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1998 Market Update – Cores: The Consolidation Of The Automotive Aftermarket

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Core suppliers are watching the consolidation of the automotive
aftermarket with much interest. After all, many businesses in
transition are their customers. But while some core suppliers
are not as busy as they’d like to be, most don’t blame the consolidations
of large retailers like Auto Zone and Chief for their troubles.
Likewise, many don’t believe that the rebuilder mergers and acquisitions
will have a profound effect on them.

Scott Stolberg is president of A & A Midwest, a large engine
core supplier with facilities in Las Vegas, NV, and Chicago, IL.
"We’ve got fewer customers, but we’re doing just as much,
if not more, business than we used to," he said. "Up
until this year, no one customer made up more than 8% or 9% of
our gross sales. But today, there are several that have a substantially
larger percentage of our business."

Stolberg believes core availability is a function of what and
how he buys from his suppliers Ð wrecking yards, independent
"peddlers" and other core suppliers Ð not the size
or nature of his rebuilder customers.


The president of another Midwestern engine core business, Glen
Berhow of G.B. Core in Green Bay, WI, also sees the future of
the rebuilder business as having fewer number of larger players.
He also comments that "consolidations" and "mergers"
aren’t the right descriptions for the changes taking place in
the market place. "They’re really buyouts and acquisitions,"
he said.

Call them what you will, Berhow believes that when all is said
and done, the only critical component of the shrinking number
of rebuilders is its effect on demand. "As some of the bigger
players like Jasper Engine and Transmission, Jasper, IN, capture
more market share, the only thing we can hope is that they’ll
be able to equal the demand of the people they’re taking that
(business) away from," said Berhow. "We don’t care if
there’s 20 huge rebuilders in the country or 10 large ones and
20 small ones, as long as the demand for cores stays up."

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Others in the core and rebuilding business do see some impact
of the consolidations going on in the rebuilder’s business world.
Bob Grady, president of a large East Coast core supplier, Rebuilders
Automotive Supply (RAS), finds that as rebuilders consolidate,
their combined inventory results in a lower need for cores.

"In the short term," he said, "it’s frustrating
because you’re losing a few customers, and the new entities have
a reduced need for cores. But eventually there will be a shortage
again, and hopefully the demand will increase back to the levels
where it was before they merged."

Grady doesn’t find this a profound or long-lasting problem. He’s
also quick to point out that he’s not in a position to pass judgment
on the positive or negative attributes of the many mergers and
consolidations which are taking place. "In all aspects of
our life, the mom-and-pop stores are disappearing, and I don’t
know enough to call that a bad thing," he said.

"But there are certain portions of it that we need to worry
about," Grady continued. "We’re seeing people who don’t
know the business involved at a higher level than ever before."
To make money in this business, you have to be an entrepreneur.
You have to be very savvy about making your product high quality."
Yet, Grady observed, a rebuilder has to provide that quality in
a cost effective manner. "I see people getting involved who
don’t understand that part of the business," said Grady.

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The vice president of another Eastern U.S. core supplier, John
Brunetto, World Auto Parts, Buffalo, NY, sees aspects of consolidations
among rebuilders that work in his favor. "The consolidated
rebuilders want to deal with more sophisticated suppliers, and
they seem to want to buy on a ‘one source’ basis, which has reduced
the competitiveness somewhat," he says. "Also, they
are more sophisticated with their core tracking, so they have
better control of what they’re doing." But its not all positive,
said Brunetto. "It’s a two-edge sword, too," he observed,
"because rebuilders are looking for better prices!"

As a partner in a start-up caliper rebuilding operation, Undercar
Express of Cleveland, OH, Paul Schuck sees the rebuilder consolidation
from the inside. "Larger rebuilders start acquiring smaller
ones for several reasons," said Schuck. "But when you
end up with a limited number of rebuilders out there, someone
will say, ‘There’s got to be room for a small guy, too’, and a
new operation opens its doors." In Schuck’s opinion, it’s
an evolution that repeats itself in cycles approximately every
20 years. "I think we’re in one of those transition periods
right now," he observed.

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Ebb and flow

Perhaps this only proves that "what goes around comes around."
Much has been said, for example, about how the just-in-time (JIT)
delivery concept has taken over the way inventory is handled.
But RAS’ Grady sees a hesitant trend away from JIT. "Once
you get to that point of having what you need, when you need it,
you’ll find that there are some products that you buy every week,"
he pointed out. "And if you’re going to do that, you can
get a better price if you buy at higher volumes! Besides,"
he said, "the tooling changes required to run 10 or so parts
at one time has made some people decide to carry larger inventories."

Whether it’s the result of a global economy, the much discussed
parts proliferation issue, or possibly just the maturation of
the rebuilding business, core suppliers are serving their rebuilder
customers differently than they did 10 or even five years ago.

