To lease, or not to lease

There’s been a trend lately toward machine builders who lease—not sell—their machines to customers. Who benefits most? Executive Editor Jim Montague went looking for answers and reports his findings.

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By Jim Montague, Executive Editor

What’ll it take to put you into this machine today?" Though it’s a variant on the old car dealer cliché, this basic question never is far from the minds of industrial machine builders and their customers. Ever-present pressure to increase production and efficiency continually drives users to seek better machines, and forever pushes builders to design and develop them.

However, many machine builders focus so intensely on technology that sometimes the financing needed to deploy a big-ticket machine on a plant floor seems to be almost an afterthought.

Most users simply rely on third-party banks or other financial entities for loans, which may be facilitated to varying degrees by builders and machine distributors. Meanwhile, some use various types of leases to secure the machines and form the partnerships they need to survive.

"We don’t understand enough about the power of finance," says Randall Harland, sales vice president for machine builder Mori Seiki, which has a small portfolio of leases with some longtime end users. "We know we have competitors with in-house financing, and we need to build similar capabilities. We’ll get there, and will have opportunities when we do. However, because we’re a machine builder, leasing and financing still are seen as marketing concepts, even if they do help users." Harland adds his former company, Machinery Systems Inc. of Schaumburg, Ill., does more leasing and financing because it’s a machine distributor.

The relative prevalence of leases among machine builders seems to be a combination of industry tradition, application type, company size, and/or machine longevity. One or more of these factors seem able to convince some builders and potential customers to seek the advantages that leases can give them. These benefits typically include giving users access to performance features they couldn’t afford otherwise, not tying up too much cash in hardware they might not be able to resell, and limiting a machine’s presence on a balance sheet for depreciation and tax purposes. These benefits give builders more ways to gain sales and revenue.

Though end users and builders enter into leases to widely varying degrees, increasing global competition and shortening machine lifecycles might be inspiring more industrial OEMs to reexamine leasing as a useful option. "Most machine tool builders and distributors obviously would like buyers who just come in and write them a check, but many find that leasing is just another good arrow to have in their quivers," says Bill Colwick, senior vice president of National City Manufacturing Finance, which sets up leases for machine tool builders and industrial users.

Economic Undercurrents
Though leasing has grown along with machine tool sales in recent years, both suffered previous declines as well, according to research by Equipment Data Associates of Charlotte, N.C. (See Table I below).

TABLE 1: FLUCTUATIONS AND GAINS
Fluctuations and Gains
Click image to enlarge.

Of course, the 9/11 attacks triggered many economic drop offs, including steep reductions in machine tools leases and sales. However, leases began to slip earlier due to a federal capital-expensing allowance program in 2000-04, which allowed many users to expense the first several hundred thousand dollars of new equipment they bought. "This had a big impact on smaller companies, but since then leases have bounced back to about 30% compared to sales," says Patrick McGibbon, the Association for Manufacturing Technology’s strategic information and research vice president. "In fact, there’s still an incentive for small companies to buy machine tools instead of lease because they still can expense them at a higher rate."

Colwick adds that, "Overall, we’re now seeing adoption of more types of leases because business is strong. Four years ago, manufacturing was really straining after 9/11. Business and profits were down sharply, and so we saw more true leases because users didn’t need any extra depreciation. It was better then to have lower payments than the depreciation that goes with ownership. As the economy improved and profits increased recently, demand for some of leases decreased, while other types of financing made gains."

A History of Partnerships
While many builders are unfamiliar with leasing, FMC Food Tech, Lakeland, Fla., has been building and leasing machines practically ever since it invented the bean sprayer in 1886 and then its citrus juice extractor in 1942. Since its machines often had to be trucked out to remote agricultural sites to perform traditionally season work, leasing appears to have been a natural strategy, and is still how it conducts most of its business. Today, FMC’s five-headed extractors run at 120 rpm, and can process 600 pieces of fruit per minute (See Figure 1 below). The company has more than 2,000 machines operating worldwide, including a few facilities with 200 machines, and the largest in Florida, which has 76 machines.

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