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Cores Market: ;The Core Market Right Now Is Very Soft

By Tom Glover

Core suppliers throughout the industry are trying to interpret the reasons for a slower market this year. "The core market right now is very soft", says Bob Grady, president of Rebuilders Automotive Supply (RAS) in Cranston, RI. "Unit sales are about the same, but prices and margins are down and terms are longer, so profits are down too."

It's human nature to ask why, and business people especially like to have an explanation as to what's making the market act the way it does. Grady is no exception, but seasoned marketer that he is, he's looking for help in finding the answer to the current situation.

"If you look at the statistical data published by people such as Pep Boys or Auto Zone, you see that their unit sales are up, the number of stores they open are up, and their bottom line is up. So wouldn't that lead one to believe that (core supplier) sales are up?," he asks with a note of sarcasm. Grady notes that there are a lot of people with some information about various aspects of the market, but that no one seems able to put it altogether to paint the whole picture accurately.

One rebuilder we talked to blames the way new cars are sold today, i.e., through attractive financing and leases, for the decline in parts sales, and consequently, a soft market for cores. Barry Zeidler, owner of Hydra-Steer in Las Vegas, NV, rebuilds power steering components. Although he concentrates on the fleet market, he feels the pinch of fewer parts being sold; 24% fewer over the last five years, according to one study.

"Retailers have had to cut their prices over the last few years," he observes, citing that a large WD in Los Angeles, serving the entire state of California, has cut the size of its delivery fleet from 60 to 20 units over the last five years. "Fewer and fewer aftermarket parts being sold, of course, has a direct impact on the core business - and the number one factor is the easy availability of new cars, - what I call the $199 a month specials. Zeidler added that the extensive sale of extended warranty contracts," has also negatively impacted his, and indirectly the business of core suppliers.

The West Coast seems to be experiencing the same soft market that Grady talked about existing in his own East Coast market. Ken Meier, president of The Recycler Core Co., Riverside, CA, expresses frustration at his inability to identify the problem. "In the present structure, there's something going on that makes everybody crazy," he says. "I can definitely feel the reduction in business from both the rebuilder and the core supplier end. I don't have a valid reason for it - some say its primarily because of the weather."

Indeed, the weather can be blamed for a lot of things, and Tony Grillo of Tony Grillo and Sons in Wilmington, DE, is one core supplier who believes it significantly influences his business. "Cars are made to run best (in climates where the temperature is) between about 25° and 90° F," he points out, "so when temperatures go below 25° and above 90°, it really takes a toll and parts start to wear out faster. The good weather we've had in this country, both winter and summer, has had a (negative) influence on my business," he says.

But back in California, where the weather is usually good, the Recycler Core Co. has grown rapidly, from 38,000 sq. ft. of warehouse space to its current 280,000 sq. ft. in four years. Meier is a great believer in quality control through having his 70 employees do their best, and has instituted a videotaping program where everything that comes in and goes out is recorded. "It helps, because it answers questions. Now if somebody says that we didn't do a good job, I pull the video tape and see what was done to the part, and we go from there."

Meier has also depended on diversification to help him weather the changes in specific markets. "The core business is difficult right now, but our health comes from a diversity of products; if foreign master cylinders go down, we might switch to air conditioners. When that goes down, we switch to something else, such as electrical components or fuel injectors," he points out.

Another tack he's taken has been to produce more, and better catalogs. "We produced a picture catalog, covering parts all the way back to 1977," explained Meier. "We're actively seeking to sell these catalogs at a profit, which we think will demonstrate that we know our products well, and can do a good job for our customers."

Grillo believes that besides the weather factor, the soft market for core suppliers is due to an increase in the number of people who function as core suppliers. "Some of the larger core suppliers have become very selective about what they'll accept because of market conditions. As a result, a lot of the 'peddlers' - (those that go around to salvage yards and garages to pick up cores and used parts that are sold to core suppliers) have themselves decided to become core suppliers and deal directly with rebuilders," he says.

Rick Dickerson manages the Gasoline Engine Division for Bishop Automotive, a large engine and transmission core supplier in Dallas, TX, that also serves as a scrap dealer. He sells 1,500 to 2,000 engine cores a month, and observes that 90% of them are for pickup trucks and the ever-growing sport utility vehicle market. Dickerson also sees the competition growing by leaps and bounds.

