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Desert Engine Reman Expands in the West

By Ed Sunkin

Since the early years of the United States, the West has always provided young pioneers a chance at adventure and the freedom to expand our nation. For Jonathan Smith, president of the Production Engine Remanufacturers Association (PERA), the passion for expansion found in the hearts of those heading west is also a key element in operating his own successful business.

Smith will serve as president of PERA until the association's annual convention September 16-20 in Albuquerque, NM. He is also the president of Motor Replacement Co., Inc., a production engine remanufacturer located in Phoenix, AZ, a business Smith has been working to expand since becoming president of Motor Replacement in the mid-1980s.

Motor Replacement Co., Inc. was started in 1946 in a downtown Phoenix location, by Everett Warner, who also served as a president of PERA in 1959. In late 1984, Smith, along with partners and family members, bought the company and retained the then current management.

At the time of the purchase, Smith had never worked as an engine rebuilder. But he had always had a fascination with motor vehicles. "Growing up we worked on our own vehicles, but nothing major like engine rebuilding," recounted Smith. "However, when I saw Motor Replacement Co. advertised for sale, we all thought it would be a good investment opportunity."

Since taking over the business, Smith has come to share in the universal understanding that other remanufacturers and rebuilders have when it comes to such things as coping with engine design changes, installation matters, core availability and customer satisfaction. "It's a difficult industry," Smith stated, "very labor intensive. But it's pretty much about what I expected."

Smith, a 37-year-old Indiana native said because the other investors in Motor Replacement were involved in other careers, he assumed the title of president. "

In October 1988, Motor Replacement moved to its current location, a 50,000 sq. ft building situated on a seven acre site west of downtown Phoenix. The new site is more than double the size of its previous location. Smith said all of the engine remanufacturing is completed at the Phoenix location and engines, both long and short blocks, are sold under the Roadrunner Engine® brand name. About 1,000 engines are in inventory at any given time at the facility.

     
Piston assembly process (left) and crankshaft grinding operations (right) at Motor Replacement Co. About 65 crankshafts are ground and inspected each day.

The company also has five engine distribution warehouses located in El Paso, TX; Las Vegas, NV; Salt Lake City, UT; Tucson, AZ; and Mesa, AZ. Each location is staffed with a territorial sales representative and stocked with anywhere from 150 to 300 remanufactured engines, depending on the market's distribution needs. Smith noted another warehouse location opened Dec. 1 in the Denver, CO, area, adding sales are already doing well there.

When the company relocated to accommodate growth, Smith found out that expansion doesn't always proceed smoothly. Although the new location meant a larger work area, there were some limitations to the layout. "This building wasn't a custom build for an engine remanufacturing facility," Smith said. "We did have some limitations such as the thickness of the concrete in various areas, so equipment like our five crank grinders had to be set up in specific locations. When setting up the equipment, we had to step back and really look at what we were doing. How the building was originally built dictated how things had to be set up for desired production flow." However, Smith said talking to equipment manufacturers provided helpful information implementing the shop's layout and production flow.

Because Phoenix has year-round warm temperatures and sees little precipitation, the engine tear down and cleaning areas of Motor Replacement Co. are located outdoors. It is there where each block receives an identification stamp that is used throughout the remanufacturing process. "When an engine comes in as a core, it is stamped with a work order number," Smith said, adding organization is a must in an operation this large. "With this number, we can track what work has been done and what is left. It's an extremely small, but effective detail."

Growth expectations
Smith said Motor Replacement Co., which had $9 million in gross sales for 1997, has the ability to grow in both workload and sales. "Right now we're not running to the total capacity of our facility and we do feel we will be adding to our personnel by about 10% over the next 12 months." Currently, there are 55 people working in production.

Smith estimated the company is operating at about 75% to 80% rebuilding capacity. "We feel we have the capabilities to grow another 20%," Smith said, adding he is looking toward additional equipment expansion for the cleaning department, as well as other machining processes.

Despite a competitive market place throughout the country, the company anticipates continued expansion. "We sell to program distributors, warehouse distributors and jobbers throughout the Southwest," explained Smith. "But the Southwest isn't as densely populated as the East and West Coasts, so we're looking to sell our engines in some new markets." Noting that the company's new Rocky Mountains center is a practical location, Smith said he is looking to step up service to Southern California.

A motor reaches the final assembly area prior to testing where all new rockers, pushrods and lifters are installed.

Smith said he credits much of Motor Replacement's growth to increased marketing. "Remanufacturers like us are doing a lot more marketing today," he said. "Not only do we market our product to jobbers, installers and WDs, but we've even done some consumer advertising on television to increase customer awareness of remanufactured engines, too," he said. "Viewers who call us for information are provided with the name and location of a reputable installer near them."

Motor Replacement remanufacturs all domestic gas passenger car and light truck engines. Although the company has been primarily a domestic engine remanufacturer, import engine remanufacturing has grown to about 15% of total production. The company does not remanufacture diesels, although the possibility of doing so down the road could provide another area for future growth, Smith said. However, for the present diesels are not on the agenda.

