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Rebuilt Market Reviews – Engines Market

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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"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."

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"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.

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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.

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‘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."

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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.

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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."

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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.

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"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.

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"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.

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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.

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"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.

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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."

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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.


Most Important Factors Affecting the PER Market Today

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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

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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%

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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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