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1998 Market Update - CV Shafts

Taking a profit in a maturing market is never easy.

One of the biggest issues still facing rebuilders is the controversy over the pros and cons of grinding CV joints. Though many CV unit rebuilders will tell you it's getting harder to remain competitive unless you grind, nobody grinds unnecessarily in this tight market because of the costs of machine work and labor.

Craig Russell of Drive Plus, Inc., Lock Haven, PA, which has been rebuilding CV units since 1993, said his company grinds cages, races and housings because it's a "cost effective" way to save otherwise unusable cores.

Tony Perticari, vice president of sales/marketing for Crown Remanufacturing, Inc., Philadelphia, PA, said his business grinds parts "only as needed."

According to several rebuilders, nearly half of the CV joints they rebuild are salvaged and reconditioned by grinding. About 20% are rebuilt using slightly oversize ball and cages, and another 20% are reassembled with new boots following a good cleaning and fresh grease. Only about 10% are damaged beyond repair.

Though grinding can be a cost-effective method of salvaging cores in a tight market, opinions still differ on the effects of grinding on joint durability. Kevin Yutani of Constant Velocity of Ocala, Inc., (CVO, Inc.), Ocala, FL, a remanufacturer and distributor of CV axles, said his shop limits grinding to housings and races. "Tolerances in the housing for hardness are much more forgiving than those in the race and cage, and the race even more so than the cage," Yutani said. "To grind a cage weakens the structure and leads to early failure."

Al Van Horne, president of CV USA, Saratoga Springs, NY, which has been remanufacturing CV joints for about 4-1/2 years, said he favors grinding all three CV parts. "Precision CV joint grinding now is very accepted by the market and the issues from the past as to whether or not precision grinding would produce a quality remanufactured CV joint seems to have faded," Van Horne said. "We grind all three components (cage, housing and race) and reassemble each CV joint with oversized bearing balls. Each CV joint is custom made to the axle rebuilder's own standards and backed with a lifetime warranty," Van Horne said, adding CV USA remanufactures between 8,000 to 12,000 CV joints a month. It does not remanufacture axles, but sells its CV joints primarily to axle rebuilders.

Because of these grinding questions, the Automotive Parts Rebuilders Association's (APRA) CV and Rack Division is continuing its goal of providing definitive answers for CV rebuilders concerning grinding recommendations. One way the issue of grinding may be solved is through completion of the Society of Engineers' (SAE) recommended practice (J1620) document for rebuilding front-wheel drive axles. The draft document, intended to serve as a guideline to maintain the quality of remanufactured/rebuilt CV joints and halfshafts, and to aid the rebuilder in producing a product that will credit itself and the entire industry, went to the SAE Appeals Board in 1996. Since then it has been under revision in accordance with the Appeals Board recommendations. (Earlier standards proposed by SAE have been thought to be excessive toward independent rebuilders.)

Rich Lovely, general manager of Powerline, Inc., Roebuck, SC, said SAE has recently resumed its meetings on the grinding and rebuilding requirements issue. "SAE has said it's going ahead with its recommended practices for CV joints, though they still want the aftermarket input," Lovely said. "SAE has said they want to hear from us as to what we can live with and still be able to make a profit."

To provide SAE with "tolerable" standards, APRA has been working with Nabil Nasr, director of the National Center for Remanufacturing and Resource recovery for Rochester Institute of Technology (RIT), Rochester, NY, who is developing a CV parts testing unit. The tester would be used to set benchmark standards for rebuilding CV driveshafts. Lovely explained Nasr's equipment would test the endurance of OE components and driveshafts. APRA and RIT would then decide on four or five reasonable and quality ways to rebuild a driveshaft. Similar stress tests would be administered to the rebuilt units assembled under these reasonable methods. Using the stress tests from the OE units, guidelines could be compared and developed for rebuilding CV units. All the data would be turned over to SAE. If approved, rebuilders who follow the four or five "recommended" practices would be adhering to SAE's guidelines.

Lovely said he plans to have a meeting with the OE representatives, members of SAE and RIT's Nasr on the reasonable rebuilding methods before APRA's "International Big R Show" in October. Lovely said if all goes well with the meeting and the development of the testing equipment, he expects some type of rebuilding standard will be ready by Spring of 1999. "If everything goes according to plan, we should be able to put a benchmark out there for the rebuilders," Lovely said.

Lovely said down the road, more tests could be conducted to set standards for other rebuilding methods, such as welding.

Today's market
Gene R. Maszy, manager and owner of Atlantic Parts and Remanufacturing, Jacksonville, FL, whose business rebuilds about 1,000 CV joints a month for the past three years, said he feels the market is going bad. "There's a lot of fly-by-night shops opening and closing which are bringing down prices and quality," Maszy said. "And the large remanufacturing companies, rebuilding on a much larger scale using machine grinders, have contributed to the deflated pricing." Maszy said another concern he has about the market is that grinding may diminish the percentage of cores that can be rebuilt a second time.

