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Machine Shop Market Profile

By Dave Wooldridge

Interviews conducted with parts and equipment suppliers, as well as machine shop owners and custom engine rebuilders, generally point to market demand which has remained flat when engine production numbers are compared to year earlier figures. Recent survey results of machine shops concerning production year 1997 confirm these assumptions.

Automotive Rebuilder magazine conducted a survey of the machine shop membership of the Engine Rebuilders Association (AERA) in January of this year. Four different questionnaires consisting of four pages each were developed to profile such areas as production numbers, labor hours on specific jobs, market trends, sales figures, profit margins, employee benefits, shop expansion plans and equipment purchases.

Each questionnaire was mailed to 800 machine shops, primarily in the U.S. A total of 462 questionnaires were used in the final analysis, resulting in a return rate of 14.5%. Results of the survey are being published in a two-part series appearing in our 1998 July and August issues.

Space limitations prevent us from printing all of the statistical charts generated from our survey. If you would like a copy of all charts generated from our study, or if you have specific questions regarding any of the survey data, contact Dave Wooldridge, editor, at 330-670-1234, ext. 214, or email dwooldridge@babcox.com.

Gas engines up slightly
Gas engine production averages rose slightly in production year 1997 compared to 1996. Last year, machine shops averaged 17.1 rebuilt engines produced monthly compared to 16.2 produced in 1996. This is an increase of less than one engine monthly, a rise of 5.8%. For the purposes of our study, a short block, long block or complete can be considered as one engine in a monthly total. However, once counted in a specific category, it cannot be counted again in any other categories.

In the gas engine category, machine shops showed increases in four and six cylinder production, while eight cylinder production declined. Machine shops averaged 4.6 four cylinder gas engines last year compared to 4.0 in 1996, 3.8 six cylinder engines compared to 3.4 in 1996, and 6.9 eight cylinder engines compared to 8.2 in 1996. Production in our "others" engine category rose from 0.6 to an average of nearly 2.0 in 1997.

There could be a variety of explanations for the increases in four and six cylinder gas engine production. Vehicle makers have been steadily increasing the number of four and six cylinder equipped vehicles over the past several years. Vehicle designs continue to emphasize a decrease in weight in an effort to improve emissions and increase fuel efficiency. Lighter weight component parts, including aluminum and plastic composites, will likely continue to be employed in today's and tomorrow's vehicle powertrain systems.

The parts proliferation associated with the increasing number of four and six cylinder engines, in the opinion of some, is an improving market opportunity for the custom engine rebuilder or machine shop. However, many of these engines are more sophisticated in their technology, often requiring a larger investment in equipment and tooling to meet machining and assembly tolerances and specifications.

Old line 350 Chevy and 302 Ford eight cylinder engines are still in demand, especially for light duty truck and older automotive applications. However, depending on geographic location, many machine shops and custom engine rebuilders cannot compete with the local retailer or the production engine remanufacturer (PER) supplying retailers, WDs, jobbers or installers direct with these types of motors.

There is little disagreement that machine shops that are still solely focused on rebuilding cast iron cylinder heads and providing machining on vintage eight cylinder blocks will not be in business for the long term. Most successful machine shop owners we've interviewed suggest that shops today must find niche markets that are not in the realm of the larger production engine rebuilder.

"We can't compete with PERs today who basically sell engines in one of two ways," one engine rebuilder told us. "They sell them by giving them away on price, or they sell them by giving them away on warranty. Custom engine rebuilders have to find markets for their products and services that are not as sensitive to (this price and warranty giveaway)."

What are these potentially more profitable markets for machine shops and custom engine rebuilders? In general, they would include the very old engine, industrial, high performance, marine, very late model engines, and cylinder heads and blocks for imports.

The import engine market may well represent one of the more profitable niche opportunities for machine shops. Import cars and light trucks are characterized by more part number proliferation than their domestic counterparts. Many of these late '80s and early '90s import vehicles are of greater resale value than earlier imports, and they are coming into the engine service/rebuilding window of opportunity in greater numbers.

As with domestic engines, there are also opportunities for machine shops to undertake late model cylinder head rebuilding for local new car service dealerships. The import engine and cylinder head market is one that most PERs have yet to address adequately. In many instances, they simple have not been able to cope with the part proliferation or the issues involving availability of cores, both of which can be more easily addressed by the custom engine rebuilder.

Like import engines, the performance engine market is also one that most PERs have not addressed adequately as far as the typical racing enthusiast is concerned. Unless a PER can find a way to rebuild engines on his current production lines, taking advantage of existing production and manpower capabilities (which a few PERs have been able to do), performance engines do not make a lot of economic sense for the typical PER's operation.

