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Niche Market Opportunities

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In today’s highly competitive market, it makes sense to constantly
be on the lookout for new opportunities. Information on the markets
described in this article may provide some new business prospects
for those shops not already involved with them. However, rebuilders
should constantly be prospecting for other niche markets for their
existing products or services.

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There are potentially many products or market opportunities for
the machine shop or production engine rebuilder (PER) curious
enough to prospect for them. From small industrial crankshaft
applications to one-off repairs of large equipment, machine shops
and PERs may find profitable niche business exists just around
the corner.

It’s important for shops to know the neighborhood that they do
business in. What types of businesses exist in your markets? You
may be pleasantly surprised at the variety of industrial and commercial
jobs that can be handled, for example, by your existing shop equipment
and technical capabilities.

Do you employ an outside salesmen whose job it is to locate these
types of businesses and to learn what machine work and/or rebuilt
products they may require on a regular basis? Sadly, many shops
don’t. However, with competitive pricing on typical passenger
car and light truck work being what it is, it makes sense to do
so.

Too many engine rebuilders today are not keeping up with technology,
especially as it pertains to marketing and customer service. Make
a commitment to keep abreast of developing information technologies
to expand your business opportunities. From e-mail to the World
Wide Web, managing information and information systems will be
a critical ingredient to keeping up with developing markets and
customer expectations.

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One of the most talked about information resources today is the
Internet. And believe it or not, the Internet offers PERs, machine
shops and small parts rebuilders the same basic capabilities as
it offers any other business. Those capabilities include using
the Internet as:

  • A business-to-customer sales tool;
  • A business-to-business sales tool;
  • A marketing research resource;
  • A technical information research tool;
  • An industry events calendar;
  • A rules and regulations resource;
  • A recruiting tool.

Although there are a lot of less-than-useful locations on the
Internet, the World Wide Web will only become more and more utilized
to conduct business. There simply is no other medium that offers
either the immediacy or the variety and volume of information
as the Internet.

The search engines used to navigate the hundreds of thousands
of websites on the Internet are becoming increasingly more sophisticated
in categorizing and presenting information. Modem connections
are increasing in speed to access this information as well. Concerns
about financial transactions over the Internet will soon become
a thing of the past.

There are already 75 machine shop and supplier members of the
Automotive Engine Rebuilders Association (AERA) with their own
websites. These sites range from simple name, address and phone
number pages to full-blown multi-page websites detailing all products
and services provided by the engine rebuilder or supplier. At
the very least, shops should not underestimate the benefits provided
by e-mail, e.g., documented and immediate communication between
your business and your existing or potential customers.

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Find a need and fill it

When looking for profitable niche markets engine rebuilders should:

  • Identify engines/components that fail most often;
  • Identify engines/components that have high replacement costs;
  • Identify engines/components where availability is a problem;
  • Identify engines/components that are difficult to rebuild;
  • Identify engines/components with low volumes but high margins
    (often the very old or the very new);
  • Identify services as well as products that solve customer
    problems.

Look at these areas and then decide if you can enter any of them
as either a rebuilder or a distributor. What might make sense
for a small to mid-size remanufacturer to rebuild might be the
kiss of death for a higher volume rebuilder. Obviously, you have
to be able to take advantage of the expertise and the economies
of scale that your business presently offers. But you also don’t
want to forgo any sales opportunities that may present themselves
by partnering with another shop that may provide you with the
resources and products to serve various niche markets.

Specific market opportunities

As was mentioned earlier, there are potential customers for a
variety of shop services, too many actually, to describe in detail.
What products and services those potential customers require will
only become known once you make the effort to call on them to
learn more about their businesses.

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This article will take a look at some of the markets that PERs
and machine shops often have asked us to provide more information
on. These include: performance, marine, transmissions, on- and
off-road diesels, cylinder heads, finish out parts kits and specialized
repairs.

Performance

In general, the performance market has grown to more than a billion
dollar industry that includes both racing and performance products.
According to the Specialty Equipment Market Association (SEMA),
the performance and racing industry amounted to $1.4 billion in
1994. Racing and performance products defined by SEMA consist
of internal engine, drivetrain, exhaust system, fuel system and
ignition components. Light truck, off-road, street performance,
street rod/custom, restoration, racing and restyling make up the
primary outlets.

Performance Outlets

Outlets for performance products include speed shops (16.1%),
full line auto parts store/jobber (15.5%), mail order (14.2%),
auto chain store (13.7%), specialty products/installation (9.5%),
direct from manufacturer (7%), discount chain (4.9%) and other
(19.1%).

