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Machine Shop Market Profile

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Interviews conducted with parts and equipment
suppliers, as well as machine shop owners and custom engine rebuilders,
generally point to market demand which has remained flat when
engine production numbers are compared to year earlier figures.
Recent survey results of machine shops concerning production year
1997 confirm these assumptions.

Automotive Rebuilder magazine conducted a survey
of the machine shop membership of the Engine Rebuilders Association
(AERA) in January of this year. Four different questionnaires
consisting of four pages each were developed to profile such areas
as production numbers, labor hours on specific jobs, market trends,
sales figures, profit margins, employee benefits, shop expansion
plans and equipment purchases.

Each questionnaire was mailed to 800 machine
shops, primarily in the U.S. A total of 462 questionnaires were
used in the final analysis, resulting in a return rate of 14.5%.
Results of the survey are being published in a two-part series
appearing in our 1998 July and August issues.

Space limitations prevent us from printing
all of the statistical charts generated from our survey. If you
would like a copy of all charts generated from our study, or if
you have specific questions regarding any of the survey data,
contact Dave Wooldridge, editor, at 330-670-1234, ext. 214, or
email [email protected]


Gas engines up slightly

Gas engine production averages rose slightly
in production year 1997 compared to 1996. Last year, machine shops
averaged 17.1 rebuilt engines produced monthly compared to 16.2
produced in 1996. This is an increase of less than one engine
monthly, a rise of 5.8%. For the purposes of our study, a short
block, long block or complete can be considered as one engine
in a monthly total. However, once counted in a specific category,
it cannot be counted again in any other categories.

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In the gas engine category, machine shops showed
increases in four and six cylinder production, while eight cylinder
production declined. Machine shops averaged 4.6 four cylinder
gas engines last year compared to 4.0 in 1996, 3.8 six cylinder
engines compared to 3.4 in 1996, and 6.9 eight cylinder engines
compared to 8.2 in 1996. Production in our “others”
engine category rose from 0.6 to an average of nearly 2.0 in 1997.

There could be a variety of explanations for
the increases in four and six cylinder gas engine production.
Vehicle makers have been steadily increasing the number of four
and six cylinder equipped vehicles over the past several years.
Vehicle designs continue to emphasize a decrease in weight in
an effort to improve emissions and increase fuel efficiency. Lighter
weight component parts, including aluminum and plastic composites,
will likely continue to be employed in today’s and tomorrow’s
vehicle powertrain systems.


The parts proliferation associated with the
increasing number of four and six cylinder engines, in the opinion
of some, is an improving market opportunity for the custom engine
rebuilder or machine shop. However, many of these engines are
more sophisticated in their technology, often requiring a larger
investment in equipment and tooling to meet machining and assembly
tolerances and specifications.

Old line 350 Chevy and 302 Ford eight cylinder
engines are still in demand, especially for light duty truck and
older automotive applications. However, depending on geographic
location, many machine shops and custom engine rebuilders cannot
compete with the local retailer or the production engine remanufacturer
(PER) supplying retailers, WDs, jobbers or installers direct with
these types of motors.

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There is little disagreement that machine shops
that are still solely focused on rebuilding cast iron cylinder
heads and providing machining on vintage eight cylinder blocks
will not be in business for the long term. Most successful machine
shop owners we’ve interviewed suggest that shops today
must find niche markets that are not in the realm of the larger
production engine rebuilder.

“We can’t compete with PERs today
who basically sell engines in one of two ways,” one engine
rebuilder told us. “They sell them by giving them away
on price, or they sell them by giving them away on warranty. Custom
engine rebuilders have to find markets for their products and
services that are not as sensitive to (this price and warranty
giveaway).”

What are these potentially more profitable
markets for machine shops and custom engine rebuilders? In general,
they would include the very old engine, industrial, high performance,
marine, very late model engines, and cylinder heads and blocks
for imports.


The import engine market may well represent
one of the more profitable niche opportunities for machine shops.
Import cars and light trucks are characterized by more part number
proliferation than their domestic counterparts. Many of these
late ’80s and early ’90s import vehicles are of
greater resale value than earlier imports, and they are coming
into the engine service/rebuilding window of opportunity in greater
numbers.

As with domestic engines, there are also opportunities
for machine shops to undertake late model cylinder head rebuilding
for local new car service dealerships. The import engine and cylinder
head market is one that most PERs have yet to address adequately.
In many instances, they simple have not been able to cope with
the part proliferation or the issues involving availability of
cores, both of which can be more easily addressed by the custom
engine rebuilder.

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Like import engines, the performance engine
market is also one that most PERs have not addressed adequately
as far as the typical racing enthusiast is concerned. Unless a
PER can find a way to rebuild engines on his current production
lines, taking advantage of existing production and manpower capabilities
(which a few PERs have been able to do), performance engines do
not make a lot of economic sense for the typical PER’s
operation.

