4 Application of Utilization .................................................................................................................. 5

4.0 Results .................................................................................................................................................... 7

5.0 Conclusions ............................................................................................................................................. 7

ARA Equipment Rental Penetration Index Standards for the Equipment Rental Industry

i


Acknowledgement

The American Rental Association (ARA) convened a workgroup on September 25, 2012 at the request of ARA

members to develop an industry methodology and appropriate measure of equipment rental penetration for

the equipment rental industry.

The workgroup was led by John W. McClelland, Ph.D., American Rental Association’s vice president for

government affairs in conjunction with our partners at IHS Global Insight.

The result is the ARA Equipment Rental Penetration Index ™, which reflects a consensus view of ARA

members about equipment rental penetration.

_______________________

The American Rental Association (ARA) is responsible for the content of this document. This document

and all of its contents are the sole property of the American Rental Association. Reprinting or

reproducing this document in part or in whole without the expressed written consent of the American

Rental Association is prohibited.

About ARA:

The American Rental Association, Moline, Ill., is an international trade association for owners of

equipment rental businesses and the manufacturers and suppliers of construction/industries, general

tool/homeowner and party/event rental equipment. ARA members, which Includes more than 8,500

rental businesses and nearly 1,000 manufacturers and suppliers, are located in every U.S. state, every

Canadian province and more than 30 countries worldwide. Founded in 1955, ARA is the source for

information, advocacy, risk management, business development tools, education and training,

networking and marketplace opportunities for the rental equipment industry throughout the works. For

more information, visit ARArental.org.

MEDIA CONTACT: Tom Hubbell 800-334-2177, ext. 248 [email protected] ARArental.org

ii

mailto:[email protected]


ARA Equipment Rental Penetration Index ™

Executive Summary

The American Rental Association (ARA) convened a workgroup on September 25, 2012 at the request of ARA

members to develop an industry methodology and appropriate measure of equipment rental penetration for


The result is the ARA Equipment Rental Penetration Index, which reflects a consensus view of ARA members

about equipment rental penetration and leverages ARA Rental Market Monitor™ as a foundation.

In short, the ARA Equipment Rental Penetration Index offers the following:

Rental companies can measure how much potential market exists vs. the current market.

Manufacturers can project demand for machines.

Investors and analysts can consistently measure trends about equipment rental in construction.

The basic concept of the ARA Equipment Rental Penetration Index is to measure the amount of equipment

that is rented as a percentage of total construction equipment. The entire fleet of construction machines is

constantly changing with new and old machines moving in and out of the fleet every day. Thus, a measure of

equipment rental penetration must account for the flows of machines into and out of the fleet, as well as the

stock of machines that constitute the fleet.

Rental firms tend to measure their performance on a cost basis, and the most often used cost base for rental

equipment is original equipment cost (OEC). The OEC-weighted approach allows us to derive several

components of the equipment rental penetration calculation using well-established data and techniques. For

example, the Financial Utilization metric is defined as the rental revenue earned by an equipment unit

divided by the OEC of the unit.

Conversely, if we have measures for average industry financial utilization and rental revenues, we can derive

fleet OEC. ARA’s industry research with IHS Global Insight provides estimates and forecasts of rental revenue

for construction and industrial equipment. Rouse Analytics Inc. calculates average financial utilizations for a

large segment of the rental fleet. These data sources allow us to calculate an estimate of rental fleet OEC.

U.S. Census data is used to calculate a value-based measure of the construction fleet. Using this value as the

denominator and rental fleet OEC as the numerator, we estimate an equipment rental penetration index that

is value-based and accounts for flows of equipment into and out of the fleet and for the stock of equipment

in the rental and total construction fleets.

Our initial results cover 2003-2011 and indicate an

Equipment Rental Penetration Index in the range of 40 to

just above 50 percent over the period. This result is

consistent with the expectation that in recent years the

size of the rental fleet has increased relative to the

construction fleet.

Along with other ARA industry market data the ARA

Equipment Rental Penetration index is another tool for

analyzing the rental channel.

iii


ARA Equipment Rental Penetration Index

1.0 Introduction The penetration of rental equipment into the construction market is of critical interest to rental firms.

