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Salvage Yards: From Junkyard Dog to High Tech Heavyweight
By Jenna Bates
Salvage yard. When most people hear those words, they automatically think "junk yard" and may conjure images of the 1970s television show "Sanford and Son." That may have been true of salvage operations in the past, and those junk yards are still around, but today’s salvage industry is far more sophisticated and worldly than Fred and Lamont’s fictional operation.
As cars have become more sophisticated, salvage yards have had to keep up. Not only can you still get an old tire at the local salvage yard, but you may also be able to find a computer for a Lexus, as well as a bevy of other automotive parts.
Large salvage yard consolidators like LKQ — an $800 million company — can do up to $90 million in business annually out of just one location, and LKQ owns 42 of the most sophisticated salvage yards in the United States. LKQ only buys vehicles five years old or newer and will not purchase vehicles with any serious mechanical damage — especially those that have been involved in front end collisions. They primarily buy from large, nationwide insurance companies and have exclusive rights to their "best" collisions. From there, parts are sold to body and repair shops.
Raising the industry bar even higher is increased OEM involvement in the industry. Ford’s Greenleaf program was founded in 1999 and seeks to provide customers with recycled and reclaimed OEM parts.
"It’s complementary to our new parts business," says Garry Nelson, vice president of operations and sales for Greenleaf. "We are very concerned about properly recycling vehicles at the end of their lives."
Nelson admits that Ford has become even more concerned with recycling vehicles since Europe has implemented cradle-to-grave regulations for OEMs in disposing of their vehicles. Nelson has no doubt that similar regulations will eventually find their way to the U.S.
Greenleaf has an extensive network of 33 facilities located throughout North America, making it the second largest salvage operation in the United States after LKQ. For the salvage yard industry, OEM involvement is both detrimental and beneficial depending on whom you ask.
"Ford brings a new level of professionalism to the industry," explains Patrick Garrity, manager of Bay Auto Parts, Green Bay, WI. "They’ve designed their own computer system. I’ve ordered some things from Ford-owned salvage yards, and the packaging and invoicing certainly opened my eyes as to what’s possible."
Bay Auto Parts has been in business since 1960, and Garrity has been employed in his family’s business for 19 years. During that time, he’s seen a lot of change in the industry, and he feels that OEM involvement will benefit the salvage yards that are strong enough to survive.
"Raising the bar is good for the industry and will bring to it a legitimacy," he explains. "Those who can afford it will benefit. But, there will be a lot of turmoil for the industry while that bar is being raised — especially for smaller, family-owned businesses."
There may be a lot of turmoil for automotive rebuilders, too, as OEM involvement in the salvage yard industry may make it more difficult for rebuilders to find and acquire, especially late model cores. As salvage yards consolidate, they bring with them increased purchasing power.
Besides the customer’s old core, historically, salvage yards, directly or indirectly, have been the rebuilders’ primary source of cores. Just as rebuilders have become more sophisticated businesses, so too have salvage yards. As vehicles became more complicated and engines started lasting longer, more people have begun to turn to salvage yards for used engines. It didn’t take long before the salvage yards determined they had an increasingly valuable and marketable commodity, and in many areas they suddenly became a rebuilder’s chief competitor instead of primary supplier.
Salvage yards have been consolidating for years. According to Garrity, there were approximately 30,000 salvage yards in the United States in 1980. That number has decreased to approximately 17,000 today.
There are a number of reasons for the decline in numbers, perhaps the primary one involving the growing expense of operation. According to Garrity, increasing environmental regulations have made running a salvage yard far more expensive than it used to be. There are salvage license permits to be purchased, monitoring to be paid for, expenses for evacuating freon, training of employees to dispose of oil and other liquids, and the expense of permits for reselling these types of materials.
"For the larger yards, the more difficult they make it to run a yard, the better off I am because I can afford it," says Garrity. "In the short term, that’s good for me. In the long term, the regulations can get to a point where they are overwhelming for all of us."
The biggest competition for salvage yards like Garrity’s are what he calls the "mammoth-sized" yards like LKQ and Ford, which can come in and buy up several yards, putting some family-owned yards, which find it impossible to keep up, out of business. LKQ alone sells an average of 10,000 engines a month.
In an attempt to defend themselves, 18 yards in the Wisconsin area have teamed up to create QRP, Quality Replacement Parts. These independent yards work together to consolidate inventory, create Internet sites, merge deliveries, and are even looking at creating a central housing location.