"The number of core suppliers has tripled in the 10 years that I've been here," Dickerson said, pointing to some former Bishop employees who have gotten involved in their own core supply operations. "There's a lot of opportunities, because the market has grown," he comments. In the engine core area, the market seems to be able to absorb that kind of growth, and Dickerson is not unduly concerned about newcomers to his business. "I've got about five or six large remanufacturers I supply, and frankly, I can't take on anyone else right now," he says.

It can't be denied that the entire industry is becoming more selective. "The days of buying calipers for 10 bucks apiece, for example, and it didn't matter what calipers were on the truck, are pretty much gone," says RAS' Grady, who adds with a note of humor, "I can honestly say that I miss those days; it was a lot easier!"

Today, he finds that he must provide more service than in the past. "I've become more involved with my customers' inventories and their needs as far as product back orders are concerned," he says. Now RAS, like other core suppliers as well, serves its customers by shipping smaller orders more frequently, necessitating more frequent communications by phone and fax.

Grady finds he makes more customer visits, too. "They're not just social visits," explained Grady. "They're working visits where you have to take a shot at getting to know some new material that they have, but can't get enough of, and then go out and buy it for them. In the same vein, Grillo also finds that his company does much more research for its rebuilder customers than it used to.

Most of the core suppliers we talked with are feeling the effect of having to carry more of their customers' inventory. It seems that the just-in-time manufacturing concept has trickled down to the world of the core supplier and rebuilder. "We're almost the rebuilders' warehouse now," says Grillo. "We used to get monthly orders, but now they need it immediately. We now deliver faster, but it does place a burden on us both financially and from a space perspective," he observes.

A burden it may be, but carrying more of a rebuilder customer inventory can have a silver lining; it represents another service that a core supplier can add to his menu of service offerings to his customers. At least that's the way Bishop's Dickerson sees it.

"When rebuilders push their inventory back on the suppliers, well that's fine with me - that's what we want to do. We're here to provide more services to our customers," he says. Dickerson finds that going the extra mile does a lot to enhance his competitive position, too. "We sell a lot of nuts and bolts that we didn't used to, as well as oil pans and things like that," he explained. "We want to supply everything we can to our customers, and package it so that its easier for them to use. For instance, we'll put push rods into sets and label them to make it easier for the rebuilder to use," he comments.

Such services may be great for the rebuilder, but some core suppliers are feeling the increasing demands. Meier of Recycler Core Co. experiences pressure from his rebuilder customers to present them with more thoroughly cleaned parts, and to pull off components such as pulleys on power steering pumps, which he does. "But I recently talked to one company that wanted their supplier to come in and stock their shelves for them as well as other labor saving items, said Meier. "I'm sure there are things we could do to save the customer labor and increase our sales, but there's also a limit to the amount of labor we can provide."

There are changes afoot at the salvage yards too. Besides the EPA mandates that gas tanks and tires be removed before vehicles go into their yards, and that some parts must be stored on concrete or under roof, there is also greater attention paid to inventory control of specific parts. In addition, a more professional approach at salvage yards seems to have replaced the concept of supplying a mixture of parts of varying quality.

"Its bringing in a vehicle and dismantling it piece by piece, all at once, instead of taking parts off as needed from vehicles that sit out in their yards," comments Grady, who also appreciates that the yards are more conscientious about how they salvage. "In the old days, the salvage yard used to knock an alternator off with a hammer, or cut a caliper out with a torch," he explained. "Now when they dismantle a vehicle, they make sure that the alternator comes off without breaking off the 'ears', and the bracket stays with the caliper."

Of course, most of the issues we've been discussing - the greater demand for specific parts and how much inventory has been "pushed back" to the core supplier - is intimately connected to the proliferation of part numbers that's been widely covered by this and other automotive magazines over the last few years. It continues to affect the need for storage space, sorting space and record keeping on the part of suppliers.

