Interview: Terex without Demag
13 June 2019
Our industry’s biggest business news story in the first half of this year was about the acquisition of Terex Corporation’s Demag crane brand by Japanese crane manufacturer Tadano. From a customer point of view and from a Terex standpoint what was the thinking behind this move and what will it mean for the future? John Garrison, Terex Corporation president and CEO, talked about the implications at the corporate level and Steve Filipov, Terex Cranes president, explained things from the crane angle.
ICST: What is Terex without Demag, what will change and what will become of the remaining elements of the former Terex Cranes segment of tower cranes, rough terrains and pick and carry cranes?
JOHN GARRISON: In 2016 we introduced our Focus, Simplify and Execute to Win strategy. Focus was about really focusing our business portfolio on businesses that we really believe had a real opportunity to provide exceptional customer value.
Simplify was how we’d come together via 80 acquisitions over time and never really integrated it. We were very complex to deal with externally so it’s looking at how we can simplify doing business with us. We’ll spend a lot of time and effort trying to simplify, by reducing legal entities, investing in IT and that sort of thing.
Then our Execute to Win. It is a competitive marketplace. What are the things you need to do to drive improvements? We picked three things; commercial excellence, strategic sourcing and life cycle solutions.
The strategy is going to be consistent going forward. With the sale of the Demag crane business the focus element is principally complete. We’ve got two very strong businesses; we have our tower cranes business and our RT business. They enjoy good market positions and are profitable, remaining so in good times and bad. That gives you a solid platform to work off. It is an industry structure we think is conducive to being successful.
In the case of the Demag business with large crawler cranes it is very project orientated and with all terrain cranes there were four major competitors fighting in a very challenging market. The combination of Demag and Tadano gives them an opportunity to really challenge competitors. Combining those two businesses, I believe, is going to be best for customers in the long term and it’s going to be best for Demag team members and for the respective shareholders.
Steve’s done a great job with Demag. We brought him in to correct it and fix it and he’s done a great job improving the business but it’s a business that fundamentally has consumed a lot of cash and there are significant operating losses. By recognising that perhaps the Demag business could have a better owner, we are now much stronger as a Terex enterprise going forward. We’ll continue in the spaces that we’re in. We’ll continue to invest organically. I still think there’s opportunity for that. If you look at our capital investment this year, we’re investing US$145 million in the business which is almost triple the historical average for Terex.
With Terex we’re going to be smaller but we’re going to be more focused and we’re going to be significantly more profitable, which then provides significantly more capability for us going forward. I don’t believe our strategy needs to change. We’re going to invest. One of our challenges in Demag was we went through periods when we didn’t invest in the business.
There’ll be an opportunity for us to look at inorganic growth, not in 2019 but in the future. As we demonstrate performance we’ll be able to deploy capital via acquisitions. It hasn’t changed right now but, as we look forward, it wouldn’t be unreasonable for us to look in those two spaces for potential opportunities.
ICST: What about the crane businesses you will be left with after the Demag sale?
JG: Exactly, that’s the other side of it. Our tower cranes and rough terrain crane businesses have different competitive dynamics. They have been profitable through the up and down cycle. We’ve got good product offerings.
Tower cranes historically is pretty much operated as an independent business anyway. There wasn’t a lot of synergy between tower cranes and the other parts of the business. There is some on the technology side but even there they went a different way with telematics; they didn’t go with the IC-1 control system.
On the RT side Steve was doing a good job of bringing some of the Demag Inside technology into RTs so we’ll have to modify that. It was a good leverage point that we’ll have to modify for the RT strategy.
Both are strong businesses with good distribution, profitable and worth investing in. We’ve got a capital programme to expand the capacity of our tower business. They deserve to have the capital and it will be a good return. We’re not in the big all terrain sector, we’re in niche markets where we’ve got strong competitive positions. Likewise with our Crespellano RT facility in Italy, they are good facilities, highly efficient and they do a good job.
ICST: With the RT market down at the moment how can you develop it or turn the situation to your advantage?
JG: Our RT business is significantly challenged in North America and, if we’re honest with ourselves, we didn’t invest in where the market was going. Steve recognised it and we came out with the RT90 and RT100. Bigger cranes is where the market had moved. We hadn’t invested and we had stayed at the low end of the market and the market moved up.