Estimating the level of equipment rental penetration and understanding the trends and cyclical

movements over time is essential to foreseeing risk and growth, and making decisions about

investment. Because the idea of equipment rental penetration is of such great interest to rental firms,

equipment manufacturers, and investors, the American Rental Association (ARA) formed the ARA Rental

Penetration Work Group in September 2012 with the aim of developing a consistent methodology for

estimating and forecasting rental penetration. The Work Group consisted of representatives of rental

firms, manufacturers with rental operations, analysts from ARA’s research partner IHS Global Insight,

and ARA staff. This paper presents the results of that meeting and subsequent communications among

the Work Group members.

To date several different measures of rental penetration have been proposed and estimated. One

method is the sales penetration approach. This approach looks at the total number of equipment units

sold over a given period of time and the number of those units that are sold to equipment rental firms.

The ratio of these measures gives the proportion of current equipment sales into the rental channel.

Equipment manufacturers are especially interested in this number and many of them look at this

measure of rental penetration in their own fleet sales as an indicator of relative activity on the rental

channel versus the owned channel. Economists call estimates like the sales penetration method a flow

analysis because it analyzes the flow of equipment to the fleet. Indeed sales penetration is likely a good

indicator of future rental industry performance, but it does not tell the whole story.

There are really two issues with a simple sales penetration approach. First, the numbers are generally

unit counts with no regard for the value of the equipment. Thus, a $30,000 skid loader counts just as

much as a $2,000,000 mining truck. Secondly and most important the sales penetration approach only

analyzes the flow of equipment into the fleet; it does not analyze the fleet itself. The fleet is the total

stock of equipment held by rental firms and construction companies. It is the consensus of the Work

Group that an analysis of rental penetration must be based on value and includes an analysis of both the

flow of equipment into the fleet and the fleet (stock) itself.

2.0 Background

The first challenge is simply to define the concept of rental penetration. Fundamentally, equipment

rental penetration will be the ratio of some measure of the rental sector to some equivalent measure

for the total. Prior IHS Global Insight/ARA work along these lines used a definition of penetration as a

ratio of rental equipment stock to total equipment stock. While this measure had several advantages—

not least the ready availability of reliable data—it was by nature a long-run measure with a great deal of

1


inertia. Equipment stock changes relatively slowly, even as behavior in the market changes quickly,

because it is largely a function of purchasing decisions made years in the past by rental firms and

contractors. Equipment that was bought a decade ago can be as much a part of the fleet as equipment

bought this year, but the decision to buy the equipment could have been made in a radically different

environment.

( )

The ARA Rental Penetration Work Group decided that a more nimble definition of equipment rental

penetration would be more useful, one based on rental revenue. While rental revenue is a concept that

IHS/ARA have been estimating and publishing for some years, deriving an equivalent measure for non-

rental equipment is more of a challenge. The cost to a contractor of rental equipment, and the benefit

to the rental firm are clearly defined by the invoice the contractor pays to the rental firm. The cost and

benefit from contractor-owned equipment, or the total cost and benefit of owned equipment is more

nebulous, as it comprises the initial equipment cost (amortized over the lifespan of the equipment), as

well as the costs associated with maintaining and administering fleet, costs which are transferred from

rental firms to renters in the rental cost. The approach below aims to estimate both a better measure of

total equipment stock and—based on that—a measure of the total value to owners of that equipment

accounting for the manner and extent to which it is used.

( )

3.0 Approach

3.1 Data

In order to estimate this value derived from all equipment, we need information in several areas. Most

importantly, we need to know the size of the total equipment stock. Past analysis centered on the

Bureau of Economic Analysis (BEA) Detailed Fixed Asset tables, which provide estimates of the private

capital stock of certain broad equipment types by industry. Although these tables provided a clear,

transparent, set of data, they have some limitations. Firstly, they contain depreciated capital stock,

whereas this project is interested primarily in original equipment cost (OEC) stock on the basis that a

given piece of equipment will be about as productive until it is retired as it was when it was new.

