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Cv Shafts Market: Cv Axle Rebuilding Business: There's Definitely More Competition

By Vicky Poulsen

When Dan Levine, president of Southland Clutch, Inc., in National City, CA, started his rebuilt axle operation three years ago, it seemed like a win/win situation. The projected growth of front-wheel-drive vehicles and the number of vehicles nearing service age were good reasons to pursue this market. Plus, his initial start-up costs were minimal since he already had a thriving clutch business.

However, as with many of those in the CV axle rebuilding business, continued price compression on FWD components and lower profit margins have given Levine a different outlook on his axle operation today. "I'm not disappointed that I got into the market, but I am disappointed that it's become such a cut-throat, small margin business," he said.

Like Levine, several other rebuilders such as Kevin Keillor of Omaha, NE, Gary Giusto of Waterbury, CT, and John Bedard of Lockhaven, PA, all shared similar hopes to profit from what seemed to be a potentially lucrative market.

Keillor and his father started Omaha Constant Velocity, a CV driveshaft rebuilding operation, four-and-a-half years ago. "The more we looked into CV axles, the more we liked what we saw," says Keillor. "But once the bigger companies started rebuilding on a larger scale, prices started to drop and that has continued over the past several years. There's definitely more competition for the CV axle dollar today."

"Price can go from one extreme to another," says Ted Krueger, marketing and advertising manager for Rockford Constant Velocity, a CV component parts supplier located in Rockford, IL. "It depends on where the rebuilder or wholesaler is located. Since 1994, Krueger says complete axle prices to the consumer have dropped in excess of 150%.

"We're going through what the rear wheel drive industry went through about 10 years ago - a very vicious price war," said Krueger. "A lot of your bigger companies, because of automated capabilities, keep pumping them out faster and faster; the little companies can't keep up."

The influx of foreign product entering this country is also another reason behind falling prices. The greater the number of options to the consumer, the lower the price. "To the consumer, quality and country of origin are subjective," explained Krueger.

Another major factor responsible for dwindling prices is that there are too many rebuilders chasing the same customer and undercutting one another to get the business. "The profit is down the toilet because of the competition," says Giusto, vice-president of Specialty Constant Velocity, Inc., Waterbury, CT. "I know of one large rebuilder whose prices are unbelievably low," says Giusto. "He's really putting the hurt on other rebuilders."

Competition is not limited just to rebuilders. The emergence of retailers and mass merchandisers who also carry replacement shafts for many popular applications have also taken their toll on price. "As soon as an AutoZone or similar operation comes into town one of their tactics is to offer products at the lowest possible price," said Rockford's Krueger. "They can undercut the local rebuilder primarily because they're buying in such large quantities."

Besides increased competition and the influx of foreign products, Drive Plus' Bedard says the availability and lower cost of FWD component parts have also driven prices down. "Several years ago, the parts for the components were three times more than what they are now," says Bedard. "The price of most component parts has come down, so the price of the complete unit has also come down."

The bad news is that despite escalating demand for rebuilt CV axles, prices have continued to decline. The good news is that industry experts we spoke to predict that most rebuilders won't lower prices much more from this point.

Supply and demand

Southland Clutch's Levine says what's occurring in the CV market today goes against the typical laws of supply and demand. "From what I hear the big guys are very busy, but are not filling the pipeline. But they still continue to drive the price down," he says. "The (primary) thing that drives price down is oversupply. No matter how many rebuilders say they can't keep up, it seems to be a hollow comment because if it were true, prices would go in the other direction."

The size of the CV driveshaft market is estimated to be between seven to nine million units a year with a market value of about $720 million. Specialty Constant Velocity's Giusto predicts by the year 2000, the number of units will grow another two to three million a year.

"Some rear-drive cars are now using CV axle shafts," says Giusto. "Plus, you have a lot of sports utility vehicles on the road with CV shafts in them. You can actually have a sports utility vehicle with six CV shafts in it."