The speed shop specialist, full-line jobber and mail order outlet
account for nearly 46% of total racing and performance market
sales.

Anyone who has attended the PRI Show in Cincinnati and Columbus,
OH, over the past several years could attest to the growing interest
in performance and racing. Interestingly enough, several equipment
suppliers told us that many of the new shops which they are opening
are much more performance oriented, as compared to full-service
traditional machine shops of the past.

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Does the performance market offer opportunities for the PER or
machine shop? Yes, of course. How does a PER or machine shop integrate
a performance line into existing production? To build exotic,
high performance engines takes a lot of technical expertise and
can be quite costly for the rebuilder as well as the customer.
Most engine rebuilders producing performance engines, would likely
tell you that circle track or tractor pull engines, for example,
are viewed more as a research and development opportunity than
as viable, growing profit center for them.

While there are two to three thousand racing shop specialists
that do perform a variety of specialized, high profile, performance
engine rebuilding, the typical PER or machine shop would probably
be better off aiming for less technically sophisticated applications.

Shops we interviewed concerning performance work offered the following
suggestions for the typical PER or machine shop:

  • Aim to use existing equipment and processes as much as possible;
  • Target the weekend warrior involved in street rod, Saturday
    night specials and/or local bracket racing;
  • Target the "towing packaging" RV buyer looking for
    more horsepower to get the job done.

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A moderate performance engine program where you offer a mild duration
cam, upgraded valve springs, steel crank, etc. has definite possibilities.
Building these engines is not nearly as disruptive to the production
process and they can be targeted to those growing number of vehicle
owners looking for a towing package or to street rod enthusiasts
and those of similar interest. The performance line then becomes
a good marketing tool for promoting the quality and performance
of your standard engine services.

Mail order outlets providing performance motors told us that these
engines are always marketed and sold by horsepower. All the small
block engines, that is, the 320, 330, 360, 400 and 450 engines
make up the bulk of demand in the street racer, bracket racer,
Saturday night special categories. Long blocks, sold with all
the tin, go from $2,000 to $5,000. The essential criterion is
to provide the required horsepower while still delivering a nice
idle, fast ride and the ability to burn pump gas.

Performance engine rebuilding is all about combinations of parts.
The more exotic the engine, the more critical and expensive the
combinations become. And the more critical the combinations and
machining specs, the more difficult it becomes to utilize existing
personnel, material handling and equipment/machining processes.

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Karting

A lot of people don’t realize it, but karting is the fastest growing
segment of the motorsport industry. Basically karting is divided
into the concession kart rental, backyard consumer and racing
kart markets, most of which feature 5hp Briggs & Stratton,
Tecumseh or Honda engines. There are about 26,000 service outlets
dealing with these engines scattered throughout the U.S.

Within the concession kart market there are 9,000 to 10,000 new
karts sold annually. There are about 2,000 rental tracks in the
U.S., most of which operate 10-12 karts. Engines last about one
year before they are rebuilt or replaced.

The "fun kart" market is primarily the realm of the
backyard user. This market expects to sell 1 million karts over
the next five years. True Value is the largest single retailer
of karts in the country, although there are more and more lawn
and garden, stand alone kart shops and some motorcycle shops getting
involved with rebuilding and servicing kart engines.

Within the performance and racing industry, karting is becoming
quite a phenomenon. Today there are about 80,000 to 100,000 kart
racers in the U.S. There are about 600 kart racing tracks with
heavy concentration in the Northeast, Midwest and Southeast.

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One of the reasons karting is growing so fast is that you can
buy a race ready kart for between $3,500 to $4,000. That gets
you a race chassis and a stock 5hp, 2-cycle or 4-cycle engine.
Most karters don’t race longer than a year, however, before they
go looking for more horsepower.

There is a rapidly developing aftermarket for carburetor, crankshaft,
connecting rods and other parts for these engines. What do they
sell for? It’s not unusual to pay $750 to $1,000 for these engines.
Stroker crankshafts can sell from $200 to $300.

Age brackets for karting start at six years old, although the
average racer is typically a 28-year-old male. Overall the karting
market is presently estimated to represent about $1.3 billion
in annual sales. Several OEMs offer high end racing engines. Yamaha,
for example, manufactures its own 100cc, 15hp engine strictly
for kart racing. Briggs & Stratton has a high horsepower Raptor
line of racing engines as well.

