Part I of last month’s
profile of the machine shop market revealed that engine production
in business year 1995 was almost identical to that recorded in
1994. Based on a universe of 6,000 to 8,000 full-service machine
shops, custom engine rebuilders produced between 1.4 million to
1.87 million engines in 1995.
Last month’s data provided
details on cylinder head and crankshaft production levels, average
production time per specific shop machining jobs, equipment purchases
and more.
This month we complete
our extensive market profile with details on size and annual sales
of shops, gross profit margins, customer base analysis, warranty
trends, expansion plans, shop-labor-to-part-sales comparisons,
employee benefits, etc.
Our market data were
compiled through a survey of the membership of the Automotive
Engine Rebuilders Association (AERA). During the first quarter
of this year, survey questionnaires were mailed to 3,260 machine
shops in the U.S. The effective return rate was 15.3%. Survey
results were compiled by MarketScope, a division of Babcox Publications.
Industry-wide, average
gross sales per shop increased marginally from $599,067 in 1994
to $603,650 in 1995. Sixty-five percent of all machine shops responding
to our survey recorded annual sales of less than $500,000, a little
less than the 67% of total survey respondents that fell into this
sales range in production year 1994.
The largest percentage
shift was from respondents reporting annual sales of $1 million
to $1.5 million. Nearly 8.5% of machine shop owners fell into
this sales range last year, compared to 6.5% of all shops in 1994.
However, in general, both average annual sales as well as the
percentage of shops falling within specific sales ranges, have
remained fairly constant over the past several years.
Overall, fewer shops
reported an increase in gross annual sales (43.4%) compared to
50.3% that reported an increase in 1994. The number of shops that
said sales remained the same was identical (34.7%) while the number
of shops that reported sales levels declines rose from nearly
15% to nearly 22%. The average increase was nearly 13% for those
reporting an increase, and the average decrease was 12.3% for
those shops reporting a decrease. Based on figures reported in
1994, as an industry, machine shops totaled a modest average increase
in annual sales ranging from 1.6% to 4.0%.
Gross profit margins
on annual sales declined in 1995. In 1994, shops averaged gross
margins (sales minus cost of goods sold) of 33.2%. In 1995 gross
margins were reported at 31.6%, a decline of about 4.8%. Additionally,
fewer survey respondents reported gross profit margin increases
than in previous years. In 1994, nearly 36% of machine shop owners
said that gross margins had increased. Last year just 19% of shops
reported an increase.
For the majority of machine
shops, profit margins remained steady. Last year 63.5% of all
shops reported that profit margins were equivalent to the prior
year, compared to just 47.3% who said so in 1994. The number of
shops reporting that profit margins declined was almost identical
to the prior year – about 17%.
In focus group meetings
conducted by Automotive Rebuilder, and in personal and telephone
interviews, many shop owners stated that competitive pricing from
larger production engine rebuilders, as well as from competing
machine shops, made it very difficult for them to maintain margins
on typical passenger car and light truck engine rebuilds. Many
shops continue to look for opportunities in more profitable markets,
e.g., industrial, performance, marine, restoration, in an effort
to increase profit margins on complete engine rebuilds.
The cost to operate machine
shops today in terms of equipment, local, state and federal regulations,
labor and overhead continues to increase. In order to meet these
expenses, shops must price their products with an eye towards
continued investment to meet both product technology requirements
and customer expectations.
Is that happening? Well,
in terms of labor rates, the trend since 1990 has been up. The
average hourly shop labor rate in 1990 was $33.99. In 1995 that
same rate was $39.42, an increase of 16%. Shop owners reported
that in 1995 their average markup on shop labor was 42.6%. This
is a decline from the average markup of 51.9% reported in last
year’s survey, although it is in line with markups reported in
1991 through 1994.
The greatest percentage
of machine shop owners (nearly 50%) mark shop labor up between
21 to 40%. Only 11% of all survey respondents reported shop labor
rates that were marked up more than 50%.
The national average
hourly shop labor rate is $39.42. The largest percentage of shops
(56.9%) charge an hourly labor rate between $21 and $40. Twenty-seven
percent of shops charge $41 to $50 hourly, while just over 10%
of shops reported hourly labor rates at $51 or higher. On the
other hand, just over 21% of all shop owners reported charging
hourly shop labor rates of $21 or less.
Total sales volume attributed
to machine shop labor, and parts sales related to shop work, declined
by a little more than 3%. In 1994 machine shop generated business
represented a little more than 61% of total company sales. In
1995, 59.3% of total sales volume was attributed to machine shop
parts and labor sales.
