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Rebuilt Market Reviews - Cores Market: The Perfect Example Of Supply And Demand,

By Tom Glover

In some businesses, the classic law of supply and demand is hard to identify. But that's not the case in the core business. "The core market is the perfect example of supply and demand," comments John Lathan, plant engineer at The Hastings Co., a rebuilder in King, NC. "When one company is looking for a hard-to-get part, everybody else is, too, and that drives the price up immediately!"

Another core supplier based in the Southeast, Joe Cogbill of PAP Replacement Parts in Norcross, GA, puts it quite succinctly: "It's always supply and demand, but cores are the 'whole' issue in the remanufacturing business. Cores dictate the dynamics of the rebuild market."

Those in the core business know the stages well; newly-introduced components are hard to come by and carry a high price tag. Over time, the pipeline fills up and the prices drop, leveling out until the parts fade in popularity, at which time the price goes back up because nobody has been saving them.

The key part that cores play in the rebuild business tempts many suppliers to seek a competitive advantage through manipulation of the cycle. Cogbill's company specializes in supplying rebuildable bolt-on components for Audi, Volkswagen and Porsche automobiles, and he unabashedly admits that he's out to hoard all of the cores for these vehicles that he can in order to keep competitors from getting hold of them.

Some core suppliers report that the demand for cores is off, and suggest that the reason has something to do with the way the motoring public puts their automotive bucks into new and used cars, instead of rebuilt parts and the raw materials of rebuilt components, i.e., cores.

While it may be true that cores are the lifeblood of the automotive rebuilding industry, the availability and price of cores is influenced by many factors. One of the most important is the seemingly endless proliferation of part numbers, which affects not only prices, but the allocation of space, employee training and related overhead expenses, e.g., insurance, etc.
"Parts proliferation requires us to have more space, and more sorting positions and bin locations," says Seth Davidow of Recore, Inc., a core supplier in Arlington, TX. "Plus, it requires us to be more technically oriented to contend with identifying various parts."

Indeed, parts identification has become a staffing issue at both core supply and rebuilder operations. "The level of product knowledge is not what it used to be, which I attribute to the fact that there have been so many numbers added," says Jeff Pierson of Claybaugh-Weathers, an Indiana core supplier. "We use line drawings, pictures and stuff like that, but its an enormous job. For parts identification, you just have to surround yourself with competent people."

Rebuilders face similar requirements. "Fifteen years ago, one guy knew all the popular numbers for six or eight different product lines. Now, its virtually impossible for one human being to do that," says The Hastings Co.'s Lathan. "It just takes more manpower to know what we're sorting, and the people we have as identifiers are well paid for it - in fact, they're some of our highest paid employees."

As a rebuilder, Lathan also notes that the expanding number of parts has a direct impact on his manufacturing processes. "With parts proliferation, we're processing the same number of parts, or maybe even more, but smaller runs. Unless a rebuilder is able to rapidly change their remanufacturing processes, and use more flexible manufacturing methods, they'll be less efficient," said Lathan.

Another factor impacting supply and demand has come through some evolutionary changes in the system of collecting cores and distributing rebuilt parts. For most core components, the common system has been three-tiered, where independents with truck(s) collect used and damaged parts from salvage yards, dealerships and vehicle maintenance companies. They in turn sell to the core suppliers, who often specialize in particular core products. Core suppliers typically sort, grade and inventory the parts they specialize in, often selling the cores of products not in their area of specialization to other core suppliers. Then the cores are sold to rebuilders.

There have always been core suppliers who go to scrap yards directly. But as the competition for hard-to-get cores increases, more of them are attempting to eliminate the first tier of core collectors, and go direct, hoping to corner more of the market for the high demand cores. Glen Berhow, president of G. B. Core, Inc. of Green Bay, WI, specializes in engine cores, and is following others in this approach. "We'll take the top 20 salvage yards in Minnesota and Wisconsin and go direct with them," said Berhow. "This will eliminate those high demand cores in our own back yard from going anywhere else."

Another aspect of the core business that has changed, and continues to do so, is inventory allocation. As "just-in-time" concepts of parts delivery trickles down from new product manufacturing to the rebuilding industry, core suppliers are being asked to carry more of the inventory that their rebuilder customers used to carry themselves."People are trying to push inventories one level back, from the rebuilders to the core suppliers," said John Brunetto, vice president and general manager of World Auto Parts, a core supplier located in Buffalo, NY. "They won't stock any more than they need to, so we're keeping more of our customers' rebuild inventory. It's not always out of choice, but it does allow us to respond quicker."

