Using Pre-Owned Machines To Increase Profitability And Productivity

Introduction

We would be discussing about how pre-owned machine valuation impacts profitability of projects. In India when we the MSME companies think about setting up a new plant or think about expansion of existing capacity in the current working plant, we always think about purchasing and installing new plant and machinery. May be we get influenced by the sellers, banks, consultants, etc. To reduce the total project costs, have we ever thought of using pre-owned plant and machinery? I am sure we have kept the idea of using pre-owned machinery for our plant. In this article I am going to discuss about this concept, its PROs and CONs, etc.

Cost Break-Up Of MSME Manufacturing Units (Machine Valuation)

To discuss this concept, first let’s start with the cost break up of few manufacturing units⁽¹⁾. For getting better results, I have considered a broad base as follows:

Sr. No.	Project Name	Capacity	Total Investment In Rs. Lakhs	Machine Valuation Rs. Lakhs
1.	Biscuits	30.0 Tonnes / Day	828	224
2.	Bopp Adhesive Tapes	6000 Sq. Mt. / Day	51	7
3.	Bread Making Plant	5000 Packets / Day	36	12
4.	Chocolates	15000 Kgs / Annum	45	4
5.	Corrugated Carton Boxes Gum Powder (Tamarind Kernel Powder Base)	1 Ton / Day	36	7
6.	Decorative Laminated Sheets (Sunmica)	50,00,000 Sq. Mt / Annum	1,484	860
7.	Disposable Plastic Syringes With Needles	120 Lakhs / Annum	253	90
8.	ERW Steel Conduit Pipes (Black Pipes)	15.00 Mt / Day	600	100
9.	High Mast Poles	9000 Nos. / Annum	484	206
10.	Particle Board From Rice Husk	15 Lakh Nos. / Annum	426	152
11.	Rubber Based Adhesive	1500 Mt / Annum	92	32
12.	Rubber Compound Toys (Using Plaster Of Paris)	1500 Nos. / Day	61	18
13.	Rubber Gaskets	200.00 Kgs / Day	60	18
14.	Steel Fabrication Unit	2 Mt / Day	131	25
15.	Tennis Ball (Used In Playing Cricket)	1200 Nos. / Day	86	10
16.	Transmission Towers & Tele Communication Towers With Galvanizing Plant	24000 Mt / Annum	853	163
17.	Tube Making For Umbrella	400 Kgs /Day	41	7
18.	Tyres And Tubes For Bicycle And Rickshaw	300000 Nos. Tyres	351	158
19.	Wire Mesh (Hexagonal Square)	10 Mt / Day	181	23
20.	Wooden Furniture (With Mediocre Automation)	20 Articles / Day	73	13
	Total		6,172	2,129

Note – P & M – Plant & Machinery

From the above table, we can see that the cost of plant and machinery is about 34.5% or roughly 1/3 of the overall project cost.

Pre-Owned Machinery An Option

When we set up any MSME unit, we seldom want to venture into technologically complex product or process. We want to set up unit because we have seen an opportunity in some field or want to have an import substitute product (आत्मनिर्भर भारत). All these products are generic in nature and need common available plant and machinery and not specialized equipment. However due to our mindset we always think about the new plant and machinery items for variety of reasons. Few of the reasons are given below:

• Sentimental value – We think that we want to start a new plant or expand our existing plant, then I should always use new machinery as my clients would come and if they see old machinery, they may not like it. Or since this manufacturing unit is going to be earning me my bread and butter, I should always purchase the best available option.
• Insisted by the Machine Manufacturers’ Representatives – Many a times, the plant and machinery manufacturers’ representatives visiting us don’t tell us about refurbished machinery available with them or old second hand machinery any of their current client wants to dispose off. The reason could be that representative getting lesser commission.
• Insisted by Banks – Many a times, the bank employees insist that we should purchase new machinery only. For old machinery they don’t give loans. The reasons could be they are not technical persons so are not aware of the true worth of pre-owned plant & machinery items.
• Taboo of Old Machinery is always junk – We think that old machinery could be always junk and if we purchase it, then there could be too many break-downs and the maintenance costs could be higher making the overall cost of pre-owned machinery higher than the new machinery

However if have been given option of getting the assessment of the pre-owned machinery with correct machine valuation, then I am sure we would like to purchase them. Think about pre-owned car market in India. Earlier people were reluctant to purchase pre-owned cars as they were not very sure about the maintenance history of the vehicles and feared that if the vehicle fails on the road then it could cost them dearly. With many companies such as First Choice, Maruti True Value, Carwale, CarDekho, etc. companies coming into picture and inspecting the pre-owned vehicles for their fitness and if required repairing those vehicles and certifying them, people have started trusting them and started purchasing pre-owned cars. Even now banks give loans for pre-owned cars. If this can happen to pre-owned cars then why not for machinery?

Options available for Pre-Owned Machinery

There are many Indian companies akin to First Choice, Maruti True Value, in the pre-owned machinery sector in India. There are experts who offer machine valuation services also. If we search on internet we can get more information about them. Few of these companies have their warehouses in prominent cities such as Navi Mumbai, Mumbai, Pune, etc.

If we are thinking about purchasing imported pre-owned machinery, then there are many websites all over world where the sellers list their machinery with photographs, specifications, etc. and from these machinery we can purchase the desired pre-owned machinery. If the desired machinery is not available then the sellers through their network check the required machinery and make it available to us.

There is an exhibition of used plant and machinery items⁽²⁾. For last few years this exhibition was getting held in NSE Exhibition Ground, Goregaon Mumbai. This year it would held in Delhi. It could be a good idea to visit this exhibition to get good pre-owned machinery.

Fourth option is taking part in liquidation auctions. Nowadays with the passage of IBC (Insolvency and Bankruptcy Code), the government has made the work of liquidating a company very simple compared to earlier option of DRT (Debts Recovery Tribunal) was tedious and very long. When a case used to referred to DRT, by the time the final case result was declared all the plant and machinery of that unit would have been junk. However under IBC, the NCLT (National Company Law Tribunal) has become very pro-active and cases are decided very fast (from 180 days to 270 days)⁽³⁾, so the condition of plant and machinery of IBC cases is much better and in the auction, we may get them at very cheaper rates.

Advantages of Pre-owned Machinery

Generally depending upon the specifications and requirements, depending upon the considering of the pre-owned machinery, they are available from 10% to 70% of the original cost of the new machinery of same brand and specifications. If the pre-owned machinery is purchased from auction, then they may need some repairing to be carried out to make them in workable condition. But that cost many not be very high and eventually we get the machinery at much cost effective rates. For maintenance of this pre-owned machinery, we may tie up with reputed machine repairing units or OEM or their representatives.

The cost saved in the pre-owned machinery (machine valuation) can be used to purchase inventory of raw materials or may be to get more manpower and increase the production of the unit and earning more profits and lesser break-even periods of the projects.

Conclusion:

There are many options available in the market and we should always choose what is best for us giving us maximum returns on our investment rather than taking decisions on sentiments and considering this, purchasing pre-owned machinery after good market survey or machine valuation or taking guidance from the expert would be the best option.

References:

1. https://www.entrepreneurindia.co/project-and-profile
2. https://umexonline.com/
3. https://www.ibbi.gov.in/uploads/whatsnew/1f4d5f48bbc0d66b4b53ce6cb8220d08.pdf

Author

Author is a Chartered Engineer or CEng or CE in Mechanical Engineering Field and also a registered valuer with IBBI as well as Government Approved Valuer with Income Tax Department under Wealth Tax Act. Section 34AB