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Rebuilt Market Reviews - Engines Market

By Dave Wooldridge

Total engines remanufactured by all production engine remanufacturers (PERs) in 1995 increased a modest 3.5%, growing to 1.318 million units last year compared to 1.273 million units produced in 1994. Production totals are based on a U.S. and Canadian universe of 120 PERs that produced an average of 10,609 remanufactured engines annually in 1995.

Survey results were tabulated following mailing of an extensive questionnaire to the membership of the Production Engine Remanufacturers Association (PERA) during the first quarter of 1996. Questionnaires were mailed to 91 PERs with an effective return rate of 31.9%.Survey information is provided for an ALL, BIG and SMALL category of respondents. BIG respondents are those producing at least 10,000 long or 10,000 short blocks annually. SMALL PERs are those that do not produce either 10,000 long or 10,000 short blocks annually. These definitions are made solely for the purpose of interpreting data from this study. Of the total survey respondents, 33.3% were BIG while 66.7% were SMALL.

Production engine remanufacturers accounted for between 41.2% and 48.3% of all engines rebuilt in 1995. This market share range is derived from comparison of PER versus custom engine/machine shop engine production over the same period of time. Custom engine rebuilders/machine shops produced between 1.4 million to 1.87 million rebuilt engines in 1995. (See Automotive Rebuilder magazine, June 1996 issue, Machine Shop Performance Profile, page 60.) The universe of custom engine rebuilders/machine shops for the purpose of that study is estimated at 6,000 to 8,000 "full service" shops.

The combined total of engines rebuilt in 1995 by both the PER and custom engine rebuilder/machine shop markets was 2.718 million to 3.188 million units. This represents a slight increase from the combined market total of 2.67 million to 3.14 million engines rebuilt by PERs and custom engine rebuilders/machine shops in 1994.

Engine production by PERs increased fairly significantly in 1993 following the end of the 1990-1992 recession. Since 1993, production of remanufactured engines has increased, on average, between one and 3.5% on an annual basis. Although many PERs we interviewed said that engine production was indeed flat during 1995, 1996, at least through three quarters of this year, has been significantly higher.

Based on interviews conducted with PERs during late August and early September, we expect remanufactured engine production to be significantly higher in 1996. Several of the BIG PERs reported that sales of remanufactured engines had increased from 10 to 20% through the first three quarters of 1996.

Several PERs involved with cylinder head kit production also reported that production levels had increased significantly. One large PER we interviewed said that demand for rebuilt cylinder head kits had grown 47% for the first nine months of 1996 compared to year earlier figures! More information on the cylinder head market appears further on in this report.

BIG PERs, on average, generated a 15.6% increase in total engine production in 1995 compared to 1994. SMALL PERs saw an average decline of about 4%. Average total annual engine production for BIG PERs was 26,727 last year, compared to 23,114 in 1994. Small PERs saw total annual production of engines drop from 4,070 in 1994 to 3,901 last year.

Short block production, for the most part, continues on a downward trend. Primarily due to concerns for warranty, as well as to facilitate ease of sale and installation, long blocks are the preferred engine product for the majority of PERs. BIG PERs built an average of 1,984 short blocks in 1995, essentially unchanged from numbers recorded in 1994. SMALL PERs, however, averaged just 494 short blocks produced in 1995 compared to 1,082 in the prior year.

Long block production, however, was up for both segments of PERs. BIG PERs averaged 24,741 long blocks in 1995, an increase of a little more than 17% compared to long block production in the prior year. SMALL PERs saw an increase of about 14%, going from 2,988 long blocks remanufactured in 1994, to 3,407 produced last year.

Keep in mind that these numbers represent industry-wide averages. The population of PERs that are members of PERA is a diverse group encompassing businesses that generate anywhere from a few hundred thousand dollars in annual sales to those approaching $50 million or more. The customer base of these engine remanufacturers is also diverse. Depending on location and type of remanufacturing operation, PERs may sell direct to installers, WDs, jobbers, retailers, OEMs or rebuild and install engines at their own facilities, to name just a few.

Will market growth continue?

