What’s Wrong With Our Industry
We explore top issues facing the engine building industry today.
By Doug Kaufman
What’s wrong with the engine building industry today? It’s a simple question that has no simple answer. Like many other if not every industry facing difficult times, the factors impacting this market are varied, complex and frustratingly hard to pin down.
Are the woes of the industry the fault of customers or suppliers? Has Mother Nature helped cause a decline in engine sales? If a niche market is touted as the next big business opportunity, is it really a niche?
Those are some of the questions we uncovered while attempting to determine what the leading factors impacting this industry really are. The plan had been to rank the top 10 factors, based on industry responses to a list of probable topics. Our goal was to wrap it up neatly, determine the solution to each of those problems, make everyone rich, save the industry and go home happy at the end of the day.
As you might expect, however, with an industry this diverse, the responses were varied. Very varied, to be precise. In fact, what was ranked as the leading factor by one industry member was ranked eighth by another…and not even considered worthy of Top 10 status by several others. In simple terms, determining which was most important proved impossible and unnecessary. As one leader said, "you’ve certainly picked the right subjects now, what do we do about it?"
Although ranking these subjects would be difficult at best, careful analysis of interviews with leading parts and equipment suppliers, association leaders and owners, managers and employees of machine shops and engine rebuilding facilities do reveal some trends. Many of the factors that at first glance seem to be unique from the others actually are impacted by or themselves impact many other factors. Like the children’s game of pick-up sticks, when one is moved, it reveals its relationship to the others.
Another analogy, as Doug Anderson points out in his sidebar article on page 50 is "The Perfect Storm," in which several individual factors (by themselves, perhaps mere annoyances to a forward-thinking business) create a powerful force that does significant damage. Like the famous Halloween storm of 1991, the Perfect Storm walloping the engine building industry has sunk many good ships.
Computers are an important and ever-present part of our lives today. Technology has made many things easier and more affordable and has improved society immeasurably. For the automotive industry, technology has created longer-lasting vehicles and better, more fuel-efficient engines.
Talk about your double-edged sword. Unfortunately, it has required engine builders to stay current with an ever more complex universe of car, light truck and diesel engines. Of course, advancements in technology have always occurred, but now those advancements seem to be coming faster than ever.
Technological advances in engine design, materials and sealing, as well as the degree to which precision must be maintained, mean being on the cutting edge isn’t just a nice option, it’s critical.
Ed Kiebler, national sales manager at Winona Van Norman lists some of the key changes: "Surface finish tolerances on head or deck surfaces and cylinder walls. Multi-layer steel gaskets that take a much finer Ra finish. Ring and piston technology has shops fitting pistons with no clearance. New cylinder coatings will change the way we machine cylinders."
In short, yesterday’s equipment and methods just won’t produce the results needed to succeed with today’s engines.
Luckily, many engine builders recognize the importance of staying ahead of (or at least near) the technology curve. Rebuilders who responded to our annual Machine Shop Market Survey questionnaire had the opportunity to tell what they felt their biggest business hurdle is. More than four percent indicated that technology is their issue.
"The complexity of newer engines and heads," said one. "The specialized tooling required for quality control," said another. "The rising cost of equipment and keeping up with technology...or trying to," said another.
For some areas of the country, all of the planning and preparation in the world haven’t been able to counteract one of the biggest challenges: Mother Nature. According to Armand Mancini, president of Liberty Engine Parts, the weather has been much more than a topic of conversation among machine shops on the East Coast.
Although racers are known for spending money on their cars at the expense of life’s necessities, a very wet summer has played a role in Liberty’s as well as many others’ business. "We had significant rain all along the coast this year," says Mancini. "Because of that, many weekend races were cancelled. When races are cancelled, racers don’t break their engines, and they need less freshening up and repair. Consequently, that impacts the work that many of our customers expect."
A wet summer makes racing a challenge, and another rebuilder says mild winters have had equally strong effects on his business.
"Mild winters have been a real problem," says the Northern engine builder. "We haven’t seen double-digit below zero temperatures for the past four years. Consequently, we’ve had to scale back our business."
