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The Future Of OEMs In The Reman Aftermarket
By Jenna Bates
Some original equipment manufacturers (OEMs) and the independent automotive remanufacturing industry have maintained a symbiotic relationship since the introduction of the first automobiles; other OEMs are still lagging behind when it comes to getting involved in reman automotive aftermarket sales.
However, today the future of the relationship between the two is critical not only to the OEMs and production engine rebuilders, (PERs) that supply them, but also to the small machine shop owner who will have to meet the challenges and find the opportunities provided as OEMs continue to grow their involvement with remanufactured engine programs.
Automakers continually make changes to engines, transmissions and other essential vehicle components, some of which can be completely redesigned every five to 10 years or even less. The new car sales boom of recent years means that car manufacturers have had to meet increased demand for new vehicles, including the production of new engine designs or engine components for existing engine models.
This demand for engines and component parts for new vehicles has not made it economical for many vehicle makers to use new production lines to manufacture replacement service parts for vehicles requiring either warranty or nonwarranty service replacement engines and/or parts. And, rest assured, those cars will need replacement parts at some point. OEM plants cannot keep up with the service demands for their out-of-warranty vehicles, and it’s a huge benefit to be relieved of, what is for them, low-volume, off line builds.
So, where does the OEM turn when replacement components are in demand? In many cases, car manufacturers have turned to remanufacturers, who are authorized and/or certified by the automaker. These remanufacturers assemble new, or remanufactured engines, as well as other component parts, in order to be able to provide inventory to meet the demand for OEM service replacement components.
All of these PERs have undergone rigorous certification processes, meeting demanding criteria, producing remanufactured engines and engine components that meet OE standards. It’s a growing relationship that produces profit for both the OEM and the PER fortunate enough to be a contract supplier.
Jumping on the bandwagon
Many OEMs have realized a huge financial gain by using independent remanufacturers to provide them with both warranty and non-warranty remanufactured replacement engines. It’s nearly impossible to calculate the amount of money OEMs have saved by turning to remanufacturers, but one thing is for sure, they wouldn’t keep doing it if they didn’t see the benefits in terms of significant dollar savings. Some OEMs say they can save up to 65% of the cost of producing a new engine when providing a remanufactured service replacement engine instead.
OEMs we interviewed say more and more vehicles today are return to dealerships for service after the base warranty has expired because of extended warranties and service contracts. Using remanufactured products instead of new to service these vehicles means quicker repairs for the customer at a lower cost to the vehicle manufacturer, dealership and consumer.. Because of these benefits, there can be little doubt that the role OEMs will play in the future of rebuilding will only continue to increase.
However, not all OEMs are jumping on the remanufacturing bandwagon. Some continue to harbor the old stereotype that remanufacturing doesn’t provide the same quality or performance of new products.
Hyundai is one such company. According to representatives there, today’s labor costs do not make remanufacturing cost effective for them. Further, Hyundai offers a 100,000 mile new engine warranty and feels the best way to protect that warranty is to provide only new engines and components as service replacements when needed.
Toyota representatives also told us they do not have a remanufacturing program, preferring to replace all engine parts with new ones for up to 10 years. Although Honda has had a small parts remanufacturing program dating back to 1980, the company has not yet entered the realm of engine remanufacturing, choosing instead to stick with the remanufacturing of starters, transmissions, audio components, alternators and the like.
Though Honda has considered remanufacturing engines in the past, company representatives say there really isn’t a significant demand for it; neither customers nor dealers are asking for them, we were told.
Like these companies, General Motors was initially hesitant to develop a remanufacturing replacement parts program. Nevertheless, join they did, and they’ve been involved in the remanufacturing side of the industry for about 15 years. Last year, GM sold approximately 50,000 remanufactured engines to consumers.
Other OEMs, like Ford, had no problem embracing remanufacturing to support their warranty and recall programs and have done so for many years.
By turning to remanufacturers, the OEM’s main goal is to save money, explains Ray Fink, president and COO of AER, a Carrollton, TX-based production engine remanufacturer and OEM contract supplier.
AER is a contract supplier to Ford, General Motors, Nissan and Mercury Marine. It is a supplier for the Ford FQR remanufacturing engine program, whereby remanufactured engines are provided to service Ford’s dealerships with a warranty replacement engine. All of Ford’s engine warranties which require a replacement engine receive an FQR remanufactured engine.
