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Rebuilt Market Reviews – Electrical Market

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Though the overall demand for rebuilt alternators
and starters continues to be relatively soft, particularly in
the Midwest and Northeastern parts of the United States, sales,
in general, have been up in the South.

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Weather seems to play a major role in driving the demand for electrical
products. Cold winters are hard on starters and hot summers increase
alternator failures. Much of the country had a cold winter earlier
this year, but summer has been unusually mild in the Midwest and
Northeast. The South, though, has sweltered through some hot weather
which helped stimulate sales for regional rebuilders supplying
that market.

One theme echoed over and over again by almost every rebuilder
we interviewed is that electrical rebuilding is a tough business
to be in these days. "Fifteen years ago this was a fun business
to be in," lamented Bob McClaren of Genco Auto Electric,
Islandia, NY, who’s been in the electrical rebuilding business
for 30 years.

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"Today, it is not fun," McClaren continued. "Between
the EPA, taxes and insurance, the stress is unbelievable. And
the pricing is crazy. I think we’re a low-cost rebuilder, but
I see guys who are selling their units for 15% less than mine.
I don’t see how they can make any money," he said.

The lack of profitability is a major concern with most rebuilders
everywhere. "I don’t know anybody who’s making money in this
business today," said more than one rebuilder we spoke with.
Many blamed cutthroat competition. They said there’s always somebody
who will undercut a price by a couple of bucks to make a sale.

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Rising costs were also blamed for squeezing profits. "How
are we supposed to make any money when all our costs keep going
up and the government tells us we have to increase our employee’s
wages?" said another rebuilder. Recently passed federal legislation
raised the minimum wage to $4.75 per hour beginning October 1st,
and boosts it another 40 cents to $5.15 per hour Sept. 1, 1997.

Prices have also been driven down by changes in distribution and
consolidations. The backbone of the electrical business for many
rebuilders has long been the traditional channel of wholesale
distribution. But as warehouse distributors and jobbers are displaced
by retail chains, many small- and medium-sized rebuilders have
found their markets drying up. One midwestern electrical rebuilder
who did not want to be identified classified his business as "a
medium-sized operation that’s getting smaller every day."

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"Our work force has been cut from 47 people back to 25, and
output has dropped from 3,000 units a week to less than 1,400,
" he said. He attributed his unwanted downsizing to changes
that have taken place in distribution.

"Small independent jobbers have been the mainstay of our
business," he explained. "But in our area, a lot of
them have gone out. Autozone and Western Auto are taking over
here, which is bad news for rebuilders like us because these guys
only source their rebuilt alternators and starters from one or
two suppliers. Some retail jobbers will supplement their inventory
by buying from a local rebuilder, but it’s hard to find the ones
that do."

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How does he plan to cope? "If we have to, we can downsize
to an eight- to 10-man shop and do okay. We do some installation
work now, mostly for our customer’s customers, who have had problems.
We really haven’t promoted installation work, but maybe we should.

"We could also bid on some government work. We’ve done that
in the past. It’s not real profitable and there’s a lot of competition
for government contracts. But if you get it there’s usually plenty
of time to complete the contract and you can use the work to fill
in and keep your people busy."

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Core brokers are feeling the pinch, too. Evaristo Isordia of Evaristo’s
Cores, Los Angeles, CA, said the market for cores has been really
soft. "I’m not sure I’ll even be in the core business five
years from now," said Isordia. "It’s harder to sell
to customers now. Rebuilders are buying more and more new parts,
the new units are harder to rebuild, and I’m seeing fewer opportunities
for the small rebuilders. We really depend on the smaller rebuilders
who buy our cores. When they’re gone, so’s our business."

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Searching for profits

Low profits are certainly a thorn in the industry’s
side. Everybody agrees that prices need to be higher, but there
seem to be few ideas on how to make that happen. Some say large
retailers who have tremendous buying power have been driving prices
on a downward spiral. Others say there’s been too much price competition
between rebuilders fighting for market share.

Last year, Champion Parts, Inc., Blue Chip and several other lesser
known rebuilders abandoned the electrical market or closed up
shop completely because they were losing money. Their departure
was seen as a major shakeup for this industry. But for some it
was good news, particularly those rebuilders who were able to
pick up some of their former accounts.

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Are there still too many players in the electrical market? We
haven’t heard of any other major rebuilders dropping their electrical
lines, but neither have we heard of any who are getting into this
market.

