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Power Investments, Inc.: Building An Empire In The Rebuilding Industry

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Mike Jarvis, 53, president of Power Investments,
Inc., is quietly building an empire in the rebuilding industry.
If you want proof, just take a look at his frequent flyer miles
(he’s averaged about 2,500 business miles per week over the past
four years), and the fact that company growth has averaged between
12-18% per year, mostly through acquisitions, since 1983.

Power Investments, Inc. is a holding company
for an extensive array of primarily remanufacturing businesses
in both the U.S. and Canada. What began in 1983 as Franklin Power
Products, Inc., when Jarvis and his partners Larry Light and Dr.
Beurt SerVaas acquired one of the ReNew divisions of International
Harvester Co., has now become a vast holding concern producing
primarily rebuilt gas and diesel engines, cylinder heads, transmissions,
new marine engines and fuel injectors, as well as rebuilt fuel
pumps and other small parts. Annual sales total more than $100
million.

Jarvis is a unique combination in the business
world. He is a man deeply devoted first to his family and then
to his employees. But he is also a skilled business tactician
in a maturing U.S. and Canadian market place, one who seems to
intrinsically understand the existing as well as potential value
of the people and the physical assets that have made up many of
the companies that are now under Power Investments’ corporate
umbrella. And one who also simply responds to the question of
how much bigger do you expect to get with, "We’re not done
yet."

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That may be an understatement. Jarvis has never
"thought small" when it comes to cultivating the growth
of Power Investments. And over the course of the past decade-and-a-half,
he has never been afraid to take risks, however calculated, to
ensure that business growth continued. One of those calculated
risks was undertaken in 1996 when Jarvis and partners gave up
some of their equity in the company to sell a majority interest
in Power Investments to Delco Remy International, Inc. (DRI).
Power Investments’ U.S. and Canadian divisions continue to operate
independently from DRI, a worldwide supplier of remanufactured
starters and alternators to both the OEM and independent aftermarket.

As president of Power Investments, Jarvis has
always pursued what he refers to as "focused manufacturing."
He defines it as the acquisition of companies which will allow
Power Investments to combine the facilities, people and technical
expertise to keep overall profits before taxes above the industry
average of 10-11%, which he says is necessary in order to sustain
growth and to remain competitive.

The decision to allow DRI to acquire Power
Investments was part of a long range plan designed to continue
to hit many of those same focused manufacturing targets. Says
Jarvis of DRI’s acquisition of his company, "DRI’s vision
of business is worldwide. It is a huge company with an understanding
of remanufacturing and the assets to grow on a global basis. It
has product lines that compliment our own, offers extended distribution
for our products, and has worldwide name recognition and a strategy
for global expansion. From DRI’s leadership perspective, they
liked our aggressive growth record, our financial track record,
our quality products, and our management team."

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In evaluating the North American market for
remanufactured engine sales, Jarvis doesn’t see a lot of growth.
It’s internationally that he sees the larger prospects. "We
won’t back away from any opportunities that present themselves
to us in the North American market," said Jarvis. "But
that’s not market growth, that’s market redistribution.

"I think foreign markets offer the brightest
growth potential," he continued. "Southeast Asia, India
and South America are all places with growing numbers of first
time car owners that will need service. To succeed in those markets
you will have to set up remanufacturing operations there; DRI
already operates facilities in Europe and other emerging markets
around the world.

"It wouldn’t surprise me at some time
in the future we will be able to ship remanufactured products
produced in different places around the world back to the U.S.
market," Jarvis continued. "It wouldn’t surprise me
if my two sons, (both of whom are presently employed at Franklin
Power Products, one as an assistant plant manager, the other as
a controller) eventually end up running plants in foreign countries."

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While Jarvis implements the framework that
should allow Power Investments to expand globally, his existing
U.S. and Canadian companies are solidifying relationships with
their customers ñ in almost all cases, OEM distribution
facilities or the OEM dealerships themselves.

Power Investments’ U.S. operations consist
of Franklin Power Products, Inc., Franklin, IN, remanufacturers
of primarily mid-range diesel engines, but also some gas applications;
International Fuel Systems, Inc. (IFS), also headquartered in
Franklin, with three more manufacturing facilities in Indiana
and Ohio and a distribution outlet in Toronto, Canada; Marine
Corporation of America, Inc., (MCA) also located in Franklin,
and producers of new Navistar marinized diesel engines for marine
applications, sold under the Starpower label; Marine Drive Systems,
Inc., located in Peru, IN, and producers of new stern drives and
marketers of MCA Starpower engines; Powrbilt Products, Inc., located
in Mansfield, TX, and producers of big diesel engines such as
the Cat 3208 and 3406, GM 8.2L and 6V-92, Cummins Big and Small
Cam engines, and a variety of component parts including upper
rockers, water pumps, idlers, connecting rods and cylinder heads;
Western Reman/U.S., headquartered in Peru, IN, remanufacturers
of GM industrial connecting rods, industrial blowers and industrial
clutch drive springs used on locomotive applications; and International
Premium Products, located in Franklin, which is a distribution
facility for various Power Investments private label products.

