Electrical Market The Market For Rebuilt Starters And Alternators Has Been Painfully Soft
By Larry Carley
So far this year, the market for rebuilt starters
and alternators has been painfully soft for many rebuilders. In
a business that depends heavily on the weather to stimulate sales,
a mild winter and a relatively cool spring and early summer have
done little to spur demand. For most rebuilders, sales have been
flat. In some areas of the country, sales are off as much as 15-20%
compared to a year ago at this time. That's the good news.
The bad news is that when the market is soft, the competition
isn't. With fewer total units moving through the pipeline, everybody
is scrambling to capture market share from their competitors while
protecting their own accounts. Consequently, the competition for
sales has continued to drive down prices.
"There are rebuilders in the New York metro market who are
selling the same unit we sell for $55 to $60 for as little as
$35," said Showky Kaldawy of Flushing Auto Electric in Flushing,
NY. "A legitimate rebuilder can't sell parts that cheap.
We have overhead, taxes, things like that. People selling at those
prices don't have any overhead and are rebuilding in an alley
or back room somewhere."
"Rebuilders are so hungry for business everybody is cutting
each other's throat," observed Paul Sailon of Sailon Auto
Electric, Syosset, NY. "They're driving down prices, offering
longer and longer warranties, paying for labor on warranties,
and giving their accounts product on consignment (the customer
pays for the unit when it is installed). We're working twice as
hard for half the profit. This used to be a fun business, but
it isn't anymore."
Sailon said he tried to start up a rebuilders group on Long Island
to deal with the situation. One of the objectives was to develop
a universal warranty policy that was in the best interest of both
the customer and the rebuilder. He also wanted the group to do
something about the "credit problem" faced by many rebuilders.
"Rebuilders are often the last guys to get paid," said
Sailon. "So we wanted to make a list of all the accounts
who are slow payers. But it's hard to get much unity among rebuilders.
As soon as one guy broke rank because he needed the business,
the group fell apart."
Sailon said his strategy for dealing with customers who want him
to provide labor coverage on warranty claims is to explain that
it shouldn't be necessary if they buy a quality remanufactured
unit. "I tell them I don't need to pay labor because I can
provide them with quality units that will last and don't have
to be replaced," he said. "That saves them labor as
well as downtime."
The price issue
As every rebuilder knows, there's always another
rebuilder who can come in and sell the same unit(s) for less.
Pricing seems to know no bottom in this industry. Even so, pricing
doesn't always dictate buying decisions. A growing number of retailers
are discovering that quality also counts. What good is a cheap
price if the units don't hold up? Dissatisfied customers and warranty
hassles do not build a strong business in today's economy.
"I think too many rebuilders have misjudged what their customers,
warehouse distributors and jobbers, really want," said Ron
Carlson of Applied Systems Research, St. Paul, MN, a supplier
of management software for parts remanufacturing. "What they
want is reliability, not necessarily the lowest price in town.
"The real issue isn't so much price as it is overall value.
Many retailers are actually paying premium prices for quality
product lines," he said. "It isn't the retailers who
are driving prices down, it's rebuilders themselves. They're cutting
their own prices in an attempt to increase sales. But most have
no idea what their true costs of doing business are; they end
up losing money on every unit they ship."
Jack Volbrecht, president of Unit Parts, Oklahoma City, OK, agrees
with Carlson's observation. "The automotive electrical remanufacturing
industry does not understand its true costs of doing business,"
he said. "If it did, some of the ridiculous pricing that
we've seen in the marketplace would disappear." Volbrecht
says Unit Parts has built its business on selling a top quality
product line at prices that are as much as 30% higher than some
of its competitors.
When a rebuilder cuts prices, costs must also be cut to maintain
profit margins. That means using a higher percentage of salvaged
parts where possible, buying less expensive replacement components
and/or putting less labor into the finished product. Using a higher
percentage of salvaged parts can increase profitability provided
the parts can be adequately tested and reconditioned when necessary.
Buying less expensive replacement parts can also save money, but
only if the less expensive parts do not compromise reliability
and performance. Unfortunately, not all parts are designed to
OEM standards. Consequently, durability and performance can vary
a great deal from one vendor to another depending on the component
and who manufactured it. New parts that do not live up to expectations
can result in higher failure rates that cause warranty returns
that eat up profits.
