The machinery equipment leasing industry is on the mend in Europe and 2014 has been welcomed with optimism among the region’s major players. Isabella Grotto and Jonathan Minter find out about the challenges and opportunities in the year ahead
While Germany has confirmed the strength of its market and its role in European industry, a recent resurgence in Italy’s manufacturing levels could combine with favourable legislation and long-delayed demand for updated instruments to create new demand for leasing in the country.
At the opposite end of the spectrum, France is still struggling to recover its manufacturing clout, and Europe’s largest players are increasingly looking overseas for growth opportunities.
Competitive factors including global footprint, links to a solid manufacturing base and, perhaps above all, size, are becoming increasingly determining differentiators among the continent’s leasing titans, who look poised to seize the moment in 2014.
Despite the recession, Germany remains a stronghold for manufacturing in the region, and has succeeded in maintaining its primacy in the area, as well as being the focus of some of Europe’s foremost leasing players.
Christian Bernhard, GE Capital’s head of equipment finance, says Germany is the company’s biggest market, one that’s solid, which the company has successfully navigated.
"We have outperformed the market here. The German market in manufacturing overall has been down. But we’ve been flat, I think as a result of Germany not having a blockage of investment like we had in other countries."
He adds that Germany started reinvesting in facilities rapidly after the end of the crisis, thanks in part to the requirements of the automotive sector, historically central to the German economy.
However, GE’s outlook for 2014 remains cautious for Germany, still the key driver for capital expenditure in Europe.
Bernhard says: "I believe we will see a relatively flat overall capex expenditure. Germany has fulfilled or satisfied its investment requirements in the past couple of years. As such we don’t expect to see a huge investment increase in Germany, rather it will be reasonably flat."
Overall, he says GE expects German spending "to drop from 166bn to 136bn in the coming 12 months, with an accompanying drop-off expected in spending on manufacturing equipment assets."
Another major player in Germany, Deutsche Leasing, has also fared well. Chief executive Kai Ostermann says: "Our machinery and equipment segment grew by 6%. It is our largest business segment making up 51% of overall new business."
In addition, he says Deutsche Leasing’s 22-country network remains a further point of strength.
When asked if Deutsche Leasing has its eye on foreign expansion in 2014, Ostermann says: "Our foreign network and our country-specific expertise are a major competitive advantage for us and represent further growth potential, since German medium-sized companies are increasingly active outside Germany."
Now in its eleventh consecutive month of growth, UK manufacturing industry exceeded expectations for expansion in February, with employment in the sector increasing at the fastest rate since May 2011.
Motivated by recent performance, several players are now looking to make a bigger mark on the UK market.
Bernhard says expansion in the UK is foremost on GE’s agenda for 2014: "The UK is a strategically important market for us and we have strengthened our staffing to enable us to expand our presence in this market."
A newcomer to the UK manufacturing equipment financing sector, Siemens Financial Services is also positive about its progress in 2013. Brian Foster, head of industry finance, says: "We have been encouraged in the UK by the receptiveness of the market to our offering.
"While Siemens Financial Services has vast experience in the manufacturing sector across the globe, this is a relatively new market for us in the UK."
When asked whether the leasing industry might capitalise on the resurgence of manufacturing in the UK, Foster seems optimistic.
"I think there’s a place for leasing in the UK, without a doubt," he says.
"Obviously as you come out of a recession, which a lot of our customers have done in the last 12-24 months, they’ve had a requirement to retool and up-spec some of their equipment, so we’ve been fortunate enough to be able to meet that demand. Activity in the manufacturing sector is definitely improving significantly."
He adds: "Obviously there are particular routes to funding that certain companies prefer. Some companies can afford to buy their equipment outright, but as companies come out of recession, for many their working capital has been eaten up on other strategic priorities. This allows leasing companies to come to the fore."
In Italy, recent signs point to a long-awaited resurgence in the beleaguered economy’s manufacturing sector. Once a European hub, the recession wreaked havoc on the country’s industry up until the fourth quarter of 2013, when the first signs of recovery were
heralded in the industry as the economy witnessed growth, albeit modest, for the first time since 2011.
That growth has since strengthened, with Italy’s Purchasing Manager’s Index up for the ninth consecutive month in February 2014, recording an increase in both output and new orders.
As far as GE Capital is concerned, Bernhard says that, although it’s not out of the woods yet, the company’s success has been solid. "We’ve been very successful in Italy. The country is still in a difficult period, but there’s a big manufacturing base there," he says.
"In fact Italy is the second-largest equipment finance market for manufacturing industry for us in Europe (after Germany)and during the crisis we continued to support those businesses, and had great volume results from this."
Leasing Life also spoke to Giampiero Farina, commercial director of Palladio Leasing, who was able to shed light into the state of the market for some of the smaller, domestic participants.
Active under the Mediobanca group in the north-eastern Triveneto area of Italy, Palladio Leasing specialises in the provision of machinery, as well as vehicle, nautical, aeronautical and real estate leasing.