Secondly, the level of detail, while excellent in comparison to most other sources with equivalent

breadth of coverage is insufficient for the current purposes. The breakdown by equipment type is at a

relatively high level, enough to separate farm tractors from construction tractors, but not sufficient to

segment any further. Also, the industry detail is at the three digit NAICS (North American Industry

Classification System) level, so that rental equipment stock is combined with leasing, introducing

complications when the methodology of data collection was changed recently from focusing on

ownership of assets to looking at use of assets1.

1 Bennet, Jennifer A, et al. "Fixed Assets and Consumer Durable Goods for 1997-2010." Survey of Current Business,

September 2011: 27-40.

2


With the rental portion of equation (2) determined by rental revenue, this new approach does not

need to separate the rental equipment estimate from the total, but it does need a better estimate of

total equipment stock at OEC values. The Current Industrial Reports (CIR), published by the Census

Bureau through 2011, provide a far more detailed breakdown of equipment shipments, as well as

presenting import and export data from the United States International Trade Commission (USITC).

These three series provide information about apparent consumption, the net amount of equipment

introduced into the total equipment stock each year. This measure lies at the heart of estimating the

total value derived from equipment in a given year.

The remaining essential piece of historical information is the level of utilization. Rental equipment

dollar utilization, defined as rental revenue from a piece of equipment (or, in aggregate, a fleet) divided

by original equipment cost2 is produced for the rental industry by Rouse Analytics from 2011 onwards.

Additional history can be estimated, as several major rental companies have published their utilization

rates over time in financial filings.

While these sources provide historical information, there is some delay in processing and releasing the

data. In order to provide estimates for 2011 and 2012, IHS draws upon the forecasts of production,

imports, and exports from the U.S. Industry Service, as well as forecasts of the level of construction

put-in-place from the U.S. Construction Service.

3.2 Preparation of Apparent Consumption

The bulk of the preparation involved compiling

shipments, imports, and exports from the last

two decades of table MA333D of the Current

Industrial Reports (Construction Machinery), and

in making certain assumptions about the general

properties of the machinery. Imports and exports

are always available, but shipments data is

embargoed when a sufficiently small number of

companies produce a particular equipment type

that releasing the data would provide meaningful

information about individual firms-see Figure 1.

As a result, the limiting factor in terms of

available detail by equipment type was the

shipments time series. Where there were gaps,

data was interpolated, either using the growth rates

of an equipment subtype for which data were not

embargoed, or by using import data (shipments tend

to be dominated by domestic consumption, and so

their movements have more in common with imports than exports).

2 McClelland, John W, and Michael S Graboski. Rental Market Metrics; Definitions, Calculations and Examples;

Financial Standards for the Equipment Rental Industry. Moline, Illinois: American Rental Association, 2011.

-2-10123456

Mill

ion

s

Shipments

Net Exports

Apparent Consumption

Figure 1: Shipments, trade, and consumption of off-highway trucks, coal haulers, truck-type tractor chassis, trailers, and wagons (excluding parts).

3


The U.S. Industry Service generates forecasts of construction machinery manufacturing output, as well

as imports and exports of construction and mining machinery. Shipments, imports, and exports, can be

combined to create a measure called ‘apparent consumption’ See Figure 2, the net amount of

equipment being added to the stock.

( )

Figure 1 shows these measures for off-highway trucks. This particular equipment type is an extreme

example of the response to a market downturn. In 2007, shipments began to fall, imports nearly

halved, and exports more than doubled. For several years, exports exceeded shipments, indicating not

only that new equipment during this period was being manufactured primarily for overseas

consumption, but also that a meaningful proportion of the existing stock was being sent abroad.

3.3 Analysis of Equipment Stock

Apparent consumption provides information about

net additions to the total equipment stock, except in

the rare case where more used equipment is being

sent abroad than is being produced and imported as

new. The other primary means by which equipment

leaves the stock is retirement at the end of its useful

life. Expected equipment lifespan varies by

equipment type, and by individual pieces of

equipment, but on average one would expect the

occasional fortunate superannuated piece of

equipment that continues operating well beyond its

normal retirement age to be cancelled out by the

unfortunate pieces of equipment that meet with

disaster prematurely. Given assumptions about age for each equipment type, equipment stock of a

given type in a given year can be calculated as the sum of apparent consumption over the years prior to

the lifespan of the equipment.