"The market is starting to appreciate
quality more than it used to," said Steve Seabourne of A.I.M.,
a component parts supplier in Rancho Cordova, CA. "Rebuilders
who strive to build quality products will do well in spite of
soft market conditions, and those who sell cheap lines are going
out of business."
However, not everyone agrees that quality is making a comeback.
"People say they're becoming more and more quality-minded,
but it still boils down to price," said Al Weiner of Renard
Manufacturing Co., Inc., a supplier of component parts in Miami,
FL. "If your price is a penny too high, your customer will
buy from somebody else, regardless of quality."
Weiner says the industry needs quality standards for component
parts to eliminate much of the confusion over component specifications
and test procedures. The OEMs typically do not provide any performance
specifications for the individual components they use in their
units, so rebuilders have to develop their own specifications
by reverse engineering, or rely on their suppliers for such information.
Weiner says that without accurate performance specifications,
rebuilders should not compare components by part numbers alone.
Joe Montoya of Component Parts Co., Newcastle, CA, says too many
rebuilders think all component parts are essentially the same
(a diode is a diode) and base their buying decisions strictly
on price. "The first thing a customer asks when they call
for a part is 'what's your price?' and not 'do you have it?'"
Mark Oleksa of IPM Products Corp., Dallas, TX, said his company
recently surveyed its customers to find out what they wanted and
whether quality or price was more important. The answer, he says,
was quality is number one and price is number two.
"Because there are no industry specifications for quality,
everybody establishes their own level of what's acceptable,"
explained Oleksa. "Customer A may want one level of quality
while customer B wants a different level. Our goal is to match
or exceed OEM quality."
Oleksa said IPM has undergone a reorganization to shift the company's
focus from distribution to manufacturing. It closed down all of
its satellite distribution centers because that side of its business
had been "stagnant." Oleksa said the company is now
selling everything from its Dallas facility, while maintaining
four manufacturing facilities.
"Quality is something everybody talks about, but too many
rebuilders just replace parts rather than do what it really takes
to improve their units," said Richard Vensel of Vensel Enterprises,
a test equipment supplier in Crystal Lake, IL. "We believe
rebuilders should always salvage as much as possible. If an electronic
component tests good, why replace it? Replacing it only increases
the cost of rebuilding the unit, which reduces your profitability."
Vensel said rebuilders need to invest in sophisticated test equipment
if they're serious about improving quality and reducing warranty
expenses. A computerized alternator tester, which may cost from
$18,000 to $40,000 depending on the equipment's capabilities,
might reject as many as 35-40% of the rectifiers it tests. Yet
weeding out the bad parts with increased certainty can drastically
reduce warranty returns.
Vensel says large rebuilders want more in-depth test equipment
because they appreciate what it can do for their business. He
says many smaller rebuilders, though, have not been investing
in more advanced test equipment because they find it hard to justify
the expense. Even so, some realize they must upgrade their testing
capabilities if they're going to remain profitable and competitive
in today's market.
Applied Systems Research's Carlson says one
of the reasons why the rebuilding industry, as a whole, is in
trouble today is because of poor management. "Too many rebuilders
think the only way to sell product is to lower their price,"
he said. "The first thing they do when they feel price pressure
in the market is to cut their own selling price. But when they
drop their price, they cut their margins and give up the ability
to do research and provide other services.
"If you cut your margin 10%, you have to increase your sales
volume substantially to make up the difference. In the real world,
this rarely happens, so you end up losing money.
"The sales volumes of some of the larger rebuilders is down,
but not their profit margins," continued Carlson. "Many
are still doing well because they haven't panicked and lowered
their prices. The key to making money in this business is to have
a good handle on what your costs are so you can price your products
accordingly. Yet, fully 60% of the customers we take on have no
concept of how to measure their costs."
Carlson said one of the fundamentals that is often ignored is
the concept of "core yield." When a rebuilder sells
a unit, he gets back a core. The yield of parts that can be reused
from a core that has never been rebuilt is often quite high, so
the rebuilder assumes he can always get the same percentage of
yield from his cores forever.