All of the core suppliers we interviewed agree that everyone in the business, from the guys who buy from the scrap yards to the rebuilders, are more selective about not only what core numbers they'll buy, but core quality, too. "At one time, the philosophy was to do volume, and core suppliers figured that if there was no visible cracking and the engine turned, it was a good core," explained G.B. Core's Berhow.

While his inventory is large - G.B. warehouses between 6,000 and 7,000 engine cores - the emphasis on volume has been replaced by an emphasis on quality. "We have to be picky about the cores we'll accept, because we're setting the boundaries that are set for us," said Berhow. Once in his facility, engine cores are inspected to higher levels than they once were.

"We 'mike' cylinder bores, magnaflux critical areas of cylinder heads, and check for crankshaft tolerances," said Berhow. "To be honest, I'll admit that our 'cast-iron tanks' get filled up with scrap once or twice a month, but we accept that as part of the nature of dealing with used components. With the cost of freight, we can't afford to send things out that will be rejected at our customers' door."

Likewise, World Auto Parts' Brunetto finds that everyone in the business has become much more selective about what they'll accept. "This means that instead of buying a mixed batch of say brake shoes from us, and accepting that they can't use 30% of them, they're now specifying that they want only that 70% they can use," he said of rebuilder purchasing policies.

Again, parts proliferation is seen as the reason, along with a tighter emphasis on inventory control. "We've seen our numbers in inventory go from 9,000 to 19,000 in about five years, and we've had to get more sophisticated to keep serving our customers needs," said Brunetto. "We weren't required to do such an in-depth job of inventory breakdown in years past." As more core inventory becomes the responsibility of core suppliers, their accountants have to deal with the problems of inventory valuation that have long plagued the core business.

"The problem with the core business is that its primarily a cash business, and you can tie up a lot of inventory on speculation," says Jeff Pierson of Claybaugh-Weathers. "You have to be very careful how you price it and how much of it you buy at any given time, especially if you're trying to value your inventory in pieces. The IRS doesn't distinguish between what's usable and non-usable, and you're going to have a lot of fall-out of value when your dealing with used, rebuildable materials."

And in the minds of many in the core business, what's a usable and non-usable core has been influenced by the trend to lighter weight parts. Many in the business denounce the new component materials as ruining the rebuildability of some components. "It makes some parts less rebuildable, and that's especially true in parts like brake shoes, which are smaller and lighter, and more susceptible to being warped, dented or bent," explained World Auto Parts' Brunetto. "Water pumps are more fragile too, and it puts a lot of pressure on people to buy new instead of rebuilt."

Others see a "positive" coming out of the use of lighter materials. They point out that these materials can contribute to a greater incidence of failure and, consequently, increased demand for rebuilt replacements. "If it wasn't for Delco's CS series alternator, we'd be a lot worse off," says The Hastings Co.'s Lathan. "It's a great thing for us when parts don't last as long. In some cases, the lighter weight parts have been a blessing instead of a burden."

G.B. Core's Berhow agrees that light weight materials have had a significant impact, but thinks the _positive_ effect has been on quality. Berhow says modern component designs and materials have forced quality rebuilders to develop more sophisticated rebuilding and testing procedures. "It's forced rebuilders to do more than just peening and welding," said Berhow. "Rebuilding lighter weight components has become an art in itself," he observed.

But Berhow, like others, sees another agenda behind the prevalence of lighter weight and sometimes more fragile parts. "You have to believe that besides lighter weight for better fuel economy, OEMs are designing to sell more new parts too, Berhow said."

Claybaugh and Weathers' Pierson shares his cynicism. "The effort is to make the units less rebuildable, so everything will have to go through OEM distribution,"Pierson said. "Although they'd like you to believe that their goal is to make the parts lighter, the ultimate goal of the OE manufacturers is to make the parts throw-aways. They're already working on technology to do away with starters, with combustion within a chamber that kicks the motor over without a starter."

The issue of scrap metal prices and how it affects the core market has always been an issue. However, it doesn't seem to be as critical to the business as it once was. As Recore's Davidow commented, "Whether scrap prices are high or low, it has always been an issue of whether the salvage yards feel its worth it to invest labor to take the parts off and sell them as cores before they go to the crusher. And while they were up in the past, right now scrap prices are low - copper is low, and so is aluminum, while steel is average."

