Academic journal article Business Economics

Heavy Construction Equipment: Vitality in an "Old Economy" Sector

Academic journal article Business Economics

Heavy Construction Equipment: Vitality in an "Old Economy" Sector

Article excerpt

The world demand for heavy construction equipment is projected to increase by 5.9 percent per year through 2003, almost identical to the 1993-1998 rate and exceeding the rate projected four years earlier. Continued healthy growth is attributed in part to the recovery from recession in several Asian countries. Solid growth is also expected in Latin America and Africa. A minor, cyclical slowdown, however, in the mature markets of North America and Western Europe is likely. The industry is not as heavily concentrated as before, but acquisitions are still ongoing and strategic partnerships are on the rise. Competition is keen, and price increases tend to be modest. Equipment rental and leasing are also popular. Technical advances in equipment design and security assist in marketing efforts.

Despite being very much part of the "old economy", the heavy construction equipment industry is showing remarkable signs of vitality. Global demand for its output continues to grow at about six percent per year. After shaking off worries about financial crises in Asia, Latin America and Russia, the industry is sharing in the worldwide drive to construct new projects or to renew older public and private structures.

Heavy construction equipment consists of the following major product categories: off-highway trucks and tractors, loaders, graders and rollers, cranes and draglines, mixers and payers as well as attachments and parts. This equipment is used in a broad array of applications--ranging from major infrastructure projects to office buildings and from housing to factories, power plants and mining. The scope of use is so broad that key measures in demographics (population growth, urbanization) and aggregate macroeconomic forces (GDP, gross fixed investment, industrial output) are the major determinants of the demand for construction equipment. A previous article in this journal (Gross and Weiss, July 1996) commented in more detail about the kinds of projects where heavy construction equipment is used.

The Cyclical Global Economic Environment

Demand for heavy construction equipment is highly cyclical, as the projects that use it require substantial amounts of capital. Potential investors are more receptive when borrowing costs (interest rates) are low and when a reasonable rate of return seems assured. This scenario applies especially to privately funded projects. In contrast, public works programs are often embarked upon during recession as part of a broader fiscal stimulus (witness the recent experience of Japan).

Cyclical trends tend to be shorter and more applicable in mature markets. In developing countries, the rate of sustainable economic growth is of key concern. This, in turn, influences the country's ability to attract external capital or generate its own. Short-run factors were clearly at work, however, in the financial crises of the late 1990s in Southeast Asia, Latin America and Russia. These crises interrupted capital flows, and large-scale construction projects were canceled or delayed. Thus, demand slackened for construction equipment. A turnaround now seems to be well under way.

Reductions in tariffs and non-tariff barriers in the mid-1990s by GATT resulted in increased competition and lower costs due to economies of scale. Large machines and components can now be manufactured in fewer locations to serve the global market. Products can now move duty-free between mature markets, though some emerging countries still require local content or offsetting exports to qualify for duty-free imports.

Demand and Supply Patterns Vary by Major Regions

Regions and countries vary in their construction needs and, hence, in their demand for equipment to do the task of building and re-building. Table 1 shows the different growth rates for major regions during 1993-1998 and 1998-2003.

Having experienced an almost decade-long boom, the U.S. will slow down, while Western Europe will remain stable; and Japan will gradually recover. …

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