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Power Investments, Inc.: Building An Empire In The Rebuilding Industry

By Dave Wooldridge

Mike Jarvis, 53, president of Power Investments, Inc., is quietly building an empire in the rebuilding industry. If you want proof, just take a look at his frequent flyer miles (he's averaged about 2,500 business miles per week over the past four years), and the fact that company growth has averaged between 12-18% per year, mostly through acquisitions, since 1983.

Power Investments, Inc. is a holding company for an extensive array of primarily remanufacturing businesses in both the U.S. and Canada. What began in 1983 as Franklin Power Products, Inc., when Jarvis and his partners Larry Light and Dr. Beurt SerVaas acquired one of the ReNew divisions of International Harvester Co., has now become a vast holding concern producing primarily rebuilt gas and diesel engines, cylinder heads, transmissions, new marine engines and fuel injectors, as well as rebuilt fuel pumps and other small parts. Annual sales total more than $100 million.

Jarvis is a unique combination in the business world. He is a man deeply devoted first to his family and then to his employees. But he is also a skilled business tactician in a maturing U.S. and Canadian market place, one who seems to intrinsically understand the existing as well as potential value of the people and the physical assets that have made up many of the companies that are now under Power Investments' corporate umbrella. And one who also simply responds to the question of how much bigger do you expect to get with, "We're not done yet."

That may be an understatement. Jarvis has never "thought small" when it comes to cultivating the growth of Power Investments. And over the course of the past decade-and-a-half, he has never been afraid to take risks, however calculated, to ensure that business growth continued. One of those calculated risks was undertaken in 1996 when Jarvis and partners gave up some of their equity in the company to sell a majority interest in Power Investments to Delco Remy International, Inc. (DRI). Power Investments' U.S. and Canadian divisions continue to operate independently from DRI, a worldwide supplier of remanufactured starters and alternators to both the OEM and independent aftermarket.

As president of Power Investments, Jarvis has always pursued what he refers to as "focused manufacturing." He defines it as the acquisition of companies which will allow Power Investments to combine the facilities, people and technical expertise to keep overall profits before taxes above the industry average of 10-11%, which he says is necessary in order to sustain growth and to remain competitive.

The decision to allow DRI to acquire Power Investments was part of a long range plan designed to continue to hit many of those same focused manufacturing targets. Says Jarvis of DRI's acquisition of his company, "DRI's vision of business is worldwide. It is a huge company with an understanding of remanufacturing and the assets to grow on a global basis. It has product lines that compliment our own, offers extended distribution for our products, and has worldwide name recognition and a strategy for global expansion. From DRI's leadership perspective, they liked our aggressive growth record, our financial track record, our quality products, and our management team."

In evaluating the North American market for remanufactured engine sales, Jarvis doesn't see a lot of growth. It's internationally that he sees the larger prospects. "We won't back away from any opportunities that present themselves to us in the North American market," said Jarvis. "But that's not market growth, that's market redistribution.

"I think foreign markets offer the brightest growth potential," he continued. "Southeast Asia, India and South America are all places with growing numbers of first time car owners that will need service. To succeed in those markets you will have to set up remanufacturing operations there; DRI already operates facilities in Europe and other emerging markets around the world.

"It wouldn't surprise me at some time in the future we will be able to ship remanufactured products produced in different places around the world back to the U.S. market," Jarvis continued. "It wouldn't surprise me if my two sons, (both of whom are presently employed at Franklin Power Products, one as an assistant plant manager, the other as a controller) eventually end up running plants in foreign countries."

While Jarvis implements the framework that should allow Power Investments to expand globally, his existing U.S. and Canadian companies are solidifying relationships with their customers ñ in almost all cases, OEM distribution facilities or the OEM dealerships themselves.

Power Investments' U.S. operations consist of Franklin Power Products, Inc., Franklin, IN, remanufacturers of primarily mid-range diesel engines, but also some gas applications; International Fuel Systems, Inc. (IFS), also headquartered in Franklin, with three more manufacturing facilities in Indiana and Ohio and a distribution outlet in Toronto, Canada; Marine Corporation of America, Inc., (MCA) also located in Franklin, and producers of new Navistar marinized diesel engines for marine applications, sold under the Starpower label; Marine Drive Systems, Inc., located in Peru, IN, and producers of new stern drives and marketers of MCA Starpower engines; Powrbilt Products, Inc., located in Mansfield, TX, and producers of big diesel engines such as the Cat 3208 and 3406, GM 8.2L and 6V-92, Cummins Big and Small Cam engines, and a variety of component parts including upper rockers, water pumps, idlers, connecting rods and cylinder heads; Western Reman/U.S., headquartered in Peru, IN, remanufacturers of GM industrial connecting rods, industrial blowers and industrial clutch drive springs used on locomotive applications; and International Premium Products, located in Franklin, which is a distribution facility for various Power Investments private label products.

