Constraints On Capital Equipment Sales
We often think of the inertia of the status quo in terms of complex buying teams (10.2 different agendas, personalities, departmental priorities, etc.) but it's bigger than that.
Capital availability and allocation is one example.
But basic market demand is another.
And regulatory uncertainty is an infrequently acknowledged and rarely discussed influencer of market demand.
On the one hand we're told as salespeople to address the factors we can control. On the other, without understanding bigger forces arrayed against us, we can't even begin to consider what tools we have to combat them.
Since regulatory uncertainty is certain to rise over the next few years, it's important to plan accordingly.
Important note: This article isn't designed as a commentary on the value or desirability of any specific regulation. It's intended to highlight for sales, marketing and management teams that the decision process is vastly more complex than often portrayed, and likely to become more so.
Taxes, Environmental, Labor
Regulatory uncertainty (and unwelcome certainty) impacts capital investment decisions in several ways - both directly and indirectly.
- Expensive new compliance requirements which take priority for capital allocation over improvements in productivity - If, for instance, new regulations create new litigation threats and therefore require companies to invest in substantial cybersecurity or candidate tracking systems, that money isn't available to invest in the capital plant.
- Increased corporate and individual taxes will impact business decisions - Keep in mind that many privately held companies are pass-throughs (pay taxes on corporate profits/retained earnings at the individual rate). Therefore tax rates, depreciation schedules and investment incentives will play a role. Additionally, if business owners need a certain level of after-tax income (for instance to pay two children's college tuitions), and taxes rise, they'll need to take more pre-tax income from the company to net the same. That means less is available for use/reinvestment in the business.
- Growing supply of low-skill labor through increased immigration will put pressure on wages for those jobs and shift the curve of investment in automation. e.g. the relative cost of automation will be higher, if the work can be performed manually - all other things being equal - at a lower price. On the other hand, increases in healthcare costs and new regulations regarding workforce composition and benefits, as well programs which encourage worker activism, will make labor more expensive.
- Shut-down jitters - a company has to be able to operate to generate revenue from physical plant. If executives are concerned that their ability to operate isn't assured, or that their customers' ability is uncertain, they'll be hesitant to make any capital equipment investment decisions predicated on production assumptions.
- Cost and consistency of energy supply will cause execs to carefully consider expansions and locations.
These are just representative examples based on reasonable expectation for changes based on new priorities at the national level.
We can guess. But we can't know. And the reality is that even once legislation is enacted, there's considerable uncertainty about how executive branch agencies will apply and implement.
All of that adds up to uncertainty which clouds the capital equipment investment picture for companies weighing options.
But those are dynamic. There's one area of regulation which will almost certainly become substantially more onerous - and which already serves to constrain substantial investment.
Grandfathered Clean-Air Act Compliance
Clean air and clean water are goals of importance beyond dispute.
However, the devil is in the details.
Let's quickly unpack some critical insights from Oren Cass' recent book The Once and Future Worker. Chapter 5 takes a deep dive into the impact of environmental regulation on American manufacturing (and by extension the sale of capital equipment to manufacturers.)
- The Clean Air Act stipulates that there must be continuous improvement - obviously this eventually runs into the law of diminishing returns. Already "America has so little particulate matter in the air that levels in only ten localities (with Fresno, CA, the only city of significant size) exceed the Clean Air Act standard, already twice as strict as Europe's. Nationwide, the pollution level is on par with New Zealand's and Iceland's - dramatically below the levels of major developed countries like the United Kingdom, France, Germany, and Japan. London, Paris, Amsterdam, Frankfurt, and Munich would all be among the dirtiest cities in the United States, Brussels would be the dirtiest."
- Absolute standards may be functionally unattainable - In fact, the EPA's 26 November, 2014 reduction in acceptable levels of smog to 65 ppb led NASA to warn that CA Yosemite and ME Acadia national parks would be non-compliant.
- The method for determining the cost/benefit of compliance is simultaneously expansive and creative in establishing the denominator, but quite limited in its calculation of the numerator. In other words savings & benefits are theoretical and, likely vastly overstated. In contrast, costs are conservative for direct compliance and omit all secondary impacts. In fact, in some cases, projects that constrain manufacturing may be promoted as net positive to the economy based on hypothetical values.
- The enforcement guidelines are often established in an environment completely divorced from the impact (e.g. Washington, DC vs. Youngstown, OH)
All of those factors create a challenging environment for manufacturers wondering whether to build and expand factories in the US or overseas.