"But as the units go back out and eventually come back again,
the percentage of yield drops because some of the cores have been
rebuilt before and do not contain as many salvageable parts. This
means a higher percentage of parts in that core have to be replaced,
which drives up the cost to rebuild it as time goes on. Being
able to monitor the percentage of yield on an ongoing basis is
one way to better control costs.
"Many rebuilders wonder why they're not making as much money
as they used to. It's because the core yield has changed,"
continued Carlson. "The cost of parts has also gone up about
12% over the past three years. Labor is more expensive, too. So
it might cost 24% more, for example, to rebuild a particular unit
today than it did three years ago. If the selling price doesn't
reflect that difference, the rebuilder may be losing money."
Carlson's advice to rebuilders is this: "If you can't make
money rebuilding a particular unit and are essentially shipping
money out the door with every box that's sold, why keep on doing
it? Let somebody else do it. Or, buy the unit from another source
if that's a less expensive way to offer the product. Some large
rebuilders have gone on the rocks for ignoring this simple fundamental."
Finding new niche markets
Keith Horn of EGR Products Co., Dalton, OH,
said his company rebuilds about 1,000 to 2,000 starters and alternators
a month for its regional jobber and warehouse distributor customers
in northern Ohio. About a year ago, EGR Products lost one of its
largest customers, so the company has been trying to find ways
to expand its business.
"We've done well with the small mom-and-pop jobber stores,
but that business has been going away because most of the mom
and pop jobbers have affiliated themselves with one of the major
buying groups," explained Horn. "So we're trying something
new. We've started to sell our refurbished field housings to one
of our suppliers. If it goes well, we may start selling the housings
to small two- to four-man electrical shops. For many of these
shops, it's cheaper for them to buy the housings with the brushes
installed than to do the housings themselves."
George Seymour of SDI Remanufacturers in Kenner, LA, said the
southeast Louisiana market has been soft because sales are driven
by hot weather, which had not yet arrived at the time this article
was being written.
"What has also hurt us is Delco Remy America getting into
the aftermarket," said Seymour. "Delco's push into our
market has taken a lot of the profit out of the late model alternators
in our area - the CS-130s and CS-120s, primarily. A lot of people
in our area are selling units at jobber less 10%. Many prefer
to buy the Delco name brand, so to be competitive we have to be
under Delco's price.
"One niche that has been profitable for us is providing automotive
units to heavy-duty rebuilders," said Seymour. "They
don't want to do automotive units themselves, but often have to
provide them for their fleet accounts."
Delco Remy America has been buying up electrical rebuilders to
expand its presence in the aftermarket. Some say one of the reasons
for expanding into the aftermarket is to reduce the number of
warranty claims new car dealers have been experiencing from installing
incorrect or low quality rebuilt aftermarket alternators.
New car dealers are supposed to buy from factory authorized rebuilders,
but do not always do so. The problem in some market areas is,
some rebuilders have over consolidated applications resulting
in mismatches between the alternator and vehicle. If the charging
voltage isn't correct, for example, it can damage the battery
or onboard electronics. If an alternator does not have the proper
diodes, the result may be a battery drain or overcharging.
Applied Systems Research's Carlson says part of the misapplication
problem stems from the fact that there is a lot of misinformation,
as well as lack of information, with respect to vehicle applications
and specifications from both aftermarket suppliers and the OEMs
"What we do is sift through the information and verify applications
and component specifications when we find inconsistencies,"
said Carlson. "We publish the information in an electronic
format called Autodata, which includes cross references, unit
and part number applications. We can also provide illustrations
of alternators and starters (Other sources for such information
are available. Check our January Purchasing Directory issue for
a complete list of suppliers. - Editor's note).
Clifford Cohen of CJ Metro in Detroit, MI,
said the core market mirrors current conditions in the electrical
rebuilding market. "The demand has been very weak the past
six or seven months, so we're hoping for a hot summer to stimulate
sales," he explained.
Cohen said recent demand for popular units such as the Delco CS-130
has been very strong, along with the Ford modular starters and
Chrysler 1.5L and 1.8L engine starters. Even so, core prices,
on average, have been down, overall, he explained.
"When the market is down and money is tight, some rebuilders
are slow to pay," explained Cohen. "They look at their
core suppliers as banks, which makes it tough on us, too."