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Good Enough for Developing Countries?

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
September 1964
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A UNITED NATIONS publication of a few years ago referred to the conflicting views of several UN experts about the advisability of using old or reconditioned machinery in underdeveloped countries. One expert in a Far Eastern country, a specialist in the production of ramie, proposed that secondhand decorticating machinery be used in a plant producing ramie fiber. “While the [reconditioned] machines will not be as efficient as new models,” he pointed out, “first quality fiber can be produced with them. It is obviously important that every possible economy be practiced in order to conserve foreign currency funds.” In contrast, another expert advised against a proposal to install reconditioned textile machinery in a Middle Eastern country because “old machinery or even the best reconditioned machinery will produce only inferior goods.” He saw “no reason why the country should be handicapped with worn-out theories or machinery which would only hamper its strides toward improvement….”

Mr. Waterston is a staff member of the Development Advisory Service of the International Bank for Reconstruction and Development. He has been associated with the Bank for 17 years. He is coauthor of The Economic Development of Mexico, and author of Planning in Morocco, Planning in Yugoslavia, and Planning in Pakistan, all published by The Johns Hopkins Press, Baltimore, Maryland.

Similarly divergent opinions are also found outside the United Nations. There are, indeed, two widely separate schools of thought on the subject. Advocates of greater use of secondhand equipment in developing countries contend that not only do firms using such machinery do well in the domestic market, but, because of low wages, they may be able to compete in export markets with companies in high-wage areas which operate with more modern machinery. In Calcutta, for instance, an old private firm, affiliated with a larger British concern, bought from its British associate a used semiautomatic machine for making wood screws. Paying wages at the low rates prevalent in India, it not only undersells the British company in India, but also exports to neighboring countries at a lower price than its associate. An even more striking example is that of a foundry in Cleveland, Ohio, that shipped some of its old casting equipment (which in the United States required uneconomic amounts of high-cost labor to operate) to South America, where it was used to establish a foundry. Although steel for casting also had to be shipped from the United States, the company found that the South American castings could be delivered to Cleveland (a round trip distance of 7,000 miles, including 700 miles of inland transport) at a lower cost than that of producing similar castings with modern equipment in its Cleveland plant.

Nevertheless most entrepreneurs prefer new equipment if they can get it. There are several reasons for this. There is the widespread view, by no means limited to the developing countries, that what is new is inherently better than what is old. This is not necessarily so, as everyone knows. Nevertheless, like some financing agencies, operators of plants in underdeveloped countries do not wish to add to their burdens unnecessarily by using secondhand machinery, even if they know where to get it; and it is not always easy to locate the right type of usable secondhand equipment when it is needed. Furthermore, while a plant may be found where used equipment is pointed out to visitors, most operators take much greater pride in managing factories with the most up-to-date production facilities. Indeed, in some developing countries, there is so strong an aversion to the use of anything but new machinery that entrepreneurs have been known to settle for lower financial returns in order to enjoy the psychological satisfaction derived from ownership of the latest equipment.

Again, anyone who advises a developing country to acquire used machinery runs the risk that his motives will be suspect, and that he may be accused of wanting to saddle a country with the castoff equipment which another country wishes to scrap. If anything goes wrong in a factory which has installed secondhand machinery, the blame may be placed on the used equipment instead of on possible mismanagement or on other causes unrelated to the used machinery.

The Supply of Used Machinery

No one knows exactly how much used machinery and equipment of all kinds is surplus to the needs of the U.S. economy and available for export, but everyone concerned with the subject agrees that it is considerable, and that it is increasing. The considerable age of most American machinery and equipment at a time of rapid technological advance has stimulated a movement toward large-scale modernization and automation of U.S. industry. It is, therefore, probable that a considerable amount of used machinery and equipment will become available in the United States in the next five years.

