Online heavy machinery rentals: upsides, downsides, prospects
Publication date: 26.08.22
Reading time: 5 minutes
The heavy machinery rental market is growing relatively in sync with the markets that offer new such equipment for sale, and serves a wide range of target projects for earth moving, freight handling, logistics, concrete and road construction, and for many others. We talk about a raft of equipment, including excavators, loaders, backhoes, bulldozers, dump trucks, tower cranes, etc.

The industry is notorious for its high fragmentation. The top five firms own as much as a quarter of the market; the share of the second “top five” is only 8%; and there are a swarm of some 2,500 minnows left with scraps to gnaw at in what is estimated to be a hefty 60 or so percent of the market. Experts view the easy domination of the major players as an “insurmountable barrier to evolution in the industry’s strategies and practices.”

Digital has been increasingly infiltrating the market, imperfect as it may be. We watch more and more rental deals discussed and closed online.

According to FatBit Technologies, in 2021 the global construction equipment rental market hit a record valuation of $208.3bn. The COVID-19 pandemic reined in the global economy to a noticeable extent, and at the year-end the FatBit analysts gave a rather conservative CAGR forecast for the next five years: 3.8%. Unless the prediction is further adjusted downwards these months by the deteriorating geopolitical situation, we may expect the market to grow to $250bn by 2026. It’s a post-COVID revival in construction activity worldwide that will likely spur the growth, including the increasing demand for cranes, backhoes, excavators, road rollers, etc., and a progressive trend towards automation and sophisticated telematics.

For an ever-growing number of construction and infrastructure companies, renting construction equipment makes more economic sense than purchasing new machinery. It’s not just about saving on the cost of buying; rentals also bring down recurring expenses such as labor, maintenance and operational costs as these are incurred by the rental platform owner. For the latter, the business appears lucrative enough, too, as they eke out long-term profit from their machinery through continuous operations.

Customers and their pains
There are two groups of businesses that benefit from the activity. The lessees of machinery constitute the larger category, of course. Construction companies that need such equipment on a regular basis and in considerable quantities account for an estimated 70% of those and view rentals as the very foundation of their business. The remaining 30% are infrastructure, industrial and servicing companies that want a limited number of specific equipment on a per-project basis only.

With an array of snags the lessees have to face in their work, the sweeping digitization of the market segment is only a matter of time. Before it cuts its costs through a lease a company has to scrutinize all the parties to its deal; make sure the equipment it is planning to use is in good order; take measures to de-risk its financial flows, including action to anticipate possible fraud; be able to monitor the transportation of the leased machinery it has paid for but not received yet; and complete other vital things. Having fallen behind schedule through remissness in any of the above, not to mention the failure to get its equipment for whatever reason, may derail the entire construction project.

The other category are lessors. These include the manufacturers and/or owners of equipment and components, and dealerships. The lessors are not immune to pains, either. The handwriting is always on the wall for them: make sure your lessee is financially sound and your equipment they are now using is still technically OK — or you may find yourself in a quagmire of debts.

A one-stop shop: the business model
To address the pains and warrant a win-win situation for the market players, the digital marketplace model appears best to develop. We talk about an online platform that helps construction customers and fleet owners find each other and interact at a dedicated venue. Lessors, which can be collectively referred to as vendors, kick off by listing their assets on a marketplace website to await rental requests from construction companies or individuals. Once a request is placed and approved, the lessee transfers due payment to the platform owner’s account. Following the deduction of a stipulated commission to the marketplace, the rest of the money goes to the equipment owner’s account. The vendor (lessor) completes the cycle by dispatching the requested machinery to where the lessee wants it to come.
To allow for all possible eventualities during equipment transportation or use, a typical lease contract has an insurance clause. Leaving nothing to contingency, the system requires that a security deposit be kept in the admin’s account, which is refunded to the lessee once the equipment is returned safely and undamaged. Thus the marketplace acts as guarantor of transaction security (through the assignment of accounts receivable mechanism) and of equipment indemnity.

A special CRM system and cloud platform are developed to manage the search, transactions, and all the logistics associated with rentals. The marketplace does not wait in the wings to be called for; it is intimately involved in every contract and deal closed, thus making itself interested in, and responsible for, the success of transacting.

There’s a range of equipment rental monetization options in place for a modern platform. Most marketplaces started out as a brainchild of IT platform owners and their partner lessors. So, their early-stage operations were based upon what could be called “rent unadulterated”: you rent out something, you get paid directly. Marketplaces expected no commission from equipment vendors at that time. But the business model matured, and diverse monetization techniques have evolved:

  • A commission (5–15%) earned on every transaction on the platform (dual commissioning from both lessee and lessor is also possible);
  • Advertising proceeds, when the owner hosts third-party advertisers to display their ads on the platform; the number of clicks and views of the ads is the basis for fee agreement;
  • Featured listing as extra preferential treatment for vendors; the latter can be invited to list their equipment on the main focus spots of the marketplace website, such as the homepage or a “Special Feature” section;
  • Subscriptions to the use of a platform and access to a dedicated cloud for leased equipment management. Those are not indiscriminate but rather include customized benefits such as reduced delivery charges, flat discounts, or even special equipment verification for maximum quality assurance. The services that are now regarded as standard, including insurance, are also part of subscription plans;
  • Finally, a platform and its vendors may agree to offer a lessee an option for buying out the equipment under certain conditions, a development that is opening yet another revenue generation channel in the form of new commission to the marketplace.

