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Machine Shop Market Profile

By Dave Wooldridge

As is generally already known, the machine shop/custom engine rebuilder market struggled in 1996 to keep pace with production numbers generated in 1995. Many shop owners told us that demand was flat for machine shop services and/or rebuilt engines during 1996.

Verification of these shop owners' comments was generated in our annual survey of the membership of the Automotive Engine Rebuilders Association (AERA). Our survey was conducted via a mailed questionnaire sent to 3,279 AERA machine shop members throughout the U.S. The initial mailing was done on Feb. 18. Completed questionnaires were accepted for inclusion in our study through April 10. The effective return rate for our survey was 12%.

Our survey consisted of four, four-page questionnaires which contained about 20 questions each. Each of the questionnaires was mailed to 820 potential respondents. The first 10 questions - primarily directed at production numbers generated in 1996 for engines and engine components - were identical.

Specific questions regarding statistical averages presented in this study should be directed to Dave Wooldridge, editor of Automotive Rebuilder (330-670-1234, ext. 214, or e-mail to dwooldridge@babcox.com), or to Bob Roberts, marketing research manager for Babcox Publication's MarketScope Division at 330-670-1234, ext. 252, or e-mail at broberts@babcox.com.

Our market study results will be presented in two parts, appearing in this month's and next month's issues. Space limitations prevent us from being able to publish all charts generated from this study. For a copy of all charts which were compiled from this study, call or e-mail Roberts at the numbers provided above.

Engine production

The average monthly production of engines declined about 7% in 1996. Machine shops reported an average of 18.2 four, six and eight cylinder gas and diesel engines rebuilt monthly in 1996 compared to 19.55 engines produced monthly in 1995. For purposes of our study, an "engine" is defined as a short block, long block or complete. No category is counted more than once in arriving at a monthly total.

Gas engine production of four, six and eight cylinder engines averaged 16.2 units in 1996 compared to 17.9 in 1995. Diesel engine production in 1996 increased slightly from 1.65 units to two units per month.

Of the total gas engines rebuilt, machine shops averaged four four cylinder, 3.4 six cylinder and 8.2 eight cylinder engines produced monthly. This compares to 4.8 four cylinder, 4.9 six cylinder and 7.9 eight cylinder gas engines produced in 1995. Specific diesel engine production for four, six and eight cylinder engines, statistically, shows little significant change over the previous year's production numbers.

Based on monthly averages, the typical machine shop produced about 218 engines in production year 1996. Based on a universe of 6,000 to 8,000 full service machine shops located in the U.S., the custom engine rebuilder/machine shop market produced between 1.31 and 1.7 million engines in 1996. In 1995 this market segment produced between 1.4 million and 1.87 million engines.

Assigning an average retail cost of $900 per engine, the custom engine rebuilder/machine shop market represented between $1.17 billion to $1.53 billion at the end user level. Of course, price per unit will depend on the type of engine being machined/rebuilt as well as to whom the engine is being sold.

Our definition of full service machine shop would be one that is capable of providing a complete array of machining services from turning a rotor to grinding a crankshaft. Obviously, there are many more shops with more limited service capabilities. The circulation of Automotive Rebuilder magazine itself reaches nearly 15,000 engine rebuilders, including those who classify themselves as production engine remanufacturers (PERs). The Production Engine Remanufacturers Association (PERA) presently lists about 100 PERs as members of its organization. PERs must rebuild at least 150 engines monthly to qualify for membership in PERA.

Conversations with various parts suppliers and machine shops with parts operations also indicates that sales in 1996 were, in many instances, below sales figures generated in 1995. According to these same sources, in many areas sales have remained soft through the first quarter of 1997 for both engines and engine parts.

It's difficult to ascertain specifically why market demand has declined over the past 12 to 18 months for the machine shop industry in general. We say in general because we have talked with various machine shops in different parts of the country that report sales of rebuilt engines and shop services are either strong or have begun to show signs of picking up.

One thing is certain, however, when examining the machine shop market. This is not an industry that is waiting for things to "get back to normal." Business conditions, competition, technology and information/management expertise have changed the face of the machine shop/rebuilding industry forever.