According to Bob Frick, vice president of sales for Badger Front Wheel Drive. Co., Madison, WI, rebuilders are typically replacing a CV axle on a car that has 60,000 to 70,000 miles on it. "Right now we're experiencing the replacement of shafts on a vehicle population base that may be representing 80% of the total vehicle market," says Frick. "Two years from now we will be dealing with a vehicle population requiring replacement that is closer to 95-97% of the total vehicle population. The demand is going to increase by 10-15% quite easily."

Based on the fact that the average age of a car or light truck on the road in the U.S. has risen to 8.8 years, and that in 1995 an estimated 40 million used cars were sold and/or exchanged, Rockford's Krueger says there should be a wealth of opportunity for aftermarket parts manufacturers to increase sales.

However, Phil Cromwell, facility manager of Undercar International, a subsidiary of Dana Corp. in Tuscumbia, AL, says its studies don't indicate a large increase in market demand right now. "We're seeing the pipeline being filled up and we don't expect a lot of increases," he says. "We are seeing more demand for the later model front-wheel drive axles, and on those particular models there is a shortage of cores in the market; I anticipate that will continue."

A maturing market

As the market continues to mature, John Naumann, president and chief operating officer of Constant Velocity Systems, which manufacturers CV joint grinding equipment in Clifton Park, NY, says prices should start to rise over the next 12 months. "The market is not as attractive for new players to get into because the return on investment is long," said Naumann. "Within the next six to 12 months we'll see price stabilization and somewhat of a (price) increase."

According to Drive Plus' Bedard, another sign of the market maturing is the quality of the cores that are coming back. "The companies who haven't had the ability or the money to buy the right equipment to compete have been falling by the wayside," said Bedard. "Unfortunately, there have been a lot of CV drive axle companies that have gone out of business."

Bedard also adds that many of the cores that are coming back to rebuilders now are ones that actually have to be ëremanufactured.' "During the initial growth of the business, we were getting cores from core dealers that didn't require the amount of work that today's cores do," he said.

Core availability

Rockford's Krueger says core availability is not expanding proportionately to the number of vehicles entering the market. "The best example of this can be seen in the doubling of core prices over the past three years," said Krueger. "Incidentally, this is also within the same time frame that the practice of grinding CV joints (overall) has gained economic prevalence.

"Although the used car market is going up, the number of axles that can remain usable in that pool (because of over-grinding) is going down," said Krueger. "In the next couple of years, prices will go up again simply because a good core is going to be really expensive."

"With the shortage in cores on certain applications, Specialty Constant Velocity's Giusto says there are a lot of manufacturers who are retrofitting a part to make something else from it. "A core supplier has to watch what he's buying these days," says Giusto. "An educated core supplier will not get duped into buying garbage. How many times a core goes through the loops in terms of the number of times it has been rebuilt is a big concern of core suppliers today," he said. Especially with second generation joints, some core suppliers are concerned that they are not going to be able to sell them to rebuilders.

Point of installation

All of the rebuilders and parts suppliers interviewed for this article reported that installers always prefer installing the complete driveshaft with the inner and outer joint included, compared to just replacing the CV joint by itself. It's easy to see why since shafts are faster and easier to install and there's less chance of a comeback because of a loose or leaky boot.

Specialty Constant Velocity's Giusto says an axle replacement takes considerably less time than a joint replacement which can take up to two hours. "Axle replacement is quick and the mechanics can roll the cars out of the shop a whole lot faster," he said.

Although the market for half-shafts has taken sales away from individual CV joints in this country, Naumann says the CV joint market is still promising overseas. "If you look at developing markets like South America or Eastern Europe, they're still in the joint (repair/replacement) phase because labor costs are lower on an hourly rate compared to the United States," said Naumann. "Joints are still available at parts stores in this country, but 80% of what's being replaced is complete axles."

Because installers prefer shaft replacement, jobbers, warehouse distributors and retailers are all stocking shafts, or at least the fastest moving shafts in their inventories. Consequently, adequate coverage requires a lot of SKUs. Many suppliers are helping their customers by providing computer software systems that will make ordering and streamlining their inventory a lot easier.