Will PER engine production continue to expand at the modest 3-5% annual increase that it has over the past several years? PERs who were asked that question provided us with a mixed response. First, almost every large PER we interviewed, as well as several smaller sized operations, told us that production levels had increased significantly for the first three-quarters of 1996. The reasons given ranged from recently acquired OEM or retail contract business to aggressive cultivation of niche markets and expanded service, financing and warranty coverage.

There is no question that significant growth has occurred in the retail and OEM (Ford, Chrysler, GM, for example) customer base of some PERs. However, there are also several large PERs and a few smaller operations, that supply WD and/or direct to installer channels that have seen double digit growth this year, too. In a nutshell, there are both technical, as well as marketing factors influencing the demand for rebuilt engines provided by PERs.

From a strictly technical perspective, it is difficult to ascertain whether over the long term demand for remanufactured engines will decline, be flat or increase. While it is generally true that new engines today are made better (at least as far as engine blocks are concerned) the cost of new vehicles also continues to rise, contributing to the increasing length of time that the average car or truck is on the road - today about 8.7 years.

Pickup trucks have an even longer life - nearly 10 years. So although engines are better made, requiring less service in the early years of operation, depending on vehicle model, they may offer better opportunities for replacement later in their operational life.

 About 50% of vehicles sold today are in the pickup truck, sport utility or minivan category. These vehicles, traditionally, are kept longer than the typical passenger car, so, overall, this should be a positive factor influencing demand for remanufactured engines.

From a strictly technical and design perspective, our best guess is that improved engine performance and durability will be canceled out by higher cost vehicles that remain on the road for longer periods of time. We would guess, that all else being equal, demand for remanufactured engines would continue to grow at about 3-5% annually over the next several years.

However, from a marketing perspective, the possibilities are much greater. The potential market for rebuilt engine replacement is certainly much higher than the 2-3% of total vehicles on the road that presently receive a rebuilt engine. But to grow the demand for rebuilt engines, PERs must do a better job of informing the potential customer/end user of the remanufactured engine option, convince them of its benefits, and then provide the availability, service, warranty, and in some cases, financing to put such an option within the reach of the average consumer.

Many PERs we interviewed for this study are doing just that. We spoke with a PER producing more than 35,000 long blocks annually, and a PER producing about 7,000 long blocks annually, both of whom attributed extended warranty coverage as a major component to their double digit sales increases.

"We've got to stop taking business from one another and figure out how to grow the market for remanufactured engines," one smaller sized PER told us. "I think our major competition for a reman engine sale is the consumer purchasing a used car or truck," he continued. "Our limited lifetime warranty and our financing programs are driving our engine sales which are 20% above year-to-date forecasts. I think that affordability for the consumer is a major issue today for remanufacturers trying to increase their engine sales."

"We've extended our warranty on engines to 36 months/50,000 miles," another PER told us. "Combined with our reputation for a quality product, we feel that our new warranty is directly responsible for a large part of sales increases. It has both our own sales people as well as our customers (primarily installers and fleet accounts) very excited."

Never before has marketing been more important to the success of individual PERs. PERs that are growing their businesses are those that are successfully identifying their customer base(s) and developing specific programs and services for them. Almost every PER we spoke with had the same story to tell: PERs today must become an extension of the sales arm of their chosen customer base.

As one PER selling primarily to the jobber wholesaler market explained to us recently, "Just because jobbers are a part of a large distribution outlet doesn't necessarily mean they are going to sell a lot of your engines. Distribution does not equate to marketing and sales. Most jobbers don't have either the time or the expertise to develop the type of programs required to increase their remanufactured engine sales." Several PERs we interviewed said that same perspective on customer engine sales applies to installers, WDs, retailers and others.

'Enhancing' the relationship between PER and customer is a priority of all successful PERs today. Said one PER serving primarily OEM accounts, "There is no question that we have to continue to get closer to our customer. And this will continue into the future. We are continually bringing in (new car and truck) dealership customers to show them our business, and to meet with them to find out what they need in terms of units, service, pricing, etc. Then we have to figure out a way to give it to them."