Likewise, Mancini says the economy has adversely affected business. "We’ve seen people put much less money into their boats this year," Mancini says. "That directly impacts us because the larger majority of our customers build marine engines. The economy has been a real problem people don’t have the money to spend on their toys."
An engine builder in the agricultural Midwest says the economy’s impact isn’t limited to East Coast marine customers. "We’re in a farm community with no factories. The economy is bad here. Our customers are 75 to 100 miles from us, so the cost of fuel hurts us too."
Open any newspaper, listen to any radio or television station and you’ll recognize that the country is awash in new cars. For the first time in history there are more cars than drivers and anyone who doesn’t already have a car is being bombarded to buy a new one. New car dealers advertise zero percent financing, offering cash rebates and other incentives to get customers into new vehicles, regardless of the financial sense it may make to keep their old ones.
Reports of the availability of $6,000 cars and even "buy one car get one car free" sales abound, but the fact is, today’s consumers are not looking for low-cost transportation. They are often looking to buy the nicest car they can get for the lowest monthly payment even if that payment stretches out four, five or even six years. The perceived low monthly payment is often enough to convince potential rebuilt engine customers to abandon "old faithful." But at what cost?
All of the real costs of owning a new car, including buying it, maintaining it, repairing it and insuring it can add up rapidly, and quickly eliminate any savings from zero financing. Unfortunately, many consumers don’t realize that. "If you look at the studies that have been done, most consumers are unaware that they can have a remanufactured engine installed and have a good, viable warranty," says Dave Deegan, first vice chairman of the Engine Rebuilder’s Association (AERA). "Economically, it’s a lot less costly than purchasing a new or used vehicle."
Deegan would like to see an industry-wide financing system that gives extended billing terms with no finance charges. "Its just like they’re selling furniture today," Deegan points out. "We need something like this that would be endorsed by the whole industry. We need to offer attractive financing the same way OEs do."
To fight a negative image, most vehicle dealers now refer to used cars as "pre-owned." Yet for many price-focused consumers a used engine has no such stigma. This, according to Asiff Dhanani, chairman of the Production Engine Remanufacturers Association (PERA), should be a huge concern to the industry.
Of course, while the low price of a used engine may make it attractive, as Deegan and Dhanani both point out, there’s no way to know the history of the engine and its owner’s (or owners’) maintenance habits.
But while it’s easy to focus on the negative impacts used engines present and moan about the problems they present, Dhanani urges that we look at positive ways to address the issue. "We’re all concerned about emissions standards and pollution, so we need to be sure used engines meet current emissions standards. This is a particularly troubling aspect of engines coming from Japan, for example. How do we know they meet our standards?"
Dhanani points out that focusing on the strength of that argument that used engines may be increasing costs due to pollution rather than saving a few bucks is a great way to fight used engines in the marketplace.
"I remember a few years ago, CARB (California Air Resources Board) began requiring that used engines be stripped of anything relating to emissions," recalls Dhanani. "This made what had been a complete engine a long block which meant engine builders could be more competitive."
With the combined strength of PERA and APRA, Dhanani calls for a strong lobbying effort to stop the sale of complete used engines. "As long as we focus on the emissions aspect of the situation we should have the support of both rebuilders and parts manufacturers."
Tom Schrader, Jasper Engines, echoes Dhanani on the need for education about the economic impact of "junkyard" engines. "The big issue we need to understand is what is involved when using a used engine. There are a lot of auxiliary parts sales being lost. What’s the real impact on the industry of the engines?" questions Schrader.
The issue of parts sales is a volatile topic in the industry. The Internet has given anybody the ability to be an "expert" on performance engine modifications, which should both encourage and worry this industry. More information often translates into more opportunity, but there’s a problem. Although many rebuilders acknowledge the work is out there, they say customers often bring parts in with them, eliminating a profitable part of the job ticket.
"Most of our engine building customers cite mail order parts as their number one source of competition," says Liberty’s Mancini. "Some shops are starting to discount machine work if the customer buys his parts form the shop. Others have given up trying to sell parts and are happy to just have the machine work."