The upsides
There’s a combination of various factors that fuel the growth of online machinery rentals.

First and foremost, rentals eliminate the need for a hefty capital investment that would inevitably come with the decision to buy. A tower crane is a costly toy, and an ROI may take long months to shape up. So, the money you have bought it with remains “locked up” within the crane (or whatever you have purchased) until your construction project begins to pay off (which will likely take much longer than the ROI) or you sell the thing to other builders (which will require a considerable discount, to your financial loss).

Secondly, you do not pay much to transport the leased equipment, and you pay nothing to store it until new projects materialize. When one buys an expensive crane, he never knows how long the machine will have to endure rains, subzero temperatures, or scorching heat (which all lead to depreciation), and the cost of using the storage area may bite. When one rents it, he does so to support a specific project under way, and the leased equipment hardly ever stays idle. As another plus point, the lessee bothers with no delivery issues as it’s the marketplace that does that, taking the lessee’s project schedules into consideration.

Thirdly, unlike a purchased tower crane which is taxed at a depreciated rate for as long as you own it (maybe for its lifetime), a crane you rent will be counted as a deductible expense, especially if your accountants show flexibility in registering a rental as part of project expense with all due tax-saving benefits.

Finally, renting stuff helps allay small players’ typical fear of being eclipsed or even overridden by the deep pockets which the market underdogs believe can buy all the latest technology. A lease for as advanced a crane or excavator as the majors usually purchase is a way of empowering a “David” in the vast construction market to contend for opportunities on a par with the “Goliaths.”

The top players in the global digital machinery rental market
If any company outside the “big IT” ever changed the world in its industry, few have done so as quickly and profoundly as U.S.-based Equipment Share. Investors are increasingly falling for this eight-year-old company, and in 2020, for example, it ended the year with north of $300m in revenue and upwards of $350m in investment from some revered venture capital firms like Tiger Global. Equipment Share relies on commission and subscriptions as the company’s main monetization options.

Their fellow-countrymen at Big Rentz are lagging noticeably behind with just about 10% of what Equipment Share makes and raises, but they nonetheless look resolute and on track. Commission is their milk and honey in operations.

Germany’s Klarx has been in business for seven years now and in 2020, for example, was not much of an eye-opener with its modest $15m in revenue and $20m in investment. However, experts give the firm their due for steady headway, if never swift, and for its strong faith in sweeping automation across its business operations. The company builds its monetization model on a combination of commission and subscription.

Look also at a young but very fast-growing company from the United Arab Emirates called Tenderd. Fresh out of its infancy, the four-year-old start-up can’t blow its own trumpet over multimillion revenues yet; but some of the investment gurus at global accelerator Y Combinator have already sung the young company’s praises by offering it $6m support.

Alongside these greenhorns, there are real past masters in the industry. Herc Rentals, for one, traces its corporate history as far back as the 1960s and in the past few years carved out an enough market share to post $2bn in revenue. Of course, the old-timer grew and thrived on rental classics when digital was still decades ahead; but they refuse to stay behind the curve and are already challenging self-assured rookies with their interesting software products.

What all these companies offer their customers and machinery owners goes far beyond a marginal go-between role. At the heart of their services are IT platforms that enable remote management and monitoring of equipment and transactional logistics; it’s a fully data-driven process with automated telemetry and machine learning enhanced performance analytics. On top of that, the marketplaces can help potential lessees out of financial trouble, if any arises, by allowing credit.

Technology brings a win-win
Technology has been permeating all the major industries around the world. There are sectors, however, where old habits and traditions stymie its pervasion; and construction is one of these. That causes a chain reaction where no transparency in classical deals translates into poor-quality services and predictable customer dissatisfaction.

Up until just recently, it was a real conundrum for a lessee to track down where their equipment was in transit and whether it had been dispatched in the first place. But the advent of IT platforms such as Uber for ride-hailing or Foodpanda for meal delivery has helped players in more “cumbersome” industries like construction or oil and gas to descry an appealing plausible future for them. In the equipment rental business, the nearest concept to serve as the epitome of all-digital order management and tracking is the online marketplace.

The marketplace makes hay for both parties. The lessee gets all the equipment they need from a single platform that has already ensured that all its vendors are ranked and no unscrupulous lessor is there to incommode the client. The lessor uses the same platform to keep track of their property and monitor its status, and all the pains that have to be taken to screen the lessee are fully shouldered by the platform owner. With rental services that go digital, the customer can pick the equipment required and transact business at a much higher speed than any classical rental service can offer. At the end of the day, a construction company saves across the board, and a property owner increases the share of their monetizable machinery by 10–30%.

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