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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
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ARA Equipment Rental Penetration Index ARA Rental Market Monitor™
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
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ARA Equipment Rental Penetration Index ARA Rental Market Monitor™
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 equipment rental industry.
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.
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ARA Equipment Rental Penetration Index ARA Rental Market Monitor™
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
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ARA Equipment Rental Penetration Index ARA Rental Market Monitor™
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.
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ARA Equipment Rental Penetration Index ARA Rental Market Monitor™
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
ARA Equipment Rental Penetration Index ARA Rental Market Monitor™
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
ARA Equipment Rental Penetration Index ARA Rental Market Monitor™
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.
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ARA Equipment Rental Penetration Index ARA Rental Market Monitor™
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)
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ARA Equipment Rental Penetration Index ARA Rental Market Monitor™
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
the equipment rental industry.
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
ARA Equipment Rental Penetration Index ARA Rental Market Monitor™
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