Mancini says the availability of parts from mail order and online sources has been a blessing and a curse. While it has raised the excitement in the midst of the consumers, it has made it difficult for engine builders to compete on price.
Growth of Niche Markets
As we’ve said in these pages many times before, if you want to be successful you gotta be unique. "The guys who say they’re doing well are the ones doing the specialty work," says Mancini. "The ones who are doing the 302 Fords, the 350 Chevrolets and the 307 Olds engines are getting killed the ones who diversify, who take chances, are the ones doing well."
Niche markets offer opportunities to engine builders to compete on something other than pure price. Antique restoration, street performance and the growing number of compact diesels offer significant opportunities. Frankly, these aren’t cheap engines to rebuild and skill and expertise are needed.
"Guys need to create a new reason for their customers to do business with them," says Dave Monyhan, Goodson Tools and Supplies. "They either have to start with a niche service or machining offering, or provide a capability their nearest competitor can’t match."
Monyhan points out that engine builders have the skills necessary to do niche projects. Machine and tooling upgrades if needed will allow engine builders to compete for these exciting markets.
"The only way to beat your competition," says Monyhan, "is to not compete on the same level. Compete for your customer’s business by offering something not readily available."
Ask an engine builder who his competition is and you’re likely to hear "The knucklehead down the street who gives bad work away and gives the rest of us a bad name. Dan Minick, long-time contributor to Engine Builder magazine and an expert in import engines suggests the competition isn’t just another shop.
"Today’s engine remanufacturer is faced with ever increasing competition on all sides, and it’s not just from people who do the same thing you do. Today’s competition also comes in the form of the great lease options and new car financing programs. Can you match the competition? How important is convenience to your customer? Does the length of downtime discourage a buyer from replacing an engine and going ahead with a new car?"
The solution, from Minick’s perspective, is to recognize the challenges faced by your customers and try to meet those. "Don’t over promise and under deliver," Minick advises. "Rather, over deliver. Give the customer more than you promised. You are building a long-term relationship with your customer. Build them for life."
Cost of Doing Business
Running a business is different today than it was 30 years ago," says Joe Munoz of Enginetech, Carrollton, TX. "It takes increased business savvy and a willingness to change. Just because it worked then doesn’t mean it will work anymore."
The various costs of doing business were collectively referenced by our readers as the second most important issue. Everything from the local economy to collecting for work done to employee benefit has a cost attached and rebuilders know it.
John Debates, Auto Machining Inc., St. Charles, IL, says his biggest business expense is health care and it’s one of his most important, too. "My employee health insurance premiums went up almost 30 percent this year. A lot of people are surprised that I pay 100 percent of my employees’ healthcare, but it’s definitely a good investment. I’m not only competing with other machine shops, I’m competing with other industries for my employees. If I don’t make that investment, they’ll likely walk across the street to a factory. They’ll make just as much and have benefits, too."
Debates may be a unique case because he hasn’t had to replace an employee for 14 years. His attention to the needs of his workers and their families is certainly one of the reasons for this. He prides himself on the quality his craftsmen produce. Other engine builders say they’re not so lucky.
"We can’t find good help!" lament managers and owners of shops. "No one wants to do the work." Finding qualified employees was listed by our readers most often as their leading problem. Complaints such as "lack of interest and skill," "can’t do quality work," and "they just won’t show up," are fairly common. What isn’t so common are the remarks of one parts store machine shop manager who begs for an opportunity to do the work.
"The problem of ‘can’t find good help’ is talked about, but on the other hand there are a lot of guys who want to do the work but can’t get into the companies. I am ASE certified, have years of experience yet can’t get into a more supportive situation. I keep hearing about all these shops going under so why is it so hard to find help? Perhaps many shops really aren’t willing to pay what we’re worth..."
Importance of Installers
I think many of this industry’s problems are related to one specific factor," explains Greg Dunlap, Engine Parts Group. "And that is the professional installer. The engine installer is the one in closest contact to the consumer and is in the unique position to influence the consumer’s transportation choice and options."