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Power Investments’ Canadian operations consist
of Central Precision, Ltd, Toronto, Canada, which remanufactures
gas engines, electrical, brakes, clutches and a variety of other
small parts; Western Reman, Winnipeg, MB, Canada, which remanufactures
primarily gas engines and a broad array of small parts from rack-and-pinions
to power steering pumps, clutches and carburetors, and industrial
engine components from crankshafts to injectors; and Engine Rebuilders,
Ltd., Edmonton, AB, Canada, which remanufactures gas engines,
transmissions, power steering pumps, rack-and-pinion, wiper motors
and air compressors. Engine Rebuilders also operates an electrical
rebuilding operation located in Toronto, as well as a sales and
distribution facility located in Winnipeg, Manitoba Canada.

From the beginning in 1983, when Jarvis and
his two partners convinced International Harvester to divest itself
of its Indiana Engine Renew Division, a gas engine rebuilding
operation which Jarvis and company renamed Franklin Power Products,
the OEM has always been Franklin Power Investments’ target customer
base.

In an increasingly competitive and technically
complex engine and small parts rebuilding environment, it seems
to be a decision that has served the company well. Jarvis admits
that serving customers such as Ford, General Motors and Navistar
requires large capital resources and a lot of patience. But he
also knows that a relationship with the OEM provides resources
that are available nowhere else.

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"Being able to enjoy the engineering support,
along with the distribution network of the OEM, is a major competitive
advantage," explained Jarvis. "I think it would be most
difficult to rebuild products at the necessary quality levels
considering the complexity of today’s injection systems and engine
and vehicle electronics, without their support."

Although the OEM is the primary customer base
of Power Investments’ companies, Jarvis early on made a conscious
decision to serve a broad base of them. Remanufactured engines
and parts are currently sold to Ford, General Motors and Navistar.
New marine engines are sold to Mercruiser, with additional sales
of marinized diesel engines and stern drives through the company’s
own worldwide dealer base. Caterpillar, Cummins and Detroit Diesel
engines are also sold through the company’s independent distribution
outlets.

Diversification for Franklin Power Products
really began as International Harvester started phasing out production
of its gasoline engines and moved primarily into diesel applications
beginning in the early 1980s. That meant that the service requirements
of its sole customer at that time would become primarily diesel.

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To better serve its customer, Franklin Power
Products in 1987 purchased Findlay Diesel, a diesel pump and injector
rebuilding business with locations in Toledo and Findlay, OH.
Today, known as International Fuel Systems, Inc. (IFS), the company
has four remanufacturing locations with a fifth distribution outlet
located in Toronto to serve its Canadian market customers.

IFS has been able to triple its annual sales
over the past five years. In addition to its impressive growth,
IFS has received Navistar’s highest quality rating for its rebuilt
pumps, and in 1996 it became the exclusive supplier to Ford on
rebuilt 6.9L and 7.3L diesel pumps.

Franklin Power Products, itself, is also no
laggard as far as growth has been concerned. Since 1983 the company
has been able to sustain average annual growth of about 12%. Today
85% of its engine production is diesel.

In late 1996, Navistar became the Ford Quality
Renewal (FQR) supplier for Navistar’s remanufactured T444 Power
Stroke engine. The new T444 engine is found in most new Ford three-quarter
and one-ton pickup trucks. Franklin Power Products is Navistar’s
authorized remanufacturer of the T444. Long term, that should
be good business for Franklin Power as Navistar expects to soon
be building close to 200,000 of these new engines annually for
installation in new Ford trucks.

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In addition to rebuilding the T444 for Navistar,
Franklin Power Products also supplies Navistar with a variety
of component parts for the engine such as rebuilt cylinder heads,
connecting rods, etc. Power Investments’ Marine Corporation of
America (MCA) division has also taken the base T444 engine, which
generates 210-220 hp, and marinized it to generate about 330 hp.

MCA, whose president, John Knee-bone, was one
of the original founders in the Franklin Power Products startup,
produces about 800 new engines annually, half of which are sold
directly to Mercruiser. Projections are to be producing up to
1,200 engines within 12-18 months. MCA and the company’s Inter-national
Fuel Systems division are both housed in a separate 50,000 sq.
ft. facility. The company’s marinized, private label Starpower
engines, all built from new Navistar blocks, are found in a variety
of workboat and pleasure boat applications around the world.

