Demand for Reconditioned Tobacco Machinery is Driven by more than Just Price Considerations

Source from:  Tobacco Reporter  08/02/2013

Ron Woodthorpe, the director of Hampshire Tobacco Machinery Services (HTMS), recently made an interesting　comment when describing his company's role in the tobacco-machinery business. Asked at the end of an interview whether he wanted to say anything not covered by the questions posed, he replied that HTMS was trying to help bring manufacturing back to the United Kingdom.

Many people take the view that the U.K. has, for some time, been running a lopsided economy in which manufac-turing has been allowed to dwindle and financial services have taken a too-dominant position. Although I have no expertise in this area, I suspect that this crude analysis of manufacturing and the financial sector is pretty much correct. Indeed, I recently started a story on China ("Slow Turning," June 2013, page 36) by describing how the manu-facturing of some goods in the U.K., previously outsourced to China, were being repatriated, and though the gist of what I was saying comprised a comment on the state of affairs in China, it implied that the repatriation of manu-facturing was a good thing for the U.K.

The example I chose concerned the manufacture of Symington's Golden Wonder Pot Noodles, which hardly chimes with tobacco-machinery engineering, but I could just as well have mentioned that Aston Martin was bringing the manufacture of its Rapide S car back to the Midlands.

Worth keeping

One trend I didn't mention in the China story was that toward a return to building various machines and equip-ment in such a way that they are, in the first place, more robust than those of the recent past, and, in the second place, repairable. What a minority of people—often dispar-aged as cranks—have been saying for a long time is that, given limited resources, we cannot afford to keep throwing items onto the garbage heap because some of their small parts have malfunctioned. These people are starting to be taken seriously and, specifically, it is being suggested that all washing machines should be made to a certain high standard so that they last a long time and can be repaired.

For years, the tobacco industry has had such an approach to machinery. As far as I am aware, nearly all tobacco machinery lasts for a very long time, given the nature of some of the raw materials it has to handle and given the speeds and shift patterns at which it is worked. And it is certainly built in a way that allows it to be rejigged, refur-bished and rebuilt. As I understand the situation, if you can find the machine, it can be refurbished or completely rebuilt by any one of a number of companies that specialize or partly specialize in such work. The only thing that has thrown a small spanner into the works—and made it neces-sary to destroy rather than retain certain older machines—is the need to prevent equipment from getting into the hands of those bent on producing illicit tobacco products.

A mix of new and reconditioned (I will use the word "reconditioned" from here on to mean both refurbished and rebuilt) machinery has served the tobacco industry well. Generally speaking, the bigger manufacturers have been supplied with ever-more-sophisticated new equip-ment that has allowed them to increase their speeds of manufacture and efficiencies, while smaller operators have been able to take advantage of reconditioned machinery whose technological upgrades have piggybacked on those of the newer machinery, especially in the area of electronics. For instance, Woodthorpe said HTMS was now developing old-generation, affordable makers to run at about 5,000 cigarettes per minute.

In recent times, with economies floundering in many countries, it seems to go without saying that reconditioned machinery must have come into its own even more, either directly because of financial constraints on manufacturers or indirectly because downtrading by impoverished con-sumers has fragmented the market for cigarettes, created the need for product innovation and boosted demand for other products, such as roll-your-own and make-your-own.

A good thing getting better

There is a sense, too, in which reconditioned equip-ment is simply a good idea. Harsh Rai, of Ascent Techno Management Services, in answer to a question about whether the trend toward buying increased amounts of such equipment would continue for some time, made the point that he could see no reason why this wouldn't be the case. "Why would you do away with a good thing?" he asked. "It's here to stay because its value is apparent."

I had started by asking Rai whether the financial con-straints caused by the near-global economic problems had—as is assumed above—encouraged tobacco manufacturers to buy or consider buying reconditioned machinery where, pre-viously, they might have bought newmachinery (a question I have been asking since 2009). Yes, he said. In fact, for the past decade, financial strictures had encouraged manufactur-ers to look at reconditioned machinery as an alternative to new equipment.