Cylinder head production

Total cylinder head production rose about 8% overall in 1995. The average number of cylinder heads rebuilt by PERs was 20,455 compared to 18,932 in 1994. BIG PERs averaged 45,311 heads, up a little more than 18% compared to the 38,307 heads rebuilt in production year 1994.

SMALL PERs also reported an increase in total cylinder head production. SMALL PERs produced an average 8,682 heads in 1995, up nearly 5% compared to the 8,275 heads rebuilt in 1994.

Cylinder head kit production, on the other hand, declined overall by about 17% for the ALL category of PERs. BIG PERs reported a decline of about 5%, producing an average 2,948 cylinder head kits in 1995 compared to 3,105 generated in 1994. SMALL PERs averaged 3,034 cylinder head kits last year, a drop of about 23% compared to the 3,948 cylinder head kits averaged in production year 1994. Cylinder head kits represent cylinder heads that are rebuilt and sold separately from those heads that are rebuilt and installed on either short or long blocks.

The total number of cylinder heads being rebuilt is impacted primarily by the total number of types of engines (four, six or eight cylinder) being rebuilt, and by the designs of heads found on today's engines. Almost all PERs we visited personally, and/or interviewed by phone, describe the cylinder head business as a "repair business" today. Very few PERs will tell you that they have enough good quality cores available to meet either demand for their own engine production or for their separate cylinder head kit requirements.

Several PERs told us they are not aggressively supplying cylinder head kits because of the problems in finding enough good cores to supply their own internal engine demands. "There are not enough good cores available to meet both our own engine requirements as well as demand for remanufactured cylinder head kits," one large PER told us. "We make a better margin by putting that good rebuilt head on a remanufactured long block and selling that rather than a separate cylinder head."

As in most business areas, however, one company's problems are another company's opportunities. The typical aluminum or cast iron cylinder head found on late model engines is generally more complicated, with more valvetrain parts and of a lighter weight design that is inherently less stable. Many engine failures today can be directly related to cylinder head failure. Improper coolant or lubrication levels can quickly result in cylinder head warping or cracking, often leading to engine failure due to water or oil in engine cylinders.

PERs are challenged not only by core availability, but also by labor and equipment required to build good quality heads in a cost efficient manner. That, however, is not a hurdle that can't be overcome by some PERs. "We've simply decided that we are going to be the leader in providing cylinder heads," one PER told us. "It's a growing market with lots of demand.

"I feel that if you are building a good quality head for your own engine production, there is no reason you can't extend that to cylinder head kits," this PER said. "It does demand a considerable investment in facilities, labor, training, cores, and equipment. But we're making that investment.

"Rebuilding cylinder heads is a repair business in a very big way," he continued. "To be successful you have to keep the costs down while ensuring good quality. We also have to make sure that our WDs and DCs have the heads they require in stock.

"We've got 60 people involved in rebuilding heads now," he continued. "We're producing 300 heads daily for our own engines and separate cylinder head kit sales. I think we'll be near 400 heads per day by year's end. It's a very big market."

Although the total number of heads being rebuilt has been increasing for several years, and should continue to increase, the number of heads per engine built has been on a slow decline. This is due to the increasing number of six and four cylinder engines that make up the daily production of many PERs. Many PERs today average between 1.5 to 1.8 cylinder heads for each remanufactured engine produced.

Cost of doing business

Cost containment, enhanced technical efficiency and improved customer service programs are large priorities for today's successful PERs. Most PERs we interviewed said that continuing investments in updated equipment in order to meet more stringent rebuilding requirements, as well as to meet customer expectations for quality, performance and availability, are a must in today's market.

If there is one thing most PERs agree upon, it's that expectations for a better quality remanufactured engine have never been higher on the part of the vehicle owner. The reasons for this are primarily due to the OEMs themselves, who have raised their own vehicle quality levels substantially over the past several years. This expectation by the consumer for improved quality and performance of the new vehicle has been transferred to aftermarket service replacement parts in general.

"This trend in higher quality levels and better performance will continue over the long term," one PER told us. "Vehicle owners have become accustomed to it in terms of extended warranty coverage and new car quality. They want the same satisfaction from remanufactured products as was provided by new. I also think that they are willing to pay a little more to get it."