The ease of access in terms of cost, should position karting as
a continuing growth industry. It might be interesting to explore
the opportunities of doing business with kart tracks directly
or independent distribution outlets providing parts and service
for this marketplace. Perhaps even mail order sales of these engines
and parts to the growing number of lawn and garden or service
and parts repair outlets is a possibility.

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The marine market

Replacement marine engines are primarily for the inboard/outboard/stern
drive applications. The National Marine Manufacturers Association
says that at the end of 1995 there were 1.4 million inboard and
1 million stern drive boats in operation in the U.S. Based on
conversations with a variety of people from OEMs to aftermarket
gasket suppliers to PERs and machine shops, we’d estimate that
the marine market is about 1% of the size of the passenger car/light
truck gas engine market.

The automotive gas engine market is between 2.7 to 3.2 million
rebuilt engines produced annually. That would put the demand for
rebuilt marine engines at somewhere between 27,000 to 30,000 units
per year.

PERs that we’ve interviewed with marine engine market programs
have seen impressive growth in terms of percentage increases over
the past one to two years. But, the total number of these engines
in actual unit numbers produced is not all that great. As late
as this past February, however, Mercury Marine was looking to
develop PER sources for its own line of remanufactured inboard
engines. Mercury Marine sold between 1,500 to 1,600 rebuilt engines
last year and about one-third of these were for warranty purposes.

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Marine inboard engines consist primarily of a basic Chevy, Ford
or Chrysler engine. Companies such as Mercruiser, OMC, Volvo Penta,
etc. then marinize these base engines by adding their own proprietary
exhaust manifolds, ignition and electrical systems, carburetion,
mounts, transmission or drives.

In general, the marine market is not a growing industry in terms
of either new boats sold or existing boats in operation. That
said, the market for an exchange reman marine engine is growing.
There are a couple of major reasons for this. One is that many
marine distributors, of which there are maybe 40-60 in the U.S.,
have not really been involved in engines or engine hard parts
in the past.

Many of them have been more involved in boat accessories such
as life jackets, rope, bottom paint, lights, etc. The problem
is that many of these distributors have seen their market share
in these products eroded by the K-Marts, Wal Marts and other mass
merchandisers, so some are looking at putting in a line of reman
engines or parts. However, up until just a few years ago, there
were perhaps only 10-12 marine WDs with any significant expertise
in engines or engine parts.

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The other contributing factor to growth in marine reman exchange
engines is that the boat owner does not tolerate well any delay
or problems in getting or keeping his boat in the water. It’s
a short season for many and they only get to their boats once
a week or once a month and if they have a problem, they want it
fixed ‘yesterday.’ So the convenience of an exchange engine is
attractive to them.

Marine reman programs are growing primarily because traditional
marine distributors are looking to replace lost market share,
and the boat owner is looking to minimize lost time on the water.
All of this exchange engine business seems to be coming at the
expense of the local shop that formerly repaired or rebuilt the
engine, because the boat market in general has remained stagnant,
or actually declined somewhat since the mid to late 1980s.

If you do enter this segment, you should recognize that it is
a very traditional, close-knit market. Most marine dealers have
had only two sources of supply, their franchise OEM and their
local distributor. Dealing with the OEM or the independent WD
is likely your best bet in terms of developing a customer base.
Mercury Marine is looking at expanding sales of its reman line
of engines. It has 6,500 dealers and its big problem as we see
it is that most of them don’t know anything about engines or engine
service. The problem for Mercury Marine is identifying the proper
dealers for this program and then educating those dealers on how
to market reman engines.

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Because marine engines are primarily the typical base Ford, Chrysler
or Chevy engine, you can likely take advantage of existing processes
and equipment within your company’s production and materials handling
programs. You can also expect to price these engines to return
about 6-10% higher profit margins than your typical passenger
car or light truck engine.

Transmissions

For some PERs, transmission sales have been the largest single
growth area in their business over the past 12 to 18 months. One
PER told us that redistributing remanufactured transmissions now
represents one-third of total sales volume for the company.

Some people think that the small mom and pop transmission rebuilder
is at the stage where many jobber machine shops were 10 years
ago, that is they can no longer compete on price for the rebuilding
of the popular, fast moving numbers. Nor in many cases do they
have the technical expertise to rebuild the variety of transmissions
in the marketplace.