Power Investments' Canadian operations consist of Central Precision, Ltd, Toronto, Canada, which remanufactures gas engines, electrical, brakes, clutches and a variety of other small parts; Western Reman, Winnipeg, MB, Canada, which remanufactures primarily gas engines and a broad array of small parts from rack-and-pinions to power steering pumps, clutches and carburetors, and industrial engine components from crankshafts to injectors; and Engine Rebuilders, Ltd., Edmonton, AB, Canada, which remanufactures gas engines, transmissions, power steering pumps, rack-and-pinion, wiper motors and air compressors. Engine Rebuilders also operates an electrical rebuilding operation located in Toronto, as well as a sales and distribution facility located in Winnipeg, Manitoba Canada.

From the beginning in 1983, when Jarvis and his two partners convinced International Harvester to divest itself of its Indiana Engine Renew Division, a gas engine rebuilding operation which Jarvis and company renamed Franklin Power Products, the OEM has always been Franklin Power Investments' target customer base.

In an increasingly competitive and technically complex engine and small parts rebuilding environment, it seems to be a decision that has served the company well. Jarvis admits that serving customers such as Ford, General Motors and Navistar requires large capital resources and a lot of patience. But he also knows that a relationship with the OEM provides resources that are available nowhere else.

"Being able to enjoy the engineering support, along with the distribution network of the OEM, is a major competitive advantage," explained Jarvis. "I think it would be most difficult to rebuild products at the necessary quality levels considering the complexity of today's injection systems and engine and vehicle electronics, without their support."

Although the OEM is the primary customer base of Power Investments' companies, Jarvis early on made a conscious decision to serve a broad base of them. Remanufactured engines and parts are currently sold to Ford, General Motors and Navistar. New marine engines are sold to Mercruiser, with additional sales of marinized diesel engines and stern drives through the company's own worldwide dealer base. Caterpillar, Cummins and Detroit Diesel engines are also sold through the company's independent distribution outlets.

Diversification for Franklin Power Products really began as International Harvester started phasing out production of its gasoline engines and moved primarily into diesel applications beginning in the early 1980s. That meant that the service requirements of its sole customer at that time would become primarily diesel.

To better serve its customer, Franklin Power Products in 1987 purchased Findlay Diesel, a diesel pump and injector rebuilding business with locations in Toledo and Findlay, OH. Today, known as International Fuel Systems, Inc. (IFS), the company has four remanufacturing locations with a fifth distribution outlet located in Toronto to serve its Canadian market customers.

IFS has been able to triple its annual sales over the past five years. In addition to its impressive growth, IFS has received Navistar's highest quality rating for its rebuilt pumps, and in 1996 it became the exclusive supplier to Ford on rebuilt 6.9L and 7.3L diesel pumps.

Franklin Power Products, itself, is also no laggard as far as growth has been concerned. Since 1983 the company has been able to sustain average annual growth of about 12%. Today 85% of its engine production is diesel.

In late 1996, Navistar became the Ford Quality Renewal (FQR) supplier for Navistar's remanufactured T444 Power Stroke engine. The new T444 engine is found in most new Ford three-quarter and one-ton pickup trucks. Franklin Power Products is Navistar's authorized remanufacturer of the T444. Long term, that should be good business for Franklin Power as Navistar expects to soon be building close to 200,000 of these new engines annually for installation in new Ford trucks.

In addition to rebuilding the T444 for Navistar, Franklin Power Products also supplies Navistar with a variety of component parts for the engine such as rebuilt cylinder heads, connecting rods, etc. Power Investments' Marine Corporation of America (MCA) division has also taken the base T444 engine, which generates 210-220 hp, and marinized it to generate about 330 hp.

MCA, whose president, John Knee-bone, was one of the original founders in the Franklin Power Products startup, produces about 800 new engines annually, half of which are sold directly to Mercruiser. Projections are to be producing up to 1,200 engines within 12-18 months. MCA and the company's Inter-national Fuel Systems division are both housed in a separate 50,000 sq. ft. facility. The company's marinized, private label Starpower engines, all built from new Navistar blocks, are found in a variety of workboat and pleasure boat applications around the world.