Motor Replacement currently remanufactures an average of about 35 engines a day, 650-750 units a month. "Sales dictate what we build," Smith explained, adding that the company has about 2,000 combined units in stock, which includes engines at its various distribution locations. "We have a wide range of inventory and our fill rate is very good," Smith said. "We're a big believer that availability is an important key to servicing customers. If we don't have something, a quick turnaround time is a must."

Smith explained product availability is just one way Motor Replacement Co. has worked to service customer expectations. "Although customer expectations are different for each buyer, today's consumer expects a better product," Smith said. "Our customers also expect the support of a high-quality, reasonably priced remanufactured engine that will be delivered to them when they need it."

Smith said the increasing number of engine applications and the increasing costs of inventory have changed the way remanufacturers operate today. Scheduling of work must be very defined. "In the old days, you could set up a run of 350 Chevys for three to four weeks. Obviously, rebuilding the same type of engine was simpler then.

"Today it's not like that anymore. Because you are remanufacturing different engine models nearly everyday, your shop has to accommodate quick setup time and quick changeover time. At any one point, though, you try to schedule work so you can maintain a full day's production on the same engine type."

Smith also said coordinating work is vital. "We have to plan our production by the week," he explained. "Some remanufacturers today are planning daily production schedules, but we haven't got to that point yet."

Smith said weekly production schedules help maintain a steady flow of needed cores. "By preparing a weekly production schedule, we can see which cores we have a deficit of, so those orders are placed right away. Cores are usually delivered in about three to four days. The just-in-time theory works with all products, but it really applies with cores and fill rates."

Smith said Motor Replacement Co. uses about five core suppliers regularly. "Some get more of our business than others. It just depends on the type of service they give us," he said.

Smith said core availability continues to be a problem for remanufacturers, especially with import engines. "In some applications, finding a repairable core that's been junked is a growing option. Of course, cracked cylinder heads seem to be the biggest core problem."

Smith said remanufacturers have to look at different ways to save money, and one way is being more frugal with cracked heads than in the past. "If it's repairable, we'll do the crack repair ourselves. We try to salvage and save everything (that can be salvaged)." By reducing its scrap, and making quality repairs on components that in the past may have just been discarded, has improved both availability and profitability of the company.

But Smith said to offer a reliable product, you can't skimp on replacement components. He said more new parts go into a Roadrunner Engine than many reman engines currently available in the market place, adding when it comes to purchasing a remanufactured engine, people should not be shopping on just price alone.

Consumers today should keep in mind the warranty that comes with the engine, the quality of parts and the quality of the workmanship, Smith offered. "We replace the valves, guides, springs, rocker arms, push rods valve springs, etc. with all new components," he said. So our pricing on product in some cases is higher than a majority of our competition in our sales areas.

Limited warranties on long block domestic and import Roadrunner Engines, which covers defective workmanship and materials furnished by Motor Replacement are 24 months or 24,000 miles (whichever comes first) for passenger cars, vans and pickup trucks up to 3/4 ton driven for personal use. Engines for trucks, cars and vans used commercially are covered by an 18-month or 18,000 mile warranty. Additional optional extended coverage is available for both warranty plans.

Short blocks (which make up just 10% of the company's total engine production) for passenger cars and trucks are warranted for a period of 90 days or 4,000 miles, whichever comes first.

Warm year-round temperatures combined with little annual precipitation allow for the cleaning/teardown operations to be held outdoors.

Smith is proud to proclaim Motor Replacement Co. has a comeback rate of less than 2% on its work. But what concerns him the most, as is the case with nearly all remanufacturers, is the issue of proper engine installation. "Installers today have to invest in both education and training, as well as dedicate money for the proper diagnostic equipment to handle all of the computerization and on-board diagnostics on late-model engines," Smith said, adding he believes most installers are making this commitment. "But there are still some installers who haven't updated. They have been getting away with it on the early-model engines, but to work on late model engines, they're not going to be successful without that investment."

Smith said when a remanufactured engine doesn't operate correctly, it's not the installer who gets blamed, it's the remanufacturer. "The typical vehicle owner doesn't understand what parts are supplied and how critical the installation of the engine really is," Smith said. "When it doesn't work, they blame the engine and the remanufacturer. And too often the installer believes that the engine remanufacturer has complete and total control of the product quality. But in reality, it doesn't matter how good the product is made, if the engine isn't installed properly, it will fail."

When asked about the viability of a nationally-franchised remanufactured engine installation business, Smith said it could be part of the answer to installation concerns. "I think that an engine installer, much like AMMCO which handles transmissions, could be very successful," Smith stated. " A national franchise would be more apt to spend money on equipment and training of its personnel."

Today's market and looking ahead
Smith said he sees demand for remanufactured engines staying about at current levels. He doesn't see much in the future which would alter that. "In the last 12 months we haven't really seen any increase in overall demand," Smith said, "it's been pretty level. But on the other hand, there is great potential for growth for engine remanufacturing in the U.S. in the future.

