In 2015, Was Used Equipment Export Still a Good Business?

In early September, a friend in the building-materials business took me to dinner at a Chaoshan beef place in Kecun. He had two million yuan on hand, and asked whether used equipment export was still worth entering.

He'd made money in building materials, watched us ship container after container, and figured this trade was easy money.

I didn't answer directly. I ran the numbers for him. This article is what was said over that meal.

How many old machines are there in China

In 2015, China's construction machinery fleet stood above six million units. Excavators alone: about 1.3 million.

I'm not making these numbers up — they come from the industry association's annual statistics, cross-checked against what we see buying machines in the market.

The wave of equipment sold between 2008 and 2011 was hitting six or seven years of age — prime time for selling off. Owners upgrade, and the old machines flow onto the market.

In the Pearl River Delta alone we got word of thirty-plus machines a month, mostly phoned in by brokers. After screening, five or six were worth buying.

Supply isn't the problem. Good machines are. Owners of good machines never lack buyers — exporters don't get to pick.

What Japanese machines cost

The hottest items then were used Japanese-brand machines.

A 2009 Komatsu PC200, around 8,000 hours, bought domestically for 300,000 to 350,000 yuan, exported to Africa and sold for 420,000 to 480,000.

A same-year Hitachi 200 went twenty thousand cheaper; a Cat 320D went thirty to fifty thousand dearer, because Cat has stronger name recognition in the mines over there.

I learned that price band machine by machine — buying them, selling them. It shifts every quarter, but the pecking order never has.

Chinese machines of the same tonnage bought in at sixty percent of Japanese prices, and sold abroad at sixty percent too — but they moved slowly. A machine sitting three months was common, and the interest ate two or three points of gross margin.

What Africa wants

The three markets we worked that year — Tanzania, Kenya, Ghana — mainly wanted twenty-ton excavators, five-ton wheel loaders, and double-drum rollers.

Work there is mostly roads and housing, mining second. Tanzania was building feeder roads for the central line, Kenya was building stations along the railway, Ghana was putting up affordable housing. What every site lacked most was a twenty-ton excavator ready to work now.

Customers don't have much money, but what they want isn't cheap — it's fixable when broken.

When a machine lands, the customer's first three questions: how many hours, what year, and can I get parts in Dar es Salaam.

The order of those three questions hasn't changed in ten years.

How many competitors

In 2015, in Guangzhou and Shenzhen alone I knew forty-plus firms in this trade. Nationwide, no fewer than two hundred.

But those with real customers and real after-sales in Africa: under ten. Most were order-flippers — take the customer's deposit, then find a machine, pocket the spread. Flippers gross eight to ten points.

Flipping isn't unworkable, but a flipper holds no machines. When the customer asks to see the machine, all he can say is at the port or in transit. Customers aren't stupid. Ask three times and they stop asking.

Those of us who buy, inspect, and stock our own machines gross fifteen to eighteen points — but each machine ties up 300,000 yuan for a two-month cycle. One lemon and the year is wasted.

Eighteen points gross sounds high, but out of it come reconditioning, storage, exchange losses, and after-sales reserves. Net lands around ten points — worse than his tile business.

In the first half of 2015 alone I knew of five or six new entrants. By year-end, two were still alive.

I knew one peer who in 2014 bought an excavator that had been flooded and didn't catch it. He shipped it to Nigeria, paid out a claim, and left the trade the next year.

Where the barriers really are

The trade looks barrier-free — rent an office and start taking orders. The real barriers are three.

One, inspection. Misjudge a machine's condition, buy one lemon, and the year's profit is zeroed. Our inspector Lao Li has twenty-two years in — a man like that has to be kept on payroll.

Two, capital. Two machines' purchase price plus freight is seven or eight hundred thousand, with a ninety-day-plus collection cycle. Break the cash chain for one month and the business stops.

Three, trust. African customers have been burned too many times. A new face quoting the lowest price still won't get their deposit. Trust is built machine by machine. It can't be rushed.

One more thing that's not a barrier but costs money: stocking. If customers are going to look at machines, the yard needs machines. From purchase to sale, the reconditioning, parking, and safekeeping in between all cost money.

What I told him in the end

That dinner ran two hours; the beef went cold and got reheated. When the numbers were done, he said it himself — he wouldn't do it.

I told him: two million ties up at most three machines at a time. If you can accept three deals a year and 300,000 in earnings, come in. If you want fast money, stay away.

He never entered; he's still in building materials. When we met last year he said thank goodness he stayed out — back then he couldn't even tell an excavator from a wheel loader.

Me, I'd been at it nearly two years, and my conclusion was: it's a business, but not a good business. A good business doesn't keep you awake on every single deal.

This was written in September 2015, and the numbers are that year's numbers. Reading it now, the fleet size and price bands have all changed — but the way of doing the math hasn't.

He picked up the check that day. He said the math was worth a meal.