Our read on the market is that very few shops today are capable of surviving on the slim margins available in rebuilding the typical passenger car and light truck engine that can be found at the local retailer for as little as $699. Machine shops today must be much more aggressive in researching various niche market opportunities from motorsports to small engine to industrial to heavy duty to cylinder heads to possibly doing their own installation work.

More and more shop owners we spoke with say that they are much more involved in providing "machining services" to a broader variety of market customers rather than trying to rebuild long blocks or complete engines.

"I don't try to compete in the short block and long block markets any longer," one shop owner told us. "The complete engines we do are only those that really are complete - from manifold to the pan. We simply don't trust most of the people out there that would be assemblying our engines to get everything done right."

Addressing the need for exploring more profitable niche markets, another shop owner told us that any shop that is not venturing into some form of mild performance work is missing a tremendous opportunity in today's market.

"Interest in motorsports is exploding in across the United States in general," one shop owner reported. "In our own case, 80% of the (performance) work that we do goes to the enthusiast that is doing the work himself. There are a lot of guys out there in their 40s that now have the discretionary income to return to their youth, those days during the 1960s and early '70s when they worked on and enjoyed their cars."

Several shops told us that there is a variety of shop work that can be specifically marketed to the performance enthusiast. This includes such machine work as line honing, square decking, boring and honing with torque plates and balancing. This work can easily generate an additional $250-$300. And in most cases, performance enthusiasts are happy to pay it.

"The only complete engines that we will build any longer are the performance street motors," one shop owner told us. "These engines can easily sell for $2,500 to $3,500." Outside of that, we focus strictly on selling machine shop services for small motors to aluminum head repair to light industrial and heavy duty."

As many shop owners have told us, they don't like to let any machine work opportunities slip through their fingers. Competition is too intense to fail to explore any niche markets that could generate potential customers for existing shop capabilities, we were repeatedly told.

Cylinder heads

Total production of cylinder heads declined for the first time in several years, dropping from a monthly average of 59.5 gas and diesel heads in 1995 to 55.84 units in production year 1996. The decrease represents about a 6.2% overall reduction in cylinder head production.

Based on a universe of 6,000 to 8,000 full service machine shops, combined production of cylinder heads last year, industrywide, was 4.02 million to 5.36 million. However, this figure is certainly higher due to the fact that the estimated remaining 7,000 machine shops that are not "full service" shops, are most likely all involved in cylinder head rebuilding to some degree.

Gas engine cylinder heads are by far the largest segment of total heads being rebuilt. Machine shops averaged 50.35 gas heads rebuilt per month in 1996 compared to just 5.49 diesel heads. In 1995, shops produced 53.1 gas and 6.4 diesel heads monthly.

In point of fact, production of four cylinder and six cylinder gas cylinder heads was virtually unchanged compared to year earlier figures. Shops produced 17.1 four cylinder and 22.6 eight cylinder heads last year, compared to 17.9 and 22.5 four and eight cylinder heads, respectively, in production year 1995.

Production of six cylinder gas engine heads, however, dropped from a monthly average of 12.3 in 1995 to 10.1 in 1996. Diesel head production of four cylinder heads declined from 2.06 to 1.32 units monthly, while six and eight cylinder diesel head production rose slightly compared to the previous production year.

Production numbers of cylinder heads are most likely reflective of overall declines in market demand, in general. In fact, production of engines declined an average 6.9% while production of cylinder heads declined an average of 6.2%, industrywide.

However, market conditions and engine design and technology, still point towards strong demand for rebuilt cylinder heads in years to come. The OE vehicle makers have done a good job of convincing consumers that they don't need to look under the hood for the first 100,000 miles. Although engines and engine components are built with better quality parts than ever before, the safety margin before major failure can occur is smaller than ever.

This is especially true with cylinder heads which are often of light weight casting designs predisposed to cracking or warping or surface errosion. One only has to look at the three to five quart cooling systems that many vehicles operate on today, compared to the 10 to 15 quart systems of yesteryear, to realize the potential for head failure. A cooling system that is even one quart low in today's vehicle designs can lead to head gasket failure due to overheating.