The growing amount of surplus equipment and machines in the United States, and the promise of an even greater accumulation in the next few years as U.S. industry is modernized, have given rise to plans for making some of these items available to less industrialized countries, and some of these plans are already in operation.

The Meaning of Obsolescence

The idea that used machinery and equipment can be put to advantageous use in a developing economy can hardly be called new. In Asia, Europe, Latin America, and other parts of the world, the large amounts of used machinery and equipment which have been in operation for many years in cement, iron and steel, aluminum, electrical, automobile, metal fabricating, textile, chemical, and other manufacturing plants, as well as in machine shops, foundries, sugar mills, mines, road building projects, and agriculture bear testimony to the usefulness and profitability of secondhand equipment in the less developed nations.

It is sometimes forgotten that many prosperous industries in the United States started their plants with secondhand equipment. Indeed, many of these plants are still in operation, and there are some U.S. manufacturers who have never bought a new piece of equipment. Even today at least two secondhand machine tools are sold in the United States for every new one. In 1960, about 88,000 used machine tools were sold, with a dollar value that greatly exceeded the value of the 40,000 new machine tools sold. The use of secondhand equipment does not necessarily imply backwardness. Indeed, old equipment has been employed for the most modern purposes. According to the New York Times of June 3, 1961, “Lockheed Aircraft Corporation’s outer space research is depending to a large measure on a 52-ton generator that formerly fed power to the inner reaches of Boston’s subway system.” The subway system, which had used the generator for 40 years, was converting from direct to alternating current. Lockheed purchased the old unit at about one tenth the cost of a new generator and has used it “on such projects as Agena B satellite vehicles and advanced versions of Polaris ballistic missiles.”

In an advanced industrial country, many pressures operate to make machinery and equipment obsolescent before they are worn out. When a new technical process is introduced or an existing one improved, usable machines or equipment may, in order to meet competition, have to be replaced by new ones which embody new or improved techniques. Thus, ceramic-tipped cutting machine tools have outmoded carbide-tipped tools, just as carbide-tipped tools outmoded high-speed tools, and the latter in turn had outmoded carbon steel tools. Sometimes machines become obsolete because of a change in the way an industry is organized; or changing fashion or consumer taste may require redesign of a product, and usable machines have to be discarded to supply the new demand. If the market for a product contracts, good machines may become surplus; if it expands, existing machinery may no longer be able to produce economically the greater quantities needed within the required period. This is especially likely to be so when the demand is seasonal, but also when the output at the higher level would require the addition of larger than economic amounts of labor per unit of output (perhaps by requiring overtime pay at higher rates). In industrial countries high or increasing wage rates are one of the most persuasive forces in bringing about the replacement of existing manually operated or even semiautomatic machines by “automated” machinery which needs fewer men to work it. In short, there are many reasons, having little or nothing to do with age or usability, which may make machinery or equipment obsolete.

Most obsolescent machinery and equipment has been used, but a machine could be brand new and still be obsolescent. To take a commonplace metalworking machine as an example, an 813 inch swing general purpose engine lathe is obsolescent in the United States at the present time, but it is not obsolescent in the U.S.S.R., where it is being mass produced as new machinery both for internal use and for export. Machinery which is obsolescent or even obsolete in the most advanced industrialized countries today may thus be well suited for operation in economies which have not moved so far along the industrial road. A used machine may represent a considerable advance over manual labor or hand tools, just as a slightly used machine may be an advance over much older machines. In Yugoslavia, the replacement of 50-year old textile machinery by 5-year old machines, which cost only about 40 per cent of what new machines would have cost, was a great step forward.

This does not mean, of course, that developing economies can never make good use of the most modern equipment. Where, for example, a new process eliminates the need for skilled labor, chronically short in the less developed countries, it might be better for them to acquire equipment which embodies the latest innovations. Thus, in the foundry business, hand skills are normally needed for making patterns and molds, and in sand technology, which take 15 or 20 years to learn thoroughly. Such skills are obviously not available in most developing countries. However, a new shell molding process has been invented which employs a combination of resinous material and sand. When the metal is poured into the shell, the resin is melted out and an excellent casting is obtained. Such molds can now be imported by developing countries to make castings mechanically without the use of the highly skilled labor that was needed for the older process.

