Is the core dead?

Is it soon to be a part of our past or, as the headline asks, is it already dead? In a word, no, but recent changes in the market have prompted people to ask what its future might be.

A number of issues surrounding cores, those used parts that feed the remanufacturing industry with a part to remanufacture, have swirled around the industry for years: core valuation, which affects

taxation; core credits, which rise and fall with the need to feed the factories; core availability, which affects the former; and core quality, which affects them all.

Over the past number of years, issues like these have forced some remanufacturers to move toward supplying new products, instead of remanufactured units. We’ve see this happen in the water pump market, where new units have made inroads, and in the clutch market, where new units have virtually taken over.

So new is, well, nothing new, but the concept has recently come to the forefront of discussions as a result of a move by Winnipeg-based Wilson Auto Electric Ltd. to move its Delco CS series and Ford 3G series alternators and Delco PG series and Ford PMG series starter sales over to a no-core program.

“What’s happening is that we have been able to obtain plenty of cores and new component parts and assemble the products here. That has alleviated the need to rely on exchange cores for some of the late model high volume automotive numbers,” says Jeff Lewicki, director of sales for the company. He says that the company carefully considered the move, its impact on their facilities, on their customers, and on perceptions. He says it was important that the move not be misunderstood or seen as more widespread than it really was.

“Our dependence is still on the industrial high variety cores in the market. We still rely on the process of obtaining a cores and then remanufacturing, but we have been able to bring new components and assemble here on these fast moving automotive units.” Of the company’s thousands of part numbers, only 187 have no-core value attributed to them, though Lewicki says this will likely rise and the concept will spread to other companies.

“A core isn’t as important as it once was for the high-volume units. I think it will be more widespread. There will likely be a lot of competitors doing business the same way in the future.”

The move is being phased in over the next year, so jobbers and warehouses need not worry their core credits will be lost. Lewicki says the company will even continue to accept cores to keep the parts out of landfills.

There are some significant benefits to the no-core approach. For Wilson, it frees up significant production capacity that can be applied to production of low-volume skus. Similar benefits will hit the distribution chain.

“By eliminating cores, it will allow customers to invest in more electrical exchange units, or invest elsewhere in their inventory, rather than having a large investment in cores. This is a huge change for the better. There were situations where our core was more than 50% of the value of the unit. Customers had that money invested in their inventory. They can now have more invested in their product or in the diversity of their offering.”

While core availability is not the driving force behind this move, it is nonetheless seen as an issue by some.

“It seems like it is getting more and more difficult to get them,” says Eric Surkari, owner of remanufacturer Mister Starter Auto Electric. “The cores that come back are almost all destroyed. They’re so cheaply made. That’s one of the reasons why a lot of the guys are going to newer replacement.” He says that in some cases as much as 70% of the cores he receives are unrebuildable. And this isn’t just the offshore units coming back after one lifecycle; the OE versions of items like A/C compressors and alternators are a big problem.

“In the old days we used to change the brushes and bushings. Now, in order to get that same level of performance, you have to put in so many components that you can go to brand new for cheaper.

“A/C compressors from seven or eight years ago were solidly built inside. Every one of them, the quality was really good. Now almost every component, if you look at it sideways, it falls apart. It is designed in such a way that 100,000 km is all you get out of them.

“The OEM manufacturers are destroying the reman market slowly but surely,” he adds in a particularly pessimistic characterization. That view is extreme, more extreme than what others share and maybe even Surkari really believes, judging by his continued perseverance in the market. It does however illustrate the point well regarding the interplay between OE and aftermarket when it comes to cores.

“Cores are the lifeblood of the business,” says Cameron Young, national sales and marketing manager, Robert Bosch Inc. “We have to have them to sustain the program. With longer warranties a lot of the newer cores are going back to the OE channel, making it more difficult to get the new applications. As the primary manufacturer, we recover an awful lot through the OE channel, because we supply the aftermarket and OE channels.”