About one-third of all
those responding to our survey derive the vast majority of their
sales from the machine shop. A little more than 31% of all survey
respondents reported that labor and parts sales related to the
shop accounted for 91% or more of total sales.
More than 53% of all
machine shop owners reported that labor and parts sales related
to the shop accounted for 50% or more of total company sales.
On the other hand, one-third of all respondents reported that
shop labor and parts sales represented 33% or less of total sales.
The average parts dollars
generated for every dollar in shop labor billed has continued
to decline over the past several years. Machine shop owners reported
that in 1995, for every dollar in shop labor billed they generated
$1.52 in parts sales. This is a decline of about 2.6% from the
$1.56 in parts sales generated per labor dollar billed in 1994.
However, in 1992 shop
owners reported generating $1.76 in parts for every labor dollar
billed, which fell to $1.71 in part sales in 1993. With the increasing
complexity of engine designs, the variety and number of components
in those designs, i.e., late model cylinder heads, we would expect
part sales associated with labor dollars billed to be increasing.
However, the reduced parts sales dollars may indicate that more
shops are focusing on machine work rather than complete engine
rebuilds.
Interestingly, the total
dollars expended on internal engine parts rose significantly in
1995. Last year, the average machine shop spent $153,992 for internal
engine components compared to $141,484 spent in production year
1994. That represents an increase of nearly 9%.
A number of factors may
account for the rising dollars spent on engine parts. As previously
mentioned with late model cylinder heads, many shop owners and
their suppliers feel that more component parts are being replaced.
This may be due to engine designs that more easily produce catastrophic
failures, or because of the particular failure characteristics
of late model units. For example, on Mitsubishi 2.0L engines,
when the timing belt breaks it has the propensity to destroy all,
or a good percentage, of the valves.
On a number of aluminum
cylinder heads, cracking between the valve seats requires replacement
of many of the seats following crack repair. In general, newer
head designs, when they fail, have a tendency to require more
component replacement due to the required repairs. In some instances
the design of component parts also does not lend itself to rebuilding,
e.g., reduced margins on valves which makes it difficult to reface
them.
Later model cylinder
heads also tend to be of the OHC, multi-valve, multi-cam design.
So there are more parts to replace and the cost for many of these
parts is higher. In addition, older engines originally designed
to operate on leaded fuels, will often require more valves, seats
and guides to be replaced to accommodate unleaded fuels.
At an average annual
expenditure of $153,992, based on a universe of 6,000 to 8,000
full-service machine shops, the internal engine parts market at
the machine shop level is worth $924 million to $1.23 billion.
Of the total dollars spent on engine parts by machine shops, nearly
52% are for internal shop consumption. The remainder is for retail
or wholesale sales.
Machine shop owner preferences
for their sources of engine parts have not changed much over the
past several years. Nearly 70% of survey respondents reported
preferring to purchase parts from multiple suppliers versus a
single source. The average machine shop utilizes 6.5 suppliers
for their hard parts requirements. About 16% of shop owners use
two or less suppliers, while 20.6% of shop owners reported using
nine or more supplier sources.
Beginning with last year’s
survey, we began tracking the average age of machine shops. There
are many who feel that the total number of machine shops is consolidating
and that it is becoming increasingly difficult for smaller shops
to survive or for new shops to open. The reasons for this span
the spectrum from the high cost of equipment to the shortage of
skilled machinists. Conversations with equipment suppliers tend
to confirm the reduced number of new shop start-ups from an historical
perspective.
Over the long term, we
hope to be able to document where these trends lie through tracking
the age of shops. This year the average age of the machine shop
climbed modestly from 19.8 years to 20.3 years. If such a trend
continues it would document the “maturing” of the machine
shop market.
Although essentially
statistically insignificant, there were fewer shops in the less-than-five-years
old, six-to-10-years old, and 11-to-15 years old categories. On
the other hand, there were modest increases in all shop age categories
from 16 years old through 45 years old. We’ll have to wait a few
years to see if this trend continues.
Customer base
Historically, machine
shop sales have been primarily to the do-it-yourself and service
garage/installer. Since 1991, sales to DIYers have accounted for
an average 38 to 40% of total sales, while the service garage/installer
has averaged 28 to 30% of sales.
In 1995, machine shops
reported a significant increase to the service garage/installer.
