The fear factor in a capital equipment market

By Tom Hausken
I hear a lot of talk about fear these days. "It's just fear that's driving the market." "If people could get over their fear..." I don't find such talk very helpful, and here's why.

We work in an industry that is mostly driven by capital equipment purchases. Big purchases have to be financed. You can think of it this way: the customers borrow money to buy the equipment, and pay it off with the revenues they will get in the future. Even if they use cash to buy the equipment, they could have used the cash for something else (like generating interest itself), so they have to cover that opportunity cost.

In times like these, the customers are no dummies--their confidence in the future has dropped enough that they delay buying new capital equipment. Think about it: are you looking for a new car right now? Or are you thinking of a used car, or maybe keeping the one you have a little longer? Is that fear?

No, fear is too strong a word. It connotes panic. From my discussions with customers, at the financial level, they aren't in a panic. They aren't reacting out of emotion. They have a reasoned, albeit cautious, approach. But all these microdecisions add up, and that hurts suppliers.

What will bring back the confidence to buy new capital equipment? Inexpensive and available credit helps. Rising demand in the end-user markets helps, such as that stimulated by government spending. New product innovation helps, by motivating industrial customers to replace inefficient equipment with new equipment. Finally, understanding how the customer thinks--and the customers' customers--helps.

Fear does indeed drive speculative markets like the stock market. Fear and greed. But not capital equipment purchases.
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