Problems such as rain make rental atypical in the "Terra do Sol"

In Brazil’s Northeast region, there are particularities that make the activity of rental unique, requiring local competitors to have a keen perception of climatic and cultural characteristics, among other ‘enhancements’

When it comes to equipment rental, that old saying that says there are various different “Brazils” within Brazil makes all the sense in the world. That’s what this M&T magazine series on rental, which begins with this issue, intends to demonstrate. And for starters, there’s nothing more appropriate than to speak about the region that has been the fastest growing in terms of major construction projects in recent years: Brazil’s Northeast. And the rental market in the nine states that make up the “Terra do Sol” or “Land of the Sun” has unique characteristics, as demonstrated by experts who are active in the region.

Let’s start with the Bahia Association of Equipment Rental Companies (Abelme), whose president, Arthur Luiz Brandão Vieira, summarizes the moment of instability that the equipment rental sector is going through. According to Brandão Vieira, this is directly linked to the planned volume of investments in construction works that never got off the ground in 2011 and in the first half of 2012. “There is a lack of construction work in general. We have great railway construction projects in progress, such as the ‘Ferrovia Leste-Norte’ (East-North Railway), but the stretches of the railway job are being hired gradually, without generating a high demand for equipment rental,” he says. “And that happens for a variety of reasons, including the problems of irregularity and interventions by IBAMA, which hinder the progress of some jobs.”

The feeling reported by Vieira is consistent with what is felt by the main equipment rental companies in Bahia, and some that operate throughout the Northeast. These impressions are collected when the members of Abelme get together to share information. But Brandão Vieira’s assessment is also, in part, corroborated by rental companies that operate nationwide and that have expanded their businesses in the Northeast.

That is the case of the Escad Rental, as explains the company’s commercial director Eurimilson Daniel. He assesses that investments in major construction projects that were initiated in the region in recent years are still underway, but stresses that new investments that were anticipated did not materialize as planned, and that fact has cooled off the northeastern market for rental. “This means that the jobs that were served by rental equipment in 2010 continue to be served by the same fleet today, leaving no room for new rentals,” he explains. “If we add a few new projects that started from 2011 onwards, such as the refurbishing and construction of football stadiums for the 2014 FIFA World Cup, and subtract other jobs that ended during this period, we realize that the fleet that is mobilized is basically same,” he adds.

In contrast, Daniel evaluates that the boom that has been expected since 2010 has resulted in the emergence of new players in rental who began to compete in the region as of that year. Some, as he classifies, are well-structured while others are not very.  “But the fact is that competitiveness has increased, and that has caused a drop in rental prices,” he says. He assesses that the large number of competitors in the Northeast is also due to the facility of credit afforded by the Banco do Nordeste (Bank of the Northeast). “There has been imported equipment that was purchased through funding provided at the same rates of interest of the Finame, of the BNDES - Brazilian Development Bank, and only available for products with a domestic content of over 60%, which greatly facilitated the acquisition of imported machines by small local competitors,” he says.

Competition strategies

The assessment that the rental market in the Northeast could be better is also shared by André Leão Ribeiro, executive director of Fornecedora, and by Cândido Terceiro, commercial director of A Geradora. These two companies operate strongly in the region where they have a long history in the segment of rental.

In the case of Fornecedora, Ribeiro reports that the company is betting on professionalism. With a fleet of 350 units of construction equipment, 220 of which are heavy ‘yellow line’ machines and the remainder industrial handling equipment, such as aerial work platforms and forklifts, the company operates from Bahia to the state of Piauí with branches in six of the nine Northeastern states. “The region lacks service providers with a greater level of formality,” he says. “When large construction companies begin projects here, this is a very strong requirement, and the fact we have this expertise puts us one step ahead,” he adds.

Ribeiro attributes the lagging development of the Northeast compared to the South and Southeast to the precarious specialization of local competitors. “It was only after the second term in office of President Fernando Henrique Cardoso that there was strong investment in local infrastructure. It was then that a potential market for equipment rental began to develop here,” the executive evaluates.