In 1994 shops reported 28% of sales to this customer base, however,
last year that percentage climbed to a little more than 34%. Sales
to the DIY customer was virtually unchanged.
Sales to the professional
service garage have been on a steady upward climb since 1993.
The increasing complexity of vehicle systems will likely continue
to keep this trend intact. However, it is interesting that sales
to the DIYer continue to remain strong, despite the fact that
many have predicted this customer base will be less involved with
vehicle repairs in the future.
Our educated guess is
that much of the continued strength of sales to the DIY customer
is related to increasing work done on performance, restoration,
marine and other specialty areas rather than the typical passenger
car or light truck engine or cylinder head rebuild.
Just as increasingly
sophisticated technology may be contributing to strong sales to
the service garage/installer market, it also may be contributing
to a rise in service work or engine installations being done by
jobber machine shops and custom engine rebuilders. Since 1992
the percentage of shops reporting that they operate service bays
for vehicle repairs or engine installations has risen from a little
more than 25% to nearly 34%. The average number of service bays
operated by those performing this service has risen from 3.2 to
4.4 over the same time period.
Those involved with engine
installation and/or vehicle service work do so for a variety of
reasons ranging from profit potential to an effort to reduce warranty
returns.
As far as warranty returns
are concerned, machine shops have reported little change over
the past few years. Since 1992, engine work returned on warranty
has averaged about 2.5% of total sales. However, the percentage
of those returns that are attributed to customer installation
or misdiagnosis is at its highest level ever. Last year, machine
shop owners reported that nearly 68% of all warranty claims are
due to customer-caused problems.
There is no question
that warranty charges today are more costly than they have ever
been. The problems related to the overall shortage of skilled
service technicians, and the availability and access to equipment
and information required to service today’s vehicle systems, will
likely continue to impact the warranty policies, marketing and
service provided by the machine shop/custom engine rebuilder.
Facilities/employees/productivity
Despite the challenges
in operating a machine shop today, more than 50% of survey respondents
reported that they planned to expand their engine rebuilding capabilities
over the next two years. The single largest percentage (72.1%)
said that this would be done through the purchase of rebuilding
equipment. Expanding the engine production area, adding shop services
and adding employees were cited by 50% or less of survey respondents.
Presently, the typical
company operating a machine shop employs an average 7.6 people,
4.5 of whom are shop employees. Shop employees have been with
their current employer an average 8.67 years. Experienced machinist
are paid an average $12.07 hourly, while inexperienced machinists
receive $7.68 per hour. This represents and increase of 5% and
9.2% respectively.
Wages for shop counter
sales and core disassembly personnel also rose modestly. Counter
sales employee wages increased from $8.45 hourly to $9.51, while
core disassembly personnel wages rose from $6.62 hourly to $6.78.
Judging from time studies
to rebuild engines, over the past three years, shop productivity
and efficiency levels have improved. The average amount of time
required to disassemble a typical four, six or eight cylinder
engine core has been increasing. However, the total time required
to rebuild the same engine from core teardown through cleaning,
machining and final assembly has been decreasing.
On average, shops reported
spending 95.7 minutes to disassemble an eight cylinder engine,
83.6 minutes to disassemble a six cylinder engine and 69.7 minutes
to disassemble a four cylinder engine. This represents an increase
of 3.1% and 1.2%, and a decrease of 9% respectively over times
reported in last year’s survey.
On the other hand, the
time to rebuild an eight cylinder engine last year decreased from
13.5 to 12.5 hours. Six cylinder engine production time declined
from 12.2 to 11.3 hours, and four cylinder production time declined
from 10.9 to 10.1 hours.
Overall, shop owners
reported that 80.6% of their business is on domestic engines while
the remainder is for imports. Specifically, shops reported that
an average of 13.6% of total engine and cylinder head rebuilding
is related to performance/racing engines.
In conclusion, the machine
shop industry showed its third consecutive strong year since recovering
from the recession which ended in 1992. Shop owners continue to
focus on keeping costs down while striving for productivity and
efficiency enhancements.
Competitive pricing from
PERs and mail order parts houses, governmental regulations, and
finding, training and keeping qualified shop employees were continually
cited by survey respondents when asked to define the biggest problem
facing their business in the coming years.
It seems clear that management expertise in terms of knowing actual
job costs and then matching products, services and pricing to
a specific customer base is a necessity for today’s shop. Otherwise
shops will be unable to finance the equipment, training and information
resources required to build today’s engines in today’s markets.
