9/1/2002
Acquisitions, Proliferation Cloud Parts Suppliers Predictions
By Doug Kaufman
With a nod to Charles Dickens, "it is the best of times; it is the worst of times" in the engine building industry. And no matter which of these perspectives you favor, you’ll find someone in the motor vehicle aftermarket to agree with you.
The subject of "parts" is extremely complex and could well consume this entire month’s issue. Leading parts suppliers and manufacturers were asked their opinions on several issues facing engine builders and their comments are summarized here.
During the late 1990s, the word that best described the aftermarket parts and accessories industry was "consolidating." Each year, from 1997 to 1999, more than 90 mergers or acquisitions of manufacturers or suppliers were reported.
Consolidation fever ebbed dramatically in 2000 and last year only 55 mergers were reported. But though the numbers have slowed, the impact of this consolidation is still being felt. Has the continuing consolidation of engine parts suppliers affected availability and quality of parts for engine builders? Will consolidation continue? Has it been good or bad for the industry? All the answers depend on your perspective.
"Availability and quality issues are precisely the forces that have driven the consolidation of manufacturers. I would argue, therefore, that consolidation has largely helped leading manufacturers ensure the continued availability of a growing range of premium-quality replacement components for today’s engine population," says Steve Hildebrand, Sealed Power/Federal-Mogul.
"We’re facing significant increases in engine platforms and parts SKUs. Additionally, many of these components are far more complex and expensive to design and manufacture. Smaller manufacturers often don’t have the capital or OE relationships to continue to compete in this environment."
Hildebrand feels involvement at the OE level will be almost critical to survival in the future parts business. Pointing to a demand for "engine systems" solutions for rebuilders, Hildebrand says "we’re perfecting many of the new component technologies before the engine platforms are even introduced, and we’re using sophisticated performance modeling programs to predict and address potential engine failure modes. This knowledge is then extended to the aftermarket to enable rebuilders to grow their businesses by using the best technologies for every application."
Will consolidation continue? Probably, say parts makers, but not at the pace we’ve seen. It will be based on the concept of adding value to the customer, not for the sole purpose of building a big corporate presence. Hopefully, future consolidations will keep quality levels high.
"Quality is expected and will remain constant within supply lines. Manufacturers have not been able to rationalize the costs of steady acquisitions, netting only slight gains or complete failure. If buyers are found, there will be some sell-off. In the future, look for suppliers focusing on key, profitable, product lines. This focus will also translate into better service levels," says Roger Borer, ITM Engine Components.
"There’s always going to be room in the market for innovative niche competitors who focus on one thing and do it extremely well," says Raymond King, Fel-Pro Gaskets/Federal-Mogul. "What those companies probably won’t have in their favor is an appreciable level of involvement at the OE level, which limits their ability to be first to market with important new technologies that address common repair needs. A global OE presence is becoming a prerequisite for long-term success in today’s aftermarket, and small, independent companies are less likely to be able to maintain that presence."
Paul Cunningham, Cloyes Gear, agrees that an OEM presence may be critical to growth in the future. "Regarding timing drives, the few remaining strong suppliers are those that are also suppliers to the OEMs. Consolidation will continue as the product becomes more highly engineered."
Rick Simko, Elgin Industries, says survival will continue to require investment and adaptability. "We saw several companies sell out to larger, multinational corporations because those companies weren’t positioned for continued growth in the industry. But most of those companies have already been swallowed up – the ones that are left today are those with the resources needed to survive. We certainly fall into that category."
Not everyone believes bigger is necessarily better, however. Steve Markley, Egge Machine Company, says consolidation has meant one thing to his customers: reduced parts availability. A supplier of engine components for rare, antique and collectible vehicles, Markley says his customers are often the ones being neglected by larger manufacturers – a situation he’s happy to remedy.
