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Redefining Reman: Challenges and Opportunities in an Evolving Category


8/15/2006
By Brian Cruickshank

While the response to last month’s article, “The Collapse of American Remanufacturers Inc: An In-depth Look at ARI’s Fall into Bankruptcy,” was overwhelmingly positive, some felt that it put remanufacturing in a less-than-positive light. Curious about reman’s future, we asked remanufacturers and distributors to discuss reman’s opportunities, and how the reman industry is addressing new off-shore challenges.
 

These days in Beijing, progress is measured in vertical feet of steel and glass. Those visiting the Chinese capital are immediately struck by the sight of its dramatically growing skyline, dotted with cranes, punctuated by the din of construction equipment, literally paving the path for a new China.
While much of this current growth in Beijing can be attributed to the upcoming 2008 Summer Olympics, there are other reasons: China is on the move, reinventing itself as a major player in the global economy and posing challenges to the U.S. auto parts industry. According to the U.S. World Trade Commission, automotive parts imports from China to the U.S. increased from $1.6 billion in 2000 to $5.3 billion in 2005.

China has a lot going for it: low wages, a large workforce, decent infrastructure and an artificially fixed currency. These advantages make for an attractive manufacturing base for auto parts, which come to the U.S. market cheaply and by the boatload. As last month’s article showed, this competition was but one of many factors that ultimately lead to ARI’s downfall.
Yet, even in the face of this new competition and in light of ARI’s bankruptcy, the remanufacturing of auto parts remains one of the stalwarts of the automotive aftermarket, even as it redefines itself to continue providing value, quality product and essential services to customers. One of the most well-established of the U.S.-based remanufacturers, CARDONE Industries, fervently believes that reman’s present and future are bright.

“Reman’s value proposition is strong and getting stronger for a lot of reasons,” said Michael Cardone, Jr., chairman and CEO of CARDONE. Cardone’s father, Michael Cardone, Sr., started the company in north Philadelphia more than three decades ago. Today, the company is the largest privately held remanufacturer in the country.

“First, let’s look at depth of coverage and availability,” said Cardone. “Besides the new-car dealer, reman gets late-model parts to the aftermarket in the fastest and most efficient way possible. Through the remanufacture-and-return process, reman makes parts available the first day a new model comes off the assembly line. Next, let’s look at the improvements reman makes. Reman allows us to correct OE durability and design flaws throughout the lifecycle of a part. Last, when it comes to cost, reman isn’t as affected by rising material, energy, currency fluctuation, importing and freight costs.”

Cardone cautioned that as parts become more sophisticated, intellectual property rights will become more of an issue for the aftermarket. He contends that remanufacturing might be the only way the aftermarket has the opportunity to sell these parts. He said that while mechanical parts are easily copied, electronic and “mechatronic” parts are much more difficult to copy — and when they are, it is very costly. One such example is ABS. With the integration of electronic ABS motors and modules to the brake system, the OE list price can run as high as $1,500, whereas the reman price is 80 percent less.

Because of many factors, such as parts proliferation on lower numbers of specific models, as well as the time and expense needed to design, tool and source raw materials to create new mechatronic parts, the barrier for entry on these new products is very high. The result is that aftermarket new parts in these categories would be uncompetitive compared to the relatively short amount of time and low expense of remanufacturing the OE part.

In addition to these benefits, there are the environmentally friendly ‘green’ aspects of the reman process, a benefit stressed by Selwyn Joffe, chairman, president and CEO of Torrance, CA-based remanufacturer, Motorcar Parts of America (MPA). The company’s primary business is the remanufacturing of rotating electrical components.

“The recycling aspect of remanufacturing is a tremendous benefit to society,” said Joffe. “We’re basically taking junk out of the system and reusing it. We convert junk into operating parts and the amount of material and consumption is much lower because we’re reusing much of the (original) product.”

OFF-SHORE COMPETITION
To be sure, the remanufacturing industry, along with reman suppliers like CARDONE, MPA, Remy International and others, has a long, successful history in the automotive aftermarket. Reman product, even today, offers many advantages even in the face of off-shore competition. But as product from China gets better, some of those advantages on certain product lines are becoming gradually less obvious or economically feasible.

“The better companies do a great job remanufacturing products and getting quality products out into the market,” said one veteran of the remanufacturing business. “As far as quality, availability and coverage — all those essential things — I think the reman industry has an edge. It’s such an established industry. Some of the stuff coming out of China is inferior to the top-flight rebuilt product here. But there is also stuff coming out of China that’s very good. The Chinese are learning that they can’t import bad product into this country. Customers won’t accept it.”

And more often, this new product is now available for late-model applications — and that’s where he sees the real impact of off-shore new product.

“Parts for model-years 1998 and up — that’s now all available as new,” he said. “This, of course, will impact the reman business. The only way this can be countered is if remanufacturers can get these units back into the core flow cheaply and reman them.”