However, for the custom engine rebuilder, many opportunities exist to market to the performance enthusiast a variety of products and services from balancing, torque plate honing, and line honing to custom porting work. There are those that thought that as little as five to six years ago the performance market would dwindle in its participation and importance to machine shops. However, just the opposite seems to have occurred.

Whether it's due to the avalanche of enthusiastic support for NASCAR racing events, including the newly launched truck series, or the increase in the number of 40- to 50-year-olds with the discretionary income and the passion for revisiting their '50s, '60s and '70s muscle car youth, the interest in racing and high performance markets has never been higher. One only has to look at the rising attendance at consumer racing events and business trade shows to verify this trend.

Diesel engines down
For production year 1997, machine shops averaged about 1.2 four, six and eight cylinder diesel engines produced monthly. This compares to an average of two four, six and eight cylinder diesel engines produced monthly in production year 1996.

The monthly production average of four cylinder diesels remained constant at 0.30, while the production of six cylinder diesels dropped from 0.60 in 1996 to 0.36 last year. The production of eight cylinder diesels also declined in 1997 to 0.33 per month from 0.50 in 1996. Our "others" category of diesel engines also declined from a monthly average of 0.60 in 1996 to 0.16 in 1997.

When it comes to improved longevity of today's engines, diesels have probably made even larger advances than their gas counterparts. Depending on its application, it is not unusual to expect 500,000-mile performance from a typical new heavy duty diesel engine before any major engine work is required. Combine that with continued extremely price competitive remanufactured engine and component parts programs from the OEM and you have a very tough market for your typical machine shop interested in performing over-the-road heavy duty and medium duty diesel engine work.

Similar to their gas engine machine shop peers, owners of primarily heavy duty diesel engine machine shops are also searching for those niche markets that are not as price or warranty sensitive as those currently occupied by heavy duty truck OEM reman programs. Successful diesel machine shops we've spoken with are spending more time searching out businesses in their markets to try and understand their equipment maintenance needs.

These shop owners tell us that many times those in charge of maintaining equipment welcome the opportunity to discuss their service repair requirements with local machine shops, or were unaware that some of their equipment could be repaired through machining or rebuilding. Often these jobs require some ingenuity in creating fixturing to accommodate specific repair or machining procedures, but the margins can be well worth it according to several diesel shop owners we interviewed.

Truck manufacturers and engine and component makers have come to realize that they cannot put all of their eggs in any one market basket. That's why we see these vehicle and component manufacturers looking at an increasing array of global markets to participate in. They realize that North American markets are already quite mature and well defined.

Most machine shops, similarly, must realize that they also cannot put all of their products and services in one or just a few market segments. Whether its expanding into business opportunities in their local markets that they have previously left untouched, or looking abroad through the use of such technology as the Internet, machine shops today simply must continue to explore new opportunities for existing equipment and manpower

Total engine production
Combining 1997 gas and diesel engine production figures yields a total monthly engine production average of 18.29 units. This represents less than a 0.5% increase when compared to the 18.20 units produced monthly in 1996.

Based on a universe of 6,000 to 8,000 full service machine shops, the custom engine rebuilder/machine shop market produced between 1.32 million and 1.76 million rebuilt engines in 1997. This is virtually unchanged from the 1.31 million to 1.7 million units produced by this market segment in 1996.

Assigning an average value of $1,000 to a rebuilt engine (long block) the custom engine rebuilder market generated between $1.32 billion and $1.76 billion dollars in sales during 1997.

Cylinder heads up slightly
Gas cylinder heads represent the lion's share of total cylinder head production by machine shops/custom engine rebuilders. Just as total engine production increased by less than one engine per month, total cylinder head production also grew by less than one cylinder head monthly, or about 1%. Machine shops averaged 55.85 rebuilt heads in 1996 compared to 56.4 units rebuilt in 1997.

Actual production of gas cylinder heads, however, grew by 4% from year-earlier figures. Machine shops averaged 50.36 gas heads in 1996 compared to 52.4 units last year. Specifically, four cylinder gas head production declined from 17.1 to nearly 16 per month, and eight cylinder head production dropped from 22.6 per month to 21.1 last year.

The increase in overall gas head production was registered primarily in our "others" category where head production rose from 0.56 to 4.3 units in 1997. Six cylinder gas heads also showed an increase moving from 10.1 units in 1996 to 11 units per month last year.