Except for castings, most of the component parts used to marinize these engines are actually manufactured by MCA itself. Employing cad-cam designing capabilities, the company produces about 700 different part numbers for its engines, including 30 aluminum castings and 40-50 different fabrications that range from motor mounts to lifting eyes and brackets. Every engine is live-run tested for at least 45 minutes. Actually, all of Franklin Power Products' diesel engines for automotive applications are dyno or spin tested depending on the type of engine package being produced.

During our visit, Robert Bueckert, president of the firm's International Fuel Systems (IFS) division also told us that in addition to Ford and Navistar, the company rebuilds diesel fuel pumps and injectors for a variety of other OEMs including Caterpillar, Detroit Diesel and Cummins. In total, 30 different models of diesel pumps are rebuilt by IFS.

It would take a fairly large book to detail all of the employees, facility assets and numerous rebuilt and new products produced among Power Investments' various companies. However, the broad brushstroke would reveal that corporately the holding company has been able to sustain above average industry growth in almost all of its product lines, with rebuilt electrical and transmission lines targeted for an even higher growth track over the next three years.

Overall, Power Investments' total sales are about 50% engines, 20% transmissions, 20% in electrical units, with the remaining 10% of sales composed of a variety of other rebuilt small parts. Almost all of the gas engines sold by the company are rebuilt in Canada, with the majority of the diesels remanufactured in the U.S.

Can Power Investments sustain the type of growth it has generated over the past 14 years? And is the OEM a long term player in supplying the aftermarket with rebuilt service parts for both warranty as well as post-warranty requirements? Jarvis answers yes to both questions.

Coming from a financial background, he worked for more than 16 years in general accounting positions for International Harvester, as well as having a solid background in both the trucking and racing markets, Jarvis seems more than capable of keeping growth on the fast track, but with the priority that profits have to be maintained. And unlike many enterprising entrepreneurs, he has also learned to delegate responsibilities for the companies that have become part of Power Investments' holdings.

"My priorities are to look to promote growth, and to manage at a higher level," explained Jarvis. By higher level Jarvis means consulting regularly with the presidents and upper management of Power Investments' individual companies to make sure the correct business plans have been implemented and are being reviewed on a regular basis.

"I also make sure that we're providing the necessary capital and that the right people are in place and that those people are empowered and appropriately rewarded for what they accomplish," said Jarvis. "I want the people running our companies to be 100% invested in them. I want them to earn bonuses that reflect the effort they've put into growing their businesses."

When speaking of future acquisitions, Jarvis seems to have accepted that there is no turning back. "Our plan is to continue to grow," he said. "I'm not sure that when you are expanding the way that we are that you can step back."

Competition for all production engine rebuilders is very tough, noted Jarvis. Many of them require major volumes in order to sustain their operating facilities. That often leads to lower pricing in order to increase both sales and distribution.

However, Jarvis says it is not always in the best interest of a remanufacturer to be the lowest bidder on an OEM contract for rebuilding an engine or other component. "We know what our margins need to be and we strive to make bids that will allow us to maintain profitability," said Jarvis. "It would make no sense to tie up our production capacity with unprofitable contracts, contracts that would not allow us to be able to continue to make the necessary investments required to sustain future growth."

Jarvis knows that doing business with an OEM is a lot like dancing with an elephant; it comes with some serious risks as well as benefits. For example, it is not unheard of for an OEM to initially predict high volume requirements that end up being 30-40% less than what was forecasted.

It is not unusual for the OEM to continually try to reduce its suppliers' margins in order to satisfy corporate accountants and shareholder earnings expectations. And it has become mandatory for rebuilders to meet often expensive and demanding quality control expectations as part of the OEMs' effort to keep its dealerships and its dealership's customers satisfied.

"When you do business with the OEM you actually become an extension of their business," said Jarvis. "You can't make changes whenever you want; in many cases they control you."

That said, Jarvis is more than happy with his position as an exclusive product line supplier to some of the world's most prestigious vehicle makers. He is confident that becoming an extension of the OEMs' dealership sales and service capabilities is not only to their benefit, but also to that of Power Investments'.

