High interest rates and influx of back-order deliveries squeezing machine dealers
By Danielle Sottosanti
After years of dealing with machine shortages, heavy equipment dealers now have the exact opposite problem—at a time when having excess inventory can be the costliest.
Dealers have been facing an “inventory bulge,” in 2023, said Darren Grahsl, manager of commercial finance at BOK Financial® and treasurer of the AED Foundation. In some cases, dealers have been receiving six to nine months’ worth of machine deliveries in just a two-to-three-month span.
Fortunately, demand for heavy equipment continues to remain high, thanks to the federal infrastructure legislation and homebuilders trying to supplant the death of available homes with new construction. But even this increased demand can’t meet the influx of machines, such as excavators and wheel loaders, finally arriving on back order.
The imbalance between inventory and demand would be a problem even in the best of times, but it’s even more challenging now because of higher interest rates, as dealers typically use debt to acquire new machine inventory, Grahsl noted.
“First and foremost, the higher interest rates have had a very meaningful impact on companies’ earnings. The cost is real, especially when you consider where interest rates and dealers’ inventory levels were in 2021,” he explained.
A backlog of orders
It’s not that manufacturers are delivering orders they shouldn’t or that dealers have overordered. The current situation is yet another after-effect of the pandemic. Here’s what happened, according to Grahsl:
Like many other areas of the economy, the pandemic created supply chain disruptions in the heavy equipment industry. Machine dealers’ inventories kept shrinking at a time when demand for the equipment was surging due to the booming housing market and the 2021 passage of the Infrastructure Investment and Jobs Act.