This cooperative effort has recently included yards from Minnesota and Illinois as well. Each yard pays $1,000 a month to be a part of the group, which has two full-time employees and its own business office.
"We had to do something because of the fear of the big consolidators coming in," explains Garrity. "Together, 18 of us can compete with a company like LKQ."
But, make no mistake, those involved in the cooperative still compete fiercely with one another.
"If an insurance company calls LKQ, they get one quoted price," explains Garrity. "If they call QRP, they get 16 different quotes. It’s good for the insurance companies, and it’s good for us."
Another salvage yard joint venture is the United Recyclers Group (URG), a partnership of more than 350 North American recycling facilities that participate in joint programs, including co-op buying, group advertising, shared training, Internet applications and development of the Pinnacle System, an inventory management system for URG partners.
Recycled Vs. Rebuilt
Like other business operations, salvage operations have had to become increasingly sophisticated in the way they market themselves and their product.
Saying that their engine is reliable, carries a warranty of some kind, and costs less than a rebuilt engine, the salvage yards market themselves with a "recycled" rather than "used" mentality. Like the engine rebuilder, though, salvage yards have to dispel the image that "recycled" may mean "damaged" or "poor quality." They often do this by offering exceptional warranties. LKQ warranties, for example, are good anywhere in the United States and cover labor.
Bay Auto Parts offers a minimum of a 90-day warranty on all parts. However, that warranty can increase up to a lifetime warranty depending on the part. Ford’s Greenleaf program has initiated an extensive Trade-In Credit (TIC) program. With Greenleaf’s TIC-6™, TIC-12™, TIC-24™ AND TIC-Limited Lifetime™ programs, customers have the available option of trading in any Greenleaf part — for whatever reason — for a full credit/exchange or cash refund.
However, except for these large consolidated and highly managed salvage operations, according to the Automotive Repower Council (ARC), salvage yard engine warranties are generally few and far between and, when available, are for a very limited time. ARC is a not-for-profit council comprising rebuilders and their suppliers who wish to inform the public about the economic and environmental benefits associated with rebuilt engines.
In addition to the warranties offered by salvage operations, many are hopping on the environmental bandwagon by promoting the environmental benefits of purchasing "recycled" parts. Ironically, that’s the same tact that ARC takes. So, while salvage yards can be an engine rebuilder’s primary competition, both are using similar environmental marketing to sell their products.
And, there’s one more thing some salvage yards have in common with rebuilders. Some salvage yards have gotten into the rebuilding side of things themselves, although the Automotive Recyclers Association (ARA) is hesitant to call it a trend. Bay Auto Parts rebuilds about a dozen interchange numbers of transmissions in house. These rebuilt transmissions are then sold to other salvage yards, shops and through other retail venues.
"We’re very selective about what we rebuild," Garrity says. "We only rebuild manual transmissions and even then only the popular ones."
This wasn’t always the case though. Bay Auto Parts once was an independent supplier for remanufactured engines but got out of the business because of quality and warranty problems.
Like ARA, Garrity wouldn’t say that rebuilding is the trend for salvage yards. In fact, with the growing involvement of operations like Ford and LKQ, Garrity predicts that more yards will begin to concentrate more on simply selling used engines.
"As engines become more fuel injected, I’m more at ease selling a used engine than a reman one," he says. "The trend being set by Ford and LKQ is to concentrate on used salvage parts. The most successful companies are selling off all their other ‘distractions’ and are just concentrating on selling used parts."
One trend Garrity does see in the salvage industry’s future is more Internet usage. Typically, Garrity receives most of his salvaged vehicles from auto auctions. Last year 13,000 of the 16,000 vehicles that came through his yard came from auctions. The others came from insurance companies, but some came from Internet purchases — for the first time.
"It’s going to be huge," Garrity says.
According to Greenleaf’s Nelson, Ford also acquires most of its vehicles from auto auctions and has some insurance contracts.
The days of the junk yard are slowly disappearing, and this means the rebuilder’s competition with salvage yards will only continue to increase. Even more importantly, perhaps, is the growing involvement of OEMs in the business and their consolidation of independent salvage yards. It’s likely that the more OEMs like Ford increase their involvement in the industry, the harder it will be for rebuilders to find later model, high quality cores.
In the meantime, rebuilders will have to continue to do what they can to market themselves successfully, challenging the salvage yards’ claim that used is better — and cheaper — than rebuilt.
You may e-mail Jenna Bates at email@example.com.