Test and Measurement equipment is an expensive thing to own. In such times, the market for rented testing equipment has started to gain momentum. The article finds out if the rental and leasing services market in India and elsewhere is ready to show the growth that is expected of it.
For a person setting up a company dealing in the electronics sector, the biggest capital expenditure is on test and measurement equipment. That is because testing of products before mass production is one of the most important aspects of delivering a reliable and quality product. When you make a new product, you need to know as to how it will behave in real-world conditions. And to validate its ruggedness, test and measurement equipment take centre stage.
Once, the test and measurement market was a booming avenue. But, following the economic downturns in 2002 and 2008, the market went crashing down. Added to that the rate of technology, and the formula for the growth of the test and measurement market didn’t seem optimistic. Today though, the market has shrugged the harm caused by two major economic setbacks and is slowly finding its feet. However, with new technologies like the Internet of Things and 5G telephony coming to the foray, there seems a lot of catching up for the sector to do.
Recent trends tell us that the market is gaining momentum yet again owing to a number of key growth driver. Prime among which is the growing demand for rental and leasing services. As firmly established before, the capital expenditure on test and measurement equipment is extremely high. And that makes for lower rate of returns. And amid such cloudy times, more and more people have been making the shift towards rental and leasing services of test and measurement equipment.
In the rental industry, there is no commitment. The cost to own an equipment on rental is considerably low. And that means, the market comprising of both big and small companies can have access to the same standards of testing equipment. Sew a thread into those three aspects and you’ll instantly realise that due to rental and leasing services, the market has good competition. And not to forget, smaller companies have a better chance to take the fight against their bigger more established counterparts.
The biggest news for this particular sector came in 2016 when Micro lease, who leads the market by a high margin in Europe, and Electro Rent, who leads the market in North America came into a merger. This merger indicated towards a tectonic shift taking place in the test and measurement sphere. With the coming together of two of the biggest companies, the interest of private equity firms also increased tremendously in the rental and leasing services industry.
The repercussions of that were mostly positive. India got its first big name rental company in Livingston, which is a part of the Micro lease and Electro Rent group. But, despite all that, the rental market in India has failed to match the expectations of a lot of people. Livingston’s Managing Director, Shailendra Kalra revealed to ELE Times in an exclusive interview that the growth of the rental market in India has been quite slow. “India from a rental market standpoint is at very nascent stage. The adoption rate for rental has been slow. It’ll continue to be slow, but it will steadily grow,” said Kalra.
However, when you look at the global market, the narrative is a bit different than in India. North America and Europe are currently the biggest markets for rental and leasing services. While the market in those reasons is still sizeable, there are a number of reasons why people believe that it will show steady growth. According to Frost and Sullivan, currently, overall penetration of rental and leasing services for test and measurement equipment globally is around 5%, while such services represent about a third of the market revenue in comparable markets. Essentially, this market generates $500 million per year, while new test equipment sales generate close to $10 billion. Even small inroads in penetration can thus yield significant revenue for service providers.
Now, you can clearly see that compared to the rental market, news equipment sales make for a huge number. But, there is good reason in believing that it won’t always be like that. The timing seems right with the test and measurement industry at the beginning of a new era. Expenses regarding test and measurement equipment are being scrutinized by many customers across industry verticals and significant efforts are being deployed to control capital expenses related to such equipment, as customers realized inefficiencies in their operations and the huge cost savings that could result from addressing them. These efforts are not only likely to spark opportunities notably for asset management services, but also lead to a more balanced use of different acquisition means for test and measurement equipment between new instruments, used test equipment, and rental and leasing services.
Today, the market is heavily skewed toward new test equipment purchases, which is estimated to represent about 90% of the total market revenue, a much larger share compared to used instruments and rental and leasing services. Spanning various applications and consisting of widely different instruments ranging from highly sophisticated bench instruments used in research and development (R&D) laboratories to small handhelds used out in the field for installation, maintenance, and repair purposes, rental and leasing services have seen the most uptake in field applications. However, the largest portion of the market revenue for test and measurement equipment comes from the R&D segment and heavy use of traditional instruments in such applications makes R&D represent the largest revenue opportunity for rental and leasing services in the foreseeable future.
But, what does all that market growth mean for India? Trends show that the biggest problem for rental equipment in most Asian companies is that of awareness. And for the people with the right awareness, the problem is of mind set. Kalra revealed that in his role as the MD of Livingston, this has been the biggest problem as far as India is concerned. “I’d say, the biggest challenge has been the change of mind set. Engineers always like to own equipment. There is an emotional quotient which is very high there. That’s why I said that rental is growing slowly,” Kalra said. Apart from that, there is also a financial stress of renting equipment. While rental services make it cheaper to own an equipment, there is a tax burden that companies have to face.
In large organisations, corporate financial departments drive the decision to purchase or rent and tend to favour purchases for tax benefits. Providing immediate ownership, purchasing test equipment provides deductions for depreciation and interest, which translates into significant tax savings. This challenge is tempered by the fragmented customer base for test and measurement equipment, which includes many medium and small organizations for which cash flow is a priority, favouring rentals and leasing services. Moreover, research indicates growing demand for rentals and leasing services with large organizations for urgent needs due to the implementation of more stringent authorization processes for purchases.
Despite all that, India can become a big market for rental and leasing services. And that would majorly be because of its MSMEs and SMEs. These are small companies with not the same amount of CAPEX as some of the bigger ones. And more often, they take up small projects. So, for them it makes no sense to own a new piece of test equipment. And that is exactly where rentals can play a huge role. Since 2014, India has started to develop a fertile bed for people to start new companies. And as more and more startups join that bandwagon, the demand for rented equipment will grow further.
The first step to meet that demand when it comes has already been put in place by Livingston India. They recently unveiled a state of the art centre of excellence for rented test equipment. In the lab, companies could walk in anytime, make use of the equipment available there and leave anytime they wish to. “If startups, MSMEs, and SMEs need any kind of testing equipment at an affordable price, we would be there for them. Also, bigger companies who own massive assets, have come to realise that the life cycle of products is going to shorten. Obsolescence rates have become very high. Capital involved is high. So even these companies are now opting to rent equipment. So you can say, that in a way, we would be doing asset management for these companies. You will see that rentals will keep growing, our lab will proliferate the market further, and asset management will actually be the umbrella service that will cover up both,” Kalra told ELE Times.
For the time being, this is where we stand: the rental and leasing market is still not a force to be reckoned with. North America and Europe are currently the biggest markets for these services with a five per cent market penetration. India on its part is still at an extremely nascent stage. But, given several factors, the change has already started taking place. People are getting more aware about these services, and new companies are preferring to rent equipment rather than buying them outright. In the future, when IoT and 5G would be mainstream, it would perhaps be the rental market that will have the major share.