Monthly average total production of diesel heads declined from 5.49 units to 4.0 units last year. Four cylinder diesel head production as well as our "others" category of diesel cylinder heads remained virtually unchanged while six cylinder head production declined about 22% from 2.09 units in 1996 to 1.64 units per month in 1997. Eight cylinder diesel head production declined from 1.95 units monthly in 1996 to 0.92 units per month in 1997.

Our survey results for rebuilt engines and cylinder head production are generally in line with observations made by parts and equipment suppliers that we have interviewed. Most suppliers tell us that cylinder head rebuilding offers better growth prospects than lower end engine work over the near term. Sales from at least one large engine parts WD network we interviewed pegged 1997 engine production growth for machine shops at 1% while cylinder head growth was at 4%.

The reasons for better growth in the cylinder head rebuilding market remain the same. Overheating of lightweight cylinder head castings due to detonation, or cooling or oil system inadequacies can quickly generate warped heads, cracks and camshaft binding.

In general, many PERs still have problems generating adequate core supply for their own engine production requirements. Consequently, custom engine rebuilders have a better opportunity to make cylinder head repairs for a variety of customers in their marketplace.

A major problem for many machine shops looking to expand either their cylinder head or engine production capacity, however, is finding and keeping qualified employees. Presently, many markets have little to no unemployment. We've talked with more than a few shop owners over the past several weeks who have reported qualified shop employees taking better paying positions in other industries.

Continued pricing pressure has in more than a few geographic locations prevented machine shop owners from raising hourly rates required to increase the salary of hourly machine shop employees. Many shop owners tell us that the supply of potential shop employees coming out of high schools and/or two-year trade schools is at an all time low.

There is no question that along with finding a variety of profitable niche markets and sourcing updated technical specifications, maintaining a qualified and experienced workforce is a major concern for many machine shops and custom engine rebuilders.

Aluminum heads
As was mentioned earlier, the OEM effort to reduce vehicle weight to meet CAFE and emissions requirements has lead to engine designs dominated by increased use of aluminum and plastic composites.

Today machine shops report that aluminum heads represent nearly 43% of all cylinder heads rebuilt in the shop. This is virtually a negligible change compared to the 43.4% of total cylinder head production accounted for by aluminum heads in production year 1996.

Slightly more shops, though, reported sending aluminum heads out for crack repairs. In 1996 46.2% of all shops reported making these repairs themselves compared to 44.8% who reported doing so in 1997.

The overall percentage of aluminum heads that were unrepairable and scrapped remained virtually unchanged from the prior year. In 1997 machine shops reported scrapping about 19.5% of all aluminum heads brought to the shop for repairs, while in production year 1996 machine shops reported scrapping an almost identical 19.1% of aluminum heads.

We'll have to wait and see if there develops a trend towards machine shops sending more of their aluminum head crack repair work out. Those shops reporting making these types of repairs themselves rose from just 37.2% in production year 1995 to 46.2% in 1996.

The slight decline in machine shops reporting that they made crack repairs to aluminum heads themselves last year may indicate a shaking out of those shops capable of maintaining a qualified employee base to staff such repair operations.

Crankshaft production flat
As with our engine and cylinder head figures, production of reground crankshafts showed essentially little change from numbers produced in the prior year. In 1997 machine shops produced an average monthly total of 19.23 crankshafts. In 1996, machine shops reported average monthly production of 18.95 cranks.

Eight cylinder gas crankshafts occupy the largest segment of all cranks reground at 7.6 units per month. This is identical to the number of eight cylinder gas cranks reground in production year 1996.

Four cylinder gas crank production rose from 4.2 to 5.3 monthly in 1997, while six cylinder gas crank production declined modestly from 4.5 to 3.9 per month. Production numbers for four, six and eight cylinder diesel crankshafts were virtually unchanged from year earlier figures.

Crankshaft production since 1995 has remained relatively unchanged. Based on the higher quality levels today's engines are built to we would suspect no significant increase in the demand for rebuilt crankshafts over the next several years.

It is generally an accepted fact that engine block durability has improved significantly over the past 10 years. In our own opinion, much of the life of today's engines is directly related to computer controls and electronic ignition. We no longer see a situation where cylinder walls are bathed in gasoline because of hard starts or poor carburetor adjustments. In the past this was a common occurrence which could lead to major cylinder wall or engine bearing damage.

Today's electronically controlled vehicle delivers the perfect balanced mixture of fuel and air continuously. Engine performance is constantly being measured by the vehicle's computer and adjustments made on an ongoing basis. As a direct result, OEMs have met the CAFE and emissions requirements that have been mandated to them, but also significantly improved engine life.