Despite a soft market and tough competition, some rebuilders are
gaining market share. They’re doing it "the old fashioned
way" through hard work and persistence. They’re putting more
emphasis than ever before on servicing their customers. They’re
increasing their product coverage, quality, fill rate and expanding
their geographic marketing area.

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Others are branching out and diversifying into heavy-duty, industrial
and agricultural electrical rebuilding. Many small rebuilders
are finding a profitable niche by doing more installation work.
Rural electrical shops in particular are in a strong position
because most have little or no local competition.

Offering an installation service has a number of advantages say
those who do so. Profits are better because you can get a higher
retail price for your units. You can also make money on labor
and related electrical work. Warranty returns are lower because
you can diagnose battery and charging system problems. But the
downside is having to work directly with the public. For some,
that’s more hassle than they want to handle.

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Mike Cohen of Ampere Automotive Corp. in Chicago, IL, said his
sales have grown this year because his company has full line availability,
ships in the high 90s, builds a top quality product and puts a
strong emphasis on servicing the customer. Ampere sells only to
wholesale customers in a 1,000 mile radius around Chicago.

"The market today is very mature and fragmented," said
Cohen. "So we have to be flexible and able to change with
the times. Whatever they put on vehicles next year, or two or
three years from now, we must be able to rebuild it. Our customers
won’t understand if we tell them we can’t do something. That’s
why we have to stay on top of the changes that are taking place
in our industry. I think the larger rebuilders are in the best
position to do that because of the tremendous data base you need
to rebuild everything today."

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Jack Bickart of Perfection Hy-Test in Eaton Park, FL, said his
company hopes to grow their electrical business. Currently, only
about 20% of Perfection’s business at its Florida facility is
electrical. The rest is mostly clutches. Bickart said alternators
and starters for domestic passenger car and light truck applications
are rebuilt in Florida, and heavy-duty and industrial products
are done at Precision’s Oklahoma plant.

"We’re building a new facility in Darlington, NC, so we can
gear up to go after much larger customers than we have currently,"
he noted.

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Quality issues

Bickart said the electrical market in his
area has a lot of potential and could be quite profitable. The
key to making money in his opinion is limiting returns. "If
you can’t control returns, your customers control your profitability.
Too many returns will put you out of business no matter what kind
of product you’re rebuilding," he said.

Warranty returns because of improper diagnosis and installation
is an ongoing problem and serious concern for many electrical
rebuilders today, said Bickart. "A lot of units come back
because the installer failed to determine why the old unit failed,"
he said.

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Bickart said returns are not necessarily the result of poor quality,
though that may sometimes be the case. "You don’t see many
brushes or bearings failing on rebuilt units," said Bickart.
"If an alternator stops producing current, it’s often because
of an electronic failure in the rectifier or regulator which is
usually caused by something else.

"Maybe the battery is bad, the connections are bad or there’s
some other electrical problem in the vehicle," he continued.
"That’s why the original unit failed, and that’s why the
second or third unit that was put on the car failed. So until
somebody diagnoses and fixes the underlying problem, any unit
that’s installed on that car is going to fail."

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Several rebuilders cited quality as a major issue today, not only
the poor quality of some low cost rebuilt products, but also the
inconsistent quality of component parts from various suppliers.
Rick Keister of Worldwide Automotive, Winchester, VA, said quality
is more important than ever in today’s market. Worldwide rebuilds
mostly import alternators and starters, and has enjoyed a strong
year. Keister says that maintaining a high level of quality has
been a challenge, though, because of "inconsistencies"
in the component parts Worldwide has purchased from various suppliers.

"We want consistent quality in the parts we buy," said
Keister. "That’s more important to us than price. We’re trying
to work with suppliers who can guarantee us that, and if they
make a change in whom they buy their parts from, we want to know
about it so we won’t be surprised."

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Several rebuilders blamed quality problems they were having on
suppliers who keep switching vendors. Many components are now
being manufactured in China where labor costs are considerably
lower. Many diodes are manufactured in Mexico, and one supplier
said virtually all button-style diodes are made overseas.

Though some rebuilders complained about the quality of Chinese-made
parts, others said no such blanket statements should be made about
China or any other country because quality depends entirely on
the vendor who makes the parts. "You can get good parts or
bad parts from any country, and that includes the USA," said
one supplier.