Except for castings, most of the component
parts used to marinize these engines are actually manufactured
by MCA itself. Employing cad-cam designing capabilities, the company
produces about 700 different part numbers for its engines, including
30 aluminum castings and 40-50 different fabrications that range
from motor mounts to lifting eyes and brackets. Every engine is
live-run tested for at least 45 minutes. Actually, all of Franklin
Power Products’ diesel engines for automotive applications are
dyno or spin tested depending on the type of engine package being
produced.

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During our visit, Robert Bueckert, president
of the firm’s International Fuel Systems (IFS) division also told
us that in addition to Ford and Navistar, the company rebuilds
diesel fuel pumps and injectors for a variety of other OEMs including
Caterpillar, Detroit Diesel and Cummins. In total, 30 different
models of diesel pumps are rebuilt by IFS.

It would take a fairly large book to detail
all of the employees, facility assets and numerous rebuilt and
new products produced among Power Investments’ various companies.
However, the broad brushstroke would reveal that corporately the
holding company has been able to sustain above average industry
growth in almost all of its product lines, with rebuilt electrical
and transmission lines targeted for an even higher growth track
over the next three years.

Overall, Power Investments’ total sales are
about 50% engines, 20% transmissions, 20% in electrical units,
with the remaining 10% of sales composed of a variety of other
rebuilt small parts. Almost all of the gas engines sold by the
company are rebuilt in Canada, with the majority of the diesels
remanufactured in the U.S.

Can Power Investments sustain the type of growth
it has generated over the past 14 years? And is the OEM a long
term player in supplying the aftermarket with rebuilt service
parts for both warranty as well as post-warranty requirements?
Jarvis answers yes to both questions.

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Coming from a financial background, he worked
for more than 16 years in general accounting positions for International
Harvester, as well as having a solid background in both the trucking
and racing markets, Jarvis seems more than capable of keeping
growth on the fast track, but with the priority that profits have
to be maintained. And unlike many enterprising entrepreneurs,
he has also learned to delegate responsibilities for the companies
that have become part of Power Investments’ holdings.

"My priorities are to look to promote
growth, and to manage at a higher level," explained Jarvis.
By higher level Jarvis means consulting regularly with the presidents
and upper management of Power Investments’ individual companies
to make sure the correct business plans have been implemented
and are being reviewed on a regular basis.

"I also make sure that we’re providing
the necessary capital and that the right people are in place and
that those people are empowered and appropriately rewarded for
what they accomplish," said Jarvis. "I want the people
running our companies to be 100% invested in them. I want them
to earn bonuses that reflect the effort they’ve put into growing
their businesses."

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When speaking of future acquisitions, Jarvis
seems to have accepted that there is no turning back. "Our
plan is to continue to grow," he said. "I’m not sure
that when you are expanding the way that we are that you can step
back."

Competition for all production engine rebuilders
is very tough, noted Jarvis. Many of them require major volumes
in order to sustain their operating facilities. That often leads
to lower pricing in order to increase both sales and distribution.

However, Jarvis says it is not always in the
best interest of a remanufacturer to be the lowest bidder on an
OEM contract for rebuilding an engine or other component. "We
know what our margins need to be and we strive to make bids that
will allow us to maintain profitability," said Jarvis. "It
would make no sense to tie up our production capacity with unprofitable
contracts, contracts that would not allow us to be able to continue
to make the necessary investments required to sustain future growth."

Jarvis knows that doing business with an OEM
is a lot like dancing with an elephant; it comes with some serious
risks as well as benefits. For example, it is not unheard of for
an OEM to initially predict high volume requirements that end
up being 30-40% less than what was forecasted.

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It is not unusual for the OEM to continually
try to reduce its suppliers’ margins in order to satisfy corporate
accountants and shareholder earnings expectations. And it has
become mandatory for rebuilders to meet often expensive and demanding
quality control expectations as part of the OEMs’ effort to keep
its dealerships and its dealership’s customers satisfied.

"When you do business with the OEM you
actually become an extension of their business," said Jarvis.
"You can’t make changes whenever you want; in many cases
they control you."

That said, Jarvis is more than happy with his
position as an exclusive product line supplier to some of the
world’s most prestigious vehicle makers. He is confident that
becoming an extension of the OEMs’ dealership sales and service
capabilities is not only to their benefit, but also to that of
Power Investments’.

