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1998 Market Update - Cores: The Consolidation Of The Automotive Aftermarket

Core suppliers are watching the consolidation of the automotive aftermarket with much interest. After all, many businesses in transition are their customers. But while some core suppliers are not as busy as they'd like to be, most don't blame the consolidations of large retailers like Auto Zone and Chief for their troubles. Likewise, many don't believe that the rebuilder mergers and acquisitions will have a profound effect on them.

Scott Stolberg is president of A & A Midwest, a large engine core supplier with facilities in Las Vegas, NV, and Chicago, IL. "We've got fewer customers, but we're doing just as much, if not more, business than we used to," he said. "Up until this year, no one customer made up more than 8% or 9% of our gross sales. But today, there are several that have a substantially larger percentage of our business."

Stolberg believes core availability is a function of what and how he buys from his suppliers Ð wrecking yards, independent "peddlers" and other core suppliers Ð not the size or nature of his rebuilder customers.

The president of another Midwestern engine core business, Glen Berhow of G.B. Core in Green Bay, WI, also sees the future of the rebuilder business as having fewer number of larger players. He also comments that "consolidations" and "mergers" aren't the right descriptions for the changes taking place in the market place. "They're really buyouts and acquisitions," he said.

Call them what you will, Berhow believes that when all is said and done, the only critical component of the shrinking number of rebuilders is its effect on demand. "As some of the bigger players like Jasper Engine and Transmission, Jasper, IN, capture more market share, the only thing we can hope is that they'll be able to equal the demand of the people they're taking that (business) away from," said Berhow. "We don't care if there's 20 huge rebuilders in the country or 10 large ones and 20 small ones, as long as the demand for cores stays up."

Others in the core and rebuilding business do see some impact of the consolidations going on in the rebuilder's business world. Bob Grady, president of a large East Coast core supplier, Rebuilders Automotive Supply (RAS), finds that as rebuilders consolidate, their combined inventory results in a lower need for cores.

"In the short term," he said, "it's frustrating because you're losing a few customers, and the new entities have a reduced need for cores. But eventually there will be a shortage again, and hopefully the demand will increase back to the levels where it was before they merged."

Grady doesn't find this a profound or long-lasting problem. He's also quick to point out that he's not in a position to pass judgment on the positive or negative attributes of the many mergers and consolidations which are taking place. "In all aspects of our life, the mom-and-pop stores are disappearing, and I don't know enough to call that a bad thing," he said.

"But there are certain portions of it that we need to worry about," Grady continued. "We're seeing people who don't know the business involved at a higher level than ever before." To make money in this business, you have to be an entrepreneur. You have to be very savvy about making your product high quality." Yet, Grady observed, a rebuilder has to provide that quality in a cost effective manner. "I see people getting involved who don't understand that part of the business," said Grady.

The vice president of another Eastern U.S. core supplier, John Brunetto, World Auto Parts, Buffalo, NY, sees aspects of consolidations among rebuilders that work in his favor. "The consolidated rebuilders want to deal with more sophisticated suppliers, and they seem to want to buy on a 'one source' basis, which has reduced the competitiveness somewhat," he says. "Also, they are more sophisticated with their core tracking, so they have better control of what they're doing." But its not all positive, said Brunetto. "It's a two-edge sword, too," he observed, "because rebuilders are looking for better prices!"

As a partner in a start-up caliper rebuilding operation, Undercar Express of Cleveland, OH, Paul Schuck sees the rebuilder consolidation from the inside. "Larger rebuilders start acquiring smaller ones for several reasons," said Schuck. "But when you end up with a limited number of rebuilders out there, someone will say, 'There's got to be room for a small guy, too', and a new operation opens its doors." In Schuck's opinion, it's an evolution that repeats itself in cycles approximately every 20 years. "I think we're in one of those transition periods right now," he observed.

Ebb and flow
Perhaps this only proves that "what goes around comes around." Much has been said, for example, about how the just-in-time (JIT) delivery concept has taken over the way inventory is handled. But RAS' Grady sees a hesitant trend away from JIT. "Once you get to that point of having what you need, when you need it, you'll find that there are some products that you buy every week," he pointed out. "And if you're going to do that, you can get a better price if you buy at higher volumes! Besides," he said, "the tooling changes required to run 10 or so parts at one time has made some people decide to carry larger inventories."

Whether it's the result of a global economy, the much discussed parts proliferation issue, or possibly just the maturation of the rebuilding business, core suppliers are serving their rebuilder customers differently than they did 10 or even five years ago.

