Could Covid lead to record construction equipment sales in 2021?

Compact track loaders and mini excavators have opened up new markets in North America

Equipment sales are a reliable indicator of the health of the construction market, as buyers don’t generally invest tens of thousands of dollars in durable assets unless they need to. With that in mind, sales over the past year tell a surprisingly upbeat story, including the potential for a record-breaking 2021.

Global sales of construction equipment peaked in 2018 in 2019 at a record volume and value of 1.1 million units/$110 billion in each of those years, according to data released by Off-Highway Research during its Global Briefing Webinar on March 30.

Following that peak, the forecast in late 2019 was for global sales to decline by approximately 5% in 2020, in line with the usual market cycle. Conditions were seen as broadly favorable, with strong infrastructure markets around the world and reasonable residential construction activity.

Those forecasts, of course, changed drastically in the early months of 2020 when the Covid-19 outbreak spread into a

global pandemic. The immediate expectation was for a sharp decline in construction equipment sales in 2020, and that certainly came to fruition in the first six months of the year.

Final figures for the market in 2020, however, showed sales remained level with the volume seen in 2019. This means the global market performed better in 2020 than was forecast for a world without Covid. The key reason was the extraordinary stimulus spending in China, OHR said, which saw sales in that country rise from an already high level in 2019 by a further 30%.

In addition to this boost, a solid recovery in the second half of the year in most other countries of the world meant the impact of Covid and its associated lockdowns was not as severe has had been feared at the start of the pandemic. Rather than falls in sales of the order of 30%, most markets declined by 10% to 20% and the average fall for countries, excluding China, was 12%.

“On a global level, Covid arguably had a positive impact on the global construction equipment industry,” noted Chris Sleight, managing director for Off-Highway Research. “Looking ahead, there’s a very realistic possibility that we’ll have a record year for construction equipment sales in 2021.” 

North American equipment sales boosted by compact track loaders

Construction equipment sales in North America fell 16% in 2020, although the figure was only 8% if compact track loaders are included in the data.

This made for a worse year than was expected before Covid struck, but it was certainly not as bad an outcome as was expected in the second quarter of 2020.

“The expectation is that the market will bounce back to the peak levels we were seeing in 2018 and 2019, and then go on to a new high,” Sleight said, noting a key contributing factor is the recent passage of multi-trillion dollar spending bills with

an emphasis on infrastructure. 

The general forecast for North America is extremely buoyant, Sleight added. Additional factors include a strong residential construction market and the growing popularity of compact track loaders, which are now the highest-volume machines in the market.

According to OHR data, preferences have swung very firmly from the traditional skid-steer loader to the crawler variant of the same machine. The same period from the 2000s onwards has seen a rise in mini excavator sales as well. The popularity of these two machine types has negatively impacted sales of skid-steer and backhoe loaders, two traditional products.

Compact track loaders and mini excavators have effectively created new applications and therefore, new markets. This is particularly the case for compact track loaders, which offer much better capabilities on soft ground than skid-steer loaders. 

“The emergence and acceptance of new equipment types in the North American market is one of the reasons that we see long-term growth and a new high being scaled there,” Sleight said. 

The rise in popularity of mini excavators and compact track loaders, however, has had an impact on North America’s trade dynamic, turning the region very firmly into a net importer of construction equipment. Although there is mini excavator production in North America, most of the machines sold in the region are imported from Japan.

In the case of compact track loaders, while the majority of machines are manufactured in North America, the export markets for these machines are small.

At the same time, the Japanese OEMs, which compete alongside the U.S. producers in this area, import their products from Japan.

Long-term challenges to demand for construction equipment

Stimulus spending in China in 2020 kept global construction equipment sales at an unexpectedly high level last year. That buoyancy will continue in 2021 as other markets bounce back.

If the policy response around the world continues to be positive in the face of Covid-19, these helpful conditions could continue for the duration of the forecast. Off-Highway Research stated the ideal scenario is that as measures to protect jobs and support businesses are inevitably tapered-down, stimulus spending should come on stream to help restart normal economic activity.

This is a difficult balancing act and will be extremely expensive, according to OHR. There is risk in the forecast, particularly for 2022-2025, depending on government policies around the world.

A word of caution: The peak in global equipment sales which began in 2017 has already been extended beyond what would otherwise be expected, and the forecast foresees these very high levels of sales continuing.

Such high volumes tend to cause problems in the supply chain. Historically, when unit sales rise above 1 million units per year, component supply can become problematic, resulting in long lead times for new machine sales, the OHR report stated.

This issue has been exacerbated by the events of 2020, namely:

• Dealers, OEMs and component suppliers ran down their inventories in 2020 to generate cash and because of concerns about low future demand
• Production was reduced due to uncertainty, factory closures and the requirement to implement Covid-safe working practices on re-opening
• Ramping back up to normal production levels takes time in heavy industry, and where complicated global supply chains are involved

“Whenever you’re at this level - with a million-plus units - supply will eventually be an issue in some area,” Sleight said. “On top of that, industry is still ramping up after the slowdown last year, while inventory was emptied out in 2020. It’s obviously very difficult for that whole supply chain to suddenly leap back into action and react to the demand.”

He added, “That’s the issue with such a big global ecosystem like construction equipment supply chains. It just takes one boat to get stuck in the Suez Canal and the world has a problem.”

Looking further ahead, there are two issues Off-Highway Research said are potentially significant: First, the prolonged peak in construction equipment sales is unusual, if not unprecedented.

Based on estimates of average machine life, this means that by the end of 2021 the active population of equipment around the world will have risen 10% from the level seen in 2017. By the end of 2025, the population could be 8 million machines or more. This compares to the figure of 6.1 to 6.7 million machines in the early to mid-2010s.

This is a concern because a large population of equipment could be a barrier to new sales in the future, particularly if construction activity falls away. Since equipment sales and populations naturally grow over the long term as more aspects of construction are mechanized and new applications are developed, this is not necessarily a problem in the making. It could be an issue if global economic growth falters and construction activity falls, however, which is clearly a possibility in the aftermath of the Covid pandemic.

Second is the need to consider societal changes in light of the Covid pandemic. OHR stated it’s likely that many of the changes which Covid and the accompanying lockdowns forced on the world will become permanent, even as the threat to health recedes. For example, many workers who previously traveled daily to central offices will continue to work from home, and much of the expensive, time-consuming and environmentally damaging business travel which used to take place will be replaced by video conferencing.

This will have an impact on the need for a variety of nonresidential structures, from offices and commuter infrastructure to international travel hubs and even bars and restaurants. A fall in the demand for these types of structures will impact the construction of new buildings in these categories and therefore construction equipment.

While these impacts are likely to be most keenly felt in areas such as tower cranes, materials hoists and concrete equipment, among others, some impact may be felt in the earthmoving, mobile crane and road building equipment types in Off-Highway Research’s coverage.

“When we have too much equipment around when the downturn comes - and it will come - those machines could be a barrier to new equipment sales,” Sleight said. “I think it’s striking that we’ve had this peak for a very long time, and it is something unusual that the industry will have to deal with.”