"As the major suppliers get bigger through acquisitions, they often find that the slower moving part numbers aren’t cost effective to produce," Markley says. "In many cases, they either drop the part number from their catalog or raise the price on it until it is no longer attractive or affordable to the engine builder. By the nature of their size, major manufacturers need to produce parts in volume...they simply can’t afford to do the small runs.
"The bright spot in this is for a smaller manufacturer like Egge," Markley explains, "who can accommodate shorter production runs. Even though short-run parts are not cost-effective for major suppliers, Egge can and does supply the parts that enthusiasts want. And the supplier who can meet the specialized needs of the customer will continue to thrive in the future," he says.
Greg Weiler, Enginetech, echoes Markley’s assertion that small suppliers will be able to thrive if they do the right thing.
"Product shortages and escalating market prices are effects of the continuing – and in some cases failed – consolidation of engine parts suppliers," says Weiler. "We see this trend continuing due to selling margins that are not sufficient to support the development of late model components for the aftermarket as well as the service levels the market demands. Highly efficient companies that have positioned themselves to provide high service levels will continue to have advantages over larger, less efficient organizations."
Efficiency has to start with the components themselves. Today’s engines require components with minimal engineering and manufacturing tolerances, yet deliver unbelievable performance. Says Clevite’s Jerry McCabe, "Engines don’t break anymore: they wear out between 175,000 and 225,000 miles. The ‘technology trough’ is much wider than we thought, perhaps as much as four years wider."
So are there market niches that offer growth opportunities for replacement engine parts sales and for engine builders? Performance is expected to continue to grow, but Elgin’s Simko says it isn’t necessarily on the high-end racing edge.
"I think a large percentage of engine builders are missing out on the most promising part of the performance segment – moderate engine upgrades for street performance, towing, light truck and outdoor enthusiast applications," Simko explains. "A simple cam upgrade can make a difference for millions of vehicles, yet we don’t communicate that opportunity to the marketplace. Millions of consumers are looking for ways to enhance available torque and/or fuel mileage, yet for some reason we tend to focus on the much smaller number of ‘racing’ opportunities."
Clevite’s McCabe also suggests engine builders should target the foreign nameplate machines. The import tuner market has made its way from both coasts into the heartland of America, signalling significant sales opportunities.
Sealed Power’s Hildebrand says, "We also see the aging fleet of SUVs and light trucks as a real growth opportunity. The millions of expensive SUVs and light trucks aren’t going to disappear when they lose their appeal as passenger vehicles – they’ll eventually become "work" trucks. These vehicles are so well built that, aside from the need to freshen up their engines, they can provide dependable service and excellent utility for 15 years."
Says Raymond King, "Heavy-duty is another growing segment that’s fairly resistant to recessionary forces – small fleets understand the value of engine repair and can be excellent business partners for qualified engine building operations. Marine engines represent another growth market – these engines are viewed as safety components by boat owners and see high-stress operation in a corrosive environment."
To be in a position to take advantage of future sales opportunities, engine builders should understand some things about new engines and parts replacement, say the experts.
Times have changed, says IPD Parts’ Bob Straw. "Electronic diagnostics is important. It isn’t rocket science but the effort needs to be made to learn it and support organizations such as the HVMG (Heavy Vehicle Maintenance Group www.hvmg.com) that continue to fight for the independent aftermarket’s right to the information. Rebuilding procedures is another – age-old ways of doing things such as putting adhesives on gaskets or installing rings on pistons by hand have serious ramifications to product performance."
According to Engine Pro’s Greg Dunlap, today’s engine builder is facing competition unlike anything he has ever seen in the past. "In addition to the pressures of a shrinking marketplace, independent CERs are facing increased competition from other engine sellers. From PERs to OEMs to the salvage engine market, the common denominator among all these competitive offerings is, obviously, the growing importance of warranty coverage."
Dunlap says Engine Pro’s new warranty program – a program available thanks to a partnership with parts suppliers and available as a separate part number – will allow CERs to compete with extended warranties from OEMs and PERs.