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Machine Shop Market Profile: Machine shops rebuilt an average of 19.4 engines monthly in 1998 compared to 18.29 in 1997

By Dave Wooldridge

The average number of engines rebuilt by custom engine rebuilders/machine shops rose slightly in production year 1998 compared to production of engines in 1997. Machine shops rebuilt an average of 19.4 engines monthly in 1998 compared to 18.29 in 1997.

An extensive survey of machine shops located primarily in the U.S. was conducted by Automotive Rebuilder magazine earlier this year. Four different questionnaires consisting of four pages each were developed to obtain the information for this two-part series profiling the machine shop market.

Each questionnaire was mailed to one-quarter of the machine shop membership of the Engine Rebuilders Association (AERA) on a random-start "nth" name basis. A total of 3,200 questionnaires were mailed on January 15th. A follow-up mailing to non-respondents was made on February 15th. A Total of 487 completed questionnaires were returned for an effective return rate of 15%.

The purpose of our survey and market profile is to gain a better understanding of the nature of today’s machine shop as well as the market place in which today’s custom engine rebuilder is doing business. Part 1 of our survey includes information on engine, cylinder head and crankshaft production, increases and/or decreases in this production compared to 1997, the type of engines and cylinder heads being rebuilt by machine shops, the type, quantity, age and purchase of selected machine shop equipment during 1998, domestic versus import engine rebuilding and core acquisition.

Interviews with parts and equipment suppliers, as well as associations representing machine shops and production engine rebuilders, acknowledge a continuing consolidating market for both engine rebuilders, as well as their equipment and parts suppliers. The short and simple answer for this phenomenon is that engine durability has increased significantly, resulting in little increase in demand for rebuilt engines over the past three years.

Although more new cars and trucks have been sold over the past three years than ever before (for the first time in November 1998 SUVs and light trucks outsold cars), there has been no commensurate increase in the demand for rebuilt engines or cylinder heads industry wide. What there has been is a continuing shift in market share among surviving machine shops and production engine rebuilders and their suppliers.

Growth in engine production for most machine shops and production engine rebuilders that have increased sales has most often come at the expense of market share taken from other rebuilders, through purchase or acquisition of one engine rebuilder by another, or through acquisition of existing engine sales formerly provided by an engine rebuilder which has gone out of business.

Until and unless a larger portion of vehicle owners begin to opt for repowering their vehicle rather than purchasing a new car, a leased car or a used car, rebuilt engine sales are likely to remain flat. Rebuilt engine sales presently are installed in just about 1-2% of the total vehicles presently registered in the U.S. today.

An effort to educate the vehicle owner of the benefits of repowering their vehicle is presently underway by the Automotive Repower Council (ARC). This organization, comprised of production engine rebuilders, machine shops, engine rebuilder associations and engine parts suppliers has for the past year been undertaking a fund raising effort to obtain a financial commitment from industry participants to fund a national consumer awareness campaign.

If appropriate funding is obtained, a national advertising effort would be undertaken to educate vehicle owners about the economic value and performance benefits of purchasing a rebuilt engine or using the services of machine shops to rebuild their engines to extend vehicle life.

The time for undertaking such a campaign has never been more appropriate. Trucks, SUVs, minivans and expensive luxury type vehicles have accounted for more than 40% of all vehicle sales over the past several years. And many of these vehicles are owned by baby boomers increasingly concerned with retirement planning, college educations for their children and paying off housing mortgages. For more information on increasing the overall sales of rebuilt engines and machine shop services, contact ARC at 419-734-5343.

Engine production
The production of gas engines by machine shops in 1998 was almost identical to that produced in 1997. Machine shops nationally averaged 17.5 gas engines rebuilt each month compared to 17.1 rebuilt in production year 1997. As in previous years, eight cylinder engines accounted for the largest number of engines rebuilt, 7.6, while six cylinder and four cylinder engines accounted for 4.7 and 4.8 engines respectively, rebuilt each month.

Production of four cylinder engines was virtually unchanged from year earlier numbers. Six cylinder engine production rose 23.7% and eight cylinder engine production rose 10.1% compared to 1997 monthly production figures.

On average, the typical machine shop’s engine production, when reported in terms of actual units produced, is comprised of almost entirely gas engines, diesel engines representing just 9.8% of all engines rebuilt.

In 1998, machine shops produced an average of just under two diesel engines monthly compared to 1.2 produced in 1997. Eight cylinder diesel engines accounted for 0.73 engines rebuilt each month, while six cylinder and four cylinder diesel engines rebuilt accounted for 0.64 and 0.37 engines respectively during production year 1998.