Aluminum cylinder heads continue to command an ever increasing percentage of total cylinder head work undertaken by machine shops and engine rebuilders. Last year, 43.4% of all heads were aluminum, compared to 40.4% that were aluminum in production year 1995. The trend in aluminum head work is unmistakable. In 1992 aluminum head work represented just 35.1% of all cylinder heads rebuilt.

The largest percentage of shop owners - 35.1% - reported that aluminum heads account for 51% or more of all heads rebuilt in their shops. That's an increase of about 27% in that percentage range. A little more than 18% of shop owners reported that aluminum heads accounted for between 41% to 50% of all heads rebuilt. At the other end of the continuum, 14% of shop owners said that 10% or less of their head work was on aluminum castings, an increase of 36% compared to the 10.3% who were in this category in production year 1995.

Shop owners also reported that they are doing a larger percentage of crack repair on aluminum heads than ever before. When welding or crack repair is required, 46.2% of shop owners reported that they do the work themselves rather than sending the heads out for repair, an increase of nearly 10%. In 1995, just 37.2% reported doing this type of repair work themselves.

As might be expected from the above information, the number of aluminum heads being scrapped also declined from year earlier figures. In 1996, shops reported scrapping 19.1% of aluminum heads as "unrebuildable." In 1995, nearly 22% of aluminum heads coming into the shop for repair were judged as unsalvageable.

The increasing number of cylinder heads being rebuilt rather than scrapped points to the shortage of cores, as well as the lack of availability of price competitive new replacement castings for many applications. We have talked with several machine shop owners that have invested significant money in training and equipment to increase their capacity for repairing and rebuilding today's cylinder heads.

Many of these shop owners say that they now provide repaired castings to an increasing number of smaller machine shops and new car dealerships, in addition to their existing trade with service garage, retail and wholesale customers. "I'm welding heads for other shops in town on a regular basis, now," one shop owner told us. We've been trying to build up an inventory of rebuilt heads to sell on an exchange basis, but right now we just can't keep up."

Crankshaft production

Production of ground crankshafts remained virtually unchanged from year earlier numbers. Machine shops produced a monthly average of 18.95 gas and diesel cranks in 1996 compared to 18.74 in 1995. The majority of these cranks are gas engine applications. Of the nearly 19 cranks ground each month, 16.5 are for gas engines.

The largest percentage of gas cranks are for eight cylinder engines - 7.6 per month. Production of four and six cylinder crankshafts was almost identical - 4.2 and 4.5 per month, respectively. "We just keep getting demand for the 350, 454 and other V8 engine cranks," one shop owner reported. "We're selling these cranks to the DIYer, to other shops and to one or two new car dealers in town."

As has been pointed out in earlier market reports, the OE vehicle makers have come a long way in improving the performance and durability of their engines, when vehicle systems are maintained as required. Engines today are expected to last at least 100,000 miles before any significant service is required.

However, vehicle demographics and economic conditions continue to provide a strong demand for engines and engine components for older V8 cars and light trucks. It was reported recently that about 70% of the population of the U.S. cannot afford to buy a new car. In the case of older V8 engine equipped cars and trucks, demand for rebuilt engines continues to be strong according to many shops across the country.

Percentage increases/decreases

The percentage of shop owners reporting increases and decreases in unit production of engines, heads and cranks generally reflects the specific market conditions discussed earlier for 1996. Fewer shops reported an increase in engine production, 32.3% compared to 37% in 1995, while a much larger 52.3% said that production levels stayed the same. In 1995, 44.6% of shop owners reported that production of engines stayed the same compared to year earlier figures.

With cylinder heads, a slightly larger percentage of shops said head production was up in 1996, 52.2% compared to 49.5% in 1995, however, a much larger percentage of shops, 42%, also reported production of heads remained on par with levels seen in the previous year. In 1995, just 36.6% of shops said that head production remained equal to the previous year's figures.

Fewer shops reported decreases in production in both engines and cylinder heads. A little more than 15% of shop owners reported a decline in engine production in 1996. Just over 18% of shops said engine production declined in 1995.