Maszy said Atlantic Parts, which serves jobbers, repair shops and DIYers in the Southeast, prices have decreased by 30% in the past two years. "CV remanufacturing is still profitable, but is no longer the outstanding performer it was at one time," Maszy said, adding he feels the market is more competitive today. "CVs were viewed as a very profitable market because of mark-up. But now that prices are dropping it is viewed as profitable because of volume."

CVO's Yutani agrees that the market is more competitive today than a few years ago. "There's many different outlets selling CV axles," he said.

Yutani, whose company is a remanufacturer and distributor of CV axles for the past six years, remanufacturing about 200 units a month for WDs, jobbers, DIYers and retailers in Florida, said most people request a rebuilt/reman unit over a new unit solely on price. "The public only looks at the price. Quality for the most part is not an issue," he said.

So what are rebuilt/reman CV drive axles selling for today? One rebuilder said he is lucky to sell CV axle shafts for about $55 to $65 to garages and installers, and about $70 to $80 to retail customers. Most other rebuilders report sales in the $40 to $45 range, though some are selling for as low as $30! Overall, rebuilt units are half to 2/3 less then a new halfshaft.

Drive-Plus's Russell is another who expressed the CV market has become too competitive and price driven. "It's difficult to be profitable," Russell said. "The industry has become more competitive and prices have become lower which causes the profit margin to become tighter."

Many rebuilders feel the large CV remanufacturers have created a price war. Because of their automated capacities, the larger players can produce thousands of CV halfshafts per month.

According to a recent report from Frost & Sullivan, an international marketing consulting company that monitors the automotive industry for market trends, today's leading companies in the CV remanufacturing market include Car Component Technologies (CCT) Bedford, NH; American Driveline, Inc., (ADL) Detroit, MI; and Automotive Caliper Exchange, Inc., (ACEI) Buena Park, CA. David Yu, an analyst for Frost & Sullivan, said two of these companies made significant market acquisitions in 1997. "Of particular importance is the acquisition of two major competitors in 1997. CCT purchased CVJ/Jats, a remanufacturer with over 10% market share in 1995," Yu said. "The purchase of Moog's remanufacturing plant by ACEI represents another turn of events as companies compete for market share."

Reported monthly volume and annual sales for these major players are: CCT Ð 200,000 units per month with estimated annual sales of $60 million; ACEI Ð 40,000 to 50,000 units a month with estimated annual axles sales of $25 million; and ADL Ð 30,000 to 40,000 axles per month with estimated annual axle sales of $18 million.

Despite the market's tight grip on pricing, many in the industry predict that the market will grow into the new millennium. "In the next five years, I think the market will grow as the economy will reach a point and slow down," CVO's Yutina said. "Traditionally when the economy is slow the aftermarket does better because people have to fix their older cars."

Tony Perticari, vice president of sales/marketing for Crown Remanufacturing, Inc., Philadelphia, PA, agreed the matured CV market will improve. "I see the market growing about 3-4% as cars age and mileage increases," he said.

And CV USA's Horne, also is optimistic about his business' future. "In terms of remanufacturing CV joints, we see the market as excellent and growing," Van Horne said, adding as the market matures and more rebuilders exit the market, CV USA should gain more customers.

Van Horne believes CV joint remanufacturing prices have stabilized in the past year or so, and that CV joint remanufacturing can be profitable as a volume business. "To become more profitable in the CV joint market, we added several services that were not offered in the past, such as cleaning, blasting, thread chasing, cage grinding and part replacement.

"Purchasing additional machinery has allowed us to produce a larger volume of CV joints each month. This reduces our per unit cost, which allows us to offer better pricing to our customers," Van Horne said.

Atlantic Parts and Remanufacturing's Maszy said to stay competitive, his company had to improve the quality of work while lowering its prices. "We have shaved every penny from the cost of production that we can without sacrificing the quality," he said. "So the only way to make more money is to sell more units."

Frost & Sullivan's Yu reports intense competition in recent years has reduced the number of industry participants in the CV drive axle business, adding this reduced number of participants will produce more opportunities for remaining companies. "While consolidation has been the main strategy to gain market share, several regional manufacturers have left the market altogether, thereby providing opportunities for remaining companies with strong competitive advantages," Yu said. (Frost & Sullivan reports the CV drive axle and boot kit aftermarket is currently comprised of more than 700 businesses.)

If you're looking for more good news, take heart that for CV rebuilders, there will always be work, as more and more vehicles implement the front-wheel-drive system. In fact, nearly 90% of all vehicles manufactured today are front-wheel-drive, using constant velocity axles that need service anywhere between 40,000 and 60,000 miles.

Yu said a change in consumer's driving styles has altered vehicle requirements, which has lead to promoting CV market growth. "Now, many new vehicles implement CV axles, such as sport utility vehicles, 4WD vehicles and RWD vehicles with independent suspension," Yu said. "This increase in cars with CV axles will provide enhanced growth opportunities for manufacturers who produce products for this market."