"The biggest part of it is having the data lined up properly, as far as the interchanges and cross-references required," says RAS' Grady. "It can get to be an absolute nightmare. You could have a full time staff of three or four people just to check and update cross-references. He appreciates that the computer has helped coordinate the data in one place, eliminating the need to spend hours flipping catalog pages. "But still, said Grady, "every time you get a new customer, it can mean 40 hours of work to look up their numbers and cross-reference them to a number you're familiar with, plus examining their catalog to see what is the same or different between the numbers they use compared to the next rebuilder."

From the rebuilders standpoint, an organized core supplier is a preferable supplier. Harry Pugliano is a core buyer at Worldwide Automotive, a Winchester, VA, alternator and starter rebuilder that specializes in import parts. "The rotation of inventory, knowing what you have and using software to help you accomplish your job as a core supplier has gotten more complex," he says. "The core supplier should be organized to the extent that he can respond quickly - if he's disorganized, he can't. There's still many core suppliers who are disorganized," comments Pugliano.

Nobody we contacted sees the part number proliferation situation getting any better. And it does beg the question, "will the aftermarket industry ever get together and design a common part numbering system?

"Is that utopia? - it probably is!" comments RAS' Grady. Nonetheless, he thinks it will happen one day. "Through conversations and meetings at the Automotive Parts Rebuilders Association (APRA) you see people interested in having one system, but too many things are in place that prohibit it. The water is too muddy right now to believe it will happen soon," said Grady.

On the other hand, there are those who see part number proliferation in a different light. "We feel like parts proliferation is helping us," says Bishop's Dickerson. "We have access to a lot of different motors, and we try to learn more about them. We feel like its an advantage to us, because a remanufacturer will call us to ask a question about a motor, whereas he might not call another (less knowledgeable) shop."

The future of the core market is not that easy to predict, but some see it improving as the good economy we're enjoying in the mid-1997s continues. On the other hand, there is a school of thought that says that both the core supply and rebuilding business do better when the rest of the economy is down; that's when John Q. Public decides to fix his old car rather than to buy a new one, the logic goes.

Then there's the factor of the quality of new automobiles. Many agree that today's cars are running better for longer periods than they used to, and that spells trouble for the used and rebuilt parts business. But OEM engineers haven't reached perfection yet. "It does seem that not much is going wrong with that vehicle you and I bought two or three years ago," says RAS' Grady, "but there are some products out there that are just designed and built bad, and that kind of helps us all out. There are still a lot of defective components out there," he says.

And there's always new opportunities, although some of them have been disappointing. Not too many years ago, there were predictions that air bags and ABS brake systems were going to blossom into new opportunities for rebuilders and core suppliers. That doesn't seem to have happened, at least not yet.

Activity in rebuilding electronic components, however, has been better. While there is a perception that the electronic controls for newer cars are throw-away items, it ain't necessarily so. "They can be rebuilt," says Grillo. "We sell an awful lot of engine management controls, or EMCs. What happens is that if power to an EMC is lost, it actually loses its memory and has to be re-programmed," he points out. "Sometimes the only way to do that is to take the old one off, install a new one, and send the old one back for rebuilding and reprogramming, where its sold through the aftermarket. Its actually become a pretty good business!"

Most core suppliers and rebuilders are motivated by the chance to make money - the more of it the better. They're typically not turned on by the chance to save the environment. This is, no doubt, why rebuilt auto parts and the core business that supplies the rebuilding industry were here long before the current efforts to recycle all of the paper, plastic, metal and other materials in use today.

At the same time, though, there is an environmental aspect to rebuilding, and logically, there is a link between doing something for the environment and being a successful core supplier or rebuilder. It's not without reason that Recyler's Meier named his company the way he did. "My theory is that if we stimulate the sale of cores, we're giving labor to the American public, and creating not just jobs, but more efficient use of resources, and saving the environment too," he philosophizes.

"I try not to sell new, because new subtracts from the idea of cores, which are my basic emphasis," continued Meier. "Theoretically, we cannot not sell cores. Our prices have to drop to accommodate sales, and sometimes people get disgusted and say 'its not worth the time and effort.' " Meier pointed out. "But it is always worth the time. You can't just produce a part brand new and throw it away. There's another cost involved in it, socially, economically and to the environment. Some of the things I do are in my own self interest, and some of them are in the interest of everyone. I hope both will coincide most of the time."