Reinvestment in technology: The cornerstone of the future metal fabricator

The productivity of one modern metal fabrication machine can leave its older cousins in the dust. One modern fiber laser cutting thin stock can produce as much as several older CO² lasers. One press brake with automatic tool changing has the production capacity of two, three, or even more traditional hydraulic press brakes.

Metal fabrication is changing with the broader manufacturing landscape. Many feel they really cannot keep equipment for years on end. Technology is just advancing too quickly.

“We’re seeing a monumental shift now. Companies don’t know what equipment is going to look like in five to 10 years. They need operational flexibility to keep up with the technology changes.”

So said P.J. McElroy, sales account manager for the Commercial Finance unit of Siemens Financial Services (SFS). Part of Siemens AG, SFS is a financing company that works with various manufacturers, some of which use Siemens products and services.

During a custom fabricator management panel at last year’s FABRICATOR Leadership Summit in San Diego, a few participants pointed to equipment financing alternatives, like leasing, that basically will help them free up cash so that they stay technologically competitive. They added that challenges selling old equipment also factor into the strategy.

Leasing has never been incredibly popular in metal fabrication. According to the “2018 Capital Spending Forecast” from the Fabricators & Manufacturers Association, released at the FABTECH^® show in November 2017, less than 11 percent of respondents said they had planned to acquire new equipment through leasing.

Leasing can be flexible. As McElroy explained, leasing agreements can incorporate equipment upgrade options, either rolled into the lease agreement itself or as part of an upgrade and refinancing arrangement at the end of the lease term.

Still, like leasing a car, leasing a machine comes with conditions. “It’s a give and take when it comes to usage and maintenance requirements over a five- or seven-year lease,” McElroy explained. “How low do you want your payments, and how much cash do you want to free up? This determines how aggressive we can be on the value we assign it at the end of the term.”

A machine’s lease agreement assigns a value for the machine at the beginning and the end of the term. The less that value changes, the lower the payments can be. But this higher end-of-lease value also can put more restrictions on the return provisions, including the usage (how many hours or shifts per day it can be used) and certain maintenance requirements and service agreements. Leasing is still an option with looser restrictions, but the payments will be higher.

The greatest hurdle to leasing for many is the chance that a machine doesn’t work as promised. Here is where being upfront with the financing institution and paying attention to details can help. “Companies can get hurt,” McElroy conceded. “This is where choosing the right financing provider is key, ones who can work with the fabricator through the options and, if needed, replace a machine with something else.”

“It’s about working with third parties and direct customers on an ongoing basis. It’s not about doing one-and-done deals and moving on,” said Peter Austin, vice president of industrial finance for SFS in the Americas region. “It’s about building relationships.”

What makes leasing especially attractive, sources said, has to do with freeing cash flow that can be used on other resources, including software. Software orchestrates not only systems within a specific machine, but also coordinates information between various systems within a plant, within multiple plants, even up and down the supply chain. All of this makes the ideas behind Industry 4.0 possible.

But software isn’t a physical entity. Should a fabricator fail to make payments, the bank can’t “pick up” and repossess a software package. “There’s nothing securing the debt,” McElroy said. “In our world, you really need a piece of equipment to lend against.

“The equipment finance space has traditionally been secured lending,” McElroy added. “You have a machine, you file a lien against it, and that secures the debt. But we’re seeing manufacturers who do need to invest well beyond physical machinery. A leasing option provides more liquidity, more dry powder. Manufacturers then can have more dry powder to make investments into software and other so-called ‘softer’ costs that are typically more difficult to finance. We’re seeing this as a major trend in [the metal fabrication] space.”

He added that software financing options are becoming available in certain situations, particularly if the financial institution has close ties with the software provider. For instance, SFS offers financing strategies that include Siemens’ product design management software.

Software isn’t very useful without physical tools and machinery, at least to metal fabricators and anyone else in manufacturing. In this sense, the true value of a manufacturer’s productive assets, besides people, lies in software, controls, and machines working as a system—and according to McElroy, companies are offering solutions to finance these systems in specific situations.

He added that, now more than ever, industrial financing needs to work together with the companies making, servicing, and enhancing the equipment. This becomes a necessity when assessing a machine’s value in the future (at the end of a lease or other financing term), especially for new technology with little or no pricing history in the used equipment market. Certain aspects of additive manufacturing fit into this category. “You don’t have specific guidance or a how-to document in place for this kind of new technology,” McElroy said.

People, machines, and software working together really represents the future of manufacturing, and all these investments demand good cash flow. Reducing inventory and increasing part flow velocity (central tenets of lean manufacturing and operational excellence) can improve cash flow. So too can leasing and other financing tools, in the right situation. In the best case, operational excellence (including the healthy balance sheet it creates) and modern financing can work together.

Whatever strategies they implement, the best companies will have more cash on hand—that dry powder—so that fabricators can reinvest and grow. Those who don’t reinvest could be left behind.

Siemens Financial Services, www.usa.siemens.com/finance