Ford Authorized Remanufacturing (FAR) was started by Ford more than 50 years ago. In this original program, various FARs rebuilt engines and/or small parts, which were then sold to Ford dealerships in geographic areas supplied by specific FARs. All those former FARs have since been "de-authorized" so that Ford can control the cores, as well as remanufactured engines sold to its dealerships.
AER became the primary supplier to Ford in the late 1980s when its FAR programs were consolidated. And, Ford didn’t simply pull a supplier out of its hat; on the contrary, AER went through an arduous process before being chosen. Quality assurance teams showed up on AER’s doorstep, along with engineering and finance staff, and even some representatives from the UAW.
AER now remanufactures approximately 500 engines a day, and those numbers are likely to increase as OEMs continue to add more model years to their rebuilt replacement inventory lines.
Engines remanufactured by AER are now sold to former FARs, now known as FADs (Ford Authorized Distributors). These FADs are only allowed to sell these engines to Ford dealerships, although they can sell them to Ford dealers in any geographic location. Some former FARs still rebuild engines, but sell them through independent distribution channels or to Ford dealerships that would buy and install them as non-warranty service replacement engines.
Recalls play another key role in the promotion of the remanufacturing programs, and it’s another area where both remanufacturers and OEMs can benefit. If a recall occurs, especially two or three years after the original engine production, OEMs would be hard-pressed to stop their production lines of new engines to begin manufacturing three-year old engines.
However, by law they need to provide that engine to the customer, and AER supplies hundreds of engines a day to recall programs.
Generally speaking, GM doesn’t remanufacture within the warranty period of a vehicle — usually about three years. And, if the original equipment plant is still producing a particular design, the company may continue to service the engines for many years even beyond the warranty through its Goodwrench or AC Delco programs.
Goodwrench parts are only sold to GM dealers and are used for all warranty replacements. The Goodwrench program employs both remanufactured and newly assembled engines, which are identified specifically. New assemblies come from an existing powertrain plant and exclusively feature GM parts, while remanufactured engines come from one of five OEM contract suppliers. For Goodwrench remanufactured engines, GM parts and GM approved parts are used.
According to one GM representative, there’s "a lot more freedom" when it comes to the AC Delco side of the program. which is why it’s a separate organization.
AC Delco parts, which can be sold to any AC Delco distributor, are usually installed in older vehicles. AC Delco, which is involved in all makes and models, has numerous distributors, too many to even estimate, according to one GM source. All GM engines provided by AC Delco are remanufactured.
AC Delco is also a good example of how marketing remanufactured engines has changed in recent years. While an offshoot of GM, AC Delco promotes itself as a separate entity and not necessarily as a supplier of remanufactured products. It’s not that GM wants to hide the fact that Goodwrench and AC Delco provide remanufactured products, it’s that they want those products to be viewed as separate brands by customers. Either way, GM succeeds in promoting automotive remanufacturing.
Like Ford, GM is careful when choosing a contract supplier. Purchasing, supplier development, site assessment for QS9000 certification, capacity, machining capabilities and ability to deliver to a schedule all go into the decision.
Typically, GM will continue to run a production line for three to five years. After that time, as vehicles start to head out of the warranty period, the company makes the decision whether to continue to provide the engine to the customer or to go outside the GM plants.
"Usually, we’re not forced to make a move outside as long as the OEM plant is building pretty much the same product," says one GM representative, who gave the example of the 3800 engine.
The 3800 engine GM is building today is only a slight variation of the 1997 engine. Because of that, GM has the ability to continue to service engines all the way back to 1995 right from the OEM plant. But, if the OEM makes a major product change, in three years, that product will be contracted out to a rebuilder.
In addition to the savings, GM also values the field information it receives from rebuilders, and it passes that information on to its engineers who use it to help them make design decisions. GM continues to develop partnerships with its authorized remanufacturers to exchange knowledge.
There are a lot of good ideas out there in the aftermarket, and we can actually bring some of those back in house through our partnership with our remanufacturer, explains one GM spokesperson.
Although Nissan has been remanufacturing parts like transmissions and starters for nearly seven years, the company has only been remanufacturing engines for the last four years. AER is the only contract supplier to Nissan, which sells about 300 remanufactured engines a month.
Nissan is honest about its reason for getting into the engine remanufacturing business.