However, for the custom engine rebuilder, many
opportunities exist to market to the performance enthusiast a
variety of products and services from balancing, torque plate
honing, and line honing to custom porting work. There are those
that thought that as little as five to six years ago the performance
market would dwindle in its participation and importance to machine
shops. However, just the opposite seems to have occurred.


Whether it’s due to the avalanche of
enthusiastic support for NASCAR racing events, including the newly
launched truck series, or the increase in the number of 40- to
50-year-olds with the discretionary income and the passion for
revisiting their ’50s, ’60s and ’70s muscle
car youth, the interest in racing and high performance markets
has never been higher. One only has to look at the rising attendance
at consumer racing events and business trade shows to verify this
trend.

Diesel engines down

For production year 1997, machine shops averaged
about 1.2 four, six and eight cylinder diesel engines produced
monthly. This compares to an average of two four, six and eight
cylinder diesel engines produced monthly in production year 1996.

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The monthly production average of four cylinder
diesels remained constant at 0.30, while the production of six
cylinder diesels dropped from 0.60 in 1996 to 0.36 last year.
The production of eight cylinder diesels also declined in 1997
to 0.33 per month from 0.50 in 1996. Our “others”
category of diesel engines also declined from a monthly average
of 0.60 in 1996 to 0.16 in 1997.

When it comes to improved longevity of today’s
engines, diesels have probably made even larger advances than
their gas counterparts. Depending on its application, it is not
unusual to expect 500,000-mile performance from a typical new
heavy duty diesel engine before any major engine work is required.
Combine that with continued extremely price competitive remanufactured
engine and component parts programs from the OEM and you have
a very tough market for your typical machine shop interested in
performing over-the-road heavy duty and medium duty diesel engine
work.

Similar to their gas engine machine shop peers,
owners of primarily heavy duty diesel engine machine shops are
also searching for those niche markets that are not as price or
warranty sensitive as those currently occupied by heavy duty truck
OEM reman programs. Successful diesel machine shops we’ve
spoken with are spending more time searching out businesses in
their markets to try and understand their equipment maintenance
needs.

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These shop owners tell us that many times those
in charge of maintaining equipment welcome the opportunity to
discuss their service repair requirements with local machine shops,
or were unaware that some of their equipment could be repaired
through machining or rebuilding. Often these jobs require some
ingenuity in creating fixturing to accommodate specific repair
or machining procedures, but the margins can be well worth it
according to several diesel shop owners we interviewed.

Truck manufacturers and engine and component
makers have come to realize that they cannot put all of their
eggs in any one market basket. That’s why we see these
vehicle and component manufacturers looking at an increasing array
of global markets to participate in. They realize that North American
markets are already quite mature and well defined.

Most machine shops, similarly, must realize
that they also cannot put all of their products and services in
one or just a few market segments. Whether its expanding into
business opportunities in their local markets that they have previously
left untouched, or looking abroad through the use of such technology
as the Internet, machine shops today simply must continue to explore
new opportunities for existing equipment and manpower

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Total engine production

Combining 1997 gas and diesel engine production
figures yields a total monthly engine production average of 18.29
units. This represents less than a 0.5% increase when compared
to the 18.20 units produced monthly in 1996.


Based on a universe of 6,000 to 8,000 full
service machine shops, the custom engine rebuilder/machine shop
market produced between 1.32 million and 1.76 million rebuilt
engines in 1997. This is virtually unchanged from the 1.31 million
to 1.7 million units produced by this market segment in 1996.

Assigning an average value of $1,000 to a rebuilt
engine (long block) the custom engine rebuilder market generated
between $1.32 billion and $1.76 billion dollars in sales during
1997.

Cylinder heads up slightly

Gas cylinder heads represent the lion’s
share of total cylinder head production by machine shops/custom
engine rebuilders. Just as total engine production increased by
less than one engine per month, total cylinder head production
also grew by less than one cylinder head monthly, or about 1%.
Machine shops averaged 55.85 rebuilt heads in 1996 compared to
56.4 units rebuilt in 1997.

Actual production of gas cylinder heads, however,
grew by 4% from year-earlier figures. Machine shops averaged 50.36
gas heads in 1996 compared to 52.4 units last year. Specifically,
four cylinder gas head production declined from 17.1 to nearly
16 per month, and eight cylinder head production dropped from
22.6 per month to 21.1 last year.

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The increase in overall gas head production
was registered primarily in our “others” category
where head production rose from 0.56 to 4.3 units in 1997. Six
cylinder gas heads also showed an increase moving from 10.1 units
in 1996 to 11 units per month last year.