However, a much smaller number of shop owners reported a decline in cylinder heads compared to the previous year. In 1996, just 5.8% of shops reported that cylinder head production dropped from the previous year. In production year 1995, 13.9% of shops said that cylinder head production had declined from year earlier numbers.

Crankshaft production followed trends shown in engine and head production. Slightly fewer shops, 25.9% in 1996 compared to 26.9% in 1995, reported an increase. A significantly larger percentage of shops, 70.9% in 1996 compared to 60.3% in 1995, reported that production levels of crankshafts were similar to year earlier numbers. A much smaller percentage of shop owners, 3.7% compared to 12.8% reported that production of crankshafts decreased in 1996 compared to 1995.

In general, what these percentage increases and decreases seem to indicate is a fairly flat market in terms of demand for engines, heads and cranks in 1996. In the case of cylinder heads, because actual unit numbers for cylinder heads were down industry wide, we would surmise that the increase in the percentage of shops indicating that cylinder head production was up is a function of these shops making an investment in becoming cylinder head specialists and taking in work from other shops that cannot repair or rebuild heads at the same cost, efficiency or quality levels.

Shop labor times

Machine shop owners reported that valve guide and seat work accounted for nearly 16% of engine machining and/or rebuilding production. This is the first time when disassembly and cleaning did not occupy the highest percentage of total machining/rebuilding production in the shop.

Valve guide and seat work, cylinder head resurfacing, valve reconditioning and cylinder head welding, occupied about 44.4% of all engine machining/rebuilding that was done on a daily basis by the typical machine shop in 1996. These percentages speak to the continued demand for cylinder head work that most shops undertake.

The largest increase was seen in cylinder head welding, not too surprising considering the condition of many head cores that come into the shop. Total shop production time on cylinder head welding increased from 2.8% in 1995 to 5% in 1996. This increase reflects the increasing number of heads in need of such repairs, and the increasing number of smaller shops, new car dealers and others looking for shops capable of making such repairs.

The reduction in the percentage of time spent on cleaning may be a reflection of improved equipment and processes being implemented by many shops today. The investment in cleaning equipment and the generally better technology of today's cleaning equipment is driven by demand for improved efficiency and cost reduction per piece cleaned, as well as by environmental requirements on a local, state and national level.

Block resurfacing, cylinder boring, connecting rod reconditioning and crankshaft welding, grinding and polishing accounted for 32.2% of total machining/production time. Flywheel grinding and clutch plate resurfacing accounted for 5.5% of production time, while shops reported that "other" jobs represented another 3.1% of total machining rebuilding time.

Equipment profile

The average age of all equipment owned by machine shop operators, 10.62 years, was virtually unchanged from production year 1995 when the average age for all equipment was 10.7 years. Lathes were the oldest equipment in the shop, 18.75 years, followed by crankshaft grinders, 16.28 years. The age of crank grinders, however, has declined somewhat from the nearly 18-year-old average of crank grinders reported in last year's survey results.

Crankshaft grinders were followed by line boring machines, 14.57 years; pin fitting and rod reconditioning equipment, 13.96 years; crankshaft welders, 13.78 years; and crankshaft straighteners, 13.61 years. Not too surprisingly, aluminum head welding equipment is the youngest equipment in the shop at an average age of 4.74 years.

Highest on the list of intended purchases for this year was line boring equipment for OHC cylinder heads. Exactly 8% of survey respondents said they intended to purchase this equipment in 1997. Six percent of shop owners indicated they intended to purchase line boring equipment for machining blocks.

Machine shops reported purchasing an average $20,167 in 1996 worth of both new and/or used shop equipment. This represents about an 18.5% reduction from dollars expending on shop equipment in 1995. Based on a universe of 6,000-8,000 full service shops, the equipment market in 1996 was worth between $121 million and 161.3 million dollars.

Part II of the Machine Shop Market Profile will cover size of machine shops in terms of employees and sales revenue, gross profit margins, customer base analysis, parts and labor dollars generated, and overall market trends.