"We had a problem with one of our original equipment engines," says Ron Lynch, project manager for remanufacturing in Nissan’s product development department. "It was a reliable engine, but it made a knocking noise. There were enough customer complaints to justify a service campaign, and it was a lot less expensive to do with remanufactured engines than with new ones. We started because of that, then saw the opportunity to really save some money, so we expanded the line."
Unlike some domestic automakers, Nissan doesn’t automatically turn an engine over to the remanufacturing side of the industry; it only does it if there are enough failures to justify it. On the other hand, Nissan also doesn’t wait for an engine to stop being manufactured before it turns it over to be remanufactured.
"We don’t wait until the engine’s not available through the OEM to send it out to be remanufactured," Lynch explains. "If there’s a high enough demand, Nissan sends it to be remanufactured."
However, when it comes to profitability, Nissan lags behind its domestic counterparts, saving only 20-50% when it comes to replacing engines with reman products. Lynch says this is because its Japanese engineers are very particular about their remanufactured parts meeting OEM specifications, and they don’t accept any variations. Because of this, Nissan finds it more difficult to stay cost competitive in the automotive aftermarket.
This is a problem Nissan is aggressively tackling, and the company is attempting to develop its products at a competitive enough price to gather customer pay sales in the aftermarket.
Like other automakers, Nissan recognizes that there is only so much profit in selling a new car.
"In general, today there’s more profit in the parts and service at a dealership than there is in selling a new car," Lynch says.
Mopar Parts has been the exclusive provider of original equipment parts and accessories for Chrysler, Plymouth, Dodge and Jeep vehicles for more than 60 years. While its original roots can be traced back to 1924 when Walter P. Chrysler displayed his Chrysler Six automobile at the New York Auto Show, Mopar officially became Chrysler Corporation’s parts division in 1937.
It was in the spring of 1937 that Nelson Farley, then Chrysler Division’s sales promotion manager, was contemplating the future of the company’s parts division. Farley established a think tank of sorts called the Activities Council to brainstorm new merchandising ideas. In the spring of 1937, the Council was kicking around ideas for how to name a new line of antifreeze products. The Council drew up a long list of names, but the one that caught Farley’s eye was a simple combination of MOtor and PARts, or MOPAR.
Today Mopar has more than 4,000 employees at offices and parts distribution centers around the world and offers more than 250,000 part numbers. Mopar parts and accessories are designed and engineered using DaimlerChrysler engineering specifications.
Mopar’s remanufactured parts program was launched in the late 1970s and early 1980s. Since its inception, the program has grown from 8% to 10% annually. Mopar’s reman program originally began on a regional basis, but by the mid-1980s Mopar took full control of the program to assure top quality and consistent remanufacturing processes. Mopar remanufactured products are available at DaimlerChrysler dealerships.
Mopar produces both the OE and remanufactured engine concurrently for a brief period of time, but in different configurations in some instances. For instance, the OE engine is provided as a short block and it’s up to the customer to construct the engine. Mopar provides the remanufactured engine in two versions: a long block with the heads already installed, and a cylinder head program where the heads come fully built up with valves and springs. That’s why it will often produce the OE engine and remanufactured engine concurrently. As an engine ages and production requirements change, however, they’ll discontinue the OE engine — such as the 2.2L and 2.5L four cylinders — and provide only reman assemblies.
Remanufacturing is done through a network of extended partners in the U.S. and Canada. Mopar uses a detailed selection process to select its remanufacturers. Essentially, Engineering, Quality Control and Purchasing must get together and identify, validate and approve all remanufacturers before they can become a Mopar supplier. A Mopar remanufacturer must be QS9000 certified; they must have the processes in place to ensure a level of quality consistent with Mopar and DaimlerChrysler engineering standards, and they must have all the equipment needed for Mopar’s testing and verification procedures.
Mopar’s basic warranty for remanufactured parts is 12-months/12,000-miles. However, Mopar just recently launched a new 3-year/36,000-mile warranty on several major remanufactured powertrain assemblies, including gasoline engines, cylinder heads, transmissions/transaxles and torque converters.
Mopar has experienced an average annual growth rate of about 8% over the past three years for remanufactured engine assemblies, and its engine sales represent a significant portion of Mopar’s remanufactured parts business.
According to its forecasts, Mopar is anticipating sales of remanufactured engines to grow at about 5% over the next few years.
Controlling the cores
OEM remanufacturing programs are typically cost competitive as well as good for the environment as OEMs control the cores and reuse the material.