Monthly average total production of diesel
heads declined from 5.49 units to 4.0 units last year. Four cylinder
diesel head production as well as our “others” category
of diesel cylinder heads remained virtually unchanged while six
cylinder head production declined about 22% from 2.09 units in
1996 to 1.64 units per month in 1997. Eight cylinder diesel head
production declined from 1.95 units monthly in 1996 to 0.92 units
per month in 1997.

Our survey results for rebuilt engines and
cylinder head production are generally in line with observations
made by parts and equipment suppliers that we have interviewed.
Most suppliers tell us that cylinder head rebuilding offers better
growth prospects than lower end engine work over the near term.
Sales from at least one large engine parts WD network we interviewed
pegged 1997 engine production growth for machine shops at 1% while
cylinder head growth was at 4%.

The reasons for better growth in the cylinder
head rebuilding market remain the same. Overheating of lightweight
cylinder head castings due to detonation, or cooling or oil system
inadequacies can quickly generate warped heads, cracks and camshaft
binding.


In general, many PERs still have problems generating
adequate core supply for their own engine production requirements.
Consequently, custom engine rebuilders have a better opportunity
to make cylinder head repairs for a variety of customers in their
marketplace.

A major problem for many machine shops looking
to expand either their cylinder head or engine production capacity,
however, is finding and keeping qualified employees. Presently,
many markets have little to no unemployment. We’ve talked
with more than a few shop owners over the past several weeks who
have reported qualified shop employees taking better paying positions
in other industries.

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Continued pricing pressure has in more than
a few geographic locations prevented machine shop owners from
raising hourly rates required to increase the salary of hourly
machine shop employees. Many shop owners tell us that the supply
of potential shop employees coming out of high schools and/or
two-year trade schools is at an all time low.

There is no question that along with finding
a variety of profitable niche markets and sourcing updated technical
specifications, maintaining a qualified and experienced workforce
is a major concern for many machine shops and custom engine rebuilders.


Aluminum heads

As was mentioned earlier, the OEM effort to
reduce vehicle weight to meet CAFE and emissions requirements
has lead to engine designs dominated by increased use of aluminum
and plastic composites.

Today machine shops report that aluminum heads
represent nearly 43% of all cylinder heads rebuilt in the shop.
This is virtually a negligible change compared to the 43.4% of
total cylinder head production accounted for by aluminum heads
in production year 1996.

Slightly more shops, though, reported sending
aluminum heads out for crack repairs. In 1996 46.2% of all shops
reported making these repairs themselves compared to 44.8% who
reported doing so in 1997.

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The overall percentage of aluminum heads that
were unrepairable and scrapped remained virtually unchanged from
the prior year. In 1997 machine shops reported scrapping about
19.5% of all aluminum heads brought to the shop for repairs, while
in production year 1996 machine shops reported scrapping an almost
identical 19.1% of aluminum heads.

We’ll have to wait and see if there
develops a trend towards machine shops sending more of their aluminum
head crack repair work out. Those shops reporting making these
types of repairs themselves rose from just 37.2% in production
year 1995 to 46.2% in 1996.

The slight decline in machine shops reporting
that they made crack repairs to aluminum heads themselves last
year may indicate a shaking out of those shops capable of maintaining
a qualified employee base to staff such repair operations.

Crankshaft production flat

As with our engine and cylinder head figures,
production of reground crankshafts showed essentially little change
from numbers produced in the prior year. In 1997 machine shops
produced an average monthly total of 19.23 crankshafts. In 1996,
machine shops reported average monthly production of 18.95 cranks.

Eight cylinder gas crankshafts occupy the largest
segment of all cranks reground at 7.6 units per month. This is
identical to the number of eight cylinder gas cranks reground
in production year 1996.

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Four cylinder gas crank production rose from
4.2 to 5.3 monthly in 1997, while six cylinder gas crank production
declined modestly from 4.5 to 3.9 per month. Production numbers
for four, six and eight cylinder diesel crankshafts were virtually
unchanged from year earlier figures.

Crankshaft production since 1995 has remained
relatively unchanged. Based on the higher quality levels today’s
engines are built to we would suspect no significant increase
in the demand for rebuilt crankshafts over the next several years.

It is generally an accepted fact that engine
block durability has improved significantly over the past 10 years.
In our own opinion, much of the life of today’s engines
is directly related to computer controls and electronic ignition.
We no longer see a situation where cylinder walls are bathed in
gasoline because of hard starts or poor carburetor adjustments.
In the past this was a common occurrence which could lead to major
cylinder wall or engine bearing damage.


Today’s electronically controlled vehicle
delivers the perfect balanced mixture of fuel and air continuously.
Engine performance is constantly being measured by the vehicle’s
computer and adjustments made on an ongoing basis. As a direct
result, OEMs have met the CAFE and emissions requirements that
have been mandated to them, but also significantly improved engine
life.

