Auto Service World
Feature   June 1, 2004   by Auto Service World

Rebuilding An Industry

Engine Business Needs to Address Internal and External Issues


Our industry has been struggling with ways to help the consumer understand the benefits of the aftermarket. Excellent initiatives have started to surface such as the “Be Car Care Aware” campaign that should be embraced by every company throughout our industry.

One area of our industry that has not received the recognition that perhaps it should receive is the rebuilt engine sector. This segment of the industry is unique in that it does offer a clear alternative to the consumer. It must, however, learn to do much more to promote itself.

To give you a small example of my point, I did my own “consumer survey” with my golfing friends while walking between holes. I don’t usually discuss business with my friends, especially while golfing, but I was having fun with this idea. This is obviously not the most scientific measurement, and certainly not the black and white measurement that may be needed, but at the same time, it was very enlightening. The cross-section of my friends were as follows: one is a self-employed entrepreneur who owns a lumber mill, one is a corporate manager with a waste management business, and one is a department head within the federal government: three different industries, with three intelligent people, with three different outlooks on life.

I told them I wanted their opinion regarding an industry issue that I had on my mind. Each of them was eager to participate.

I asked each of them, “Would you ever consider purchasing a rebuilt engine and under what circumstances would you consider this alternative?” The entrepreneur said “yes,” if his engine blew or it had only 150,000 kilometres, or less, on it. The corporate manager said he had done so before on his old car, as the engine did blow and it was a cheaper alternative at that time. The federal employee said he had never really considered such a thing as he was not fully aware of the possibilities.

The second question I asked each of them was “If you would consider a rebuilt engine, where would you go to investigate this and have it installed?” Each of them said, almost in unison, “the car dealership.” I asked why, and they each agreed that in their mind the dealership would be the most experienced in that particular vehicle make and model.

My last question (I didn’t want to consume our golf game, which I am sure you can appreciate) was “When, or why, would you not consider installing a rebuilt engine in your vehicle?”

The same answer came from all three: “If the vehicle was an import, as import engines are built better to start with and last much longer, or when the vehicle was over 200,000 to 300,000 kilometres, as usually, within our type of climate, the body would require too much work, and a new vehicle would then be a better alternative.”

Now I did not counter any of these with a full comment, but it told me that the alternative of a rebuilt engine certainly would not be prominent in their minds. I also got the impression that they perceived the rebuilt alternative as a dead horse industry issue from a consumer’s point of view, in light of the quality of vehicles being put into the marketplace today.

I thought to myself that these were interesting perceptions that made it clear that engine rebuilders must do a better job of reaching the consumer.

They must also do a better job of reaching the independent shop owner in the aftermarket industry. I have had the pleasure of interacting with many owners of engine rebuilding businesses throughout the past three years in Canada and the United States. They are truly good people, however, many of them run a small business and do not have the marketing resources many larger companies enjoy. Many owners themselves are also on the shop floor and do not make the time to get out to personally promote their own business.

Engine rebuilders, just as with independent jobbers and automotive maintenance and repair shop owners, are in the relationship business. They must forge proper business relationships and communicate clearly the value they deliver to the ultimate consumer and through the businesses they choose to sell to. Many engine rebuilders lack pure business acumen, which at this stage in the life of our industry is starting to hurt them. In the minds of consumers perception is reality; therefore the consumer does not see having a rebuilt engine installed in their vehicle as a worthwhile alternative.

Shop owners have also mentioned to me that it appears many consumers also see a rebuilt as an alternative for an older “mechanical” vehicle and not a modern high-tech vehicle. If this perception remains, then time is working against them and this sector of the industry is toast. It must be addressed now.

Consider that if the owner of the machine shop does not get off the floor and get into the field to educate and promote this alternative, then how is his business to grow?

“We are in a ‘Catch-22’ position, namely, shortage of competent machinists, therefore I must stay on the floor to maintain quality control, which in turn gives me no time to get into the marketplace,” is what I hear. This is the stage in their life cycle many small shops are at now.