In order to make the investments in equipment, training and service to meet these rising expectations, PERs must continually strive to reduce costs of operations. Over the past several years, for example, PERs have been reducing inventory levels of cores, new replacement parts and finished goods. In many cases, sales of engines and cylinder heads have increased while inventory levels have simultaneously been purposefully bleed down.

Many PERs we spoke with tell us that today they have significantly improved production scheduling of component parts from cores through finished engines. It simply takes too much money to fund high inventory levels of the vast array of part numbers required to service today's replacement engine market.

"Cash flow is extremely critical," one PER said. "Three years ago we would inform our supplier of what we would require in parts for the month and receive that order in two shipments over a 30-day period. Today, we place the order for the month and receive parts every three to five days."

PERs today, in many cases, carry less depth and a broader variety of part numbers in inventory. And this phenomenon often extends to the PERs' part supplier as well. As one PER told us, "Everyone has cleared out inventory, PERs, their suppliers and their customers. Right now if there was a 25% increase in demand for engines over several months, everyone would be out of materials very quickly."

As a consequence of tighter materials processing controls, the need for reliable computer systems for scheduling and expediting cores, replacement parts and finished goods is imperative. Properly managing the flow of information today from production to pricing will be a key factor separating winners from losers in the future.

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This article contained information excerpted from the 1996 PERA Market Report, a separate publication written by Automotive Rebuilder magazine and provided to the Production Engine Remanufacturers Association for distribution to its members.

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Most Important Factors Affecting the PER Market Today

RANKING ALL '95	BIG	SMALL	RANKING ALL '94
Core Availability	1	1	1
Price Competition	2	2	2
Installer Error	3	3	3
Labor Costs	3	4	4
Tech Problems	5	5	5
The Economy	4	6	6
Other PER Engine Sales	7	7	8
Unit & Component Identification	6	8	7
Government Regulations	7	9	9
WD Engine Kits	9	10	11
New Car Prices	8	11	10
New Car Financing Programs	10	12	12
Import Offshore Rebuilt Engines	12	13	14
Import Offshore Used Engines	11	14	13

PER Average Number OF Cylinder Heads Remanufactured in 1995
CYLINDER HEADS	ALL	BIG	SMALL
Average 1995	20,455	45,311	8,682
Average 1994	18,932	38,307	8,275
Average 1993	17,347	38,711	8,352
Average 1992	12,236	29,575	6,276
% Change '94 to '95	8.0%	18.3%	4.9%
%Change '93 to '94	9.1%	-1.0%	-0.9%
CYLINDER HEAD KITS
Average 1995	3,006	2,948	3,034
Average 1994	3,639	3,105	3,948
Average 1993	3,282	6,922	1,665
Average 1992	2,158	3,978	1,529
% Change '94 to '95	-17.4%	-5.1%	-23.2%
%Change '93 to '94	10.9%	-55.1%	137.1%

PER Average Number Of Engines Remanufactured in 1995
ALL ENGINES (SHORT AND LONG BLOCK)	ALL	BIG	SMALL
Average 1995	10,985	26,727	3,901
Average 1994	10,609	23,114	4,070
Average 1993	10,601	24,889	4,700
Average 1992	8,026	19,404	4,485
% Change '94 to '95	3.5%	15.6%	-4.1%
%Change '93 to '94	0.1%	-7.1%	-13.4%
SHORT BLOCKS
Average 1995	957	1,984	494
Average 1994	1,400	1,981	1,082
Average 1993	2,384	5,219	1,392
Average 1992	1,981	3,061	1,658
% Change '94 to '95	-31.7%	0.2%	-54.4%
%Change '93 to '94	-41.3%	-62.0%	-22.3%
LONG BLOCKS
Average 1995	10.028	24,742	3,407
Average 1994	9,209	21,133	2,988
Average 1993	8,217	19,670	3,308
Average 1992	6,045	16,343	2,827
% Change '94 to '95	8.9%	17.1%	14.0%
%Change '93 to '94	12.1%	7.4%	-9.7%

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