When Used Machinery is Desirable

When the technology of the latest machines in a specific field has not made great advances (when, for example, the new machines merely produce a product essentially the same as that made by the older machines, but produce it much faster or with greater economy in the use of manpower), there is a greater chance that the older machines can be put to profitable use in an underdeveloped economy than when improvements in the newer machines also result in improvements in the product. Yet even machinery which makes products of less than the best quality has sometimes been found to be satisfactory in some markets. For example, used batch dyeing equipment in a textile plant in a Central American country could not be made to reproduce the exact shade of color from one batch to the next. Nevertheless, it operated profitably since consumers in this market did not mind variations in the shade of the material they purchased.

In the appropriate circumstances and with adequate safeguards, it may therefore be advantageous for developing countries to acquire secondhand machinery or equipment which, although obsolescent in industrialized countries, is capable of producing satisfactory goods at marketable prices when used in developing economies. Used machinery can often be obtained at 30 to 75 per cent of the original cost (which nowadays may be only 20 to 40 per cent of what the same machine would cost if it were to be made today, and even a lesser percentage of the cost of a more modern machine doing similar work).

Used machinery, however, is a bargain only if it will produce satisfactorily, and if the price is right. The price must therefore take into account repairs needed to make the equipment operable to the required standards. A prospective buyer must have it in mind that manufacturers’ credit or a bank loan may be available to finance the purchase of new machinery but not available for the purchase of old machinery. The would-be buyer must also satisfy himself that prospective savings in investment, and consequent reductions in interest and depreciation charges, more than offset increases in labor, material, and fuel costs resulting from the use of older equipment. Whether used machinery is better than new in any particular instance, therefore, depends on the circumstances. There are, however, some rules of general applicability where used machinery may be preferable to new.

While automatic machinery requires few workers, it may demand more skilled workers than older machines. Again, where local capital or foreign exchange funds are scarce, and interest rates are high relative to wage rates, the lower cost of used equipment is often important. The smaller the investment in equipment, the lower the amount of fixed costs. Highly automated production lines can be supported only when they are running at or near capacity; otherwise the fixed cost per unit produced is extremely high. This means that the market must be large enough to absorb the output of the automated machinery. On the other hand, markets in most underdeveloped countries are small, and automatic machinery might easily turn out the whole of the yearly requirements of the market in a few days. Until demand caught up with production, the machinery would stand idle.

Moreover, a manufacturer may require from six months to two years to supply new machinery and equipment. The actual “lead time” depends on the size and complexity of the equipment ordered and the size of the manufacturer’s backlog of orders. In contrast, used machines can usually be acquired immediately and installed quickly to start yielding returns. This difference in availability of new and used machinery has sometimes been used to advantage by entrepreneurs who, forced to wait for months or years for new equipment on order, meanwhile purchase, install, and operate a used machine which they sell when the new machinery arrives.

Spare Parts

Repair parts for modern automatic machines are also likely to be costlier than for older machines, and unless a replacement is readily available when needed, the time the machine is laid up could greatly increase costs. The idle time of older machines, in the same circumstances, is less costly.

In discussions about the use of secondhand equipment in developing economies, the difficulty of getting spare parts is often either overstated or understated. One side contends that, whatever the advantages of used machinery and equipment, they are more than counterbalanced by the fact that repair parts are usually unavailable. The other side argues that the whole question of repair parts of used machinery has been grossly exaggerated. The facts appear to lie between the extremes. If the manufacturer of the used machinery is no longer in business, the purchaser may indeed face problems, especially if there is no machine shop in his city or country. But in most developing countries there are machine shops, some of them quite small, that can reproduce almost any parts likely to be found in used machinery, which usually are less complicated than newer models.

