Farm equipment doesn’t come to mind as a hot-ticket item people wait in line for, but that all changed during the pandemic, when shipping bottlenecks and product shortages caused a surge in demand for used equipment.
In fact, when one 1998 model John Deere tractor came up for auction in November 2021, the equipment market was so tight that bidding started at $100,000 and quickly jumped to $170,000 — just short of what a brand-new model costs. The winning buyer drove 12 hours from Illinois to Maryland to pick up the 23-year-old tractor.
The farm equipment industry wasn’t the only one affected. Supply chains for computers, chips, and cars were also disrupted by stay-at-home orders, sick workers, jammed shipping ports, and lean manufacturing methods.
Associate professor remembers needing a new laptop at the worst possible time — the spring of 2020, when it “took months to arrive.”
From manufacturing equipment and cars to computers and medical devices, “companies were all suffering through the same thing,” Sutherland said. Given all the chaos, “we wanted to try to understand the consequences of these supply chain disruptions.”
New research by Sutherland and professor Olivier Darmouni of Columbia Business School reveals that startups and young firms are hurt the most when there are supply chain disruptions that delay the production of new equipment.
“When the supply chain crunch happened, there was a huge rush on the used market,” Sutherland said. “All of the big, established companies that were counting on getting new models couldn’t. So they went to the used market, which startups heavily rely on, and that drove the price of used equipment through the roof.”
The authors studied the consequences of the supply chain shock that resulted from the pandemic by creating a comprehensive dataset of equipment financing transactions involving U.S. companies, recorded in Uniform Commercial Code filings.
Their dataset covers 12 million assets securing 10 million contracts. Those contracts, which originated between 1997 and March 2022, involved more than 2 million unique companies across all locations and industries. The size of the dataset allowed the authors to gain a broad perspective of how new and used assets were allocated during the pandemic.
Cash-constrained startups suffer
The authors found that pandemic-related supply chain disruptions disproportionately hurt smaller firms more than larger, more established ones. Specifically:
1. Established companies aggressively switched from new capital to used capital from November 2021 through March 2022 — the peak of the supply chain chaos. When new equipment was unavailable, they turned to the used market, which drove up prices and squeezed out the younger companies that normally rely on that market. “Interestingly, if you look at whose investment declines the most when there’s a supply chain crunch, it’s not the big, established firms that are always buying the new equipment and counting on the supply chain,” Sutherland said. “It’s actually the younger firms that are cash-constrained and counting on the used market.”
2. Younger firms experienced the largest drop in total capital investment relative to other firms. Their total investment volume dropped by 21 percentage points, in part because they couldn’t afford to buy. “Higher prices put the squeeze on the smaller firms that historically rely on used equipment.”
3. In the same period, there was an increase in trading activity in secondary markets, with greater geographic distance between buyers. “Usually, with heavy-duty manufacturing and construction equipment and tractors, it’s a local market because it’s so expensive and energy-inefficient to transport. But we saw a big spike in firms going out of state to find what they needed,” Sutherland said.
4. The squeeze was made even worse in the agricultural and construction industries by a strike in the fall of 2021 at John Deere, the largest equipment manufacturer in the country. “If you were planning on buying a John Deere skid steer loader, and all of a sudden you can’t get that, there’s essentially going to be a big price increase for other brands’ loaders, both used and new,” Sutherland said.
Troublesome economic and safety implications
There are implications for the wider economy when startups can’t get used capital, Sutherland said: There’s less entry, less job creation, and less growth. “All the great things that startups do for our economy — if they can’t get the capital that they need, they’re not able to fulfill that role,” he said.
The research also points to safety concerns, given that newer models typically come with improved safety features and older machines might be in substandard condition.
“This is heavy-duty machinery being operated by workers, and if a lot of companies are operating older models, there’s greater risk to the employees,” Sutherland said.
And from an energy perspective, “if more firms are using vintage equipment that doesn’t have the energy efficiency of the newer models, there are consequences for the environment, too.”
Prices still high for used equipment and parts
Prices of used equipment are still quite high, Sutherland said, adding that it’s important to realize that it takes time to work through an equipment shortage.
Because there wasn’t a lot of new equipment being produced in 2020 and 2021, any firms that were counting on that equipment coming onto the used market three years later aren’t going to see that happen, “so we’ll still have a shortage” years after the pandemic, Sutherland said.
“There’s a long-term effect to all this,” he said. “These temporary disruptions in the supply chain can have lasting effects.”
The authors also explored the question of whether government subsidies for new capital or used capital might have been effective in alleviating the shock but cautioned that subsidies that are too broad could actually exacerbate the crowding out of younger firms.