As an example, A & A Midwest’s Stolberg offered that his company
is providing more and more core conversions. "We have a machine
shop here in Las Vegas and we’re in the process of setting one
up in Chicago to drill additional holes in certain engines, or
make adapters that can be bolted on to use a particular engine
in a different application Ð it’s something that a lot of
rebuilders used to do themselves," he said.

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In a related effort, about 10 years ago A & A Midwest launched
a separate company, EngineQuest, to manufacture new small parts
that rebuilders need to complete their jobs. "EngineQuest
either manufactures parts to convert a core to another application,
or replaces hard to find or salvaged parts, such as timing covers,
as well as items such as adapters to convert dipsticks from the
right to the left side," explained Stolberg. He said his
company also has a lot of demand from rebuilders for the small
parts like cam eccentrics and timing tensioners that many rebuilders
have to source from new car dealerships.

A & A, like many other core suppliers, is also shipping
in smaller quantities and more frequently. "Rebuilders don’t
do the long production runs that they used to," Stolberg
said. "It used to be orders for 50 of this and 50 of that.
Now it’s 10, eight or even five of specified pieces, and they’re
looking for bi-weekly and even weekly deliveries. I even have
one West Coast customer who wants us to ship every Monday, Wednesday
and Friday," he said.

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Howard Gossage, president of Automotive Rebuilders Supply Co.,
Chicago, IL, says he’s doing a lot of things differently than
he did just a few years ago. He observed that he and most people
in the core business, including salvage yards, are more sophisticated
than they used to be, especially when it comes to recognizing
the value of cores and how they’re packaged and sold. His company,
for example, plastic wraps boxes and skids, and he finds that
the attention paid to packaging helps his competitive situation.


"Let’s face it, cores are used parts to begin with, so they’re
going to have grease on them," he explained. "But rebuilders
don’t want to get them with oil and grease spilling all over.
We all know that there’s a set market value for almost everything,
but if the supplier gives you a junky looking product, all thrown
together into an old drum, the customer is not going to want it."
He also believes that better packaging notches up the quality
level, too. "In general, cores are in better condition, because
they’re being looked at more carefully as they’re being packaged,"
said Gossage.

When asked how he services his rebuilder customers differently
than he did five years ago, World Auto Parts’, Brunetto, says
that he’s adding some value added services that he didn’t used
to. "We’re sorting parts by exact OEM part numbers, and doing
things like disassembling cores," he says.

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Almost without exception, the core people we talked to agreed
that the quality of the cores being bought and sold has taken
a giant leap upward over the past few years. "The quality
is a lot better, an awfully lot better," said Rebuilder Automotive
Supply’s Grady. "The people who dismantle vehicles are becoming
more aware of the value of a core, so the hammers are left in
the toolboxes Ð they use their wrenches instead!"

Grady believes that there is a connection between core quality
and EPA regulations, too. "The regulations are driving some
of the smaller scrap yards out of business, and they realize that
if they don’t pull all of the money there is out of a car, they
won’t survive," he said.

While Grady acknowledges that EPA regulations have contributed
to core quality, he’s also wary of the effect of over-regulation
on the rebuilding industry. "I want our industry to be environmentally
correct, but we do have to keep an eye on the government to be
sure their regulations make sense," he explained. In the
same vein, Grady credits the Automotive Parts Rebuilders Association
(APRA) with doing a fine job of making legislators aware of the
rebuilding industry and the benefits that it provides to consumers
and businesses.

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G.B. Core’s Berhow thinks that, right or wrong, the tight EPA
regulations and the increase in core quality standards are contributing
to the demise of smaller operators. "With all the restrictions
and regulations, a one- or two-man operation can’t make a decent
living anymore," he said. "Before, guys could get by
because they worked hard. But I don’t think the opportunities
are there any more to be just a hard worker and survive."

The nature of the core supply business means that there are always
availability issues, and the economic boom the country is experiencing
hasn’t changed that. "Core availability today is the same
as its always been; there’s some things that are hard to get,
and other things that are everywhere," says Automotive Rebuilders
Supply’s Gossage.

"The core market people we talk to don’t see an overall core
availability problem, but they do feel the pressure of having
to pay their suppliers more, while not being able to pass their
higher costs on to their customers. In many cases, we pay more
for cores than we ever did, but we don’t get any more for them
than we did 10 or 20 years ago," observed Gossage.

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Meanwhile, at World Auto Parts, Brunetto says he sometimes experiences
what would appear to be an inverse relationship between supply
and demand. "Sometimes rebuilders who are willing to buy
in large volume think they should get their cores for less. But
in actuality, we, as a core supplier, have to pay the wreckers
more for volume purchases to make it worthwhile for them to take
a lot of parts off a vehicle. I have to pay them more as an incentive."

Brunetto also believes these situations are hinged on the fact
that scrap prices and labor costs are high. "They’re processing
more cars as scrap and saving fewer parts, all because of labor
costs," he observed.

A & A Midwest, heavily into engine cores, has many of the
same interpretations of market conditions. It believes its increased
costs are a function of EPA regulations and other factors, such
as fluctuating scrap prices. "If the scrap prices are real
high, the wreckers don’t want to pull motors out of their cars,"
says A & A’s Stolberg. "So we have to offer them a price
that makes it worth their while.