Consider that jobbers and machinists have an opportunity to work together more closely. Both are independent business owners, and the jobber has contacts with many shop owners. Perhaps jobbers can assist the machine shop owner to get the word out as to what value this alternative can have. Educational literature should be produced clearly explaining the value and the alternative. Both would benefit from this relationship as many other parts and shop supplies must be sold to complete a full rebuild and installation.

It all affects directly the future prospects of the industry and has the effect of depressing the bottom line of a machine shop, but it is not the only reason the profitability of machine shops is a concern.

The labour component, in terms of actual rate and charge-out processes, are critical to a successful shop. Competent machinists are difficult to find and their wages have increased substantially over the past few years. Knowledge is competency in this business. To secure the best machinists, the shop will have to offer a competitive hourly wage, which must be passed on properly in the billing process. Today the multiple to establish the machinist billing rate is 4.2. This means that if a machinist is being paid $20 per hour, the charge-out rate should be $84.00 per hour minimum. Many machine shops are well below that multiple, as they have built their business based on competitive pricing and not their competency and value delivered. They are suffering financially now for that strategy. As in the rest of the aftermarket industry, the math does not lie. It comes down to what is on the bottom line and the balance sheet of the business. If it isn’t enough, you can make up all the excuses you want, but you are not addressing profitability.

If a shop owner looked at his year-end financial statement, he could do some basic analysis to see if the business is healthy. For example, calculating the following can be an eye-opener to any machine shop owner, and especially his banker:

Current Ratio

Current Ratio = Current Assets divided by Current Liabilities. The banker wants to see a 2:1 ratio, that is, $2.00 in liquid assets to every $1.00 in liabilities owed over the next accounting period. When you are below 2:1, actual bottom-line profitability may be a serious issue.

Debt to Tangible Net Worth

Debt to Tangible Net Worth = Total Liabilities divided by Tangible Net Worth. In this equation if you have a “Goodwill” figure on your Balance Sheet, you want to reduce your Assets and Net Worth by that amount. It represents “air” to the banks, and banks can’t collect air. This ratio should be a maximum of 2:1, that is a maximum of $2.00 in liabilities to $1.00 in actual net worth. The lower this number, the healthier the business is.

Total Gross Profit Percent

This is calculated by taking the total Gross Profit dollars of the shop and dividing it by the total sales of the shop. An imp
ortant factor to understand is to take the wage cost out of the labour component. When you do this, the total Gross Profit percentage of the shop should be between 65% and 70%. If the shop is not achieving this, then the door rate, labour productivity, and billing processes must be examined.

These are only but three measuring tools to start the process of examining a shop. The key in running a proper engine rebuilding business is to know what criteria to follow. Too many shops are focused on cost pricing rather than selling profit. Perhaps it is time for this sector to try to slow down and become very focused on the profitability issue of their shop.

Obviously to address all the issues of the rebuilt engine side of the industry is not going to be covered in one short article, however, it does point out the fact that much groundwork and execution remains to be done. If the issues are not addressed with action, then the sector of the industry will continue to shrink and eventually become, in essence, extinct. This does not have to be the end of an era; it could be the opening of an exciting brand new chapter. The choice is that of our industry.

Robert (Bob) Greenwood is President and CEO of E. K. Williams & Co. (Ontario) Ltd. and Automotive Aftermarket E-Learning Centre Ltd. Bob has 28 years of industry-specific business management experience. He has developed shop business management courses for independent service providers recognized as being the most comprehensive courses of their kind available in Canada. Bob is the first Canadian Business Management Consultant and Trainer to be recognized for his industry contributions when he received the prestigious Northwood University Automotive Aftermarket Management Education Award in November 2003. E. K. Williams & Co. (Ontario) Ltd. offices specialize in the independent sector of the automotive aftermarket industry preparing analytical operating statements for management purposes, personal and corporate tax returns and business management consultation. Visit them at www.ekw.ca and sign up for their free monthly management e-newsletter. Automotive Aftermarket E-Learning Centre Ltd. is a leading edge company devoted to developing comprehensive shop management skills through the E-Learning environment. Visit AAEC at www.aaec.ca . Bob can be reached at (613) 836-5130, 1-800-267-5497, FAX (613) 836-4637 and by E-Mail: greenwood@ekw.ca or greenwood@aaec.ca.


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