Manufacturers of reconditioned equipment are confident that this trend is set to continue. 2008, the first year of the global recession, turned out to be a positive one for suppliers of rebuilt tobacco machinery because it led to them all rejoicing in full order books during the second year of the financial downturn. In 2009, demand for reconditioned equipment was stable, or even experienced a rise, as TJI’s latest survey among machinery manufacturers shows.
All the original equipment manufacturers (OEMs) included in this overview reported that their rebuild businesses had continued at similar levels to 2008. Stan Boyce, regional director for Europe, the Middle East and Asia at UK-based OEM Molins, said increased demand was not evident; he drew a clear line when it came to who actually made up the customer base for revitalised machinery: “Major multinationals will still prefer new machinery for new factory projects,” he explained. “Small start-up customers will always find the low-cost solution, regardless of transient economic problems. Where the multi-nationals close factories or replace with new higher-speed machines, the old machines may be cascaded down to lower output plants within their own group and this can generate some rebuild potential to maximise reliability and efficiency. Developed countries, with higher labour costs and larger production volumes, will opt for new technology solutions. Developing markets will be more receptive to rebuilt, but well-understood, machine technologies.”
The difficult economic climate, he added, did not necessarily influence buying decisions: “Capital equipment purchase tends to be a long term process and existing machines would be adapted or redeployed to maximise efficiency before the purchase of alternative capacity became an option.”
Notable increase in sales
Among non-OEMs, demand for machinery with a second life has increased notably. For example, according to Emil Sandev, general manager of Bulgarian company European Tobacco Services (ETS): “Demand in 2009 exceeded that of 2007 and 2008 by 50 to 60 per cent.” The economic crisis, he added, had definitely boosted his business: “Most of the clients are now looking for low budget machines, even if they are merely in working condition but not overhauled.” Samuil Molho, managing director of Sami MCD, an engineering company focusing on the secondary department, and also located in Bulgaria, found the line of customers for rebuilt equipment mentioned by Boyce had become blurred to a certain extent, in the light of the current downturn: “The recent global economic crisis has made tobacco manufacturers consider buying rebuilt or reconditioned equipment, where previously they might have bought new machinery,” he observed. “Depending on certain requirements and manufacturer location, just partially rebuilt or even functionally checked machines were acceptable. Manufacturers have become more cautious in terms of big investments. They often start with rebuilt machines and only when production is stabilised at a constantly high level, will they consider buying new equipment. This, however, is not always valid for big multinational companies, since they still prefer investments in new machines, unless internal transfer of equipment is made, which is preferred when opening new factories.”
In some cases, cost-consciousness has become an overriding factor and requirements are so low, even used machinery, which is in a mere working condition, is being accepted and bought. This also harbours risks, warned Stan Boyce of Molins: “Machines may be offered on the market which are claimed to be rebuilt but may have only received a cosmetic tidy up. OEMs and reputable rebuilders have, by necessity, to carry out comprehensive rebuilding with new parts and the latest in electronic control systems, which carries an inevitable cost that will be reflected in the re-sale value. The premium for quality rebuilding has to be made very clear to the end user, as the total life cost of the quality rebuild will be far better than an apparently low cost but poorly rebuilt example. You get what you pay for.”
Going for slims
As far as demand for certain types of reconditioned equipment is concerned, the trends witnessed in 2008 have continued. In the primary department, Russell Greenwood of British-Italian equipment manufacturer Garbuio Dickinson said the takeover moves of the past two years among the leading international cigarette manufacturers had left their mark on the rebuilding sector: “We have seen an increase in contracts involving machine relocations. Enquiries for refurbished equipment are increasing.” In terms of primary equipment he expected the rebuild market to grow slowly. “Whilst new factories are still being built, the majority of demand is expected to come from established factories looking to maintain existing machinery.”
