Reman Versus Recycled

The remanufacturing business has changed.

With competition from newly built products that are more competitively priced than ever, mostly courtesy low-cost Asian supplies, and generally improving original product quality in categories as diverse as rotating electrics and steering racks, remanufacturers across the board are living in, as they say, interesting times.

But perhaps no segment is as beleaguered as the engine remanufacturing business, and for none of the conventional reasons.

“Late-model, low-mileage vehicle writeoffs by insurers are killing the engine and transaxle remanufacturing market,” says Rick Miller, who heads up The E.R.I. Group, the largest buying group of engine rebuilders in Canada, and also serves as chairman of the Automotive Repower Council, a U.S.-based organization operating within the Automotive Aftermarket Industries Association.

Miller acknowledges that the used engine market has always been a competitor of sorts for the repowering market. But it was always at the low end of the market, with the expected price and quality spread.

The proliferation of low-mileage engines being taken off the road and sold by today’s sophisticated automotive dismantlers is changing that. And it’s not just on Miller’s say-so.

Researcher Frost & Sullivan called the impact of repairing airbags and a consolidated salvage industry “devastating.”

“The salvage market has always been the cheaper option for installers and do-it-yourselfers to obtain replacement parts,” reported research analysts earlier this year. “The fragmented, disorganized, unsophisticated junkyards of the past are disappearing. In the last few years, the salvage and dismantling industry has made it much easier to search for and find a wide variety of aftermarket parts, including remanufactured engines and transmissions.”

The reason why so many lightly used vehicles end up in the yard in the first place, though, can be placed squarely on the airbag.

“In 1999, dual airbags were made mandatory by the National Highway Traffic Safety Administration (NHTSA) in all vehicles manufactured for use in the United States,” continued the Frost & Sullivan analysis. “U.S. regulations regarding vehicle safety also tend to set Canadian safety standards. This has led to increased scrappage of newer vehicles with corresponding lightly used parts. This trend has affected a wide variety of parts such as engines, transmissions, and radiators, which can be salvaged after a collision.”

The reason is simple: insurance companies judge whether to repair or write off a vehicle involved in a collision based on whether it would cost more than 60% of a vehicle’s salvage value to repair. The damage caused by the airbags’ deployment to windshield, dashboard, steering wheel and other interior pieces can easily top many thousands of dollars. One example of several years ago had a Lexus being written off without any significant damage to the vehicle’s exterior.

It has all led to a significant increase in damage to the reman industry, though not everyone is in full agreement that it is wholly to blame for a decrease in the engine remanufacturing business.

“It is certainly a part of it,” says Rolf Muench, Canadian sales manager for gasket maker Corteco and chairman of the Remanufacturers Council of the Automotive Industries Association of Canada. “I would have to believe that because they are writing off cars at a much quicker rate as a result of airbag replacements, they are selling a lot of parts. I don’t know to what extent that is affecting the reman business.

“People are buying a lot of parts out, but I don’t know if it’s killing it as much as it is one of the things killing it.”

Muench says that a combination of factors are to blame, including the loss of market share by the domestic automakers, which has been the meat-and-potatoes for the traditional aftermarket at all levels; the fact that everyone is building better cars and light trucks; and the influx of foreign vehicle specialists and salvage parts.

Still, Miller says that the market is down 30% in the last two years, and insists that he isn’t just griping about a loss in market share to competition. He says that there are inherent environmental and safety issues at stake when a recycler takes a part that has been sold to them as scrap and parts it out for resale.

“I have no issue with them calling a piece of scrap car a good salvage part, as long as they have something to back it up; [such as] whether it meets safety standards or emission standards,” says Miller.

“They sell you an engine out of who knows what year [of vehicle], and it will bolt into your car, but the engine management components are not the same. As a result, that vehicle may not conform to the emissions standards that it was built to.”

The same applies to ABS components, and a variety of other parts. Who’s to say how much life is left in a part, or whether that part is still reliable? asks Miller.

“It is going on but it is a big mistake,” says Joel Fenwick, Fenwick Automotive Products, a major North American remanufacturer based in Toronto. “I call that a third-world mentality. Why would I want to take a chance on that? Sure the part is cheap, but the labour outstrips the cost of the part.

“To someone like us, a used part is nothing more than a core. We can’t trust what is inside. We need to take it apart. A consumer should think no differently of a part coming from a scrap yard.

“On non-technical parts, like a light assembly, it’s a no-brainer, but when it comes to safety-related parts, there is a big difference between body panels and cosmetic parts and functional safety parts.”

One product area that doesn’t seem to be so hard-hit by the salvage parts intrusion is rotating electrics. While the higher price of late-model units means they shouldn’t be seen as immune, other market forces are top of mind for producers in this market.

“The junkyards obviously do sell the product,” says Bob Sinclair, Canadian sales and marketing manager for Dixie Electric Ltd.,”but I don’t know how big a percentage it would be.”

The big challenge for their market, he says, is the increasing influx of Asian production. It has caused stagnation in pricing at best; a drop is more common.

“Right now, product from Asia is bringing the pricing down. It is driving the price of reman down.” Yes, the new-versus-reman competition is a factor, but reman still outsells new product by 10 to one.

“But it is definitely getting more and more. It is important that if reman is priced correctly it will cost less than new. And the price of reman plus core should be less than the new unit.”

He puts that spread at 20% to 30% in reman product’s favour, but adds that it will continue to remain a challenging market regardless. Still, he says there is much room for growth.

“The market overall is still good. It’s not like it was 10 years ago but there is definitely still room for lots of growth.

He says that opportunities can and should be sought in other markets. “We’re doing forklift and lawn and garden, for example. We’re finding other markets, because to stay in the standard automotive market is limiting growth.

“When you come into [a shop] to buy an alternator for your car, that’s a grudge purchase. But if you buy one for your boat, it is because you’re going to go boating. So those are fun things.”

Still, even Sinclair wonders if the salvage issue isn’t having a greater impact than he knows. “I hope I’m not missing something.”

Miller, and the current research, seem to support the idea that the influx of salvage parts and engines is having a large and growing impact on the market. The fact that those products are not subject to the kind of stringent testing and processing that are customary among recognized remanufacturers is at the root of his concern.

“My motto is ‘scrap is scrap,'” says Miller. “When your Windstar van hits a brick wall, it is like dropping your laptop on the floor from 20 feet. It may still work, but we don’t know the long-term impact on the components.”

That message is currently making its way through the halls of political power in Washington, D.C., he says, and the outcome is still unknown. Miller says no such activity is taking place in Canada.

“It is an issue and somebody has to pick up the ball and run with it in this country.”