However, other experts in the reman business say that from a pure availability standpoint, reman has an edge. Motors, CVs, electronics, distributors and rotating electrical are just a few examples where the reman aftermarket covers millions of 2000-and-newer model vehicles that are not available today from overseas new-product suppliers.

For some reman lines, such as rotating electrical, Joffe said new product has not really impacted MPA’s rotating electrical reman business to a great degree.

“Metal prices have gone up so high and there are so many different part numbers that new is fundamentally noncompetitive,” said Joffe. “If you talk to most retailers, they’ll tell you that the new programs are not that successful.”

He said that since nearly everyone is using cheap labor, that aspect of the equation has been essentially neutralized. The next issue to consider, then, is rising raw material prices, which make reman a more cost-effective option since the remanufacturer doesn’t need to make certain parts that consume costly raw materials, like aluminum and copper.

“The problem with new is that you can’t afford to make molds and production lines for items that sell once a year,” said Joffe. “With metal prices as they are, we just don’t see them being competitive.”

Joffe explained that as new product floods the market, starter and alternator cores will become even more available, further keeping reman at a lower price point.

CORE CHALLENGES
For many products, the core market remains healthy. According to a recent Frost & Sullivan study, however, metal prices have gone up, creating increased competition for cores, making it more difficult for remanufacturers to obtain certain hard-to-find cores. The study says that scrap metal is so valuable that people are buying up starter and alternator cores to sell as scrap rather than for use by remanufacturers. Thus, among certain product categories, the core market is tightening up, creating additional pressures.

Joffe said that the toughest starter and alternator cores to find are early-model domestic part numbers because, as the Frost & Sullivan study points out, they are being sold for scrap. However, as metal prices rise, so too does the cost of manufacturing new product, giving neither new nor reman an advantage.

The problem for the industry, Joffe said, is that those early-model parts, because of their scarcity, are not being marked up as they should.

“All the companies are losing money on supplying a portion of the market that doesn’t want to pay a high price for a part, even though those parts cost more than the others,” said Joffe.

And then there’s the question of core handling. Generally, core charges are the responsibility of the WD or store group, with the remanufacturer reimbursing them upon receipt. There is an inherent cost to this, one that many distributors would prefer to avoid. With the increased availability of new, low-cost products — at a reasonable quality level — distributors have found a way to avoid these core handling costs altogether.

Ray Reville’s opinion of reman typifies the sentiments expressed by many distributors today. Reville runs a successful two-step warehouse operation in Northfield Center, OH.

“As a warehouse, we’d prefer new, of course, because I don’t have the core investment on my shelf — if the quality is equal,” said Reville. “If new can eliminate reman, I’d do so.”

Other distributors saw what happened to ARI and how its customers were stuck with cores and had to scramble to find new suppliers. Some of these distributors don’t want to be caught in the same situation again. One distributor, who asked not to be named, said he is concerned about the health of all manufacturers, not just remanufacturers. He wants to be sure his company is doing business with strong parts manufacturers that have secure futures.

“This (ARI) situation could happen again,” said the distributor. “It’s the same thing on ride control. It’s not a core or reman issue, but our current supplier is in really bad shape. [It] is losing customers left and right and we don’t want to get stuck.”

He cites relationships such as Advance’s purchase of Autopart International and General Parts’ acquisition of WorldPac as reasons why Chinese new product is gaining a strong foothold in the market.

“These companies are going to start putting more and more money into the sourcing end of the business. Our goal is to get out of reman where we can, taking dollars out of cores, and putting them into other lines that have a lot of SKU proliferation.”

Even as these distributors talk about wanting to avoid core costs, all freely admit that reman is an important product, although it’s one that must be evaluated on a line-by-line, market-by-market basis. Each product line exists within its own universe of market forces, which dictate whether reman or new is the more attractive (or viable) option. For some lines, reman remains strong. In others, even those that were traditionally reman-dominated, new is winning over customers.

“Line by line, reman and new have their own nuances,” said Reville. He added that there is very little need for reman when the price between reman and new becomes just a couple points, as long as coverage is comparable. That’s an important point because reman is essential when there is not enough coverage for a specific part.

“Some markets are just too price-conscious for a 30 percent price difference between reman and new to work,” said another large distributor. “In these instances, reman is important to have.”

When it comes to other high-tech categories, such as electronics, the cost of repairing a failed chip is a fraction of the engineering, tooling and material-sourcing costs that are required to make a new part. CARDONE, for example, has invested in the technology to stay on top of the shifting trend toward mechatronic and electronic parts, ensuring its place in the independent aftermarket’s future.

The central question the market must ask itself is this: If the market were to move from reman to new on all the high-volume numbers, and there were no remanufacturers left, where would the aftermarket get all of the early- and late-model coverage? Further, how expensive would those parts be?