We still will offer RTs into North America out of our Crespellano facility in Italy. We have good market share in Europe and we have good market share in the Middle East. In the US, being the largest market, we didn’t pay attention to the market needs. We ended up with a situation where we just didn’t have the product and the amount of time, money and effort needed to get the product in a tough market and to recapture lost market share. We just decided that wasn’t going to be a good investment. Steve has been in the crane business a long time and when he says, ‘hmm, I’m not sure that’s a good bet,’ I have to listen.
STEVE FILIPOV: This is all about focus. Had we not been successful with the turnaround at Demag, the alternatives for that business were far worse. As much as, as John says, the sale of Demag was a hard decision to make emotionally, good business people have to take emotion out of business. The reality is Demag and Tadano was a case of one plus one equals three and that makes a lot of sense.
For RTs it’s a down market but there’s a lot of opportunity for us. We have a full product portfolio. We’re continuing to invest in more products in RTs, to continue to develop that business. Ten years ago it was a very good standalone business. It changed over time. Now what I’m focused on with John [Garrison] is how to stand up the RT business to be a global RT business and how to stand up global tower cranes, to continue to invest, because it was probably double the size at the last peak and there’s a lot of opportunity out there for us to get more market.
We’ve proven in the last two years, during the whole strategic change that we made in regaining industry leadership, that we’re going to do two new tower cranes a year. We’re doing that and we’re going to continue with two new cranes a year for the next ten years in tower cranes.
JG: That’s with a business that is half the size it was during the peak. It’s still a very profitable business that has the ability to absorb the ebbs and the flows of the cyclicality and still remain profitable and returning well above its cost of capital. Therefore, we think it’s worth continuing to invest, in both cases.
ICST: Why does the Franna pick and carry crane business fit best with the Materials Processing segment?
JG: It fits better because there’s overlap with customers down there where it is principally an Australian and a Southeast Asian product. A big element of the customers are in mining. We’ve got a good business down there.
There’s not necessarily a natural fit for RTs and towers so we have those reporting separately to corporate. Those two businesses are about $250 million. All the remaining businesses we’re keeping have their operating margin in that nine to 10% operating margin range. They are all good profitable businesses not at the peak of any cycle and we think we can grow them. They have the ability to remain profitable in tough cycles.
Part of what we like about these businesses is that they’re more nimble and can adapt to market environments, as compared to Demag. It’s a big business not as nimble. With much longer lead times it’s very difficult to be nimble. Whereas the towers and the RT business, they’re nimble businesses that had the ability to respond upwards and downwards.
We’re also actively engaged in significantly increasing the support staff for the North American cranes because, looking at our RTs, we’ve got 4,000-plus installed cranes in the market, just in the last 10 years. That’s a good service and support opportunity and a good service and support business. We’re looking at how we can improve the structure of our service because Demag is going away.
ICST: Did Tadano look at acquiring the boom truck and RT businesses outside the Demag umbrella?
JG: We had a process focused on the Demag business. If you look, one of the things that we didn’t want to get into was any potential anti-competitive situation. Tadano has an RT business and truck cranes so we probably would have run into potential issues there. At least potentially from an approval point of view so we were really just laser focused on Demag.
ICST: What can you tell us about the Demag sale to Tadano and how is it progressing?
JG: We have received German anti-trust approval and we got that fairly quickly. We are not anticipating any issues. Now it is just the execution of the strategy as we’ve laid out. We’re trying to create value for everybody - customers, team members and shareholders.
It’s all about really looking at your strategy in the dynamics of the marketplaces that you compete in and what do you think is the best long-term opportunity to create value. Sometimes the best thing is to drive consolidation. Industry structure will ultimately drive profitability and in all terrain cranes and crawler cranes consolidation is what the industry needed. The industrial logic is quite sound.
SF: I want to make sure that we send the message that the Demag teams have been successful. The two together can do a better job. It’s going to be better. In this competitive market place the business as usual message is consistent and important because we want to keep the competition away from our customers or team members and from trying to get at our business.
JG: We don’t want that potential uncertainty, especially in this in-between period of time, to create doubt in customers’ minds so that they make a different decision. It’s really important to convey to the customers so they know it is business as usual and oh, by the way, when it gets combined, it’s actually going to be better than business as usual.
Likewise, it will be business usual in our tower cranes and RT businesses. We’re going to grow those businesses. They are going to be good businesses going forward and we are excited about it.