Most heavy-duty to medium duty on- and off-road and industrial diesel engine applications are undertaken by diesel engine machine shop specialists. The majority of engine machining and rebuilding work in these shops would be in diesel engines rather than typical gasoline engine machining or rebuilding. However, it is not uncommon for the typical automotive machine shop to undertake smaller, lighter duty diesel engine or cylinder head repair work.

Combining gas and diesel engine production reveals that during 1998, machine shops produced an average of 5.17 four cylinder, 5.34 six cylinder and 8.33 eight cylinder engines monthly, an average of about 233 gas and diesel engines rebuilt annually.

Projecting these engine production averages onto a universe of 6,000-8,000 full service machine shops reveals that the machine shop/custom engine rebuilder market produced an average of 1.4 million to 1.86 million rebuilt engines during production year 1998. During production year 1997, the machine shop market produced 1.32 million to 1.76 million rebuilt engines.

Pricing of engines can vary significantly based on engine configuration and whether it is a gas or diesel unit. However, placing an arbitrary average dollar value of $1,200 on each long block produced and sold, the machine shop market generated between $1.7 billion and $2.23 billion in annual rebuilt engine sales during 1998.

Cylinder head production
As with engines, the combined production of gas and diesel cylinder heads remained almost on par with that of production year 1997. The average monthly total number of gas and diesel heads rebuilt by machine shops in 1998 was 55.8, a decline of just 1.1% compared to the 56.4 units produced by shops during production year 1997.

Production of gas cylinder heads actually declined while the production of diesel cylinder heads rose. Machine shops reported rebuilding nearly 50 gas cylinder heads each month during 1998 compared to 52.4 during production year 1997. Production of four and six cylinder gas heads rose slightly while that of eight cylinder heads declined marginally.

Machine shops averaged 16.8 gasoline four cylinder heads rebuilt each month during 1998, 12.1 six cylinder and 20.3 eight cylinder heads. This compares to 15.9 four cylinder, 11 six cylinder and 21.1 eight cylinder gas heads rebuilt during production year 1997.

Except for eight cylinder diesel engines, diesel cylinder heads rebuilt each month remained virtually unchanged last year. Machine shops reported rebuilding identical numbers of four and six cylinder diesel heads in 1998, 2.1 and 2.3, respectively, as were rebuilt in 1997. However, eight cylinder diesel head production rose from just 0.92 units in 1997 to 2.2 units produced monthly last year.

Although overall production in engines and cylinder heads as been generally flat over the past several years, many industry pundits have felt that cylinder head work offered the best growth opportunities for rebuilders compared to lower-end block work. However, since 1996 production of gas rebuilt cylinder heads has vacillated from a monthly average of 50.36 units produced in 1996 to 52.4 produced in 1997 to just 49.7 produced each month during production year 1998.

Reported cylinder head production may be a function of variances in our survey population, product life cycles of specific heads, the condition of the core of specific engines coming into the shop, and/or the availability of new or better quality used cores for the cylinder head application being rebuilt.

For the first time we asked machine shops what percentage of cylinder head cores are purchased new for rebuilding purposes. Machine shops reported that 66.5% of cores are customer returns, 26.8% are supplied by core suppliers/salvage yards, and 6.7% are purchased new castings.

It will be interesting to note how these percentages change over the next several years. Some in our industry feel that fewer shops, for example, are making crack repairs to late model cylinder heads. And, in fact, our survey results show a steady decline in the number of machine shops making crack repairs to aluminum heads (the majority of which are found on vehicles produced since the late ’80s and early ’90s.

In production year 1996, 46.2% of machine shops reported making crack repairs to aluminum heads. That number declined to just 44.8% in 1997 and to a significantly lower 38% in 1998. As might be expected, the number of shops sending cylinder heads out to a head repair specialist has been on a steady incline. While just 53.8% of shops reported sending aluminum heads out to a repair specialist in 1996, 55.2% reported doing so in 1997. During production year 1998, a significantly higher 62% of machine shop owners reported sending aluminum heads out to a crack repair specialist.

Several machine shop owners we’ve interviewed have cited growth in cylinder head repair and rebuilding noting that in addition to the typical repair garage, much of this work is for other machine shops or for OEM new car dealerships needing quick turnaround of late model cylinder heads. The difficulty for many machine shops is finding, training and keeping qualified employees capable of making crack repairs to aluminum heads. And, of course, later model cylinder heads, especially those found on dual overhead cam (DOHC) four-valve engines require more precise machining equipment and operator skill to disassemble, repair, machine and reassemble correctly.