As an example, A & A Midwest's Stolberg offered that his company is providing more and more core conversions. "We have a machine shop here in Las Vegas and we're in the process of setting one up in Chicago to drill additional holes in certain engines, or make adapters that can be bolted on to use a particular engine in a different application Ð it's something that a lot of rebuilders used to do themselves," he said.

In a related effort, about 10 years ago A & A Midwest launched a separate company, EngineQuest, to manufacture new small parts that rebuilders need to complete their jobs. "EngineQuest either manufactures parts to convert a core to another application, or replaces hard to find or salvaged parts, such as timing covers, as well as items such as adapters to convert dipsticks from the right to the left side," explained Stolberg. He said his company also has a lot of demand from rebuilders for the small parts like cam eccentrics and timing tensioners that many rebuilders have to source from new car dealerships.

A & A, like many other core suppliers, is also shipping in smaller quantities and more frequently. "Rebuilders don't do the long production runs that they used to," Stolberg said. "It used to be orders for 50 of this and 50 of that. Now it's 10, eight or even five of specified pieces, and they're looking for bi-weekly and even weekly deliveries. I even have one West Coast customer who wants us to ship every Monday, Wednesday and Friday," he said.

Howard Gossage, president of Automotive Rebuilders Supply Co., Chicago, IL, says he's doing a lot of things differently than he did just a few years ago. He observed that he and most people in the core business, including salvage yards, are more sophisticated than they used to be, especially when it comes to recognizing the value of cores and how they're packaged and sold. His company, for example, plastic wraps boxes and skids, and he finds that the attention paid to packaging helps his competitive situation.

"Let's face it, cores are used parts to begin with, so they're going to have grease on them," he explained. "But rebuilders don't want to get them with oil and grease spilling all over. We all know that there's a set market value for almost everything, but if the supplier gives you a junky looking product, all thrown together into an old drum, the customer is not going to want it." He also believes that better packaging notches up the quality level, too. "In general, cores are in better condition, because they're being looked at more carefully as they're being packaged," said Gossage.

When asked how he services his rebuilder customers differently than he did five years ago, World Auto Parts', Brunetto, says that he's adding some value added services that he didn't used to. "We're sorting parts by exact OEM part numbers, and doing things like disassembling cores," he says.

Almost without exception, the core people we talked to agreed that the quality of the cores being bought and sold has taken a giant leap upward over the past few years. "The quality is a lot better, an awfully lot better," said Rebuilder Automotive Supply's Grady. "The people who dismantle vehicles are becoming more aware of the value of a core, so the hammers are left in the toolboxes Ð they use their wrenches instead!"

Grady believes that there is a connection between core quality and EPA regulations, too. "The regulations are driving some of the smaller scrap yards out of business, and they realize that if they don't pull all of the money there is out of a car, they won't survive," he said.

While Grady acknowledges that EPA regulations have contributed to core quality, he's also wary of the effect of over-regulation on the rebuilding industry. "I want our industry to be environmentally correct, but we do have to keep an eye on the government to be sure their regulations make sense," he explained. In the same vein, Grady credits the Automotive Parts Rebuilders Association (APRA) with doing a fine job of making legislators aware of the rebuilding industry and the benefits that it provides to consumers and businesses.

G.B. Core's Berhow thinks that, right or wrong, the tight EPA regulations and the increase in core quality standards are contributing to the demise of smaller operators. "With all the restrictions and regulations, a one- or two-man operation can't make a decent living anymore," he said. "Before, guys could get by because they worked hard. But I don't think the opportunities are there any more to be just a hard worker and survive."

The nature of the core supply business means that there are always availability issues, and the economic boom the country is experiencing hasn't changed that. "Core availability today is the same as its always been; there's some things that are hard to get, and other things that are everywhere," says Automotive Rebuilders Supply's Gossage.

"The core market people we talk to don't see an overall core availability problem, but they do feel the pressure of having to pay their suppliers more, while not being able to pass their higher costs on to their customers. In many cases, we pay more for cores than we ever did, but we don't get any more for them than we did 10 or 20 years ago," observed Gossage.

Meanwhile, at World Auto Parts, Brunetto says he sometimes experiences what would appear to be an inverse relationship between supply and demand. "Sometimes rebuilders who are willing to buy in large volume think they should get their cores for less. But in actuality, we, as a core supplier, have to pay the wreckers more for volume purchases to make it worthwhile for them to take a lot of parts off a vehicle. I have to pay them more as an incentive."

Brunetto also believes these situations are hinged on the fact that scrap prices and labor costs are high. "They're processing more cars as scrap and saving fewer parts, all because of labor costs," he observed.

A & A Midwest, heavily into engine cores, has many of the same interpretations of market conditions. It believes its increased costs are a function of EPA regulations and other factors, such as fluctuating scrap prices. "If the scrap prices are real high, the wreckers don't want to pull motors out of their cars," says A & A's Stolberg. "So we have to offer them a price that makes it worth their while.

