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CERs

By Brendan Baker

What if we had the power to predict the future? We would no longer react to situations, but instead, anticipate them. By knowing what lay ahead, bumps in the road and the roller coaster we call life would be relatively flat. Don’t you think? The richness of our lives may depend, somewhat, on NOT knowing the future. However, the opposite is true of our businesses. Anticipating trends and forecasting the direction of your business are the keys to its success and ultimate survival.

We have talked to many engine builders and all of the input has been very valuable. We sent out market and business surveys to both CERs and PERs, and also made follow up phone calls where needed. We then processed all of the data in our mainframe supercomputer "HAL" (FYI: 2001 A Space Odyssey reference). Through this process we have unearthed issues and trends among engine builders nationwide.

There seems to be a quiet revolution taking place as many shops are in transition from the way things were (Lots of typical passenger car and light truck OEM engine work) to the way things are (more niche market involvement, i.e., imports, restoration, marine, high performance, etc.).

The new car market is changing, and the change has affected the way dealers handle engine problems. "More and more parts are becoming disposable," says John Konecny of Dana University, Ottawa Lake, MI. Instead of sending out engine parts to machine shops for repair, dealers are instructed to put in a new one instead. This, coupled with new technology engines lasting longer, has slowed the amount of work for those machine shops that depend on OE jobs, according to Konecny.

Konecny thinks that machine shops are in a transitional period. He said that other areas like racing and performance are likely to fill the void in the future. Performance imports are becoming more popular and also should help induce a new generation of hot-rodders to get involved and carry the industry forward.

Some machine shops are choosing to expand their horizons to up sales volume. "If I’m a retail business I can make flyers and advertise to get more customers," says John Graper, Graper Sales & Service, Troy Grove, IL. "Today, 80-90% of my business is jobber work and you can’t control how much work they get. I figured out that if I can’t get more from the people I have then I have to get more people."

"I had to extend my marketing area farther out," explains Graper. "We started knocking on peoples’ doors…and exactly what I thought would happen has happened – people said, "we have been looking for someone like you."

Another area of concern for the CER is depressed profit margins, particularly high-performance. "We feel betrayed by most brand name manufacturers who allow mail order parts to be priced at or below our cost," says Chris Mohr, Mohr Performance Machine, Auburn, KY. "We are the grass roots that support these manufacturers. We are the front line customer-tech-support, combination-matching, put-it-all-together segment of the industry…more and more customers come in with mail order catalogs…our reaction is to abandon no margin name brand parts wherever it makes sense." Mohr says that he has had "good success" with private label camshafts and intake manifolds, and sees changing from name brands as an "on-going trend."

New style engines pose a challenge for smaller shops that don’t have access to the latest equipment. According to Konecny, automotive machine shops of the future are going to need the latest and greatest computer numerical control (CNC) machines. "Tolerances are getting tighter and accuracy is more important than ever before," Konecny acknowledges.

Galon Snyder, owner of Snyder & Snyder Machine, Northumberland, PA, is very worried about keeping up with the requirements for new style engines.

"The price of equipment necessary to produce the required finishes (tighter tolerances) and sophisticated work is becoming an impossibility for the average engine builder to add to the cost of overhead a shop already has."

Although he knows that not all shop owners and equipment suppliers agree with him, Snyder feels CNC equipment will be the machines of choice in the automotive machine shops of the future. Yet with a price tag typically around $100,000, CNC machines may be out of reach for many smaller shops.

As with many CERs across the country, in the past three to five years Snyder’s business has seen the competition change from local machine shops to large production rebuilders. "Liberty and Jasper have placed installers in the area, and all they do is install their own engines," Snyder claims. Manufacturers, like Ford, have cut off outside work, he says. Instead of allowing a local machine shop, for example, to perform late model cylinder head repairs, OEMs are telling their dealers to replace the part with a new one or use only the authorized OEM reman part; otherwise they will not pay for the warranty cost.

One of the problems, according to Snyder, is many machine shops don’t have the capability to work on later model engines and heads. They can’t produce the types of surfaces new engines require. In turn, OEMs are attempting to ensure quality repairs by simply replacing the part or forcing use of only their own authorized reman components. Snyder doesn’t believe that this trend will continue for the long term, however, because it will eventually hurt manufacturers’ profitability.