( ) ∑

Some of this stock represents markets that are not currently addressable by the rental industry. For

example log skidders, which tend not to be rented, are included in the shipments for ‘construction

wheel and crawler tractors, dozers, and self-propelled wheeled log skidders’. In such cases, a scaling

adjustment is made to the OEC stock estimate, by equipment type, to disregard this un-addressable

portion of the market. Similarly, rental revenue will be adjusted downward to compensate for the fact

that some equipment types are included in construction and industrial equipment for which no

shipments data is available.

0

10

20

30

40

50

60

0

2

4

6

8

10

12

OEC

Sto

ck,

Mill

ion

s

Ap

par

en

t C

on

sum

pti

on

, M

illio

ns

Apparent Consumption OEC Stock

Figure 2: Changes in the apparent consumption and stock of tractor shovel loaders

4


Equipment Type Expected Lifespan (Years)

Addressable Market

Excavators 10 100%

Off-highway Trucks etc. 12 25%

Tractor Shovel Loaders 10 100%

Construction Wheel and Crawler Tractors, Dozers, and Self-propelled Log Skidders

10 85%

Motor Graders etc. 10 100%

Construction Machinery for Mounting on Tractors

5 100%

Personnel Aerial Work Platforms 8 100%

3.4 Application of Utilization

Dollar Utilization provides not only a useful measure of the health of the rental industry, but also an

identity that can be used to obtain a concept comparable to rental revenue for the total equipment

stock. From any two of the three components, the third can be derived.

( )

( )

In this case, the original equipment cost value of the total equipment stock has been determined; in

order to get a total measure that is equivalent to and comparable against rental revenue, the

remaining variable to define is an equivalent to the dollar utilization for the total equipment fleet.

Rouse Analytics has been tracking rental fleet utilization since 2011. Drs. Grabowski and McClelland

performed a review of off-road equipment utilization studies in several states, and found that rental

equipment utilization rates were similar to non-rental utilization rates using pre-recession data from

2003, 2006, 2008, and 20093. In general it makes sense that during the construction boom, rental and

non-rental equipment were being operated at the maximum possible utilization, “performing the same

duties at the same activity level”4. However, the recession represents an environment that is very

different for rental firms, and it would be entirely plausible that utilization rates would have diverged in

recent years.

3 Graboski, Michael S, and John McClelland. Non-Road Activity. Moline, Illinois: American Rental Association, 2012.

Here unilization refers to hour meter readings on like pieces of equpment. 4 Ibid.

5


During the downturn, the amount of work for the equipment stock to perform plummeted, but the

total stock was less responsive. Short of shipping equipment overseas, an approach that only works for

easily freighted equipment types, the total equipment stock does not change rapidly. Whereas the

comparison of rental and non-rental equipment utilization during the boom was dominated by

similarities of equipment in use, the comparison during the downturn must instead focus on

differences in the idle fleet. Furthermore, what demand there is will not be distributed evenly. There

will be lucky contractors with more work than they have equipment for, and in the environment of

uncertainty and constrained credit, these firms will elect

to rent rather than buy to a greater extent than they

would have prior to the recession. At the same time,

because of frictions in the market there will also be

unlucky contractors with idle capacity. The rental fleet is

far more nimble than the overall equipment stock.

Because the average age is younger, and access to

capital more available for large industry players, de-

fleeting and re-fleeting can occur more quickly, and the

mix of equipment can change more rapidly to suit

changing demand. In addition, national rental

companies can physically move equipment from regions

where demand is low to stronger areas more easily than

regional or local contractors can buy and sell equipment

from across the country. At its heart, efficient asset management is the core of the rental industry, but

contractors have a different set of strengths.