Many people feel the small transmission rebuilder will gravitate
to an installation specialist rather than a rebuilding specialist.
Or they will become more specialized in the repair or rebuilding
of specific lines of transmissions. Presently there are about
15,000 to 20,000 transmission rebuilding shops in the U.S. Of
that number, there are maybe 300-400 that build as many as 150
units monthly.

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Where engine durability has generally improved over the past decade,
at least in terms of the lower end, light-weight transmissions
have not seen the same kind of longevity. And people generally
do not provide preventative maintenance to their transmissions
like they do with their engines. In terms of unit numbers, the
transmission market will likely experience more growth than the
engine market over the next several years.

Many people feel that it will be the high volume transmission
rebuilder that has the economies of scale to invest in the training
and testing equipment required to meet future market demand. As
compared to engines, there is much less machining during the rebuilding
process. More expertise is required in materials processing, assembly
and testing.

In recognition of the changes taking place within this market,
the Automotive Parts Rebuilders Association (APRA) recently redefined
its transmission division relabeling it the Volume Transmission
Division. With the growing addition of electronic controls, rebuilders
require more sophisticated testing equipment which necessitates
higher capital resources. The need for more capital and larger
economies of scale benefit the volume rebuilder and redistributor.

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Volume transmission rebuilders can be large OEM contract rebuilders,
those supplying independent installers, those supplying their
own shops, or large single unit installer/retailer locations rebuilding
for their own installation needs.

Not everyone agrees with this growth trend in market share for
volume rebuilders. The Automatic Transmission Rebuilders Association
(ATRA), for example, feels that the sheer proliferation of part
numbers will keep the smaller retail, custom transmission rebuilder
in business for a long time to come. ATRA feels that there are
adequate information resources available to smaller, custom shops,
and that because transmission rebuilding is more assembly oriented
than machining oriented, small custom shops are in a better position
to build and service the variety of transmissions in the market
place.

In the final analysis, there is room for both players. However,
volume transmission rebuilders are growing in number and in market
share. And the market is estimated to be about twice that of the
demand for rebuilt engines. ATRA estimates that there are about
6,000 to 7,000 rebuilt transmissions sold annually.

On and off-road diesel engines

Chart 1 below shows annual North American diesel engine production
over the past several years.

Annual North American Diesel Engine Production

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1993
1994
1995
1996
<5hp
0
0
0
0
5-20hp
1,682
1,760
1,846
1,910
21-50hp
1,257
1,338
1,846
1,429
51-100hp
43,256
44,021
47,405
46,591
101-300hp
551,554
616,880
679,532
672,119hp
301-700hp
184,819
216,212
228,182
187,173hp
701-2000hp
7,163
8,198
8,559
8,485
2000+
995
1,109
1,247
1,231
Total
790,726
889,518
968,172
918,938

Market statistics were provided by Power Systems Research, a research
and consulting firm specializing in the global on- and off-road
engine market. The company maintains offices in St. Paul, MN,
Brussels and Tokyo.

The chart shows that the 100 to 300 hp segment of the diesel engine
market accounts for about two-thirds of all diesel engines produced
on an annual basis in North America. Engines in the 300 to 700
hp range represent the next highest segment at 187,000 engines
produced each year.

Chart 2 below shows the 1995 diesel engine population by
OEM. According to Power Systems Research, there are presently
a little more than 16 million diesel engines in operation in North
America. Navistar holds about 13% of the market which represents
about 2 million operating engines. Deere, Caterpillar, Cummins
and Detroit Diesel each hold between 6% to 8% of engines in operation,
or roughly 7% to 8% of the diesel engine population, respectively.

1995 DIESEL ENGINE PRODUCTION

Navistar
2,095,162
12.9%
Deere
1,356,497
8.3%
Cat
1,287,683
7.9%
Cummins
1,156,625
7.1%
Det. Diesel
1,089,754
6.7%
Kubota
980,090
6.0%
Chev/Pont/Can
937,481
5.8%
Perkins
921,110
5.7%
Con/Diesel
820,668
5.0%
Yanmar
773,025
4.8%
Ford
694,826
4.3%
Isuzu
680,685
4.2%
Mercedes
435,324
2.7%
All Others
1,904,131
11.6%
Total In Operations
16,265,202
100%

Chart 3 below shows the total diesel engine population in
North America. The largest segment of the diesel engine market
is represented by those in the 100 to 200 hp range, roughly 6
million engines. Throw in engines at 200 to 300 hp and you have
about 50% of the total diesel engines in operation.