But, Rai said, there was more to this change than financial constraints. The companies that were providing secondhand machinery and reconditioning services had drastically improved their performance and the quality of reconditioned machinery. "More importantly, the industry now offers performance guarantees and post-sale services similar to those available with new equipment," he said. "These factors have improved the confidence levels among customers and created a win-win situation."

This trend to reconditioned equipment, he added, was evident mainly among small and medium-sized tobacco manufacturers, but it was also being taken up by the bigger cigarette companies.

Woodthorpe said he believed it was mainly the smaller companies that had been forced by financial constraints to embrace secondhand machinery. But he, too, made the point that they had moved in this direction not only because of financial constraints—some of these companies were unable to accept the lead times quoted in respect of new machinery. And this is one reason why HTMS has,  alongside its reconditioning business, developed a range of new downstream equipment aimed at companies with lim-ited budgets and tight scheduling needs (another reason is the limited number of donor machines available). HTMS, Woodthorpe said, could deliver its tax stamper or film-wrapped parceler, manu-factured to an agreed specification, within 6–8 weeks of an order being placed.

Elsewhere, however, Woodthorpe made the point that HTMS could supply some "as-new" equipment for half the price and in half the time that a new piece of machin-ery would fetch and take to deliver.

Ifs and buts

But you have to wonder how long the current state of affairs can be maintained. It seems likely that certain reconditioned equipment will struggle to continue to come in at a big price advantage over that of its new counterpart. One reason for this is that the people selling sought-after donor machines are well aware that they are in high demand and, unsurprisingly, want a good price for them. And this situation is likely to continue until the next-generation machinery appears on the secondhand market in reasonable numbers and, therefore, at reasonable prices, and rebuilders and customers have adapted to the new technologies and ways of operating. Or perhaps "until" should have been "if." guess that much of this equipment is presently operated by the bigger manufacturers, which might be reluctant to let this machinery go freely on to the market, given the problem presented by manufacturers of illicit products. The other question that has to be asked at this point is: What will be the state of the tobacco industry when this newer-generation machinery is ready to pass in significant numbers from its original owners to new own-ers? With the current predictions about the rise of alterna-tive products, including e-cigarettes, in the United States, perhaps the need for this newer-generation, secondhand machinery will simply never materialize.

But back to the question of the cost of reconditioning and whether it will, for the time being at least, continue to make such an exercise worthwhile. Much will depend on the type of reconditioning requested, but since it is not uncommon for clients to demand that an old machine be fitted out so as to be as technologically up-to-date as pos-sible, the cost of supplying such equipment is likely to be relatively high. And it is necessary to keep in mind that reconditioned machinery will often have to comply with health and safety requirements not in force when the origi-nal machine was built.

But, as is mentioned above, there are factors other than price that encourage some companies to have their older machinery reconditioned, or to buy reconditioned versions of machinery they have been running for some time. One is familiarity. If a machine has been working well for a con-siderable number of years and a company's technicians are comfortable with it, there is possibly nothing to gain and everything to lose from buying a new machine or greatly altering an existing unit during reconditioning, unless, of course, capacity or some other such factor has raised its head. Sticking to familiar technology has the advantages, too, of raising no additional demands for training and pro-viding for continuity in respect of spare-parts stocking. One way of keeping a familiar machine running or rejigging it for a new purpose with a relatively low outlay is by having sections or sub-assemblies replaced.

I started this piece with a comment from Woodthorpe in response to a question that asked, "What are the other issues currently facing reconditioned equipment suppli-ers?" So, I'll finish it with one from Rai in answer to the same question. "There are many players now, including the OEMs, who have got into this business offering recondi-tioned machinery," Rai said.

On first hearing, this might sound like a complaint, but it wasn't. "It's good, healthy competition," he added. Enditem