In the secondary department, the growing popularity of slim cigarettes has been one of the main themes. Slim and super slim cigarettes still represent only a niche in most cigarette markets, but their share has been growing. In the Asia-Pacific region, they already account for more than a third of the cigarette market, while in Russia, their sales are increasing exponentially, too. “We noticed recently that 70 per cent of our clients are requesting slim and super slim lines, due to the market demands. The market share of slim cigarettes is increasing rapidly, and both manufacturers and traders are highly satisfied with the margin coming out of these brands,” said Emil Sandev of ETS. “The manufacturing cost is lower than the cost of king-size cigarettes due to the lower quantity of tobacco in these brands, which is the key factor in the final cost of the products. Also, the increasing prices of such brands compared with regular cigarettes has pushed the manufacturers either to purchase new production lines for slim cigarettes, or to modify their existing lines into slim and super slim. We noticed as well that the main active region during the crises is the Middle East. The market is very active and the manufacturers are improving their factories by installing new slim lines, or new modification kits for their own existing machines.”
As regulation of tobacco products tightens around the globe and marketing opportunities are further restricted, the need for differentiation of their brands becomes a vital issue among cigarette manufacturers. Providing more line extensions implies – on the production side – the need for more frequent brand changes and smaller volumes. Next to slims and super slims, new pack shapes are another field constantly explored by cigarette makers. “These trends are well reflected in our orderbook, since 80 per cent of our rebuild consists of make/pack, which is for special-size cigarettes and packs,” said a spokesperson of Netherlands-based OEM company International Tobacco Machinery (ITM), whose scope of rebuilding activities includes tobacco cutters, cigar and cigarette makers, filter makers and packing machines. “In the rebuild area, we focus on putting extra value to the customer by easier size changes and other upgrades.”
Andreas Panz is managing director of Universelle, the rebuild subsidiary of Hauni, the tobacco machinery manufacturer based in Hamburg, Germany. He commented, “Of course, the demands of the industry for differentiation, such as slim/super slim, new brands, requires flexible production machinery in rebuilds, too.”
With flexibility being another buzzword in cigarette production these days, ITM said it had seen a slight increase in the mid-speed segment of cigarette makers. A trend confirmed by Samuil Molho: “A higher demand for mid-speed rebuilt machines was observed over the last few months, since machines in the range of fewer than 4,000 to 5,000 cigarettes per minute can be found in reasonable condition at much lower prices than a few years ago, due to many closed factories around the world.”
Moreover, customers may use slower output machines to carry out brand trials, said Stan Boyce of Molins. “They will, by necessity, seek the lowest cost intermediary solution.” Samuil Molho agreed. His company, Sami MCD, has worked on many projects where the customer was looking for reconditioned mid-speed machines to test the market when launching new brands with specific flavour, dimensions or format requirements. However, Boyce is convinced: “Once a product is established in the market, the same criteria of efficiency and cost per million, etc, will determine the new versus rebuild decision.”
Suppliers of reconditioned tobacco machinery agree the positive mood in the rebuild sector will persist, for several reasons. “The quality of our rebuilt and upgraded machines often exceeds the quality of the original machine, therefore ITM’s offer has extra added value over a standard rebuild project,” claimed ITM’s spokesperson. “For this reason we feel quite confident in the future of our business within the rebuild sector.” Andreas Panz said he expected rebuild sales to be stable in the future. “But, due to the latest new machine generation from Hauni, the M generation, there will still be cascading of machines and therefore continuous demand. Also, consolidation processes create demand for standardisation.” Samuil Molho believes the consequences of the current economic crisis cannot be resolved in a short period of time, which will keep the growing trend going in demand for reconditioned machines. “There are a few more topics which determine this trend,” he added, “one being that quality rebuilt machines using latest technology and innovations can compete even with new machines, when specific projects are on the table, which is seen more often than before. Furthermore, when investing in familiar rebuilt equipment, manufacturers can maintain lower stocks of spare parts and, of course, a higher level of circulating capital, lack of additional personnel training costs, and a smooth production process with qualified personnel.”
TJI report
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