As far as cores go, AER receives cores directly from the dealerships, who are charged a core charge that can be as high as $5,000 for some diesel engines. If the dealership sends the core on to AER, the dealership receives a core credit for the amount of the charge.
GM feels it needs to maintain its own pipeline of cores. By creating core charges, it feels it should be the one to maintain control of them. It can be a costly endeavor especially since recent IRS rulings that value cores at the core charge. But, it’s one to which GM is committed.
When Chrysler dealers purchase a remanufactured engine, they are charged a core charge which is then credited when they return the core to Mopar. This helps assure a continuous flow of cores to support Chrysler’s reman program. Generally speaking, dealers also issue a core charge to their wholesale accounts or over-the-counter customers, which again is credited upon the return of the core.
Remanufacturing vs. new
Of course, the savings remanufacturing can provide to the OEM are very important. But just as important to the remanufacturer and to the industry as a whole is the fact that many OEMs have now recognized that the quality levels of reman engines have increased, and remanufacturers are able to produce a like-new or in some cases, a better-than-new engine.
"Remanufacturing is more accepted now," says AER’s Fink. "There is a comfort level with the product now that didn’t always exist."
That comfort level is generated by customer satisfaction, which is an important driving force behind all OEM produced products today.
"As long as customers keep coming back to the dealerships, the OEMs are happy," adds Fink.
Even so, GM still has some reservations about using remanufactured engines during its initial vehicle warranty period.
"If your truck, for example, has 3,000 miles and fails for whatever reason, and you get a remanufactured engine, maybe you’re not quite getting the same amount of life as you paid for," says Chris Thomas, manager of subassemblies for GM’s service parts operation. "There’s a lot of strong feeling that inside the warranty period, it’s going to remain new replacement product."
GM isn’t alone. Toyota and Hyundai don’t even have remanufacturing programs, preferring to replace engines and their components with new.
Wilfred Blum, director of operations for Cummins Original Equipment Manufacturing based in Scarborough, Ontario, Canada, is not surprised by that. According to him, some Japanese automakers still see new as better and are lagging behind when it comes to jumping on the remanufacturing bandwagon. Nissan’s Lynch agrees.
"The Japanese are in a learning process when it comes to remanufacturing," he says.
However, Blum is confident that eventually all major vehicle manufacturers will become involved in the remanufacturing industry to some extent.
European vs. North America
Part of the reason Blum is so confident that all major OEMs will become involved in remanufacturing is because the European manufacturers have been involved in it for a long time. Before Cummins Original Equipment Remanufacturing was purchased by Cummins two years ago, the company was a wholly-owned subsidiary of Volkswagen and had been remanufacturing that company’s engines for 40 years.
Cummins Original Equipment Remanufacturing now remanufactures approximately 20,000 engines annually for Volkswagen, Audi, Porsche, Mitsubishi and even for Chrysler’s Mopar division.
Blum says the European manufacturers are getting more aggressive in the aftermarket than North American OEMs are for a number of reasons, one of which is the mindset of the consumers.
"Europeans are a little more loyal to the dealer organizations than are North Americans," Blum says. "Consumers in North America are more dollar driven and expect to change vehicles every three years. Europeans look at purchasing a vehicle as an investment and are more careful about maintenance."
In addition, European automakers now have to contend with legislation that forces the dealers to take vehicles back after they have outlived their usefulness. The automakers will have to do something with those vehicles, and remanufacturing seems the perfect solution.
This kind of program may eventually have a trickle down effect, and some if not all states in the United States could see similar legislation. Already California is launching a new Consumer Assistance Program, which will pay $1,000 to consumers who volunteer their vehicles for retirement. Some of these vehicles will be permanently retired, but others will be repaired. This particular program is designed to get those cars that have failed their smog checks off the road, but it certainly seems like legislation designed to get all outdated vehicles off the road may not be far behind.
OEM involvement in the automotive aftermarket has changed over the years and will more than likely continue to increase. Despite some of the OEMs’ reluctance to start remanufacturing programs in the past, many are now more than willing to join in.
One of the biggest trends in the past decade is the aging of the U.S. vehicle population. The average age of vehicles on the road today is about nine years. In addition, consumers are taking on more debt to purchase the vehicles they want and paying off their vehicles over a longer period of time.
With those trends in mind, Mopar has developed its remanufactured program to offer products that assure the same quality and performance characteristics of OE, but at a cost that is often 25% to 40% less than OE.