Dunlap makes the bold statement that, unlike conventional wisdom, demand for engines really may not be declining. "Rather, we’re just not being thought of to fill it," he says. "Over the years and for a variety of reasons, we’ve lost the confidence of the professional installer. We’re now usually only the third or fourth alternative. The installer is on the front line talking to the consumer and if he’s not recommending our product, I think we’re sunk."
The efforts of the Engine Repower Council (ERC) are to do just that. Alive and well and part of the Automotive Aftermarket Industry Association (AAIA), ERC is not only focused on promoting repowered engines to consumers. Dunlap and others affiliated with the industry group say the message should be recognized that this is a good industry, with a good product that offers good profit opportunities.
"Rebuilding confidence that a remanufactured engine is a reliable affordable product and a profitable option for the installer will go a long way to boosting demand. We need to refocus on the value installers play," says Dunlap.
Simply put, it’s communication that may help us to overcome the industry’s toughest hurdles.
The Perfect Storm
by Doug Anderson
The market for rebuilt engines has declined dramatically since it peaked in 1996. There have been a number of theories offered to explain this downhill slide, but none of them seem to really explain the full extent of what has happened to the industry. So, we’ve given it a lot of thought and put together our own list of the five major factors that we think are affecting our market. None of them would seem to explain what has been happening all by itself, but all of them together just might get close to explaining the whole story.
- New engines last longer
Electronic fuel management eliminated the carburetor that was drowning the intake in fuel and washing the oil off the walls every time the engine was started. Some people say that engines are built better today, and that may be true to some degree, but we’re convinced that electronic fuel injection is the real reason that the newer engines live longer. For example, the ’86 Chevy, carbureted 350 blocks always have a pronounced ring ridge while the ’87’s that came with throttle body injection seldom have any wear in the cylinders, but nothing was changed in the design of the engine or the materials that were used.
Engines also live longer today because of overdrive transmissions that reduce the rpm’s in high gear. One of the car magazines used to have a wear index that was figured by calculating the piston feet/mile in high gear at 60 mph. Keeping that in mind, today’s engines with shorter strokes combined with transmissions that have taller gears are bound to live longer. It’s not uncommon to get 200,000 miles out of an engine today, compared to the 60,000 or 70,000 miles we used to get 20 years ago. In fact, we ran a flat tappet, 350 Chevy with throttle body injection over 500,000 miles in a company truck with nothing but routine maintenance and two timing chains!
- Fewer shops that install engines
There are fewer service bays today than there were 10 years ago and not all of them want to install engines. According to the Lang Report, there are 55,000 fewer bays now than there were in 1992 and there are a lot more vehicles on the road today, so there are 172 vehicles per bay today compared to the 132 vehicles per bay 10 years ago. Some of the shops that are left would rather not install engines, because they can make more money doing brakes, air conditioning and other repairs that don’t tie up a bay for very long. A lot of them don’t have the equipment that’s needed to diagnose, clean and install an engine properly so they can’t make flat rate on the job, and most of them are worried sick about their warranty exposure if they do decide to install an engine according to A.S.A. That means a lot of shops really don’t want to do engine work, so they "quote" engines and don’t do a very good job of selling the customer on a remanufactured engine. Unfortunately that means a lot of our possible customers end up solving their engine problem with another car and we lose the sale.
- Too many used cars
Used cars have always been a factor in the market because they offer the customer an alternative to repairing his car or truck, but they have played an even more significant role in the decline of our business over the last six years. The automotive industry has a lot of excess capacity worldwide, so the manufacturers have all been on a mission to protect their market share at any cost with the rebates, discounts, and deals that have enabled them to sell over 16 million new cars and trucks a year for nearly seven years in a row. Most people in the industry agree that there are about 2.06 million cars and light trucks on the road in the U.S. today and the numbers show that we’ve sold 1.14 million vehicles since ’96, so 55% of the cars and light trucks on the road are ’96 or newer! Keep in mind that they’re all fuel-injected and equipped with OBD II computer systems that can predict a problem before it happens and you get some idea of "where all the engines have gone."
