Issue link: http://read.dmtmag.com/i/759225
I DA U N I V E R S A L N ove m b e r - D e ce m b e r 2 0 1 6 11 LEGAL LINE Robert W. McIntyre IDA Association Legal Counsel CONVENTIONAL WISDOM: VERSION 2016 Continued on page 68 I n past years, I have given a lot of thought to what I heard and saw at our annual convention and then looked for lessons that we could learn from our collaborations and contacts. is year, the mood was somber, at best. e energy and commodities industries world- wide have been in a down or fl at cycle for nearly two years. Also, two bombshells – the "retire- ment" of Cat's CEO and the Passini-Valuepart U.S. and Italian bankruptcies – put an exclama- tion point on the seriousness of the situation. Also, the signifi cant imbal- ance emerging between new machine sales, rental and leasing, and used machine inventories has put the entire world market in turmoil. Add the increasing costs of new machines and engines due to Tier IV and similar emissions requirements, and the future looks less than optimistic for the near term. With hundreds of millions of dollars in used equipment on the world market, the outright sale of new machines becomes problematic for two reasons. First, the entrance costs of new equip- ment are ever higher; thus, leases and rentals have begun to exceed outright sales. Also, the value of trade-in equipment is historically low. is situation runs across construction, on-highway, mining and agriculture. Also, in some areas, ag dealers can't fi nd homes for trade-ins and, thus, can't sell their new machines. is can, and will, impact our industry, simply because idle machines in dealer, broker and user yards don't need parts. e usual safety valve of machine sales to "legacy" markets in lesser-developed parts of the world is similarly aff ected. Add the natural inclination of the remaining users, rental fl eet owners and lessees to squeeze costs, and a "run it 'til it breaks" mindset also impacts parts and service sales. Looking in from the outside, today's situation came as a complete surprise from the biggest to the smallest company. Who could have predicted that the Chinese commodity, world commodity and ag markets would shrink by half in a year and that the oil and gas market would drop 50+ percent and stay there? Small energy and energy support companies tanked or consolidated; large ones radically cut Capex and stopped looking for harder and costlier-to-extract oil and gas. e largest mining companies radically cut or indefi - nitely deferred Capex and, thus, idled thousands of machines around the world. Cat's CEO convinced his board to make an $8 billion bet on Bucyrus to "fi ll in" Cat products at the top of the mining machine spectrum. Already, Cat is looking for buyers for some of the lines, but has no hard interest and is sucking it up for the near term. Aside from the CEO, other casualties of this decision were some 15,000-20,000 career Cat employees, who will be "spending more time with family and personal interests," with slim prospects for returning or fi nding jobs elsewhere in the industry. As in many past situations, Cat and others turn to the fi nance side for leadership, instead of to products and engineering. Short-term stock value and paper strength overcome long-term product development. And, with thousands of unsold machines, why make something new? e next surprise was the ValuePart Chapter 11, fi led both in Dallas and Italy. One of the largest and most successful members of our industry seemed to run out of gas, perhaps losing near-term support from its U.S. and foreign lenders. Unfortu- nately, many lenders facing far more draconian regulations o en cut-and-run from a whole industry or business sector. Companies in the "target zone," with potential problems due to outside infl uences like those above, are o en the victims of lender panics. Hopefully, the dual reorganization proceedings will aff ord ValuePart and its Italian counterpart space and time to right the ship and remain a viable manufacturer and distributor. While the Cat situation likely will not result in any unpaid