He is also confident that the OEM has made
a long-term commitment to being more of a participant in the service
repair life of its vehicles. OEMs, says Jarvis, are doing this
to meet higher customer performance, quality, service and pricing
expectations. Many new car dealers, because of the improved quality
of today’s vehicles, have seen significant erosion in warranty
service work profits. The OEM, says Jarvis, is committed to driving
its customers back to the dealer for service work on post-warranty
as well as under-warranty service work. He says that new car dealerships
over the next five years will become much more price competitive
with the independent service provider.

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"If the dealership is going to be able
to compete in the post-warranty service and rebuilt parts replacement
market, we have to have prices based on the actual value added
to the product," explained Jarvis. "As a rebuilder supplying
the OEM, we need both high volumes and effective pricing to be
able to compete with an independent (parts and service provider)
because we have another level of distribution to go through. In
the final analysis, if the pricing doesn’t reflect the actual
value added, the competition will take you out."

New car dealerships are undergoing a major
transition, according to Jarvis. "The development of mega
dealerships, and the increasing number of used, leased and released
vehicles in the market place will all have a significant impact
on how dealerships will do business in the future," he said.

Jarvis says that rebuilders such as Power Investments’
companies will become more and more involved in joint venture
projects to ensure that OEMs can achieve their aftermarket service
goals. That already includes providing enhanced service requirements
such as direct warranty and technical administration, increased
inventory levels, and 95% order fill within 24 hours.

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In the future joint venture projects may develop
into specialized production programs where, for example, a rebuilder
would process cores, clean and machine parts that would eventually
be shipped to an OEM facility for assembly, testing and distribution.
Some of these types of partnership arrangements already exist
between rebuilders and their OEM customers.

"In many respects the relationship we
have with our OEM customers is the same as that of any successful
production engine rebuilder with his WD, jobber, service garage
or retail customers," explained Jarvis. "We have the
same drive, determination and commitment that they have to keep
their customers happy. But there is a difference, too."

What is that difference? Jarvis explains that
it boils down to those partnerships with the OEM and its dealerships,
partnerships designed to maximize the production, distribution,
technology, inventory availability and service that both the OEM
and the rebuilder have available.

Controlling the core

Jarvis notes that in addition to these partnerships,
the OEM is more focused

OEMs realize that they need to control the
availability of cores better. In the future there won’t be as
many readily available.

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on controlling the aftermarket through the
availability of cores. OEMs today are making a concerted effort
to make sure cores at their dealerships are returned to the OEM
itself, or to its authorized engine rebuilder, at least on engines
that are now under contract to be rebuilt by a specific remanufacturer.

"OEMs realize that they need to control
the availability of cores better," said Jarvis. "He
who controls the core controls more of who will get the business.
You can’t rebuild it if you can’t get a core." And although
OEM efforts to control core availability may not have much of
an impact on the custom engine rebuilder working on a customer’s
own engine or component part, it could have significant impact
on production engine rebuilders that buy an average of 30% or
more of all the cores used to rebuild their engines.

"There will always be cores in the market
place to rebuild," said Jarvis. "But I don’t think there
will be the ready availability of cores that many rebuilders have
enjoyed in the past. It’s all part of the OEM’s effort to participate
in a larger percentage of the market for service parts replacement
on their vehicles. And, of course, to control the quality of parts
and ensure customer satisfaction of vehicle ownership."

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Part of that effort has been a gradual realization
on the part of the OEM that parts need to be designed so that
they can be remanufactured more efficiently and more profitably.
To an OEM new parts engineer, that has not been an easy transition.
But, says Jarvis, it is beginning to occur.

"Navistar has appointed a full-time remanufacturing
engineer to help focus its new product changes so that parts will
be less costly to rebuild, easier to rebuild, and will deliver
a better performance level," said Jarvis.

"Ford also has a dedicated group of people
with similar objectives regarding its contracted remanufactured
Ford Quality Renewal (FQR) products, and GM is doing the same
type of things at its in-house remanufacturing operation in Lansing,
MI."

There’s no question that since its inception
in 1983, Franklin Power Products has experienced phenomenal growth.
Jarvis expects that similar growth will continue as Power Investments
cultivates new partnerships with vehicle makers looking to expand
into rebuilt engine and parts sales and service.

"We will continue to serve the OEMs and
to work towards enhancing their market share and product quality,"
said Jarvis. "If, as a supplier, you choose to compete against
them you won’t be their supplier for long. Loyalty is very important
to them as well as to us."

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There’s no question that Jarvis is prepared
for the level of competition that he is likely to face as both
OEMs and independents maneuver to increase their market share.
"I like to go rabbit hunting with an elephant gun,"
Jarvis explained of his approach to business. "By the time
someone realizes we’ve entered their market, I’ve already gained
control."

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