"At the same time, we've got rebuilders who won't pay more than 'x' number of dollars for a core," he continued. "They're saying, 'why can't you get that core for me at the old price Ð they're (prices) all over the place.'" Adding to the squeeze on profitability, Stolberg notes that he has to pay cash for everything up front, but extends credit to his rebuilder customers. "We work the opposite of grocery stores, who buy on credit and sell for cash," said Stolberg, "and with the proliferation of part numbers our inventories are getting larger and larger all the time."

New core demand?
Core suppliers don't appear to be jumping on any new product bandwagons. The predicted boom in rebuilding air bags and ABS brake systems, for example, just doesn't seem to have materialized as a viable activity, other than for a few small rebuilders who survive in that niche. However, there are core people who built their business by specializing in one type of core, but are giving serious consideration to diversification. G.B. Core, Inc. is one of them.

"We took on transmission cores this year, and set up our diesel division line," explained G.B. Core's Berhow. "Our long-term plan is to diversify into other product lines like starters and alternators as we develop our internal structure."

Parts proliferation has been a constant concern for many years, and while some think it's not growing the way it once was, core suppliers and rebuilders acknowledge that it's something they have to keep on top of. "Good software is critical to managing your inventory with all of the part numbers out there," Undercar Express' Schuck pointed out.

On the Web
Of course, the newest product of the computer age is the Internet. Very few businesses of any kind completely ignore what's on the Internet's World Wide Web, and a number of core suppliers and rebuilders have put up a website. There is at least one independent website specifically designed to help core suppliers around the world locate automotive and truck part cores. Core Fax locating service (www.corefax.com) allows its rebuilder customers to place ads under several categories, among them "cores wanted" and "cores available".

Through the use of passwords, only core suppliers have access to the lists. APRA, itself, has a website too, (apracores.com). And, of course, in this month's issue of Automotive Rebuilder magazine, beginning on page 59, you'll also find a complete listing of core suppliers and the products that they specialize in.

There is a mixture of attitudes about doing business through the Internet, and the reaction of Rebuilders Automotive Supply's president Bob Grady is typical. "It is beneficial to have a web page for the exposure and experience, but right now I see it as being a high cost item for our type of business," he said. "To make it work, you'd have to put your entire inventory and prices on it. I don't think a lot of people in our business want to do that."

G.B. Core's Berhow has a similar read on the value of the Internet. "We don't see the Web as a business tool, at least not yet," he commented. "We look at Core Fax once in a while, but for us, it's more of a curiosity. I don't think people are really using it to find the cores they need. I see its potential more for suppliers to pass information back and forth, rather than being a bridge between suppliers and remanufacturers."

On the other hand, some suppliers, like Automotive Rebuilder Supply's Gossage, are enthusiastic advocates. "We've gotten a lot of action on it, both buying and selling," he said. "Using the Web is probably the biggest thing that's happened to us in the last few years."

Not surprisingly, Gossage's company has its own website, www.arsco.com. "We decided not to reprint our catalog this year. Instead, we're in the process of putting it up on the net," commented Gossage. "Customers can order from it, but even if they don't, it helps them make good decisions because sometimes the printed descriptions and part numbers aren't as clear as the visual images of the parts we include on the net," adding that this is especially helpful to foreign customers, where there's a language barrier.

OEM core control?
A rumor that sweeps through the whole rebuilding industry from time to time is that the OEMs are about to establish a network of core collection sites, which some suspect is a way for the car companies to control the core market as some of the European car makers have done in Europe. One Detroit, MI, rebuilder, Al Benish, of Kirks Automotive, said he's seen the idea come and go, and isn't worried about it. "The OEs have tried to launch their own core collection and reman operations here, but what happens is that they usually shoot themselves in the foot," he said. "It's really no more of a problem than it was 20 years ago."

G.B. Core's Berhow points out that the OEs have had a presence in the core business for a long time, but that they've never been a real threat to his business. "Ultimately, what companies like Ford are after are new and warranty type engines, which they want to keep within the company network for their FAR and FQR operators. But they're not actively out there trying to buy the same kind of cores we are. Those cores are a little type of gravy for us, but not the 95% of our bread and butter that we depend on."

On a positive note, Rebuilder Automotive Supply's Grady observes that despite sometimes difficult market conditions, the relationship between the core supplier and rebuilder is getting better. "There has been a strain on those relationships in the past as there's been a lowering of price of the products that rebuilders sell," explained Grady. "But I think that's leveling out some as we all become more efficient and more aware of our costs."