Farina confirmed that 2013 saw a "substantial consolidation" and yielded positive results for the company, with a total of 1,700 contracts signed, totalling 176m in volume.
When asked how he believes the leasing industry might benefit from Italy’s recent manufacturing growth, Farina explains: "In essence, leasing is fiscally more convenient compared to direct purchase, and it can provide an excellent form of financing for business-owners."
He adds that recent substantial legislative changes, enacted as part of the government’s pledge to support business in the country, will further strengthen the machinery leasing industry.
"From 1 January, tax legislation is supporting us," Farina says. "Contract lengths have been shortened and the possibility of tax reductions on goods for businesses has been introduced, which was not possible previously. We should be able to benefit from this new regulation. We have a trajectory which we hope will become more positive on the strength of the new regulation, and we’re trying to accelerate in such a way as to support all our clients."
When asked what lies at the root of Italy’s recent success, and what his outlook for 2014 is, GE’s Bernhard admits there’s "room for improvement" in the infrastructure sector, which is still heavily focused around the automotive sector. However, he adds: "If you move away from automotive, you have opportunities in the packaging industries and the press industry, so if you look at the macroeconomics of the Italian economy, there’s an interesting market for manufacturing overall."
Although the success of countries such as Germany, the UK and Italy has certainly helped the industry’s outlook for 2014, the European market continues to presents significant differences in regional performance.
France’s Purchasing Managers’ Index reached a seven-month low of 47 in December 2013. In February the country recovered a few points, rising to a five-month high of 49.7, but remains among the lowest in Europe.
GE’s Bernhard confirms the company’s 2013 performance was "Okay in France, but not as good as the previous year".
He adds: "Looking at the economic environment, it’s not a big surprise."
Rather than seeking growth within the slower European economies, major companies have been increasingly turning their attention overseas.
In particular, GE say it is looking to follow manufacturing firms to the Americas and Asia-Pacific, leveraging its presence in Asia. "I fundamentally believe this is a global market – and we are global," Bernhard says.
Similarly, Deutsche Leasing reports its strongest level of absolute growth in Russia, North America and Brazil. Business in the company’s foreign subsidiaries grew by 10% to contribute 1.7bn, making up 22% of its business.
According to Bernhard, the global success of manufacturing is dependent on the demand for machine tools in the automotive sector, and he says it’s unclear how the sector is going to fare in the coming year.
However, Foster says Siemens has received an increasing number of automotive tools enquiries in the UK, adding the company has seen a "visible turnaround from where it was three or four years ago."
One area Bernhard is more confident about is 3D printing. Although the sector is starting from a very low base, he says the growth here could be so quick it may start to challenge more traditional segments in the next three years, if other industries don’t react to it.
A number of people Leasing Life spoke to said production leasing is growing in most sectors, and packaging, machine tools and manufacturing in the oil industry were all brought up as growth areas.With so many sectors growing, it’s little surprise that 2014 is predicted to be another year of growth for the industry. According to Bernhard, there was a lot of confidence that 2014 was going to be a big year for many manufacturers at the Machine Tool World Exposition, known as EMO, in Hannover last September.
Speaking specifically about the UK market, Foster says there are positive signs coming out of the UK economy, and predicts continued growth during 2014.
Farina says the Italian market’s recovery should continue over the next 12 months, even if growth remains slight. He says this growth has been positively affected by the aforementioned legislation
While legislation has had a positive impact in Italy, this appears to be unusual for Europe, with the rest of Europe seeing a general increase in regulatory pressure on the leasing industry, despite a lack of specific news rules for production machinery.
According to Deutsche Leasing, smaller German firms have been forced out of business due to not being able to cope with the increased legislation, and this is unlikely to stop in the next 12 months.
And this isn’t unique to Germany – Bernhard says GE has seen a consolidation of smaller and mid-tier finance companies as a result of the regulatory requirements across the continent.
While the consolidation of small and medium lessors is expected to continue, this doesn’t appear to be the case for the larger companies, with some doing well enough to be looking to enter new markets.
Foster, in particular, notes: "A lot of financial services providers, in particular the banks, exited from markets where they didn’t want to operate. Now you can see a return to those markets."
One example of a bank entering the market is United Trust Bank, which started offering machinery asset finance in March 2014. Martin Nixon, the bank’s head of asset finance, explains the decision to move into the area as part of the company’s natural growth, and as a result of taking on new staff who have expertise in this area.
He says: "We thought machinery asset finance would be a good sector to look at, and that there were opportunities there for us. We also got positive feedback from our brokers that specialise in that sector."
Bernhard adds: "You need to add value for the big players, so you need to be located where they need you to be."
As a result, he says "You have domination by a few big players, both on the manufacturing and financing side. You then have a relatively condensed mid-ticket size, with a big number of brokerage companies, and medium and small leasing companies supporting those customers."
Despite worries over smaller companies facing pressure from increased regulation and economic issues causing problems
in France, there is optimism that, after a number of year’s of struggle, production machinery is at last beginning to recover.