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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.

Quality turnaround?

"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.

Controlling costs

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 themselves.

"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).

Cores

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."