Taking Rouse’s 2011 level for aggregate rental fleet dollar utilization rates and extending it back with

publicly traded firm level data provides us with a clear sense of where rental utilization is, and how it

has moved. Applying the reasoning that at the peak of the market, owned equipment fleets and rented

equipment fleets were being used at the same rate provides a level for total equipment utilization

around 2006. Figure 3 illustrates the movement of the utilization rate over time which is much simpler

than determining a precise level. Conceptually, utilization deconstructs to the amount of construction

work being performed relative to the amount of equipment performing it. A total equipment utilization

index can therefore be constructed by taking the ratio of a construction activity index (from total

construction put-in-place) to an equipment stock index based on the measure already determined.

That index can then be used to extend the market peak utilization level over time.

( )

( )

0

0.2

0.4

0.6

0.8

1

1.2

Total Fleet Size

Construction Activity

Total Fleet Utilization

Figure 3: Indices (2006 = 1)

6


The result is in line with a priori expectations: rental and total

utilizations move very closely until 2011, at which point rental

utilization improves sharply as strong fleet management pays off as

noted in Figure 4 and the construction market concludes its decline,

while the total fleet remains at a much lower level of utilization.

Returning to equation (6), with an estimate of the total equipment

stock, and an estimate of utilization, there is a measure of the utility

derived from the construction equipment stock that will not suffer

from counting idled equipment. This value is comparable to the

rental industry’s rental revenue concept.

4.0 Summary Results

The ARA Equipment Rental Penetration Index remained flat during the housing boom, as contractors

had the finances and confidence in future growth to buy equipment themselves. Since the peak,

equipment rental penetration has trended upwards, as uncertainty about the future led contractors in

need of equipment to favor renting over buying as a risk management strategy. When the financial crisis

hit, equipment rental penetration suffered a

setback. Since rental fleet management is more

nimble than contractor owned fleet, presumably

rental companies de-fleeted more quickly – in which

case, lower penetration is a good thing reflecting

adaptive management. Since then, as evidenced by

rising utilization rates in rental fleets even as re-

fleeting occurs, demand for equipment rental

equipment has increased much more than either

the overall equipment stock, or the level of

construction activity. Now that the construction

market is beginning to look more encouraging, and the

level of equipment stock has corrected itself through aging out and export of used equipment, rental

penetration has stabilized, but at a higher level.

5.0 Conclusions

Equipment rental penetration has been estimated using several methods for many years. ARA, in

cooperation with the industry work group and our research partner IHS Global Insight, has developed a

consistent method for measuring equipment rental penetration that utilizes and compliments ARA’s

ongoing research program.

The ARA Equipment Rental Penetration Index will be added to our ARA Rental Market Monitor™

program.

ARA Rental Market Monitor™ is the leading economic forecasting tool for the equipment rental industry.

It provides valuable information on revenues, investment, and economic data that affects the future of


IHS Global Insight is our partner in providing the data contained within ARA Rental Market Monitor™.

0%

10%

20%

30%

40%

50%

Rental Total

Figure 5: ARA Equipment Rental Penetration Index

7

Figure 4: Utilization Rates


Bibliography

Bennet, Jennifer A, et al. "Fixed Assets and Consumer Durable Goods for 1997-2010." Survey of Current

Business, September 2011: 27-40.

Census Bureau. Current Industrial Reports. July 14, 2011.

http://www.census.gov/manufacturing/cir/index.html (accessed November 16, 2012).

Graboski, Michael S, and John McClelland. Non-Road Activity. Moline, Illinois: American Rental

Association, 2012.

IHS Global Insight. U.S. Construction Service. IHS, 2012.

IHS Global Insight. U.S. Industry Service. IHS, 2012.

McClelland, John W, and Michael S Graboski. Rental Market Metrics; Definitions, Calculations and

Examples; Financial Standards for the Equipment Rental Industry. Moline, Illinois: American Rental

Association, 2011.

United States Department of Commerce Bureau of Economic Analysis. Detailed Data for Fixed Assets

and Consumer Durable Goods. 2012. http://www.bea.gov/national/FA2004/Details/Index.html

(accessed October 17, 2012).

United States International Trade Commission. Interactive Tariff and Trade DataWeb. October 11, 2012.

http://dataweb.usitc.gov/ (accessed October 15, 2012).

RMM-0213 Rev0

®American Rental Association 2013

ara equipment rental penetration index - egsa...ara equipment rental penetration index 2 ara rental...

Documents