“The cores have changed over the years,” says Don Pike, division manager, Pacific Reman in British Columbia. “Everybody has got to the point where they have specialized in product lines. Core prices have gone up and the need for newer model parts is more so than it has ever been.” Focusing on engines, transmissions and brakes, Pacific Reman has honed its business to focus on the OES channel at new car dealers.

“It used to be that when we had a replacement that was three years old, we were in the business. Now we find that we need to have 2001 and 2002 parts. Where are you going to find a core short of taking one out of a new vehicle?”

In some ways Pike’s view is unique–they are in a particular niche of the aftermarket–but the challenges he talks about are widespread. They point to the advantages that size, specialization, or both, can offer.

“I’m not sure of everyone else’s situation,” says Young, “but we can scoop cores up from the dealer level and we can also tap factories from around the world, so that we will be supplying new products in a reman box just to seed the program.”

Young believes, though, that the market will see more new parts in the future.

“I think we are seeing a trend in the aftermarket electrical, and it has already happened with clutches. There is going to be more new [product] going into the market. I think going down the road, we are going to see more in the industry. Will there be core charges down the road? Likely, but certainly not on the fast movers in the industry as we know them.”

He agrees with Lewicki that this is a positive change.

“There are so many dollars tied up in cores that aren’t generating anybody any money down the line. It certainly frees up money for the jobber to direct to other inventory areas. I would say going forward it could be positive for all levels of the distribution channel.”

He says that he expects the trend to take five years to hit its maximum effect–not so long when you think about it–but that reman will not disappear.

“Reman will always continue, but perhaps the future of the core charge, the handling of the core charge, will be different. It may have the effect of pushing out the smaller players. It will hopefully get the industry up to a point of acceptable profitability.”

Those who seek to supply the cores hold a particular viewpoint. If cores disappeared entirely, it would be companies like JJ Core in Stoney Creek, Ont., that would suffer the most.

Co-owner Mike Nytschyk says he’s not worried that is about to happen. Although the current economic situation with certain components points the smart money to supplying new over reman, this will change, he says.

“Eventually cores will get cycled through, but instead of $20, they’ll come to the value of $10 because someone will rebuild it at that price.” He says that it can be likened to a stock market correction that will devalue the cores in the market to the point where they become economical to re
build.

“It’s a commodity really. It’s like the metals market, but not quite,” he says. One concern he does point out is an important change in the collision market. In the past, totalled vehicles were an important source of late-model cores, but the price that these wrecked cars and trucks currently command on the market has changed that.

“Now the insurance companies are getting top dollar from bodyshops that will rebuild the vehicles. Before wrecking yards used to get contracts. When a 2001 vehicle got wrecked, if they didn’t sell it, it was broken up. Now all the wrecking yards are getting cut out and a lot of auctions are getting cut out.”

It is one more factor in an increasingly long list that is destined to limit the core supply. Even so, the core is a long way from becoming extinct across the board.

“It’s not happening on our side,” says Ezer Mevorach, president of Mevotech Inc. which focuses on the rack and pinion, CV shaft, clutch and water pump business. “As far as clutches and water pumps, it has happened, but with other items like CV shafts and racks it hasn’t happened and we don’t expect it to happen.” He says that the economic argument for continuing to rebuild cores is simply too strong. The premium for new CV shafts and racks and pinion units is too high for the market to bear.

“If I compare clutches to CV shafts, it has a lot to do with market acceptance of a higher price. The market has accepted a higher price for a new clutch kit. It is directly related to the labour time. A clutch used to take two to three hours and now it takes five to six hours. Technicians will pay a premium for fear of having to do it again. With a CV, it is in the books for an hour and they can do it in half an hour, so they’re not going to pay a premium for new.”

He says that the quality of remanufactured CVs from major suppliers is good, so technicians see little reason to pay $40 to $50 more for new. “New has been tried before in the U.S. and it didn’t succeed.”