Respondent increases/decreases
The percentage of shop owners reporting increases in production numbers declined in the categories of engines, cylinder heads and crankshafts. The percentage of total survey respondents reporting decreases in production of engines, heads and cranks increased. In essence, more shops are doing less and fewer shops are doing more.

Some would interpret this as a marketplace in which the big are getting bigger and the small are getting smaller. There is certainly no doubt that the investment required in equipment, training, technical resources and management capabilities is higher than ever before. For some machine shops, as well as small to mid-size PERs, market demand may not currently support the cost required to research, rebuild and service an existing customer base.

Along with an increased percentage of survey respondents reporting decreases in production, and a decrease in the number of respondents reporting an increase in production, the average increase for those reporting an increase was smaller, and the average decrease for those reporting a decrease was larger ñ in all product categories.

For engines, the average increase for those reporting an increase was 13.4%. In 1996 this increase averaged nearly 19%. For cylinder heads, the average increase for those reporting an increase was 15.4%. In 1996 that average increase was 16.5%. For crankshafts, the average increase in production for those reporting an increase was 17%. In 1996 that increase was 18.2%.

For 1997, the actual average number of engines produced each month, the percentage of machine shops reporting a decrease in average production, and the larger size of the average decrease all seem to point towards a continued maturing and consolidating market for custom engine rebuilders.

Specific jobs/engine types
For the past several years, automotive gas engines have occupied about 75% of the total engine rebuilds of the typical machine shop. In 1997, this percentage declined from 74.1% in 1996 to 70.1%. Automotive diesel engine rebuilding held fairly constant at just 3.8% of total engine production.

The largest increase was noted in medium duty diesel production where machine shops reported that this category occupied 5.7% of all engines produced compared to just 4% in 1996. Heavy duty diesel engines also rose from an average of 4.1% of total engine production to 5.6% last year. Production of marine engines dropped from an average of 4.4% of total engines rebuilt to 3.6% in 1997.

As to the percentage of time spent in specific shop operations, disassembly and cleaning represented the largest investment in time required to rebuild an engine at 15.2%. That is slightly higher than the 14.8% accounted for by this category in 1996, but less than the 16% represented by cleaning and disassembly in 1995.

Cylinder head resurfacing accounted for the second largest block of machining/rebuilding time at 14.7%, a significant increase from the 11.9% which cylinder head resurfacing represented in 1996. We suspect that as OEM surface finish requirements become smoother and more exacting in order to seal head to block properly, machine shops will have to invest more in equipment and gauging to ensure proper specifications are achieved.

Valve guide and seat work occupied the next highest percentage of machining/rebuilding time at 12.8%, followed by cylinder boring at 12%, and valve reconditioning at 10.1%. Combining cylinder head welding, with valve guide and seat work, cylinder head resurfacing, and valve reconditioning, resulted in the typical machine shop spending 42.5% of its production time on cylinder head work in 1997. And this is before disassembly, cleaning and assembly time allocated to cylinder heads is added in.

Equipment profile
The average age of all equipment in the shop rose from 10.62 years in 1996 to 11.4 years in 1997. Machine shop owners reported spending the lowest amount on shop equipment in recent history. In 1997 machine shops spent an average of $14,354 on new or used equipment. This compares to $20,167 spent in 1996 and $24,773 spent in 1995 on new shop equipment.

Of the total equipment purchased in 1997, shop owners reported that nearly 70% was new while the remaining 30% was used. Equipment purchases for prior survey years did not provide data on new versus used purchases.

Interviews with several equipment manufacturers seem to validate our survey data with reports of flat to minimal sales increases common for the 1997 production year. Said one equipment supplier we interviewed, "Our hard metal (equipment) sales were down last year. However, our perishable sales, e.g., mandrels, stones, cutting tools were up."

The market for machine shop equipment appears to remain very price sensitive with a lot of used equipment available. One supplier told us that his company had sold quite a few of a particular piece of new equipment in 1996. They thought their prices were too low compared to the rest of the market, so they raised them. The result was significantly fewer units were sold the following year.

Machine shop owners we've interviewed have said they are aware of the need to meet increasingly tighter OEM specifications. Many of these same shop owners, however, are concerned about the significant investment in new equipment and their ability to generate both the sales and the profits to justify the investment in today's competitive marketplace.

Such concern speaks volumes to our industry's need to expand consumer and business awareness of the rebuilt engine option. It emphasizes the need for equipment and parts suppliers to share information designed to improve the efficiency and profitability of their machine shop customers.

Finally, it mandates that machine shop owners operate their businesses with sound management practices based on actual costs of operation and meeting required sales and profit margin targets.