Badger's Frick, for example, says his company's computer software program allows the user to track each facet of inventory and move it from a raw material state through the system and into a rebuilt axle. "We're able to help our customers keep their finished product and their component parts inventories very lean," he said.

Racks

There are those who feel that the CV driveshaft story parallels that of its counterpart, the rack-and-pinion steering unit. In fact, three years ago one rebuilder we spoke with characterized the market as the "Rack War of '94." Like CV shafts, rack-and-pinion fell victim to the same market pressures, i.e., diluted prices, too much competition, lack of cores on certain models, etc.

"I think rack-and-pinion has led the way," said Roger Almstrom, product manager for Moog Automotive, a division of Cooper Industries in St. Louis, MO. "A year-and-a-half ago, racks took a considerable drop in price at the WD level.

Price vs quality

What some consider ridiculously low prices in the CV driveshaft market is a sign that there are those rebuilders who are sacrificing quality for price. "There are still rebuilders popping up on street corners in every major city that don't have the proper equipment and are creating substandard products," said Drive Plus' Bedard.

Moog's Almstrom says the number of rebuilders who continue to sacrifice quality to compete on price places the entire industry at risk. "I do believe we are in danger, as an industry, of bringing quality down to meet some of the ridiculous price points that exist," he said. "We risk having customers say, ëI'm not going to tolerate that type of quality, I'll just go buy new.' My hope is that we'll be able to retain a price that will allow a quality product out there for everyone."

Kind of a grind

A major factor that has allowed rebuilders to reduce their production costs and offer more competitive prices is a large scale move to grinding joints. An increasing number of rebuilders are now using some type of machine equipment to recondition worn or damaged cages and housings which has significantly reduced the number of cores that would otherwise have to be discarded or replaced.

According to Constant Velocity Systems' Naumann, grinding equipment can allow up to 95% of all joints to be reused. "Where the market is now, the traditional rebuilding method is not cost effective," said Naumann. "The margins in the product have come down so much that our customers really need to have their (processing costs) down and their efficiencies way up.

"The process that ensures the highest quality at the lowest cost is the machine grinding process," he continued. Naumann says his company has recently developed three new higher production machines - each specific to a cage, housing or race. "The more time spent per piece, the more expensive it is to produce," said Naumann. "These machines are quicker and more efficient than other models."

Naumann says his company has also developed a measuring device that replaces manual measuring. "The operator puts the piece on the stationary measuring device, and it will accurately measure it and feed that information back to the machine or computer for any adjustments."

While more and more rebuilders are grinding joints, the question remains as to where to draw the line on how much to grind. "I think grinding will continue to be a factor in our industry," says Badger's Frick. "Our sales of component parts to customers who grind continues to be steady.

"We do sell new cages to people who grind CV joint housings and they're grinding the housings and putting a new cage in," Frick added. "We feel that they're creating a good quality product."

According to Rockford's Krueger, more than 900,000 axles per year are serviced by remanufacturers that employ grinding. "In order to cut costs, there are companies who will grind the living daylights out of whatever they can and put oversized bearings on it and then kick it out the door," says Krueger. "Once you do that, you can't put them back into the same pool."

"Ninety-five percent of our customers are not grinding the heck out of the joints," observed Constant Velocity Systems' Naumann. "They are grinding the recommended amount; I am not aware of much of a concern about (ground) second generation joints coming into the core system. For my customers, quality is number one and efficiency is number two. If a rebuilder can rebuild by buying all new parts and still sell axles at a profit, then more power to them."

Although increasing in popularity, grinding continues to be a topic for debate. At the center of the debate is whether or not rebuilders can grind a CV joint housing without negatively impacting case hardness. "Any time you grind away on something that has limited depth of hardness, you are going to take away some of that hardness," said Omaha Constant Velocity's Keillor. "The question is whether or not, when you're done, you still have a dependable part. As far as I'm concerned, you do - as long as you have competent people doing the grinding for you."