To A Geradora the Northeast (the company’s place of origin) today represents 40% of its rental business. The company recently acquired Poliservice, headquartered in São Bernardo do Campo/SP and with branches in Rio de Janeiro and Florianópolis/SC, consolidating a fleet of generator sets for rental comprising 412 megawatts, which would be enough to supply power for a city of 600,000 inhabitants. This transaction is responsible for much of the expansion of A Geradora, which now has a business operation that aims to earn R$ 260 million (US$ 140.5 million) in 2012.

Cândido Terceiro, in turn, reminds us that the company's fleet does not consist solely of generator sets. “We also have a fleet of over a thousand compressors and two thousand lighting towers, plus around 200 skid steer loaders and mini excavators,” he says. The company's fleet is complemented by another 500 units of equipment, including telehandlers and aerial work platforms, besides another three thousand units of small equipment, such as motorized pumps, hoses and manual compressors. “I agree that the big rental market in the Northeast is in infrastructure works and this is due to the large number of projects that still remain to be done,” summarizes the expert.

Regional difficulties

To serve this market, Cândido underscores the need for cultural harmony, especially in relation to climate. That, according to him, happens because there is a period of recess due to the holidays between December and January and, as of May, the beginning of the rainy season which inhibits the progress of works, causing a good number machines that are available for rental to remain idle. “The strategy in this case is to increase the rotation of machines, assigning them quickly to other regions for deployment,” he says.

The rotation of machines by assignment to opportune regions is, to Ribeiro of Fornecedora, the main way out. And it can be done just between the northeastern states. Being present in all states of the region, the executive explains, provides a knowledge of each climate which allows you to assign equipment efficiently. “That's because, while the rainy season in Ceará and Piauí goes from February to May, in Bahia and Pernambuco it goes from May to August and other states also have different periods of rain,” he explains.

The associate members of Abelme have devised a way to jointly overcome the challenge of reassigning machines to different regions in order to escape the rainy periods. According to Arthur Vieira, small rental companies get together at these times to form a type of convoy and, thus, make the cost of mobilization and demobilization in the other regions of Brazil feasible. “This alternative is feasible for fleets with over 50 units of equipment, which led us to this solution,” he says.

Daniel, of Escad, agrees with the possibility of rotating machines among different regions to escape the seasonality imposed by rainy periods. However, he points out that, nowadays, the climatic uncertainties imposed by phenomena such as El Niño make such forecasting difficult. “Furthermore, with the strengthening of local players in each state, penetration of the local market becomes increasingly difficult. Especially in the Northeast, where referrals based on relationships are strong, even in public works,” he adds.

Modes of rental

Despite these adversities, the average occupancy of the A Geradora fleet still remains good, staying in the range of 75%; something which is also associated with preferences for certain modes of rental that are mainly adopted in the Northeast. “We, for example, characteristically rent equipment without an operator, and can even assist in training people in the use of certain types of equipment, such as skid steers and mini excavators,” he reports.

Rental without an operator has become a more common practice for most companies, according to Ribeiro of Fornecedora. In his specific case, the executive recalls that the company’s philosophy has always been not to establish criteria for rental with or without operator, per hour or per m³ excavated etc. “We always thought that the rental should be customized, but most of our local competitors did not accept renting machines without an operator a few years ago on the grounds that only the operator himself could protect the machine, increasing its service life,” he recalls. This concept fell by the wayside in the middle of the last decade when large construction companies started to perform works in the Northeast and preferred to rent equipment without an operator. “As of that time renters of equipment realized that large construction companies had well-planned, conscientious maintenance schedules capable of increasing the service life of their machines even more, which reduced the resistance to renting equipment without an operator,” says Ribeiro.

The executive considers that among the construction companies in the Northeast, there is still a preference for renting with an operator because they prefer to transfer the responsibility for labor liability to the rental company. “But this is very relative, because even if the operator is an employee of the rental company’s, the construction company is co-responsible and may also be legally sued in a labor claim,” he assesses.

Daniel, of Escad, adds that, in addition to co-responsibility, the construction company assumes that it will pay a higher rental rate when it chooses the mode of rental that includes an operator. “The business of rental is not subject to the collection of the ISS service tax since the Brazilian tax system understands that the business involves supplying of mobile property that has to be operated by the renter to generate production. Once rented with manpower included, however, the story changes completely because the tax (ranging from 3.5% to 5%) applies and its value has to be passed on to the cost of rental,” he concludes.