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1995 DIESEL ENGINE POPULATION

By HP Range

HP Range
Pop.
%
3-50
3 MIL
18.2%
50-100
3.5 MIL
21.7%
101-200
6.1 MIL
37.3%
201-300
2.2 MIL
13.7%
301-400
1.1 MIL
6.8%
401-500
209,210
1.3%
501-700
83,583
0.5%
701-1000
43,946
0.3%
1000-1500
20,711
0.1%
1500-2000
9,399
0.1%
Total
16,264,750
100%

Engines at 50 hp and less account for about 40% of all diesels
in North America. One of the more promising growth markets in
this lower horsepower range are skid-steers, often referred to
generically as Bobcats. It is now the largest off-highway segment
of diesel engine applications, having surpassed backhoes a few
years ago.

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About 50,000 Bobcats were sold in 1996, and industry experts expect
that number to grow to 60,000 annually by the year 2000. The versatility
of skid-steers and their comparatively inexpensive cost make them
a highly sought after piece of equipment for many in the off-road,
construction, landscaping and agricultural markets.

Although a popular rental item, many contractors purchase these
units outright because of their lower cost and utility. The majority
of skid-steers are diesel powered with Kubota, Perkins and Deutz
the primary engine suppliers. Kohler is a major supplier on the
gas side. Engines on skid-steers range from 20 to 85 hp, although
most engines are at the 35 hp level or above.

Chart 4 below shows the 1995 diesel engine population by
market segment. It’s interesting to note distribution of engines
by number of owners in each market and number of engines owned
or operated by each owner. Generally, in the agricultural market,
for example, it is very typical for the average farmer to operate
two or three diesel-powered units at most; many operate just
one.

1995 DIESEL ENGINE POPULATION BY MARKET SEGMENT

Industry
Pop.
%
Agriculture
3.2 MIL
19.6%
Construction
1.6 MIL
10%
Gen. Ind.
962,851
5.9%
Highway
7.3 MIL
44.8%
Lawn/Garden
537,110
3.3%
Marine
257,723
1.6%
Mat. Handling
407,167
2.5%
Other
547,287
3.4%
Pump/Comp.
536,497
3.3%
Weld/Gen.
917,566
5.6%
Total
16,265,202
100%

In the truck and construction market segments, however, the average
fleet size is closer to 35 units for trucks and 22 units for construction
companies, with many fleets operating several hundred units. These
markets, being more concentrated, are also areas where factory
rebuilding programs have focused.

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Trying to rebuild engines for the high horsepower off-road gas
or diesel market is likely not a good fit for most PERs or typical
passenger car/light truck machine shops. Rebuilding applications
for mining and heavy construction equipment, for example, are
a very specialized, custom job that requires a lot of customer
attention and hand holding. However, for the right size PER or
machine shop in the right location, specialized engine or equipment
repair work can generate some big jobs as well as some big dollars.

Gary Reed, general manager at Lock-N-Stitch, Turlock, CA, for
example, told us of an 8,000 hp Waukesha stationary engine with
a blow-out hole in the side of the block which was repaired at
a cost of $3,000 in parts and labor. Charge to the customer was
$12,000 and he paid it happily because the cost of a new engine
is about $60,000. Or how about a Mitsubishi 35,000 hp stationary
engine which was crack repaired around the cylinder sleeve at
a cost of $4,000. The customer paid $8,000 for the repair. The
engine costs $2 million new. So, such damage is always repaired
because the cost to replace with new is just too high.

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It comes down to assessing where profit opportunities exist. Specialized
custom repair work can be done in both commercial and industrial
markets and can be quite lucrative. This type of repair work is
usually billed out at a much higher hourly rate. However, these
types of customers can require more ‘hand holding’ and the turnaround
times sometimes require an around-the-clock commitment by the
shop.

However, for those PERs and typical automotive machine shops involved
in diesel engines, the majority are targeting mid range, Class
6 and Class 7 motors. There are numerous fleets running engines
such as the 6.2L, 8.2L and 3208. Some PERs have even done a good
job with diesel engine and transmissions sold as a unit to such
customers as charter bus fleets and municipalities. These and
similar engines can generate good profit margins while still taking
advantage of existing equipment and material handling processes.

Heavy duty Class 8 engines for really large fleets are primarily
an in-chassis repair item for many of them. Today these engines
often see 500,000 to a million miles before a repair, and there
can be a lot of warehousing of used engines and parts cannibalized
off old vehicles f

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