As far as marking the joints once they've been ground, many rebuilders said it would be a nice gesture, but didn't know if it was feasible.

On the other hand, Undercar International's Cromwell says his operation does mark the joints once they're ground. "We know when we get our own core back whether it's been ground or not," he says.

Mark Kelly, manager of research and development for Undercar International, said marking their joints is not a problem for them. "We apply a permanent yellow ink on the housing of our joints," says Kelly. "Up until recently, our previous method of marking was using a die grinder to engrave three little vertical lines on the housing."

To study the effects of grinding, the Automotive Parts Rebuilders Association's (APRA) CV and Rack Division spearheaded a program to send a group of joints and components to the Rochester Institute of Technology (RIT) for an independent, in-depth analysis of the effect of grinding on case hardness.

According to Mark Veldhuis, president of Precision Shaft Technology in Clearwater, FL, the results of the depth hardness test, which were revealed at APRA's CV and Rack Division meeting in April, proved to him that all of the joints were equally hard past .020". "In fact, very minute differences would be apparent up to about .030"," said Veldhuis.

From other tests that were revealed at the meeting, Veldhuis says it was also evident to him that there is more than enough integrity of hardness to support at least .010" of grinding, which is what most rebuilders are removing per side, to accept a .020" oversize ball.

"I think some of the studies that we made through APRA confirmed that there is nothing wrong with grinding," says Veldhuis. Veldhuis noted that hundreds of thousands of joints are ground every month. If grinding caused the kinds of problems some people are suggesting, many of these joints would be coming back to rebuilders as warranties, and that, he says, just isn't happening.

Another issue facing the CV market has been a push to establish standards for testing rebuilt CV joints. So far, the standards proposed by the Society of Automotive Engineers (SAE) have been thought to be excessive and prejudicial towards independent rebuilders. After a year-and-a-half furlough, the SAE committee to develop recommended procedures for rebuilding and testing CV shafts has resumed regular meetings.

According to Marcy Lucas, associate engineer in the Standards, Develop-

ment and Research Division of SAE, the committee has met twice so far this year and has another meeting scheduled for September. "The last version of the standard (J1620) was difficult to use, so we're looking at revising it so it's much easier to use and understand," said Lucas.

While still in the proposal stage, Lucas says the committee is seeking more input from the industry. For more information about serving on this committee, Lucas can be contacted at 412-772-8557.

New technology

To compete in this market, rebuilders will not only need more accurate grinding and measuring equipment, but better testing equipment, as well. "We're the only company that offers products like the Axle Master, which is a testing device whereby you can put the axle on the machine after it's been remanufactured and it will tell you if you have a problem," said Rockford's Krueger. "Such problems would not be detected unless it was in the car. We have machines that will test, digitally, the amount of wear, and these machines will become smaller and more affordable," he added.

Undercar International's Cromwell says his company is planning on designing its own gauges for measuring CV joints. "Once we grind, we'll know exactly how much metal we've removed," Cromwell explained. "That's critical to bringing the product back to OE spec again."

On the horizon

As the market continues to mature, industry experts predict that the larger operations will get even bigger while the smaller rebuilder will find his niche. "The big are getting bigger because we're still on an upward climb in terms of the size of the industry," says Badger's Frick. "We've also seen rebuilders who have carved a niche for themselves as being experts in a certain area, and they are able to get a higher price for a higher quality product than what would normally be available."

Undercar International's Cromwell adds another way rebuilders can stay competitive is to open small warehouses which can offer more customers immediate access to the inventory they need. "Those are the types of things rebuilders will have to do to capture more of the business," he said.

Moog Automotive's Almstrom says he sees two markets emerging - a market for the mom-and-pop operation and one for the large rebuilder. "I think that a customer for one is not necessarily a customer for the other," he said. "But in the end, the market will determine who will and who will not survive."