Many shop owners also tell us that the labor hours required to repair many late model cylinder heads can not be recouped at existing shop rates. Many say that the customer is unwilling to pay the charge to repair such heads, or wants only partial repairs done to reduce costs which most shop owners acknowledge usually leads to a comeback, warranty claim and an unhappy customer.

The increase in the number of aluminum heads that are being scrapped seems to validate many of the observations made above. In 1997 80.5% of machine shops reported making repairs to aluminum heads while scrapping just 19.5% of those coming into the shop for repairs. In 1998, just 77.3% of machine shop owners reported repairing aluminum heads brought to the shop while scrapping 22.7%.

It appears that unless shops have made the investment in equipment and training to make repairs to aluminum heads cost effectively, an increasing number of shops are sending these heads out to those shops equipped to make such repairs, sourcing better quality cores from salvage yards that require little or no repairs, or purchasing new head casting from a growing number of suppliers of new cylinder heads.

These are significant facts to consider in the machine shop market when it comes to analyzing cylinder head rebuilding. It can be expected that machine shops will continue to see larger numbers of aluminum heads compared to cast iron cylinder heads coming into their shops. This is due to the OEMs use of aluminum heads on new engines for a variety of reasons ranging from a desire to reduce weight in vehicles, to an effort to displace greater quantities of heat more quickly through lighter weight, thinner aluminum cylinder head castings.

In 1997, machine shops reported that 42.8% of all heads rebuilt were aluminum. During production year 1998, machine shop owners reported that 45.4% of all heads coming into the shop were aluminum castings. Certainly, the number of aluminum heads will continue to displace the number of cast iron heads in ever increasing percentages.

Crankshaft production
As might be expected with production of better quality engines over the past decade, crankshaft production by machine shops has, generally, been on a slow decline for several years. Production of gas and diesel crankshafts declined from a monthly average of 19.23 units in 1997 to 17.2 units last year.

Although diesel crankshaft production remained virtually unchanged from production year 1997, gas crank production declined from nearly 17 units produced in 1997 to just 14.8 crankshafts produced monthly during 1998.

As with engines and cylinder heads, eight cylinder gas engine crankshafts continue to represent the highest percentage of units produced each month. In 1998, machine shops reported producing an average of 7.5 eight cylinder cranks monthly. The same number of four and six cylinder gas cranks was reportedly produced in 1998 – 3.5 units, respectively. This compares to 5.3 four, 3.9 six and 7.6 eight cylinder crankshafts produced in production year 1997.

On the diesel side of the equation, machine shops reported producing 0.8 four, 1.1 six and 0.4 eight cylinder diesel cranks monthly in production year 1998. This represents very little change from the 0.6 four, 0.97 six and 0.66 eight cylinder diesel cranks produced monthly in 1997.

Again, engine quality and durability is felt to be the reason by most industry people we’ve interviewed for the flat to declining level of crankshaft production by machine shops. Although several shops we’ve interviewed over the past several months say that there is good business in niche markets, for example the performance crankshaft market – racing and performance restoration work continues to be enthusiastically embraced by hobbyists, local racers and professional racers – many other shops say that there is shrinking demand for the typical passenger car or light truck rebuilt crankshaft.

Most of the typical passenger car and/or light truck rebuilt cranks seem to be going into older vehicles such as trucks, SUVs, etc., or into later model vehicles with catastrophic failures due usually to poor maintenance or abuse.

Production increases/decreases
In analyzing engine production a little closer, in production year 1998, more shops reported an increase in engine production, fewer reported that engine production remained unchanged, and almost the same percentage of shop owners reported a decline in engine production.

During 1998, about one-third (36%) of shops reported increased engine production compared to year earlier numbers. In 1997, just 30% of shops said that engine production had increased. A little more than 45% of machine shops said engine production numbers remained unchanged in 1998, while in 1997, 51.5% of shops reported similar engine production compared to year earlier numbers. Those shops reporting that engine production had declined remained unchanged at about 18.5%.

Our interpretation of these production increases/decreases, along with interviews with industry participants, indicates that the machine shop market is seeing a reduced but continuing fall out of shops, while those shops remaining are picking up the market share left by those departing shops.

Production increases and decreases may also point toward a leveling off in the consolidation of machine shops. The average increase for those shops reporting an increase in engine production was close to that reported in 1997 – 12.2%. However, the decrease in engine production by those shops reporting a decrease was significantly lower – 13.9% – compared to the average decrease in production reported in 1997 – a little more than 19%.

Percentage increases and decreases in cylinder head production were very similar to those reported for engine production. A little more than 47% of shops reported an increase in cylinder head production in 1998 compared to 40.7% that reported an increase during production year 1997.