"We find that owners of older vehicles still want to maintain their vehicles with quality parts to keep them running longer, but they may not necessarily want or need an OE part to accomplish that," says Bruce Mack, senior manager of wholesale, collision, repair and remanufactured parts marketing for Mopar. It’s a sentiment many OEMs echo.
"When you sell a vehicle, you can only make a certain amount of money," says GM’s Thomas. "And, it’s very, very competitive. But, more and more OEMs are looking at a piece of the aftermarket as another source of profit. In order to do that and sell a significant amount of product, it needs to be cost competitive, and remanufacturing allows that. So, I see growth in that area." Blum couldn’t agree more.
"The pie is getting smaller and smaller," he says. "The only way to increase the shareholders’ value is by getting involved in the aftermarket. The OEM’s goal is to control the market, and they’re now seeing all the potential out there."
When it comes down to it, OEMs want to save money and keep their customers coming back to their dealerships. The least expensive way for them to do that is by using remanufacturers. By doing that, they’ll also control the cores and the market as a whole. It wouldn’t surprise some to see OEM dealerships add separate, non-warranty engine installation shops someday.
And Blum says total life cycle management by the OEMs might not be totally out of the question down the road, though he acknowledges that would require an enormous public relations effort and changing the mindset of many consumers.
It’s the small machine shop owner that will more than likely be sacrificed in the wake of all this progress. According to Blum, changes in technology, increased OEM involvement and tougher EPA regulations will more than likely force many small machine shop owners out of business.
However, not all remanufacturers are pessimistic about what all this could mean for the small machine shop. Mike Carrigan, corporate vice present of SRC Holding, a contract supplier of remanufactured automotive engines to GM and of diesel engines to Navistar Corporation, Isuzu, Mitsubishi, Nissan, Thermo King and New Holland, says there will still be a place for the small machine shop.
"More niche markets will be available that will sustain the small producers," Carrigan says. "If I were a small engine producer, I would find a niche market and be the best at it." Mopar’s Mack agrees.
"It certainly is the case that OEM involvement in the aftermarket will grow, and Mopar sees a great opportunity for everyone involved in this business," Mack says. "The average age of vehicles in the U.S. continues to rise. And, the number of vehicles on the road is on the increase as well, by 2% a year. Two percent may not sound like much, but that translates into $4 million more vehicles every year. Last year there were 205,042,600 vehicles on U.S. roads. But this year that number has grown to 209,509,100 vehicles according to Ward’s Automotive Reports. So, the pie is continuing to expand and that will translate into greater business opportunities for the OEMs and small shop owners as well. It’s a win-win situation."
Though Mack and Carrigan see the small shop owner as being able to capitalize on OEM involvement, Carrigan also points out that PERs may have their share of problems due to what he calls a "stretch effect" caused by the lapse in time between when vehicles are manufactured and when they first fail.
"Remanufacturing is fighting a matrix of opposing factors," Carrigan explains. "The reliability of the product that the OEMs produce today has improved many times over the last eight to 10 years. When that happens, the products go further between initial manufacturing and point of failure. The vehicles last a lot longer, and as a result there’s a stretching effect that the industry sees. It will eventually benefit the remanufacturer if they can get past the stretch until that first failure. There’s been a lot of fallout in our industry because of the stretching. I hope the shake out is over."
OEMs could also suffer as a result of their own technology. As Nissan’s Lynch points out, newer vehicles are being built and designed better than ever. By the time their engines fail, the cars are already eight to 10 years old. The older a car is, the less likely the customer will return to the dealership for service. What the OEMs plan to do about that is still not clear.
What is clear though is that OEM involvement in the aftermarket is increasing and will probably continue to increase as they see more and more opportunity for profit.
Although OEMs are forming more and more partnerships with PERs, openly exchanging ideas and information, the small machine shop owner will more than likely be left out of the loop when it comes to supplying high volume popular engine applications. Though this may be bad news to some small machine shop owners, it’s good news for some very fortunate PERs. In terms of technology, training and equipment, OEMs will more than likely share everything with the PERs — as long as they’re one of the few with whom the OEMs do business.
Editor’s Note: Although Automotive Rebuilder tried to interview as many OEM contract suppliers as possible, some were bound by contractual obligations and did not wish to be interviewed regarding their participation in an OEM reman program, nor did they want their names mentioned as a supplier of reman engines to a specific OEM.