Bill Gager, president of the Automotive Parts Rebuilders Association, says that his confidence in the continuation of the current core rebuilding approach remains strong. In the U.S., where the organization is based, the industry has recently won several important legal battles. One, involving scrappage laws that would remove vehicles from the road and access to cores from the industry, has been defeated in every state except California–to nobody’s surprise–and a more esoteric but perhaps more important battle with the Internal Revenue Service is reaching a positive end.

“It really just affects the U.S. rebuilders, but they wanted rebuilders to value their cores based on the core credit. After all these years and a court decision in our favour [last year], they have come around to where they are going to solve the issue in the next few weeks.” The alternative would be to have the core valued at the core price, always substantially lower, which should put businesses into a better taxation position in the U.S. This is good news for rebuilding overall, as the core supply business tends to be transnational, with cores freely flowing back and forth across the border.

A more important issue, though, says Gager, is the offshore supply.

“That’s a real serious problem. It’s usually the stuff that’s coming in from overseas and competes at a level just above the reman price. This is not new OE, this is new from overseas.”

Gager is careful to point out that “overseas” is a sweeping generalization and that some of the products are well built, others are not. “I know one person in the caliper business. He started to bring new calipers in from Korea and within six months, he was having them sent back. He lost a couple of million dollars and whom do you go to at that point?

“This fascination with new is a double-edged sword. You have to be very careful. That’s not to say that people in China aren’t making good products, but some of it is very, very bad.”

He says that the pressure from new has forced a number of remanufacturers in the U.S. out of business–though he admits that many of these had been weakened by other business shortcomings–but he is also concerned that it affects an important environmental benefit that the entire remanufacturing industry can provide.

In Canada, with a Kyoto approval on the horizon, this is particularly salient.

“The industry has been around since the beginning of the vehicle. If you didn’t have remanufacturing, your greenhouse gasses would be much higher. When you remanufacture, you end up saving as much as 80% of the energy that went in. At some point, groups of people will make the decision that it is not a good idea to be throwing that away.”

Remanufacturing’s Environmental Edge

Inherently, remanufacturing has positive environmental ramifications. It is often referred to as the ultimate form of recycling, but why?

The term recycling is generally applied to consumable goods such as newspapers, glass bottles, and aluminum cans. However, recycling can also apply to durable goods, such as an engine or other automotive components. If an engine were to be recycled, the steel from the item would be saved from the landfill space and could be used to produce another item requiring steel.

However, by eliminating the re-smelting and re-forging of metal components, for example, remanufacturing offers a better alternative. According to an entry by Professor Robert T. Lund of Boston University in the book, The American Edge: Leveraging Manufacturing’s Hidden Assets, remanufacturing differs from recycling because remanufacturing recycles the value originally added to the raw material. According to Lund, “Remanufacturing differs from recycling also, most importantly because it makes a much greater economic contribution per unit of product than does recycling. The essential difference arises in the recapture of value added. Value added is the cost of labour, energy, and manufacturing operations that are added to the basic cost of raw materials in the manufacture of a product. Even in a product as simple as a beer bottle, the cost of the basic raw materials (sand, soda, and lime) is much less than 5 percent of the cost of a finished bottle. For a product such as an automobile, the value of the raw materials that can be recovered by recycling is only in the order of 1.5 percent of the market value of the new car. Recycling destroys that value added, reducing a product to its elemental value – its recoverable raw material constituents. Further, recycling requires added labour, energy, and processing capital to recover the raw materials.”

Remanufacturing recaptures the value-added to the product when it was first manufactured. In fact, a 1981 Massachusetts Institute of Technology study on the remanufacturing of automobile components indicated that approximately 85% of the energy expended in the manufacture of the original product was preserved in the remanufactured product. This is why remanufacturing is considered the ultimate form of recycling.

Source: Automotive Parts Rebuilders Association