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Mike Deverall of Transpo Electronics, Orlando, FL, said quality
tends to be more of an issue with suppliers who distribute parts
and don’t make their own parts. "They’re at the mercy of
their vendors," explained Deverall.

Deverall says Transpo manufacturers most of the parts it sells,
and that the company has also been able to meet not only the new
ISO 9000 standards, but also the QS 9000 standards required by
the domestic vehicle manufacturers. "Working directly with
the OEMs has really helped us improve our quality," he said.
"They’ve taught us a lot."

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Specifications

Ampere’s Cohen says his main beef with suppliers
today is that they don’t publish technical specifications for
the parts they sell. "You can’t find out the hardness of
a bolt, what kind of material is in an insulator or even a brush
holder," said Cohen. "They don’t give you schematics
for rectifiers or regulators. Sometimes they don’t give you any
specs because they buy the parts from somebody else who doesn’t
provide them with any specs. Other times, they don’t give you
any specs because they think their part has a competitive advantage
that they don’t want to reveal. It’s silly."

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Cohen said accurate and detailed specifications are a must in
today’s rebuilding environment. He said Ampere has the R&D
capabilities to do fairly sophisticated component testing so parts
can be evaluated to control quality. "Sometimes it takes
25 phone calls to get the specs we need, but we’re persistent,"
he said.

Al Weiner of Renard Manufacturing, Miami, FL, a supplier of rectifiers,
diodes and other components, said his company’s sales were up
10 to 12% over a year ago because "people are now realizing
they need to buy quality parts." Weiner faulted rebuilders
for exacerbating the quality problem by pressuring suppliers for
cheaper and cheaper parts.

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"Rebuilders aren’t making any money, so they go to their
suppliers and tell them they can’t afford their parts," explained
Weiner. "They tell them they want parts that cost less. They
keep beating down their suppliers until somebody weakens and agrees
to sell for less. The supplier might give the guy a part for $4
that actually costs him $5. He’s losing money on the deal to get
the guy’s business, and hopes he’ll make it up when the guy buys
other parts from him. Meanwhile, he’s under pressure to find a
lower cost source of supply. The end result is nobody makes any
money and quality is driven down."

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Weiner said his company is doing everything it can to assure the
best possible quality. And on the issue of specs, he said Renard
has spec sheets for all their diodes and makes the specs available
to any customer who wants them. He also said he plans to make
the information available on computer disk so rebuilders can more
easily compare various diodes and specs.

"One of the problems we see in the industry today is that
some suppliers are using numbers to sell component parts,"
said Weiner. "They tell a rebuilder that their part number
‘X’ is better than their competitor’s part number ‘Y’ based on
specification numbers. But unless you really understand what the
specs mean and how they compare to the OEM requirements, it’s
very confusing. So our spec sheets include not only our own specs
but also the OEM specs for comparison."

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Weiner said OEM manufacturers won’t give the aftermarket their
component specs, so component parts have to be reverse engineered
to establish specifications for various applications. Once these
specs have been determined, then parts that meet or exceed the
OEM specs can be selected to remanufacture the alternator.

Parts proliferation

The proliferation of new alternator and starter
designs seems to have tapered off according to most of the people
we interviewed. Most rebuilders complain that there are still
too many different types of alternators (especially for import
applications), which makes it hard to provide full coverage. Yet
those who specialize in imports are glad there’s so much diversity
because it creates a niche that many rebuilders can’t fill.

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The two most popular domestic units continue to be the Delco CS
series and Ford IAR alternators. Some say these two units alone
account for 60 to 70% of all aftermarket alternator sales! It’s
no wonder, then, that many rebuilders say these two units have
been their salvation.

Both are high-output, compact units. The rectifiers often fail
due to overheating, but Ford is also said to have a major connector
problem. Because there’s such a demand for these two units, many
are being rebuilt with new parts and/or being replaced with new.

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Delco has its own reman program, and Bosch is building new Ford
units in Mexico. Core prices are also higher. On the East Coast,
the price of Delco CS cores has jumped from $25 last summer to
the $30 to $35 range – which discourages rebuilders from buying
them.

No one foresees any major changes in alternator designs, but the
OEMs always have a way of surprising the aftermarket. And although
there has been talk the OEM will reduce part proliferation because
design and tooling costs hurt them just as much as it hurts the
aftermarket, few see little chance of that happening soon.

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