In addition to my duties as a senior analyst for Fuld + Company, I work as an on-call firefighter in my hometown, about 10 miles north of Boston. Perhaps the most visible symbols of the fire service are the trucks we use, known as “apparatus.” Like a true analyst, I couldn't help but notice some interesting competitive and industry dynamics present in the fire apparatus industry. In particular, behind the lights, sirens and bright red paint, the fire apparatus industry is as fragmented as it is old, with some marques pre-dating the internal combustion engine by several decades; and fire apparatus manufacturers and suppliers would have it no other way.
At present, there are approximately two-dozen companies producing motorized fire apparatus in the United States. This includes nine full-line manufacturers producing their own chassis for pumpers and ladder trucks. These core manufacturers are complimented by fifteen limited-line manufacturers producing only pumpers based on purchased chassis. All of these twenty four manufacturers are either independent or owned by a separate parent company, which represents a significant amount of fragmentation. This raises the question of how the fire apparatus industry has remained so fragmented compared to other industries.
Intense Levels of Customization
According to the National Fire Protection Association (NFPA), in 2013 there were approximately 69,000 pumpers and 7,000 ladder trucks in service in the United States. This fleet has an annual turnover of approximately 3.4%, indicating a market for approximately 2,350 pumpers and 240 ladder trucks annually. For comparison, there are approximately 2-million semi-truck tractors in the United States according to TruckInfo.net. Assuming an annual turnover of 5%, the U.S. market for new semi-tractors would be 100,000 annually, nearly forty-times that for new fire apparatus. This market is served by eight major manufacturers owned by four parent companies.
A cursory examination of any fire apparatus manufacturer’s marketing materials will show a high level of customization offered. End-users can specify nearly every aspect of a piece of apparatus, from the size of the motor, to the placement of emergency lights and the size and location of equipment storage compartments. This demand for customization stems from the diversity of the customer base. According to the NFPA, there were over 30,000 fire departments in the United States in 2013 ranging from large urban departments to small rural agencies. Each and every fire department will have their own specific set of requirements.
This demand for customization combined with low annual volume results in a very labor-intensive manufacturing process incurring tremendous direct labor costs relative to other industries. These costs likely translate into low margins which, when coupled with low volume, make cash flow a constant concern for apparatus manufacturers. As evidence of this, several well-respected manufacturers have become defunct over the last 30 years including Maxim, American LaFrance and Mack which voluntarily exited the business in 1990.
Margins and Loyalty
Interestingly, end-users of fire apparatus are not profit-driven. The overwhelming majority of fire suppression agencies in the U.S. are either municipal government entities or not-for-profit volunteer organizations. As such, the purchasers of fire apparatus are usually outcome-driven with reliability and customization superseding price. Thus, the premium prices demanded by manufacturers are considered the literal cost of doing business. My department purchased a new custom ladder truck in 2013 for approximately $750,000. Our primary factor in choosing a manufacturer was finding a truck that would fit within the close confines of our 70-year old station while retaining the capabilities we deemed critical.
Due to the close relationship between Firefighters and their equipment, brand loyalty cannot be discounted as a factor in continued fragmentation. Many departments develop strong loyalties to particular manufacturers. Perhaps the best-known example of this is the relationship between the Fire Department of New York (FDNY) and Seagrave, a highly-regarded manufacturer.
Barriers to Consolidation
Several factors stand-out as barriers to consolidation within the industry:
- Fire apparatus is a very low-volume product with less than 2,600 new pieces of apparatus (pumpers and ladder trucks) sold each year in the U.S.
- The demand for customization in the industry is enormous across a diverse and demanding customer base.
- The demand for customization results in a manufacturing process with enormous direct labor costs and limited economies of scale.
- Brand loyalty could result strong inertia, limited customer switching.
Thus we see that fire apparatus is a low-volume, low-margin product with a demanding customer base with a potentially strong brand loyalty. Fire apparatus manufacturers are faced with gaining market share by winning business one customer or even one truck at a time by offering superior quality and customization. This industry is unlikely to see any significant consolidation in the near-term and is an example of how numerous small, independent companies can coexist in today’s era of consolidation.