Davidow also points out that when scrap prices are up, and cores are in demand, core prices will be up, too. In the experience of other core suppliers, most of the cores that they purchase from scrap yards aren't cut out of the wrecks anyway; they're more likely to be the used parts that people bring in. That's the situation for Jim Fisher of Midwest Core Supply of Nobelsville, IN, a full-line core supplier specializing in cylinder heads.

"If the salvage yard can pull an engine off a wreck and sell it to the customer as a used engine for $700 or $800, and take his old engine that doesn't work and sell it to me as a core for $25, they've made money," said Fisher. "To sell me an engine off of a wreck for $25 would be pretty stupid on their part," he said.

Another issue for core suppliers is the fact that they've seen some of their large rebuilder customers go out of business over the last few years. The effects on them have varied. "We've had to restructure things, re-establish new accounts and so forth, as some of the weaker companies have gone by the wayside," said G.B. Core's Berhow. "But its been a blessing in another sense, because once you get through all of that, you're dealing with stronger, more financially stable companies."

Another core supplier blames the demise of some rebuilders on their inability to control costs. "I worked for a rebuilder that went bankrupt," says Claybaugh and Weathers' Pierson. "Their main problem was in controlling costs, that is, knowing how to value things, what they had in (a part)."

Pierson criticizes the practice of many rebuilders that acquire their competitors' price sheets, then go out and try to sell close to their competitors' prices or maybe just a little below them. "Everybody does things a little differently, and they have a different idea of what 'quality' is, so it becomes an issue of 'how good do you want it (the part)?' Prices are established accordingly. The survivors are those who (know their costs and) stick to their principals about what to build and how to price it."

As a rebuilder himself, The Hastings Co.'s Lathan thinks problems come to rebuilders who attempt to sell a limited number of lines to the large retailers and buying groups while continuing to service smaller customers with a broad line of parts. "As I understand it, the rebuilders who are doing well are the ones who are servicing the growing retailers with just one or two product lines. I would think that most of the medium to large rebuilders would be headed that way."
Recore's Davidow notes that despite the thinning out of rebuilder ranks, the demand for rebuilt units remains. "It does mean that a larger amount of business goes to a smaller number of rebuilders," said Davidow. "But the demand for the rebuilt product is still there," he says.

Despite the fears of people in the core business, the dreaded "clunker laws" being proposed that would force cars of a given age and/or mileage off American roads, and the implementation of the European practice dictating that manufacturers assume responsibility to reclaim their products when they've reached the end of their useful life, are not much on the minds of the core suppliers we talked to. Predictably, they're all opposed to such legislation, not only because of the potential negative impact on their businesses, but because it represents government interference in the supply and demand of the marketplace.

The comments of Midwest Core Supply's Fisher are typical. "I think its an utterly stupid thing!" he said of proposed and existing vehicle clunker laws. "Why scrap a good working vehicle just because it has a certain number of miles on it. The rationale is that it stops pollution. But if its working properly, why would it produce any more pollution than a new vehicle with fewer miles?"

As a core supplier of European-made nameplates, PAP Replacement Parts' Cogbill recently traveled to Germany to attend the Automotive Parts Rebuilders Association's European Rebuilding Symposium. He's familiar with the concepts of government-controlled recycling plans for autos there, and other proposals by European governments that threaten to throw the core business into a tailspin.

One is a proposal to obligate Mercedes to eventually buy back all the Mercedes vehicles when they're no longer serviceable. "They're going to sop all of the gravy from the core business by taking all of the items that are worth rebuilding off the cars," opined Cogbill. "Then they'll crush the rest to keep anybody else from getting what's left." He also says that Mercedes people have been in this country quietly buying up all of the Mercedes water pump cores they can find, then coming out with their own remanufacturing operation.

So what does the future hold for the core business? Changing technology is creating new markets - the CV rebuilding business is still on a roll - and its shrinking other markets - there's not much demand left for rebuilt carburetors and distributors, for example.

The potential for rebuilding ABS systems is always mentioned as a growth area, too, but some are having doubts. "People have the option to spend a couple of thousand to get their ABS systems fixed, or to just disable the system and go with standard brakes," observes Recore's Davidow. "I think most people would choose to do the later unless the repair is under warranty where the repairs are done with new parts. I don't know that anti-lock brake rebuilding is going to be as big as we first expected, but we'll see."

Other prognosticators see their competitive edge in niche marketing, perhaps getting away from the "full-line" core supplier concept. "Rebuilders today have so many more demands than they used to, and it gets harder and harder to meet their needs," commented Claybaugh and Weathers' Pierson. "So the safest thing is to find a niche market and bury yourself in it. If you spread yourself too thin, your potential for loss is greater."