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The PER Future
By Brendan Baker
When you think of the future, there is a tendency to think of Hollywood or maybe Jules Verne. You might be thinking you’re going to be remanufacturing flux capacitors or rebuilding space ships. Someday maybe this will be true; however, in the next decade it’s highly unlikely. Production engine remanufacturers (PERs) from now until the end of the decade will probably be doing what they have been doing in the last few years, only more of it.
More and more PERs are stepping into territory that was once the sole domain of the custom engine rebuilder (CER). Some PERs have begun to move into niche markets such as imports and high performance, but the bread and butter is still the domestic OEM engines. Many feel that the primary competition for PERs is the vehicle manufacturers, according to several PERs that responded to our survey. And with manufacturers pumping out low interest rate and high rebate cars like Big Macs, it has become harder for PERs to keep engine sales up.
What concerns a PER the most about the future? Many are at issue with the new style engines and the increasing costs associated with rebuilding them. It has a trickle down effect, parts cost more and the equipment to work on them also costs more. That, in turn, affects the amount of training the rebuilder needs to properly build the engines. Additionally, with more education and training comes higher salary demands.
"My biggest concern is the new engines we are seeing are a bit frightening. You are going to have to charge considerably more because of the increased parts and labor cost to remanufacture these units," says Ed Davis, of Waterhouse Motors, Tacoma, WA. He wonders, too, who is going to install "these technical time pieces"?
Ray Fink, president of AER Manufacturing, Carrollton, TX, and a contract supplier to OEMs, says, "knowing your market and how it will change in the near future, i.e., the next one to two years will be critically important. And also controlling cost, especially labor and overhead cost," are areas he believes are keys to survival and prosperity down the road.
Similar echoes can be heard from both PERs and CERs in reference to the biggest expenses. Payroll and healthcare overwhelmingly top the list. The area of healthcare has become a rather sticky issue. "Our healthcare went up 80 percent from last year," John Graper, a CER, explains. "We can’t offer coverage to our employees’ families anymore."
Healthcare has gone up so dramatically that many small companies cannot afford to provide it anymore. The healthcare issue is not, however, limited to just small companies. "Insurance has been the most volatile expense in recent years," according to Jasper Engine’s Mike Schwenk. Companies the size of Jasper, though, are more easily able to absorb such expense hikes.
Labor is also a concern to many in the industry. What’s at the core of the issue is the ability to find qualified people, pay them a decent wage, and be able to retain them in the industry.
Schwenk says that Jasper recruits new employees with a combination of local advertising, promotions and associate referrals. In addition, they use quarterly performance appraisals to keep new employees informed of their strengths and weaknesses.
Doug Anderson, president of Grooms Engines, Nashville, TN, also uses the referral system to recruit new people. "We are always looking for good people because we have a fair amount of turnover at the entry level. We advertise in the local newspaper and we pay $200 a month for three months to an employee for a referral that we hire."
Fink agrees that labor and its associated costs are high, but he thinks in the future there is a possibility it will change, somewhat. He says that with the evolving automation of some processes, these costs could be reduced.
Governmental control is another area of concern for some PERs. Recently, it has especially affected those PERs involved with diesel engine remanufacturing (Oct.1 stricter emissions regulations). "All of the government regulations worry us to death. They take too much time, cost too much money, and leave us exposed to unreasonable penalties," says Anderson.
Anderson also points out that today’s more sophisticated engines have made it difficult for the PER to rebuild later model engines. "Aluminum blocks and heads along with SOHC and DOHC engines have made our job more complicated. We have to be more careful at teardown, use different cleaning and manufacturing processes on them. Keeping track of all the front-end pieces is a challenge, too, so it takes more time and better controls to rebuild the late model OHC engines."
It is difficult for most PERs to identify specifically what area makes them money, unlike a CER that can point to cylinder heads, for example. A PER typically looks at the whole picture as one product.
"We have a single product, remanufactured engines, and all manufacturing areas contribute to the success of the end product. We obviously monitor cost for all of our processes and make sure they are contributing to the finished product," Fink explains.
Other PERs point out that the way they make money is by controlling expenses and managing their resources carefully because the end product is what is being paid for, not the individual processes.
Ed Davis, whose company can be considered both a PER and a CER, says his company typically produces about 6-10 motors a day, but also does more customized work. He says crankshafts are his big profit area. Not many other shops in his area grind cranks, so Waterhouse does a considerable amount of work for other shops in the region.
Are there a decreasing number of quality engine installers today? "There are fewer installers than ever before and many of them haven’t kept up with the times – they don’t have the equipment or the people they need," says Anderson.
"A lot of shops do not like installing engines because of the liability they take on, and for a smaller shop it ties up their bays for too long," Davis explains.
What’s the biggest problem professional installers have in making a proper rebuilt engine installation the first time? A popular consensus among remanufacturers and rebuilders is that some installers don’t diagnose the initial engine problem properly. For this reason, they sometimes ruin the remanufactured engine by the very same cause, i.e., a plugged radiator core, sensor, etc. "Our biggest complaint," says Davis, "is that they (installers) don’t clean the bolt-on components well enough. Bearing failures are usually the result, and dirt isn’t something we cover under our warranty."
The majority of the PERs we interviewed base their business around doing long block engine rebuilds. However, some smaller PERs fall in between a PER and CER, and predict some changes into doing less traditional rebuilds. "It may change," says Davis. "With so many components in the cylinder heads of these late model engines, we may find ourselves doing more repair to this part of the engine instead of a complete overhaul. That would be fine with me. We make good money on the head work, and our liability is much less than a complete long block…"
Most PERs agree that late model engines are more durable and have affected the volume of engines being remanufactured. "I believe quality is having some affect on the number of late model engines being built," says AER’s Fink. "Engines will continue to be built better and last longer and longer."
This trend may reorganize the industry to a certain degree. PERs will have to move into other areas, i.e., niche markets and find new ways to market and distribute their products. "It is hard and expensive to cover all the facets of the automotive aftermarket," Fink concludes. "Most of the niches are developed around how we go to market and not on how we build the product," he notes.
In the past, it has also been difficult to gain access to the necessary information to work on late model engines. This, too, is changing. In part, because of recent proposed legislation that would require manufacturers to disclose more information about the vehicles they make. This could allow more PERs to compete with OEMs. And when the manufacturers come back down to earth with their new car incentives – PERs’ volume should begin to pick up.
For the moment, the industry seems to be faced with more questions than answers. Today’s engines are lasting longer, that’s a fact. But what about the fact that new cars are getting more expensive to buy, and with the current state of the economy people may choose to hang on to their cars longer, which may lead to more rebuilding opportunities.
Sophisticated engines require sophisticated machine work and a sophisticated work force, which requires more investment and overhead for the PER. But will the market bear what it costs to do late model engine work? Many of the answers to these questions will depend on the business savvy and resourcefulness of today’s PERs.