Q&A with Moriaki Kadoya, CEO of Hitachi Construction Machinery (Europe)

IRN Editor Murray Pollok asks Moriaki Kadoya, president/CEO of Hitachi Construction Machinery (Europe), for his views on the rental market.

IRN: Rental is growing as an industry. Do you welcome this?

Moriaki Kadoya: It is simple to sell directly to end users, much more simple. Traditionally, as an OEM, we have a wholesale company in Europe supplying to dealers. So rental is another channel. Normally a dealer sells to rental companies, and then to the end user. It is one more step in the supply chain, so we have to share margins.

But on the other hand, the rental market is growing and there are some national and regional rental companies. They have grown large enough to become a kind of major account, or international account. They may want to directly deal with the OEM, skipping local dealers, to negotiate better prices. They will need product support, so we have to involve our dealers. We have to formalise who should do what in the distribution channel.

Have you done that yet?

Not so much yet. If rental companies are national then we can work together with our national dealers. At some time - it’s not really happening to us yet - we expect that rental companies will be international, covering several countries, then they may want to deal directly with OEMs. In that case we will have to organise our dealers to provide proper product support.

At this moment we deal with the big international players country by country. They don’t come to us for large international purchasing.

Are your dealers ready for that?

I think that’s an important point: dealers should give good product support to rental companies in each location. We have to organise that properly, with a special programme. We have to have the structure, the financial support, to enable dealers to support rental companies, especially the large ones. [Because] if the deal is done directly between the rental company and us, then dealers will not get the distribution margin directly.

There are some models: we can deal with the rental companies directly, but we may be able to invoice through local dealers, or directly with the rental company and then pay a service fee to our local dealers. So we have to arrange that kind of structure.

Is that done elsewhere by Hitachi?

Yes, in North America. In the case of John Deere they do that [Hitachi and John Deere have a joint venture in North America.] They make deals directly with rental companies and work through dealers.

Are your dealers establishing rental operations in Europe?

It depends on the market. Every country has a different preference. I think it will be a dealer’s choice whether they want to expand their own rental fleet or - if they want to deal with rental companies - keep the rental fleet to a minimum. It is a dealer choice, not from us.

Do you have a preference, in an ideal world?

In the case of rental the dealers are independent. The manufacturer has to stay back in that decision. In Japan we have our own rental branches – but it is still a combination. We have very good partnerships with some large rental companies, regional rental companies. So the network is a kind of combination of our own rental network and regional rental companies.

If independent rental companies are strong and we can establish a very good partnership, then we don’t go there [with our own rental fleet]. In other areas we cover with our rental shops.

We have to be very careful. Where you are earning money in rental – are you really earning money from rental users or from disposal of the rental fleet?

Japan’s rental industry has had ups and downs. A very big up in the mid to late 90s, big growth in rental, and then the market declined. And again, when the Yen was very weak, rental companies were able to make profit from disposing of their rental fleet overseas. They made a very profitable capital gain from used equipment. But then the Yen became stronger and many rental companies got into trouble.

The financial crisis has encouraged the take up of rental, particularly in North America. Does Hitachi see that happening in Europe?

It depends on the equipment. I think the rental markets in Japan, US and Europe – and even within Europe – are quite different. I’m not yet so familiar with today’s rental market in Europe. But I see that contractors still need to own their own equipment, especially heavy machines. Because some customers are specialists, they have their own engineering capability and their own equipment. Customers want equipment with specifications to suit their own working techniques.

On lighter equipment, it seems to me that they tend to choose rental. It also depends on the size of customers. If they have multiple jobsites using light equipment, then they go for rental rather than ownership. But smaller customers, they should own their own.

In the case of Europe, rental companies have different sets of equipment – they are not all the same. Some specialise in limited types of equipment, others go for very wide range. I need to understand why that is happening.

But do you see a trend towards more rental?

Looking at Japanese experience, and in North America, there is always a discussion that there is a tendency towards rental, but there seems to be a natural ceiling that the rental ratio will not go beyond. I think there is some point of equilibrium. I’m not sure if that point really exists, and why - it seems to relate to a difference in the structure of the construction market itself.

I only know the rental business from Japan, for the past 20 years. If the rental business is growing it is a kind of sign of oversupply of equipment – I’m not sure whether it is really happening in Europe or not.

The construction market becomes very mature, there is oversupply of equipment and customers do not have enough work to justify owning equipment. That is what happened in Japan 20 years ago.

Big rental companies can be very demanding, are you comfortable with that?

Not at this moment [laughs]. In some countries I think our dealers have very good relationships with large national rental companies. It is probably too much of a generalisation to say that large rental companies are hard price negotiators.

Would it be true to say that there could be a better relationship?

Yes, I think that is possible. But we need to talk directly with large rental companies, because dealers want to have a good price. Large fleet buyers, like rental companies, want to make a very good deal.

We have to stress that they also have to think about product, cost of ownership. Also, fuel consumption should be very important for them. Customers have to pay fuel. So customers want to choose us because we offer better fuel efficiency.

Large plant hire companies in the UK are coming to us because they know our products are very fuel efficient compared to competitive products. Better fuel savings is our sales feature and also a sales feature for plant hire companies – that’s what we are seeing in the UK.

Is that happening elsewhere?

Yes. End users can clearly see the benefits of better fuel consumption.

Do rental companies have a good understanding of the needs of manufacturers?

I think they understand that.

Do they want long relationships?

Yes they do. In the end, they find that a long term relationship is very important. If the size of the fleet grows and they need mechanics and others to support their fleet, that means they need to have good knowledge of the equipment.

It is very important for us as a supplier to give them good technical support and train their staff. I think a long term relationship keeps the cost of ownership down for the rental company.

Do you develop products with rental in mind?

Yes, of course, ease of maintenance is very important. We always consider that. Actually we own rental companies in Japan and we work together with these engineers and service mechanics to develop new products.

Europe’s market is subdued. In your view, what are the prospects for this year?

This year will be difficult again after a difficult 2012. North America is picking up, and actually has been recovering since early 2010, but now the housing market is recovering. So North America is growing, driven by the US. China will be better. Then German exports will be better, and the German economy will be better, and the European economy will be better.

That the scenario I’m hoping for, but I cannot say what will happen this year.

BOX STORY

30 year career

Mr Kadoya’s appointment in mid-2012 as president/CEO of Hitachi Construction Machinery (Europe) saw him return to Europe where first worked between 1992 and 1998 as Hitachi’s general manager for sales and marketing.

That six year stint in Europe and his current leadership role form part of a 30 year career at the manufacturer that has included six years in the Americas as well as periods in Japan at Hitachi’s finance and corporate planning departments. He has also been general manager of Hitachi’s supply chain management and sales administration offices in Japan.

Mr Kadoya’s current European role also sees him taking responsibility for Russia, CIS, Middle East, and North and Central Africa.