What Makes for Success

Those who know the market requirements of a country and the kind of machinery needed to produce for the domestic market, and who also know how to obtain the necessary equipment and to assure that it is operable, stand the best chance of using secondhand machinery profitably in a developing economy. But the very enumeration of these conditions makes it clear that they are difficult to realize. Few persons in underdeveloped countries are, by themselves, qualified to meet the conditions. Although they may know the market potentialities of their countries, they may not know exactly what type of machinery or equipment is needed. When a dealer in used machinery receives a request from abroad for “a metal-working lathe,” or when the U.S. Department of Commerce receives a request from a North African country for “equipment to process dates for export,” neither is able to proceed without more specific information. The first rule for someone who wishes to acquire machinery (new or used) is therefore that he know or learn the exact specifications required to meet his needs. The more detailed the knowledge, the greater the possiblity of locating the equipment wanted. One sometimes comes upon machinery unused and rusting out-of-doors in underdeveloped countries in mute testimony that someone was unfamiliar with what was needed.

Those who know machinery and equipment are just as subject to pitfalls if they are unfamiliar with market conditions in developing economies. Sometimes they establish plants that are too large. A year or two ago Business Week reported that U.S. firms, accustomed to “pushbutton engineering” and production for mass markets, have had to learn to “think small” in Mexico and to remember “how we did it in the United States around the turn of the century.” Thus, Diamond Alkali, “after some ‘research in reverse,’” established a small DDT plant which produces about 6 to 7 tons daily, although “to make a profit… everybody told us we needed a minimum capacity at least five times larger than we have.”

To overcome the disadvantages of one-sided knowledge, local entrepreneurs operating plants in developing economies sometimes engage managers or consultants from abroad who help them acquire and operate usable secondhand machinery, while U.S. (and other foreign) firms operating plants in developing countries engage nationals of these countries who are informed about the local market.

Another way in which used machinery and equipment, technical operating knowledge, and an understanding of local conditions have been merged successfully is through joint business ventures in which both local citizens and foreigners own shares. Industrias Kaiser Argentina is such a joint venture in which the Kaiser interest in the United States, the Argentine Government, and private shareholders in Argentina each have a one-third interest. The Kaiser contribution consisted of some $13 million of used machinery from its former Willow Run plant, as valued by independent appraisers, plus the cost of shipping the machines to Argentina. The plant, which has capacity to assemble 60,000 automobiles and employs 9,000 people, has proved to be a profitable operation.

How to Do It Yourself

If, however, an entrepreneur in a developing economy is either unable or unwilling to enter into partnership with an outside firm, there are other ways in which he may go about acquiring used machinery and equipment. If he knows exactly what he wants, and can qualify under the terms of the U.S. Mutual Security Act of 1954, he can request the item he needs through the appropriate U.S. official channels set up in his country for this purpose. However, the big problem in the past has been to match the machinery requested with what is available. In all probability he will have to wait a long time until a particular item becomes available as U.S. Government surplus.

He may also attempt to locate the machine or piece of equipment he wants through private channels. Many technical magazines list available used machinery and equipment, and trade associations of the various industries may be able to help locate particular items. The U.S. Department of Commerce, when notified by a U.S. embassy of the specific interest of a foreign buyer, will try to put him in touch with a reputable seller of the used equipment he seeks. There are also several hundred established and reliable dealers in used machinery and equipment in the United States, many of whom are interested in exporting.

Some manufacturers of new equipment also sell used machinery and equipment of their own make which they have reconditioned or rebuilt. This source is a particularly desirable one, since the buyer usually gets a warranty or guarantee with his purchase and can expect to obtain repair parts for the rehabilitated machinery. Many manufacturers who sell only new machinery and equipment know which of their customers are planning replacements. These manufacturers can therefore direct would-be purchasers of used machinery to potential sources of supply. From time to time, the U.S. Government also sells surplus machinery and equipment under sealed bids. These sales are widely publicized and anyone may have his name placed on the list to receive announcements. In certain circumstances, negotiated sales of surplus equipment can also be arranged. Finally, many private plants have idle used machines and equipment which they would be glad to sell.