Many would agree that reman’s future is really a line-by-line, market-by-market battle. The market has already seen a number of lines go completely or partially new, while others, such as calipers, electronics, rotating electrical and mechatronics, remain very strong as reman, offering many opportunities for growth. As many have indicated, the trio for reman to stay competitive rests with price, availability and quality.

Reville’s own strategy is to carry new when it can eliminate reman and carry reman when availability and price make reman a better option. Remanufacturers, of course, fully understand these dynamics.

“Obviously, if I offer a new product for $50 with no core or offer a reman product for $30 with a $25 core, it’s a no-brainer,” said a former vice president of a major U.S. reman company.

However, George Dunham, CARDONE’s vice president of product management, says that while the economics of it might appear to be a “no brainer” on the surface, the market and customer demands complicate the no-core issue.

“Customers are intrigued by the opportunity to buy a product that does not have a core charge,” said Dunham. “In our opinion, this benefit to the WD/jobber is not a benefit to the professional service dealer. Reman product offers the service dealer the same OE form, fit and function as the part he or she just removed. A quality reman part supplied with our full range of value-added benefits (cataloging, customer service, technical support, lead times, single source of supply, late-model parts, etc.) remains a very powerful go-to-market strategy. The cost of cores is an issue the remanufacturing industry has always had to deal with, but the handling and the investment in cores is the key to market share leadership in a product line,” said Dunham.

“Most distributors and remanufacturers understand the necessity of cores in their quest to compete with the new-car dealer and their participation in the hard-parts business. What’s ironic is that we actually get back a large percentage of cores on our [new product], even when no core price is given. We believe that this is the result of the growing costs and concerns of disposing of used parts. The same issue is being addressed by the battery, oil and oil filter industries. Consumers are seeing more charges for disposal items like tires and even rags and chemicals used to service their vehicles.”

MODIFYING THE BUSINESS MODEL
The Philadelphia Inquirer reported that last year CARDONE, in an effort to become more efficient, relocated a Philadelphia line that rebuilds drive-axle components to a new, 250-employee plant in Matamoros, Mexico, with more marginally profitable product lines potentially heading south of the border as well. MPA, too, is currently in the process of moving its southern California-based remanufacturing facility to Tijuana, Mexico.

CARDONE also turned off-shore to make some new parts, creating in 2004 a line of new products called CARDONE Select.

“CARDONE Select was just a natural response for providing the best service, selling opportunities and product offerings that our customers have come to depend on from CARDONE,” said Cardone.

“Our customers told us that it is too costly and risky for them to import parts directly. What this has done is made us the ‘one-stop shop’ for a complete product category, something that second and third-party importers cannot do.”

Other remanufacturers are doing the same thing, such as Fenco with its Dynapak new line of clutch products, CV driveshafts, flywheels, hub bearing assemblies, master cylinders and water pumps. MPA, too, has some new product, but it’s a small part of its overall business. Although Joffe thinks MPA should have a larger presence in new, he doesn’t see it as the future of the rotating electrical category.

Some people close to the reman business contend that remanufacturers like CARDONE and Fenco are the proto-types of the new remanufacturer — one that is a marketer of new product, often sourced overseas, while at the same time maintaining its status as a key player in the remanufacturing business.

“The bigger and better remanufacturers will become more like marketing/remanufacturing companies,” said one reman marketer. “They will be marketing new product made by someone else, and continue to reman those products that make sense.”

“Everybody has to be offshore,” said Joffe, “and that neutralizes the cost of labor and it becomes a level playing field. The next question is what’s the most efficient way to get the product (to market), whether that be new or reman. I think for U.S. manufacturers that produce off-shore or Chinese manufacturers, that decision will be continuously made. We can do new or we can do reman, it really makes no difference to us.”

“I believe for any company to survive it must be the supplier for an entire category — not just reman and not just new,” said Cardone. “Our goal must be to have the parts and information the same day the new-car dealers have it. We also need to focus on bringing the collaboration between customer and supplier to new levels up and down the supply chain. We must protect our intellectual property rights that we deliver through our value-add. Excellence in products and services sounds simple, but it is what will separate the winners from the losers, now and more so in the future.”

As many distributors know, there is more to parts than just price. There are other issues, such as terms, cataloging, advertising and brand support, local distribution, tech service, direct sales forces, packaging, order fill, labor claims assistance, warranties and R&D to consider. These are the areas that, generally speaking, Chinese new suppliers currently do not offer, yet these are areas in which full-line reman companies take great pride.

No one — WD, store or technician — doubts the value of remanufactured product. It remains an important and vital part of a distributor’s and a technician’s business. Individual reman lines are continually being evaluated as new product becomes more widely available. Customers, who now have greater and broader choices than ever, will partner with those suppliers that bring the most value. For some lines, new product will win, allowing distributors to put those dollars that went toward cores to other, more strategic uses. For a growing number of other product categories, however, reman will remain the product of choice.













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