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"At the same time, we’ve got rebuilders who won’t pay more
than ‘x’ number of dollars for a core," he continued. "They’re
saying, ‘why can’t you get that core for me at the old price Ð
they’re (prices) all over the place.’" Adding to the squeeze
on profitability, Stolberg notes that he has to pay cash for everything
up front, but extends credit to his rebuilder customers. "We
work the opposite of grocery stores, who buy on credit and sell
for cash," said Stolberg, "and with the proliferation
of part numbers our inventories are getting larger and larger
all the time."

New core demand?

Core suppliers don’t appear to be jumping on any new product bandwagons.
The predicted boom in rebuilding air bags and ABS brake systems,
for example, just doesn’t seem to have materialized as a viable
activity, other than for a few small rebuilders who survive in
that niche. However, there are core people who built their business
by specializing in one type of core, but are giving serious consideration
to diversification. G.B. Core, Inc. is one of them.

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"We took on transmission cores this year, and set up our
diesel division line," explained G.B. Core’s Berhow. "Our
long-term plan is to diversify into other product lines like starters
and alternators as we develop our internal structure."

Parts proliferation has been a constant concern for many years,
and while some think it’s not growing the way it once was, core
suppliers and rebuilders acknowledge that it’s something they
have to keep on top of. "Good software is critical to managing
your inventory with all of the part numbers out there," Undercar
Express’ Schuck pointed out.

On the Web

Of course, the newest product of the computer age is the Internet.
Very few businesses of any kind completely ignore what’s on the
Internet’s World Wide Web, and a number of core suppliers and
rebuilders have put up a website. There is at least one independent
website specifically designed to help core suppliers around the
world locate automotive and truck part cores. Core Fax locating
service (www.corefax.com) allows its rebuilder customers to place
ads under several categories, among them "cores wanted"
and "cores available".


Through the use of passwords, only core suppliers have access
to the lists. APRA, itself, has a website too, (apracores.com).
And, of course, in this month’s issue of Automotive Rebuilder
magazine, beginning on page 59, you’ll also find a complete listing
of core suppliers and the products that they specialize in.

There is a mixture of attitudes about doing business through the
Internet, and the reaction of Rebuilders Automotive Supply’s president
Bob Grady is typical. "It is beneficial to have a web page
for the exposure and experience, but right now I see it as being
a high cost item for our type of business," he said. "To
make it work, you’d have to put your entire inventory and prices
on it. I don’t think a lot of people in our business want to do
that."

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G.B. Core’s Berhow has a similar read on the value of the Internet.
"We don’t see the Web as a business tool, at least not yet,"
he commented. "We look at Core Fax once in a while, but for
us, it’s more of a curiosity. I don’t think people are really
using it to find the cores they need. I see its potential more
for suppliers to pass information back and forth, rather than
being a bridge between suppliers and remanufacturers."

On the other hand, some suppliers, like Automotive Rebuilder Supply’s
Gossage, are enthusiastic advocates. "We’ve gotten a lot
of action on it, both buying and selling," he said. "Using
the Web is probably the biggest thing that’s happened to us in
the last few years."

Not surprisingly, Gossage’s company has its own website, www.arsco.com.
"We decided not to reprint our catalog this year. Instead,
we’re in the process of putting it up on the net," commented
Gossage. "Customers can order from it, but even if they don’t,
it helps them make good decisions because sometimes the printed
descriptions and part numbers aren’t as clear as the visual images
of the parts we include on the net," adding that this is
especially helpful to foreign customers, where there’s a language
barrier.

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OEM core control?

A rumor that sweeps through the whole rebuilding industry from
time to time is that the OEMs are about to establish a network
of core collection sites, which some suspect is a way for the
car companies to control the core market as some of the European
car makers have done in Europe. One Detroit, MI, rebuilder, Al
Benish, of Kirks Automotive, said he’s seen the idea come and
go, and isn’t worried about it. "The OEs have tried to launch
their own core collection and reman operations here, but what
happens is that they usually shoot themselves in the foot,"
he said. "It’s really no more of a problem than it was 20
years ago."

G.B. Core’s Berhow points out that the OEs have had a presence
in the core business for a long time, but that they’ve never been
a real threat to his business. "Ultimately, what companies
like Ford are after are new and warranty type engines, which they
want to keep within the company network for their FAR and FQR
operators. But they’re not actively out there trying to buy the
same kind of cores we are. Those cores are a little type of gravy
for us, but not the 95% of our bread and butter that we depend
on."

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On a positive note, Rebuilder Automotive Supply’s Grady observes
that despite sometimes difficult market conditions, the relationship
between the core supplier and rebuilder is getting better. "There
has been a strain on those relationships in the past as there’s
been a lowering of price of the products that rebuilders sell,"
explained Grady. "But I think that’s leveling out some as
we all become more efficient and more aware of our costs."

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