Perhaps even more restricting is the new facility review which is invoked when any proposed change is considered a major modification. In this case any grandfathering which has been granted to the facility would be lost and it would then be forced to bring the entire facility up to the highest, most current standard (well beyond what's required in environmentally conscious Europe as noted above.)
The result is easily anticipated.
The changes don't happen. And the tighter and more strictly the regulations are written and applied, the fewer changes that will happen.
Finally, in today's super-charged political environment the executive branch's interpretation and application is likely to be arbitrary and in many areas simply capricious.
That creates high levels of uncertainty because it's a function of personality rather than regulations. Even if a judgement is clearly and patently wrong, the cost and time required to challenge it administratively - and the likelihood that a company with the temerity to take that step would be subject to other regulatory pressure - will weigh heavily on any decision to invest in projects requiring new permitting.
And without time-limits on community input and review (also common in markets we perceive as being more environmentally friendly) the timeline exceeds a company's ability to project market conditions.
Selling New Capital Equipment Projects In This Environment
This is going to take lots of skill, some luck, finesse, empathy and a solid dose of reality and business savvy.
First, let's just consider a couple random scenarios.
- If the project for which your equipment is being considered will trigger an environmental review, what's the likelihood your buyer will want to move ahead. Even if they do, what's the sell cycle? And should any opportunity that's subject to EPA or state review be ANYWHERE in your pipeline?
- Your pending automation projects are moving slowly and haven't closed. Pending immigration legislation and a high concentration of low-skill immigrant workers in the general area of the factory likely mean that labor costs will remain close to the minimum wage. What can you do to try to close the deal?
- Taxes are increasing which means the future value of your buyer's depreciation is increasing. At the same time accelerated depreciation is eliminated to increase tax revenue in the short term. How might you address this?
- You ideal customer profile (ICP) looks at industry and company size. But some Tier 1 prospects have aging facilities while others have newer ones. Which is the more likely buyer?
- Your project is approved and capital is allocated. It's scheduled to kick off in Q3. Suddenly in Q2 a new CA privacy law compliance issue arises which requires the company to redirect much of the allocated funding to address their exposure. They hope to revisit the project next year.
If you work exclusively with a plant engineer or maintenance manager you'll probably never hear about these other challenges. That's not a knock on them; these considerations are outside the specific technical parameters and specs they're charged with managing.
And if you follow a classic BANT or even an improved MEDIC approach, you'll be merely amateurish in your sales approach in a new, complex environment. The status-quo will kick your ass.
Stepping up Your Game
That means that in addition to a series of finance and regulatory qualifying questions which you'll need to answer, you'll also have to cultivate dialog with various members of the extended buying team.
The latter is pure sales blocking and tackling. But the former is going to take some work from the entire corporate team.
Enablement Content by Persona
Marketing is going to have to create content which can be used for inbound lead generation and sales enablement that answers questions related to these challenges.
Your product marketing team is going to have to understand the challenges and develop new approaches for positioning your products. (For instance, if its small footprint allows it to easily fit into existing, grandfathered plants, or if self contained dust control features means that a new system won't trigger connections, modifications and therefore review to the plant's dust collection system, you'll have powerful new ways to sell machines.)
Not only will these help to get some deals done, but the implied understanding of the buyers' businesses will accrue substantial credibility for your team and differentiate you from competitors.
Finally, understanding the finance of the transaction (cash, earnings and taxes) will be critical.
Many business owners (and even their outside accounting advisors) may take a standard approach to varying situations and overlook options.
Every capital equipment company should be building strong relationships with equipment financing firms and an understanding of factors at play.
It could well be that operating, or even capitalized lease projects will create opportunities that business owners haven't thought of. It's more than just cash availability - although that's a good reason - but with low cost of funds, high tax rates and rapidly growing demand in certain sectors, a creative approach to project finance may yield a compelling combination of benefits.
And again, it's unlikely your competitors will even have considered much less educated the buyer on these benefits.
Be Realistic, Be Proactive
There are going to be projects which make perfect sense on one level, but are never going to happen. Get over it.
Better yet, get good at identifying that early on so you don't waste time or fabricate imaginary opportunity pipelines.
There are also going to be approaches which will become viable because of regulation.
Your success may well depend on understanding your buyers' buyers situation well enough to intuit how you can address the requirements in the middle, complicated by regulatory changes. That means the ideation, the development of the business case and materials, the training (likely hiring) of reps capable of this sophisticated sale, and technology to pull it off.
The bottom line is that technology, B2C experience considerations bleeding over into B2B, changing buyer behaviors, COVID, and increased competition have already been making sales much harder.
Now we're likely to add new challenges to the mix.