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

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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!"

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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.

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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."

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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.

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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."

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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."

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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."

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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."

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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."

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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.

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"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)."

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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.

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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.

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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."

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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."

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