Buying New Equipment Makes Dollars and Sense

Editor’s note: Fred Young wrote this article to a colleague outside the gear industry to explain his company’s strategy. He sent it to Production Machining with the hope it would be of interest to our readers.

Our strategy over the years has been to buy new to gain the experience of higher productivity and quality that new equipment yields. Generally speaking, we end up expanding our size range and technology with each new machine; that allows us to pursue jobs upon which we may not have been competitive previously.

A further benefit is the marketing gain realized when customers see all new toys on your floor. Your employees will take more pride in their work, and with each new acquisition there is an opportunity for additional employee training on state-of-the-art equipment, allowing faster production.
We receive cross-pollination when training with the setup guys who come in to install the new equipment as they have been exposed to benchmark shops all over the world and have been challenged to conquer very difficult work at their individual customers’ shops.

Newer equipment allows for more uptime and significantly reduces maintenance expenses. Because we have been purchasing so much new equipment for so long, our depreciation allows us to continue to buy lots of new stuff courtesy of the depreciation tax advantage.

Finally, over the years, we have developed quite a list of potential buyers for our surplus equipment, selling it to customers or competitors or trading it in for newer equipment. Usually you are better off if you can sell it yourself versus trading it in, as your vendor has to buy at a low enough price to allow him to provide a warranty and bury sales expenses.

We also get a fair amount of work steered in our direction by the folks from whom we purchase our equipment. As I am fond of saying, your customer wants you to have the equipment on your floor with people already trained to use it rather than accepting your potential offer to go out and purchase new if they give you an order.

By buying new, we have been able to expand our productivity without adding a proportionate number of people. For more than 30 years I have been re-investing 25 to 40 percent of our gross revenues in new equipment, much to the chagrin of our accountant, lawyer and bankers. Needless to say, I believe I have finally convinced them that this is a safe and viable option which will ensure the survival of our company and allow us to grow.

A cancer in our country is the need for short-term return, which seems to be driven by accountants and stockholders. The Europeans and Asians seem to take a longer-term view, say over a 10-year period versus 6 months or a year in the U.S. 

Without re-investment, one day you wake up to discover you are sitting on a hollow shell—a dinosaur that is worth nothing. In the interim, you have lost the ability to compete in a global marketplace. I hope to bequeath a healthy, world-class operation to my successors with a reputation that will continue to abet their success.

If I were to change the modus operandi, it would be to purchase the equipment myself, setting up a separate corporation to take advantage of tax deductions for me. This, of course, depends on whether you are a C or S corporation and your personal tax situation.

Also, because we have bought so much foreign equipment, I have suffered through some currency fluctuation cycles when the cost of equipment is artificially higher because of the exchange rate. With lots of clairvoyant crystal-ball gazing, I would be sure to purchase lots of equipment when the dollar is strong. (Usually that occurs at a low point of the business cycle for us when it is hard to justify buying new stuff for lack of work.) However, I have discovered that you can offset or attract a bigger market share by having newer equipment that negates that argument.

Once you get the snowball started rolling downhill, it acquires its own momentum. Our bankers seem to applaud these efforts as well as the end results of significant cash flow from our acquisitions and the gain of higher profit margins by being able to produce gears against which few can compete.

To encourage my employees to take advantage of the potential gains from the new equipment, I have often sent them for training directly to where the equipment is made and at the same time tried to get them in other shops who are benchmark manufacturers. Naturally, sending an employee to Europe is expensive, but I am paid back by their loyalty and enthusiasm for the new equipment.

Hopefully this conveys my strategy and philosophy on reinvesting in new equipment. I have been lucky enough to convince a few of my peers in the gear industry of the this strategy’s wisdom, and in each case, they report to me the benefits of this approach.

Fred can be reached via e-mail at fyoung@forestcitygear.com