He is also confident that the OEM has made a long-term commitment to being more of a participant in the service repair life of its vehicles. OEMs, says Jarvis, are doing this to meet higher customer performance, quality, service and pricing expectations. Many new car dealers, because of the improved quality of today's vehicles, have seen significant erosion in warranty service work profits. The OEM, says Jarvis, is committed to driving its customers back to the dealer for service work on post-warranty as well as under-warranty service work. He says that new car dealerships over the next five years will become much more price competitive with the independent service provider.

"If the dealership is going to be able to compete in the post-warranty service and rebuilt parts replacement market, we have to have prices based on the actual value added to the product," explained Jarvis. "As a rebuilder supplying the OEM, we need both high volumes and effective pricing to be able to compete with an independent (parts and service provider) because we have another level of distribution to go through. In the final analysis, if the pricing doesn't reflect the actual value added, the competition will take you out."

New car dealerships are undergoing a major transition, according to Jarvis. "The development of mega dealerships, and the increasing number of used, leased and released vehicles in the market place will all have a significant impact on how dealerships will do business in the future," he said.

Jarvis says that rebuilders such as Power Investments' companies will become more and more involved in joint venture projects to ensure that OEMs can achieve their aftermarket service goals. That already includes providing enhanced service requirements such as direct warranty and technical administration, increased inventory levels, and 95% order fill within 24 hours.

In the future joint venture projects may develop into specialized production programs where, for example, a rebuilder would process cores, clean and machine parts that would eventually be shipped to an OEM facility for assembly, testing and distribution. Some of these types of partnership arrangements already exist between rebuilders and their OEM customers.

"In many respects the relationship we have with our OEM customers is the same as that of any successful production engine rebuilder with his WD, jobber, service garage or retail customers," explained Jarvis. "We have the same drive, determination and commitment that they have to keep their customers happy. But there is a difference, too."

What is that difference? Jarvis explains that it boils down to those partnerships with the OEM and its dealerships, partnerships designed to maximize the production, distribution, technology, inventory availability and service that both the OEM and the rebuilder have available.

Controlling the core

Jarvis notes that in addition to these partnerships, the OEM is more focused

OEMs realize that they need to control the availability of cores better. In the future there won't be as many readily available.

on controlling the aftermarket through the availability of cores. OEMs today are making a concerted effort to make sure cores at their dealerships are returned to the OEM itself, or to its authorized engine rebuilder, at least on engines that are now under contract to be rebuilt by a specific remanufacturer.

"OEMs realize that they need to control the availability of cores better," said Jarvis. "He who controls the core controls more of who will get the business. You can't rebuild it if you can't get a core." And although OEM efforts to control core availability may not have much of an impact on the custom engine rebuilder working on a customer's own engine or component part, it could have significant impact on production engine rebuilders that buy an average of 30% or more of all the cores used to rebuild their engines.

"There will always be cores in the market place to rebuild," said Jarvis. "But I don't think there will be the ready availability of cores that many rebuilders have enjoyed in the past. It's all part of the OEM's effort to participate in a larger percentage of the market for service parts replacement on their vehicles. And, of course, to control the quality of parts and ensure customer satisfaction of vehicle ownership."

Part of that effort has been a gradual realization on the part of the OEM that parts need to be designed so that they can be remanufactured more efficiently and more profitably. To an OEM new parts engineer, that has not been an easy transition. But, says Jarvis, it is beginning to occur.

"Navistar has appointed a full-time remanufacturing engineer to help focus its new product changes so that parts will be less costly to rebuild, easier to rebuild, and will deliver a better performance level," said Jarvis.

"Ford also has a dedicated group of people with similar objectives regarding its contracted remanufactured Ford Quality Renewal (FQR) products, and GM is doing the same type of things at its in-house remanufacturing operation in Lansing, MI."

There's no question that since its inception in 1983, Franklin Power Products has experienced phenomenal growth. Jarvis expects that similar growth will continue as Power Investments cultivates new partnerships with vehicle makers looking to expand into rebuilt engine and parts sales and service.

"We will continue to serve the OEMs and to work towards enhancing their market share and product quality," said Jarvis. "If, as a supplier, you choose to compete against them you won't be their supplier for long. Loyalty is very important to them as well as to us."

There's no question that Jarvis is prepared for the level of competition that he is likely to face as both OEMs and independents maneuver to increase their market share. "I like to go rabbit hunting with an elephant gun," Jarvis explained of his approach to business. "By the time someone realizes we've entered their market, I've already gained control."