"Some remanufacturers are down considerably in work," he said. "We've been very fortunate here." But, the remanufacturing market, like many industries, Smith said, goes through cycles of good and bad years. "I felt 1986 was a bad year, and 1989-'90 was not very good for the industry either," he recalled. "That was a time when there were quite a few rebuilding companies that closed their doors as desperate moves had to be made."

Smith said there are a number of reasons why remanufactured engine sales are flat in the U.S today. "In this country there's the popularity of new cars hitting the market each year along with low finance rates," he explained. "There's also the popularity of leasing vehicles. And we're seeing more and more leasing of fleet vehicles rather than a company owning the vehicles outright.

Smith also noted that the location of his plant is a key to the company's success, saying he credits the mild weather of the Southwest, improved body durability of new vehicles, and the consumer fondness for trucks as reasons for what he describes as steady reman engine sales.

Whereas the average age of a vehicle in the U.S in 1996 was 8.9 years, in the Southwest it's a little higher. "This is truck country," Smith explained. "And people tend to hold onto their truck and sport utility vehicles longer than a car. Plus, since these types of vehicles hold their value longer, repowering with a remanufactured engine can be a better solution compared to trading in for a new truck or sport utility vehicle.

"The cost of a completely remanufactured engine is sometimes less than the amount of sales tax you would pay for a new vehicle," Smith said.

Another familiar problem facing the industry is the new engine technology developed by OEMs. Smith said he believes engine remanufacturing is more difficult today and it's not going to get any easier. "Tolerances on later model engines aren't near as simple as they used to be and surface finishes are more demanding," he said. "There can be a lot of changes in an OEM engine even within the span of a year. And with every new application, there is a necessary learning process." But Smith contends updating equipment is a way to overcome these issues.

So in order to attract new customers and keep the old ones in today's competitive market, customer satisfaction is key. "We as remanufacturers have to realize and recognize these changes and catalog these units accurately so our customers get the right engine the first time they order," offered Smith.

And there are other ways to stay ahead of the competition. "Our supervisors stay focused on the ever-changing technology issues by attending PERA functions and training courses when they are offered," Smith said. "We do a lot of in-house training of our production personnel and we cross-train as many people for different jobs as we possibly can.

For the future of the remanufacturing industry, Smith doesn't expect to see many more mergers among PERS. "There have been quite a few acquisitions and mergers among PERS, recently, but it's not a trend that I think will continue," he said.

He does, however, see a continued trend for mergers among parts manufacturers and suppliers to PERs and custom engine rebuilders. "In the last three years the trend of mergers among suppliers has been increasing (See Federal-Mogul's recent proposed acquisition of Fel-Pro, Coretalk, Page 6). Today there are plenty of parts suppliers and product available out there. But I do feel the growth of mergers will have a definite impact on the automotive aftermarket."

Smith also believes the market trend of remanufacturers selling directly to the jobber or installer will continue. "Over the last 12 years, we have seen, not only in remanufacturing, but in all facets of the aftermarket, the bypassing of some WDs," Smith said. "Some remanufacturers feel forced to bypass WDs in order to stay in business. It may be the only way remanufacturers can sell their product in certain territories."

Smith also sees increased sales of remanufactured engines from retailers. "Many of these national retail chains have a lot of marketing money behind them. They also have real aggressive attitudes for expansion, as some of these chains are opening more and more stores each year. The sheer number of stores will undoubtedly increase the amount of retail remanufactured engines sold."

Smith said Motor Replacement Co. does not currently sell engines to retailers. He feels the sales of remanufactured engines by PERs to retail outlets has helped some remanufacturers and hurt others.

PERA ties

Smith said his membership in PERA has helped his business a great deal. "My philosophy is that we should work together toward solving problems through more communication," Smith said of his association responsibilities. "If you think about particular problems for a specific procedure, or remanufacturing productivity as a whole, and talk these issues out with your peers, you can gather quite a bit of information. Even your closest competitor will help you solve problems. The association is fairly open."

Smith said there are still some production engine remanufacturers who could qualify for membership in PERA and who would really benefit from the association if they joined. "Our goal is to increase PERA membership. The association does have a lot to offer," Smith said, adding the association is looking toward expanding more membership internationally, too.

"The world is a big place and there is great potential for finding new members around the globe. It's just a matter of letting them know we're here. As more PERs become involved with more import engine remanufacturing, the draw for more international members will be there," he said.

Smith also said the industry needs to focus on more consumer awareness. "Getting the word out that remanufactured engine exchanges are readily available would help our industry tremendously," Smith said. "For the most part, vehicle owners are unaware a company like ours houses 2,000 units where they can call up and swap their engine with a remanufactured one.

Most people think their old engine has to go to a machine shop where it's rebuilt over a number of days. People don't like to be separated from their vehicle for a long time. Our inventory offers a quick and convenient alternative."