Most rebuilders don't believe that the OE CV units on new cars last any longer than they have in the past. Yu said driven by the growth in the vehicle population and the increase in vehicle age, the market for CV drive axles and boot kits is expected to grow at a healthy rate, even should an economic downturn occur. According to Yu, the 1997 U.S. CV drive axle and boot kit aftermarket grew by 7.7%. "Growth in this mature market is mainly driven by the shorter life spans of CV boots, growth in the vehicle population and the increase in the average vehicle age," he said.

However, some OEs today are using stronger materials in the boots. "Some units last longer than others," said CVO's Yutani. "The main cause of CV failure is loss of boot integrity."

Another positive trend finding its way into the CV rebuilding and remanufacturing market is the use of the Internet to foster new business. Atlantic Parts and Remanufacturing's Maszy said this highly popular electronic marketing tool has helped his business grow in the CV market. "We mainly use e-mail to communicate with customers, both overseas and in other states," Maszy said.

CVO's Yutani said he also uses the Internet as a marketing tool. "I now have global coverage for the CV market. I can reach any customer 24 hours a day regardless of the time at my physical location," he said.

Numbers game
According to Frost & Sullivan, manufacturer revenues for 1997 totaled $455 million and unit shipments totaled 11.9 million. (Manufacturer revenues are obtained by multiplying the number of units sold by the average price charged to manufacturers' primary customers.) The market continues to be dominated by remanufactured CV drive axles. In 1997, remanufactured CV axle assemblies accounted for more than 95% of total unit shipments. The remaining portion represents part numbers with hard-to-find cores such as late model vehicles or dealer-installed warranty returns.

Yu's research predicts the 2001-2004 period to be fairly strong, with sales of aftermarket halfshafts and CV boot kits growing at a rate slightly more than twice the rate of growth in the vehicle population. "Growth in this period, while healthy, is not expected to exceed 8% per year because of the continued price war that has put a restraint on aftermarket revenues," Yu said, adding market revenues are projected to reach $679.3 million in 2004, with unit shipments approaching 16.3 million.

Yu said another significant trend in 1997 was that complete remanufactured halfshaft assemblies continued to dominate CV repairs. "CV component replacement is highly labor intensive, and installers prefer the labor-saving features of a complete drive axle over installing individual components such as CV joints," Yu said. "In 1997, over 90% of all CV repairs involved replacing the complete assembly."

According to the Automotive Market Research Council (AMRC) Aftermarket Committee, a research group that provided forecast data on product line trends for Moog Automotive, it too, expects the total sales of remanufactured half shafts to rise. With a 4.3% expected annual growth, AMRC predicts the retail dollars for reman half shafts by the year 2000 will total $721 million, and reach $786 million in the year 2002. The trend for new CV joints is also expected to grow, though at a much lesser annual percent of change. AMRC predicts new CV joints sales in retail dollars to hit $338 million this year and reach $345 million by the year 2000. By 2002, new CV joint sales in retail dollars should be about $352 million.

AMRC based its predictions on a number of assumptions, including that the number of new vehicles that use FWD will continue to increase, as well as the rising age of current vehicles with FWD systems. AMRC also believes that higher labor rates are causing installers to replace CV units with complete half shafts, rather than rebuilding the existing CV joints.

According to the Brake & Front End 1998 Chassis Survey, conducted by Babcox Research, A Division of Babcox Publications, only 60.2% of the chassis repair/service shops responding said they perform CV joint repairs (boot replacements, lubing the bearings, etc.) on vehicles. Of those shops that perform CV repairs, the number of jobs per week is 3.0, with an average total invoice of about $115.07.

The number of shops which replace with remanufactured or new CV joints is higher at 86.3%. Shops replacing CV units average about 2.8 jobs per week with an invoice total of about $205.94.

Only 4.3% of the installers surveyed report they purchase chassis parts, such as CV units, from the rebuilder directly. Most of the chassis parts installers buy Ð 71.3% Ð come from jobbers. The second choice of shop owners is the traditional WD at 41.1%. Other sources being used for chassis parts include the car dealer, 17.9%, manufacturer direct, 8% and undercar specialist, 8%. (Note: These percentages exceed 100% because a majority of shops source parts from more than one supplier.)

Frost & Sullivan's Yu pronounced one of the most important outcomes of 1997 was the intense price competition which has entangled market participants in a web of declining profit margins. "While this has forced competitors to cut costs and to be more efficient, it also curbs overall aftermarket revenues," he said, adding this trend could impact the future.

"As customers become accustomed to these low prices, they're bound to react negatively to price increases in the future'" he said.

That will mean continued pressure on rebuilders to produce the best joint possible at the lowest cost Ð a task more easily completed by those with the resources to invest in efficient and productive equipment, tooling and training.

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