About 42% of shops reported that cylinder head production remained the same in 1998 compared to year earlier numbers, while in 1997 a little more than 49% of shops said that production of cylinder heads had remained on par with year earlier numbers.

A little more than 10% of shops reported that cylinder head production had declined in 1998, almost identical to the 10.2% of shops that reported a decline in head production during 1997 compared to production year 1996.

For those shops reporting an increase in head production, the increase was lower, 13.3% compared to the 15.4% increase by those shops reporting an increase in head production in 1997. The decrease for those shops reporting a decrease in 1998 was 10%, again, lower than the 15.4% decrease reported by those shops reporting a decrease in head production during 1997 compared to 1996.

Because fewer shops reported that business remained the same in engine and cylinder head production, while the number of shops reporting that business declined was almost identical to year earlier figures, our assumption is that those remaining shops are gaining market share at the expense of those shops that have closed their doors. Lower percentage increases and lower percentage decreases are also interpreted by some as an indication of the overall flat demand for rebuilt engines and cylinder heads over the past several years.

Production category percentages
Although actual unit numbers of monthly rebuilt engines reported by shops is nearly 90% gasoline engines, when we asked survey respondents to estimate the percentage of total engine production that falls into specific engine type categories, a somewhat different market share picture emerges.

During 1998, machine shops collectively reported that an average 72% of total engine production was in automotive gas engines. A little more than 4% was in automotive diesel engines, 5.8% in medium duty diesel engines, 4% in heavy-duty diesel engines, 4.6% in industrial engines, 5.1% in marine engines, 1.9% in motorcycle/mower/small engines, and 2.4% in "other types" of engine production.

Overall, marginal increases in the production of automotive gas and diesel engines, medium duty diesels and marine engines was reported for production year 1998. Marginal decreases were reported in the total percentage of rebuilt medium-duty diesels, industrial, motorcycle/mower/small engines and "other types" of engines.

Equipment purchases
A significantly higher dollar amount was expended on the purchase of machine shop equipment in 1998 compared to 1997. This year’s survey respondents reported spending an average $25,037 on machine shop equipment, an increase of nearly 75% compared to the average $14,354 spent on machine shop equipment in 1997.

The dollar percentage spent on new versus used equipment remained virtually unchanged from year earlier figures. In 1998 nearly 71% of all equipment purchased was for new equipment, while 29.1% was for used equipment. In 1997, shops reported spending 69.7% of their dollars for new equipment versus 30.3% for used equipment.

The large percentage increase in expenditures on equipment by shops in 1998 could be a reflection of both the growing need to purchase equipment designed to handle the requirements of more sophisticated engine tolerances, surface finishes and assembly/disassembly efficiencies, along with the need to meet production requirements for those shops gaining market share from shops that have closed their doors.

As might be expected with increased purchases of shop equipment, the average dollar value of machine shop equipment for the typical shop also increased significantly. In 1999, machine shops reported that the average dollar value of their shop equipment was $198,108. In 1998 shops reported the average value of their shop equipment to be $184,049 – an increase of about 7.6%.

Applying the average equipment expenditure of $24,037 to a universe of 6,000-8,000 full service machine shops yields a machine shop sales market valued at between $144 million to $192 million in 1998.

Although today’s machine shop market continues to be characterized by consolidations and flat growth in demand for rebuilt engines, machine shops offer specific advantages over their larger competitors such as production engine remanufacturers and large retailers of rebuilt engines and parts.

One of the most important advantages is that machine shops have the opportunity to diagnose why the engine or head failed, something that production rebuilders or retailers usually do not. Proper diagnosis of engine or head failure, before the rebuilding process begins, can save time, money and future problems for both the rebuilder and the customer.

The type of engine rebuilding/services being offered by machine shops is also changing. There are those shop owners and educators that feel that because there is often little wear in cylinder walls, and pistons often check okay, machine shops may become more involved with "reconditioning" rather than total rebuilding of engine blocks. Much of this is due to computer controlled fuel injection, better materials and higher quality standards now being used by the OEM which result in longer lasting and more durable engines.

These trends also point to increased expenditures by machine shops for small tooling and gauging, such as profilometers, valve face runout and seat runout gauges, etc. to ensure that today’s engines are also rebuilt with the same type of quality, performance and durability as the original motor displayed.

In Part II of the Machine Shop Market Profile we will take a look at engine inventory levels, annual gross sales, sales volume attributed to machine shop labor and related parts sales, profit margins, hourly shop rates, engine installation/service bay work, warranty claims, shop expansion plans, labor wages and compensation programs, expenditures on engine hard parts and customer base profiles.