October 2007 – Used Capital and Industrial Assets: Let Free Trade Reign

Recently, the Boston Globe ran an article―really, an editorial―that took a strong anti-trade perspective regarding the sale of used industrial assets to developing economies. The essential argument of the reporter who wrote the piece is that the negative environmental impact of selling used industrial equipment in the third world outweighs the benefits―at least if you read in between the lines.

The main thesis of the piece, which is reprinted on page 34, is that newer equipment often uses less electricity, causes less air pollution, and is generally environmentally friendlier. According to the article, “From 4-ton trucks to 40-ton boilers, U.S. vehicles and equipment are finding a second life in developing countries—postponing meaningful reductions in greenhouse gas emissions by inefficiently using energy or directly emitting carbon dioxide … Economists and even environmentalists are loath to condemn developing countries for buying secondhand equipment and vehicles to support their growing economies.” The Boston Globe then goes onto site possible solutions to the challenge such as “trade restrictions, foreign investment policies or environmental laws.”

These solutions scare us; and for good reason. We believe there are three reasons why we should not restrict trade regarding used assets. First, we need to all realize that global manufacturing—provided we hold companies to the same social environmental responsibilities as domestic suppliers―benefits both us and those countries which are purchasing used capital equipment and industrial assets. Why? What keeps the U.S. competitive is our continual drive to greater productivity through better equipment, production processes and overall manufacturing knowledge (in fact, the U.S. was recently ranked first in the world in productivity). The fact a secondary market exists for our used assets makes upgrading to new equipment more affordable, not to mention the fact that the global manufacturers buying our equipment become an alternative source of supply for lower value production industrial parts that we’d rather purchase than make.

Second, we cannot apply the same “Western standards” to those in developing economies regarding the financing of businesses and raising of debt. The fact is, used equipment is more affordable―at least most of the time, except when there are major production shortages of new equipment―than the alternative. And this matters in the developing world, where borrowing is much more problematic and obtaining financing for either used or new assets is often prohibitively expensive.

Third, the author also hints that buyers of used industrial assets would prefer to purchase new equipment if they could afford to. But this point is certainly not always the case. In fact, buyers of used industrial equipment make purchasing decisions for many reasons outside of price. Often times, the lead time for used equipment can be months or years less than new equipment. In addition, the skills required to operate new equipment and machinery are often lacking outside the developed world. Also, the availability of parts and spares to service new equipment is often lacking in many countries. For all of these reasons, many manufacturers in places from India to Belize prefer to purchase used capital and industrial assets to fuel their growth rather than opting for the latest technology.

But perhaps the most compelling rationale for not monkeying around with these policy levers is that in our experience working with capital equipment manufacturers, little of the sales proposition is around the “clean/green” aspects of the equipment. Rather, the sales literature is focused on benefits such as faster set-ups, increased speed, fewer errors, less defects, tighter tolerances etc.—all leading to cost reduction on behalf of the buyer. And make no mistake about it, cost reduction, remains the primary benefit of sourcing new capital equipment. We have yet to see a company buy a piece of equipment merely because it was “greener” without an associated cost benefit. Hence, why should we apply even more stringent environmental standards to less developed manufacturing economies than our own?