Heavy Vehicle Manufacturing
regulatory compliance. In fact, Caterpillar estimates its R&D expenditure will account for about 7.0% of its total revenue in 2014, up from 3.7% in 2013. Moreover, compliance efforts have caused some suppliers to pass on increased costs to buyers in the form of higher prices.
Regulatory Environment and Technology Since 1994, the US Environmental Protection Agency
(EPA) has imposed increasingly stringent emissions stan- dards on nonroad diesel engines. These regulations organize engines into tiers based on horsepower output. By 2015, the most demanding set of regulations for engines with greater than 750 horsepower, dubbed Tier 4 Final, will be imple- mented. Emissions regulation for nonroad diesel equipment is also in the process of being rolled out in Europe. Much like US regulations, Euro stage IV regulation limits emissions; it will also be fully enforced by 2015.
The EPA’s tier regulations apply to diesel engine manufac- turers rather than end users. As such, previously purchased heavy machinery can still be operated legally, providing users with the option of foregoing machinery purchases in the short to medium term. The service life of heavy machinery aver- ages 10 years, at which point repairs are often economically unfeasible. Consequently, many machinery users have not yet upgraded their equipment, so they will likely need to do so in the coming years. Delayed purchases are expected to be es- pecially prevalent for high-horsepower diesel engines because Tier 4 rules are not yet fully rolled out. As buyers upgrade their equipment and Tier 4 compliance goes into effect, demand will increase. As such, IBISWorld forecasts that total industry revenue for construction machinery manufacturing will grow 2.8% per year on average from 2014 to 2017. Suppliers are also devoting large amounts of capital to the development of efficient technology beyond diesel engines. The John Deere Company, for example, recently developed a hybrid prototype that is powered by a diesel engine, an array of electric motors and regenerative braking technology. Electric machin- ery features the benefit of instantaneous access to torque, which lessens the need to run engines at high rpm to operate efficiently. Looking forward, such technologies may become increasingly prevalent in the industry. Hybrid vehicles also generally have lon- ger service lives and conserve fuel, benefiting buyers with a lower cost of ownership.
Renting and Leasing vs. Buying
Steel makes up the lion’s share of the average manufacturer’s total costs.
In general, domestic manufacturers have boosted R&D spending to comply with such regulations, increasing the cost of production and, thus, pressuring prices higher. On average, heavy machinery manufacturers operate with a profit margin of just 4.7%, so changes in production costs have a direct ef- fect on market prices because there is little room for manufac- turers to absorb variable costs.
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ManufacturingEngineeringMedia.com | October 2014
Short-term rental of bulldozers, graders, front- end loaders and other heavy equipment continues to be a suitable alternative for one-time projects or small contractors. While EPA regulations only currently govern original equipment manufactur- ers, federal construction projects require the use of Tier 4 vehicles. The majority of rental suppliers have already transitioned to Tier 4-compliant diesel engines, so renting relieves government contractors of the burden of upgrading machinery. Renting is also attractive to buyers that are averse to outright purchases because of lingering economic uncertainty in the aftermath of the Great Recession. In fact, manufacturers such as Caterpillar cited buyer reluctance as a reason to scale down the number of manufactured vehicles in 2013.
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