The industrial equipment assets sector was already suffering as a result of the scarcity of semiconductors, and those problems were only compounded by the war in Ukraine, but the situation is expected to improve in 2023. Flexible and well suited to manufacturers’ current preference for using equipment rather than owning it, equipment leasing arrangements should be one of the main ways of financing the economic recovery.
Machine tools, electrical equipment, engineering or construction equipment… The industrial capital assets sector plays an important role in the French economy. For instance, mechanical industries alone generate nearly €135 billion in sales and employ 600,000 people*.
Like many industries, the capital assets industry was particularly hard hit in 2020 due to the pandemic. For example, in 2020, business slumped by 13% for suppliers of capital assets for material handling, construction, fluid processing, steel-making, and industrial production.
A challenging context in 2022**
Thanks to higher demand in the post-pandemic recovery, business started to get back on the rise in 2021. However, that upswing was curbed in 2022 by bumps in the road such as shortages of certain raw materials due to global warming, or supply difficulties linked to the war in Ukraine.
According to Xerfi, an organization specializing in market sector research, the production capacity utilization rate in the manufacturing sector has plateaued at around 78% since the end of 2021, which is insufficient to meet new machinery needs. That same indicator is down to 67% for the automotive industry. Rising prices for raw materials and energy tend to tighten manufacturers’ margins and cash flow, making it more difficult for them to invest in new equipment.
On the bright side, the economic stimulus package, combined with production tax relief, has given a valuable boost to certain sectors, particularly machine tools.
Business is projected to increase in 2023
In this sluggish context, all eyes are now on 2023. Although the decline in French purchasing power is expected to continue to have a negative impact on demand for manufactured goods, business volumes are expected to pick up.
Machinists’ sales figures are predicted to rise by 1.4% (Xerfi figure) in 2023. The bounce back has been helped by the revival of the automotive and aeronautics industries. The creation of new production lines and the ramping up of existing ones should further stimulate the need for equipment (metal forming machines, pumps and compressors, gears, etc.).
Also noteworthy: equipment manufacturers can expect to benefit from fast-growing markets such as energy renovation. This will have a positive impact on manufacturers of HVAC (heating, ventilation, and air conditioning) equipment: air heaters, infrared radiation equipment, heat pumps, etc. Finally, the boom in e-commerce will increase the need for packaging machines.
Users of industrial equipment are less and less inclined to purchase it
As a result, equipment leasing will continue to play a key role in financing new equipment. In view of the short time frame for technologies becoming obsolescent, investors need a more flexible type of financing arrangement than the conventional bank loan. In many cases, preference should be given to using equipment under a leasing arrangement (with the associated upgrades and service contracts) rather than owning it.
It is no longer the asset value of the equipment that is important but its cost of use, including the amount of the lease payments. Once the contract is signed, it will be stipulated that the lessee of the equipment can, if they wish, exercise their option to purchase it for a set price at the end of the leasing contract. Generally between three and seven years, the duration of the leasing contract varies according to the equipment in question. Of course, it must be close to the duration of the tax amortization of the investment. Among the many advantages, let’s not forget the possibility of making a higher first lease payment, with the ensuing increase in operating expenses.
With all these advantages, leasing seems like a particularly good solution when it comes to the need to invest in capital assets. This type of financing arrangement should shore up the recovery that is expected in this business sector in 2023.
* Source: Fédération des Industries Mécaniques (FIM), figures from April 2022
** Xerfi study on machinery and equipment of July 24, 2022