We wanted to know what areas were the most profitable from a CER’s standpoint. Most everyone said that cylinder heads (surfacing, pressure testing and rebuilding) were the most profitable.

"If I could do that all day, I’d be a wealthy man," exclaims Graper, who points out that his business makes more than $120 an hour on head work (Graper’s shop is in Troy Grove, in the north central part of Illinois).

There are three areas of profitability according to Leo Croisetiere, president of R&L Engines, Dover, NH. "First, there are cylinder head services, the full gamut (from straightening to porting). Then there’s balancing, and finally engine block machining. These three areas are ‘mainstays’ – profit areas that we will always keep and grow on."

We also asked about areas in which engine builders tend to lose the most money? And the universal response was in cleaning. We were a bit surprised at how clearly alike these responses were, given that everyone has a different set of circumstances, (i.e., location, equipment, employees and so forth) with which to contend.

Cleaning was the biggest money loser followed closely by engine assembly work. "As soon as you assemble the engine you become married to it," says Croisetiere.

Consequently, Graper explains, "that’s why I encourage my customers to assemble the engines themselves. Plus, if they put it together and they don’t do it right, I don’t have to eat the cost of repairing it."

There is a lot of time involved with both cleaning and assembly and yet it is difficult to pass that time on to the customer, several respondents noted.

When it comes to finding, keeping and training employees, many engine builders have lost all hope. Responses like, "luck" or, "I don’t look anymore," were common among those we polled. Many shops are frustrated with the state of the industry and the ability to keep good people.

"I no longer expend a lot of energy looking for help," Croisetiere relates. "I have had so many come and go for so many different reasons that I now know even if I do everything right (reach far and wide, pay good money, offer all the benefits) there is no guarantee an employee will stay with me long term."

The consensus seems to be that it is difficult to find and keep new employees for the long term. They are often enticed to take a factory job where they don’t have to work or think as much, and get better pay, too. Or, if you do get a good worker – one whom you train and groom – one of the fears is that he or she will know how to do everything and then go out and start a competitive machine shop.

What seems to work for Graper’s shop is his honest, open, family atmosphere that appeals to the people he has. He admits, however, that it’s tough when Wal-Mart, which has a distribution center in his area, is hiring tow motor operators at $13 an hour with benefits, too. He said if it’s about money "we won’t be able to keep them…our guys are here for more than just money. We don’t have a set amount of vacation days, if a guy wants time off he can take it so long as we’re not jammed up."

What works for Croisetiere’s business is that he has a core group of people that he pays very well with full benefits, 401k, etc. Moreover, these people are cross-trained enough and continually get more training (in house and out). This core group has the ability to get the work he has done, and they know and appreciate what it takes for Croisetiere to pay their salaries, too.

Joe Mondello, owner of Mondello Technical School, Paso Robles, CA, says gone are the days of hiring some gear head kid to work in the back room cleaning parts and then someday move him out to the machine shop. Now, and even more in the future, you’re going to need much more sophisticated training. "The engine builders of tomorrow are going to have to learn a lot more about alloys, electronics and general machining, as well as automotive machining."

Many CERs felt a slowdown even before September 11. Some engine builders we interviewed have said that niche markets will fill the void left by the shrinking typical OEM engine market. However, others have said that it’s a case where the automotive machine shops have to retool and retrain in order to ensure the quality that installers and vehicle owners demand. In the meantime, if shops cannot be profitable enough to be able to fund an upgrade (equipment, training, etc.) they will be closed out of future profitable engine work.

Niche markets are gaining ground. Many shops have started to look to areas such as high performance, restoration, marine, import high performance, small engines, including diesel, etc., much more seriously. As Konecny explained, "there will be less engines built, but there will be more profit," so it will level out in the end.

Instead of charging less to keep up with competition, the industry as a whole will need to charge more for its services in order to survive and prosper. But how much will the market bear? This remains to be seen.

Additionally, a CER trying to compete with a PER on price is just not going to enable the CER to stay profitable in most cases. PERs and CERs must be able to play to their own strengths.