Precautions for Buyers

Since the condition of a machine or piece of equipment may vary widely, a buyer of used equipment would do well to engage an independent and qualified authority to examine the items he is considering for purchase. There are several well-known and reliable companies which specialize in inspecting, testing, appraising, and certifying equipment of all kinds. Sometimes the manufacturer of the equipment, if available, may be willing to do this, and for some types of equipment, insurance companies may be competent. The extra cost for this service is generally small in relation to the benefits.

But even the best expert cannot determine from its appearance how good a piece of machinery or equipment is. To evaluate a machine, it must be tested under power “analytically” and put through its entire cycle of operation in accordance with a standard test pattern (such as has been developed by the U.S. Defense Department) which indicates the machine’s accuracy at designated important points. Testing under power is particularly important if a machine will be required to operate to fine tolerances.

The purchaser must also determine if the machine is both capable of using attachments and is equipped with a full complement of accessories and attachments. If it is not, it may be useless for the purpose which the buyer has in mind. Many machines sold “as is,” including U.S. surplus, have vital parts and accessories missing.

The buyer who goes out on his own to purchase used equipment (especially if it is large or unusual) must also be certain that it can be dismantled, packed, shipped, and reassembled without injury. The fact that equipment operates well at its original location provides no certainty that it can be dismantled, reassembled, and made to operate efficiently at the new site. For a lathe, drill press, grinder, or other simple machine, the difficulties may not be great. But when the secondhand equipment is a complex grouping of multiple units, such as a blast furnace, a rolling mill, chemical equipment (other than separate units, like stainless steel vessels, vats, or tanks), or a coffee roasting plant, the task of appraising, dismantling, packing, shipping, rehabilitating, and reassembling it becomes a major operation surrounded by greater risks than most buyers in developing countries should undertake. The blast furnace or rolling mill may require major rebuilding; the chemical equipment may be corroded; and in order to salvage the coffee roasting plant, the building in which it is housed may have to be partly torn down and rebuilt after the plant is removed. These examples are not hypothetical; all of them have actually happened.

Finally, obsolescent machinery incapable of producing a competitive product will generally be a dubious bargain at any price. Thus an Indian factory with old (although originally acquired new) equipment producing spark plugs that are inferior to other spark plugs available in the Indian market is bound to be at a disadvantage.

Summing Up

Large amounts of used machinery and equipment are likely to become available in the coming years as U.S. industry continues to modernize. The increase in the supply of such machinery will offer developing economies greater possibilities than before to acquire and use secondhand equipment to aid their industrialization. While there will be instances when developing countries will be able to make effective use of new and modern equipment, there will also be many instances when they can make effective use of used machines that are obsolescent in the more advanced industrialized countries. The use of such equipment need not involve “backward technology.” Indeed, used machines may introduce advances that are easier for developing economies to assimilate than are the greater advances of the new and more automatic machines. In appropriate circumstances, the use of secondhand machinery has already proved its worth not only in the developing economies, but also in the more advanced.

It should be recognized, however, that acquiring equipment at “bargain” prices presents problems and pitfalls. The task calls for expertise which is often lacking in underdeveloped countries. It is well, therefore, for a would-be buyer to acquire a knowledgeable employee or partner, or to seek impartial and qualified assistance to help select the equipment he needs for his particular purposes, and to ascertain that it is fully operable and otherwise capable of doing the job required.

An earlier version of this article, written with the supply situation in the United States in mind, appeared in the Technical Digest Service, Vol. I, No. 6, July 1961, published by the U.S. Department of Commerce for the International Cooperation Administration.

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