Respondent increases/decreases

The percentage of shop owners reporting increases
in production numbers declined in the categories of engines, cylinder
heads and crankshafts. The percentage of total survey respondents
reporting decreases in production of engines, heads and cranks
increased. In essence, more shops are doing less and fewer shops
are doing more.

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Some would interpret this as a marketplace
in which the big are getting bigger and the small are getting
smaller. There is certainly no doubt that the investment required
in equipment, training, technical resources and management capabilities
is higher than ever before. For some machine shops, as well as
small to mid-size PERs, market demand may not currently support
the cost required to research, rebuild and service an existing
customer base.

Along with an increased percentage of survey
respondents reporting decreases in production, and a decrease
in the number of respondents reporting an increase in production,
the average increase for those reporting an increase was smaller,
and the average decrease for those reporting a decrease was larger
ñ in all product categories.

For engines, the average increase for those
reporting an increase was 13.4%. In 1996 this increase averaged
nearly 19%. For cylinder heads, the average increase for those
reporting an increase was 15.4%. In 1996 that average increase
was 16.5%. For crankshafts, the average increase in production
for those reporting an increase was 17%. In 1996 that increase
was 18.2%.

For 1997, the actual average number of engines
produced each month, the percentage of machine shops reporting
a decrease in average production, and the larger size of the average
decrease all seem to point towards a continued maturing and consolidating
market for custom engine rebuilders.

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Specific jobs/engine types

For the past several years, automotive gas
engines have occupied about 75% of the total engine rebuilds of
the typical machine shop. In 1997, this percentage declined from
74.1% in 1996 to 70.1%. Automotive diesel engine rebuilding held
fairly constant at just 3.8% of total engine production.

The largest increase was noted in medium duty
diesel production where machine shops reported that this category
occupied 5.7% of all engines produced compared to just 4% in 1996.
Heavy duty diesel engines also rose from an average of 4.1% of
total engine production to 5.6% last year. Production of marine
engines dropped from an average of 4.4% of total engines rebuilt
to 3.6% in 1997.

As to the percentage of time spent in specific
shop operations, disassembly and cleaning represented the largest
investment in time required to rebuild an engine at 15.2%. That
is slightly higher than the 14.8% accounted for by this category
in 1996, but less than the 16% represented by cleaning and disassembly
in 1995.

Cylinder head resurfacing accounted for the
second largest block of machining/rebuilding time at 14.7%, a
significant increase from the 11.9% which cylinder head resurfacing
represented in 1996. We suspect that as OEM surface finish requirements
become smoother and more exacting in order to seal head to block
properly, machine shops will have to invest more in equipment
and gauging to ensure proper specifications are achieved.

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Valve guide and seat work occupied the next
highest percentage of machining/rebuilding time at 12.8%, followed
by cylinder boring at 12%, and valve reconditioning at 10.1%.
Combining cylinder head welding, with valve guide and seat work,
cylinder head resurfacing, and valve reconditioning, resulted
in the typical machine shop spending 42.5% of its production time
on cylinder head work in 1997. And this is before disassembly,
cleaning and assembly time allocated to cylinder heads is added
in.


Equipment profile

The average age of all equipment in the shop
rose from 10.62 years in 1996 to 11.4 years in 1997. Machine shop
owners reported spending the lowest amount on shop equipment in
recent history. In 1997 machine shops spent an average of $14,354
on new or used equipment. This compares to $20,167 spent in 1996
and $24,773 spent in 1995 on new shop equipment.

Of the total equipment purchased in 1997, shop
owners reported that nearly 70% was new while the remaining 30%
was used. Equipment purchases for prior survey years did not provide
data on new versus used purchases.

Interviews with several equipment manufacturers
seem to validate our survey data with reports of flat to minimal
sales increases common for the 1997 production year. Said one
equipment supplier we interviewed, “Our hard metal (equipment)
sales were down last year. However, our perishable sales, e.g.,
mandrels, stones, cutting tools were up.”

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The market for machine shop equipment appears
to remain very price sensitive with a lot of used equipment available.
One supplier told us that his company had sold quite a few of
a particular piece of new equipment in 1996. They thought their
prices were too low compared to the rest of the market, so they
raised them. The result was significantly fewer units were sold
the following year.

Machine shop owners we’ve interviewed
have said they are aware of the need to meet increasingly tighter
OEM specifications. Many of these same shop owners, however, are
concerned about the significant investment in new equipment and
their ability to generate both the sales and the profits to justify
the investment in today’s competitive marketplace.

Such concern speaks volumes to our industry’s
need to expand consumer and business awareness of the rebuilt
engine option. It emphasizes the need for equipment and parts
suppliers to share information designed to improve the efficiency
and profitability of their machine shop customers.

Finally, it mandates that machine shop owners
operate their businesses with sound management practices based
on actual costs of operation and meeting required sales and profit
margin targets.

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