Some people are encouraged by the statistics that show that the domestic car fleet is the oldest it’s been in years. Those numbers don’t make sense to me unless the "domestic car fleet" means just the cars that were built by the Big Three GM, Ford, and Chrysler so that’s how we’re going to consider it. Given that premise, then the average age of the "domestic cars" is increasing, but only because the Big Three aren’t selling as many new cars as they did 12 years ago. Back in 1990, nearly 70% of the vehicles sold were cars and imports only had 10% to 15% of the market, but now half the vehicles sold are cars and half are trucks, and half of the cars sold are imports, so only 25% of our current sales are actually "domestic cars". That makes the aging of "domestic car fleet" more of statistical happening than anything meaningful for our industry.
- Used Engines
Used domestic engines are becoming more of a factor in our market, too. Good used engines are readily available because more cars get totaled due to the added cost of repairs when the air bags deploy. Replacing the air bags, the dash, the supports and sensors can add $3,000 to $4,000 to the cost of repairs, so a lot more cars are in the junkyard with fewer miles on them than in the past. The salvage yards have recognized that there’s a market for used engines, so they’ve gotten more aggressive with their pricing and warranties and they’re actively promoting used engines on the internet. Most of them are including some kind of a warranty and some are even offering to sell extended warranties, so there are people who are willing to take a chance on a used engine, hoping to save some money. Most shops we have talked with tell us they don’t really want to install a used engine, but "you have to do what the customer wants or you’ll lose the business". They also told us that the customer really doesn’t save very much because he always ends up buying a gasket set (there’s always something leaking or something that has to be moved over from the original motor) and they charge the same to install a used engine as they do to install a rebuilt, so there’s not a whole lot of money to be saved, but there are still some people who are willing to take a chance. One shop told us about a customer who had him install a used 2.2L Chevy. He ended up saving $400 on a $2500 bill and drove away with an engine that had 60,000 miles on it and didn’t have a real warranty. Be that as it may, used engines are another alternative and customers are taking some of the business away from us.
- The car manufacturers are costing us sales
The manufacturers and dealers are making less on new cars today because of the competition they face for new car sales, so they’re trying to make it up in the "backroom" on parts and service. This has led to factory sponsored engine programs like GM’s Goodwrench and AC Delco, Ford’s Motorcraft and FQR, and Chrysler’s reman program that are all stealing business from both PERs and machine shops.
The manufacturers are also more prone to take care of their customers beyond the terms of the warranty nowadays for a couple of reasons: 1) They want to create owner loyalty so they can sell the customer his next new car, and 2) the internet allows people to figure out they’re not the only one with a particular engine problemand that means both the government and the class action lawyers know it, tooso the manufacturers are almost forced to fix their problems well beyond their published warranties. I suspect Ford’s recall of nearly 1 million cars and vans that came with the 3.8L V6 that had head gasket problems was driven by a combination of all of these factors. The bad news is that the recall and the extended warranty that Ford offered on these vehicles effectively removed about 1 million engines from our shop and yours.
So, putting all of these things together, perhaps we can see "where all the engines have gone." Any one of these changes in the market could make life interesting for engine rebuilders, but having to deal with all of them at once is like putting a high school kid in the ring with Muhammad Ali; it’s a lot like "The Perfect Storm" that hit the East Coast several years ago. However, at some point the pendulum will have to swing back again. There will come a time when the market can’t absorb 16 + million new vehicles no matter what kind of incentives the manufacturers throw at them. Interest rates will go back up and so will the incredibly low payments that have made new and used cars so attractive for the last few years. People will continue to neglect their cars and "forget" to change the oiland they will learn how unforgiving today’s high tech engines are when the oil gets dirty. The OEM engine programs are not doing as well as they had expected and all the manufacturers are tightening up their warranty policies to limit their warranty exposure and costs. There will probably be even fewer general repair shops that want to install engines, but that void will create opportunities for installation centers that specialize in doing just engines. We’re already seeing the beginning of franchised installation centers. And, there will be fewer machine shops that have the people and the equipment needed to rebuild these sophisticated OHC engines, so there’s a light at the end of the tunnel if we can all just keep on building engines one day at a time.