Lift Suppliers Work to Mitigate Price Increases

There’s been much talk about across-the-board equipment price increases this year, and aerial equipment is not exempt from the discussion. The steadily rising cost of raw materials, as well as the effort to meet Tier 4 emissions regulations, are driving the cost of whole goods up. Just how much of an impact will this have on construction companies? We asked several industry leaders what they see in their crystal ball, and while the answer remains hard to pin down, the consensus is the direction is decidedly up.

“The most significant price increases over the next few years will be on diesel-powered machines, which are affected by Tier 4,” says Matt Fearon, president of Terex AWP. “Engine costs are increasing depending on the horsepower and there are additional costs associated with engine installations and heat mitigation. Many of the core AWP products are in the process of converting to Tier 4 Final in North America. Engine manufacturers have passed those costs on to OEMs, who are passing the costs on to [customers].”

Engine manufacturers have invested heavily in research and development to design cleaner burning diesel engines that promise emissions that are cleaner than the ambient air in some environments. The downside is these new engines cost more to make, and the end result is an often bigger and bulkier finished product, which can be challenging for OEMs to accommodate into their designs.

Fearon says Genie is fully committed to embracing the new Tier 4 technology, even though the new engines do require significant resources and re-engineering to fit them into the design of equipment. “We’re using it as an opportunity to make other improvements to each of the models that are affected,” he says. “The implementation is staggered over the next several years and pricing will be available as new Tier 4 models are released.”

 

Lessening the impact

As much as they can, manufacturers are attempting to avoid passing all cost increases on to customers, but the task continues to become more difficult.

“Manufacturers will simply not be able to absorb this cost. It’s a significant change for the industry, but we need to remember the positive impact it will have on both emissions and the environment we all live in,” Fearon says. “For example, engineers at Genie found the engine in a 1994 Genie S-60 to produce 60 times the pollutants of the recently introduced Tier 4 Final engine in a 2013 S-60.”

Brad Boehler, president of Skyjack, contemplates how the effort to meet Tier 4 requirements has affected the progress of equipment design overall. “We all welcome measures that focus on a cleaner environment,” he states. “But it needs to be considered whether a manufacturer’s efforts on meeting continually evolving emissions regulations has detracted from activity that otherwise would have led to newer designs specific to end-user needs. This is especially pertinent in the aftermath of the recent financial crisis and subsequent weakening of the availability of development funds.”

Boehler adds, “Having said that, we have to deal with the fiscal realities. At Skyjack, we see our customers as partners. We therefore feel obliged to apply significant resources toward cost reduction to mitigate the upward trend. However, holding pricing is not always possible. I think the other lesson we as an industry need to address is that of the overall timing of tier implementation throughout the supply base. In our experience with Tier 3 and 4 Interim, the availability of qualified components has sometimes been lacking, making meeting the deadlines extremely challenging.”

Some manufacturers are taking a conservative approach to meeting emissions regulations, working around those that require engines over 74 hp to be Tier 4 compliant. “We’re doing some derating of engines to circumvent the tier change,” says David Smith, president of Snorkel. “Between some engine modifications and some hydraulic modifications, we can get to where we need to be and get almost the same performance in the machine. Tier 4 is there, it’s affecting our resources, but we’re not totally changing machines.”

No matter how OEMs approach the issue, it does demand resources. “Ultimately, it’s the best for the environment and it takes a strategy to pull it off,” says Frank Nerenhausen, president of JLG. “We have a significant focus on our strategy to bring Tier 4 to the customer in the least impactful way. Our goal is to make it transparent to the customer in their operation of the vehicle as much as possible. We’re spending a lot of time with the packaging and bringing the right products to the market at the right time.”

 

How much will prices increase?

Clearly, there is only so much manufacturers can do to mitigate price increases to their customers when the costs of production are going nowhere but up.

“Everything that’s out there is going up, no matter what commodity you look at,” says Smith. “Prices are definitely on the rise, and whether we like it or not, with any product under 60 ft., we’re basically dealing with commodities. The majority of customers know there’s no secret about acquisition cost.”

He estimates prices increased 5% to 8% in 2013. The company announced a roughly 5% price increase in October 2012 that took effect in January. Prices held steady in the second half. “That has a lot to do with the fact that we’ve limited our build to be conservative. It’s allowed us to have better control over our costs coming in and there’s not nearly as much exposure for us in the upper commodity markets because it’s a lower amount of volume,” Smith points out.

Fearon says the rate of price increases will be directly related to the cost of steel. “There’s a lag between steel price increases and manufacturing cost increases, but they are very interconnected,” he comments. “Rather than just passing that cost on to our customers, we have had an enterprise-wide focus on cost reduction.”

Unfortunately, it’s not always possible to avoid passing on additional costs. “We certainly try and mitigate the impact to the customer as much as possible, but as technology warrants a price increase for pure cost abatement, that’s something we’ll look at. We have in the past and we’ll have to in the future,” says Nerenhausen. “We’ll just continue to try to drive costs down in other areas to mitigate the impact of the component upcharge and deliver the best value we can to our customers.”

According to Boehler, rental companies, which make up the largest percentage of the aerial work platform customer base, are experiencing good utilization and rental rates. This is helping to keep rental rate increases at a moderate level for end users.

“However, when I speak with [rental companies], it’s clear that although the market is strengthening, they feel limited in how much of an increase in equipment cost they can absorb without passing some of it on to their customers,” Boehler indicates. “Overall, while we as an industry work hard to minimize the impact of costs associated with regulations, some degree of impact may be unavoidable.”

Manufacturers want their customers to know it’s not just engine technology and raw material costs that are driving prices up. It’s the overall cost of doing business.

“In today’s business climate, the cost of doing business is becoming very hard to project,” Nerenhausen says. “Whether it’s health care or other types of things, more and more is being added to the pile of things we have to work very hard to offset. It goes beyond product.”

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