On and Offshore Competition Heats up the Reman Market
According to new research, the increasing number of prime replacement age vehicles, combined with technological improvements and the increasing cost of raw materials and labour, will drive revenues of the total aftermarket for remanufactured engines and transmissions.
Analysis from Frost & Sullivan reveals that the market earned revenues of US$8.38 billion in 2006, and the firm estimates that this will reach $11.12 billion in 2013.
What’s more, scrappage rates due to vehicles wearing out have decreased because of improved vehicle quality. The combined effect of increasing sales and decreasing scrappage rates has led to more vehicles in the prime engine replacement age of four to nine years, which will drive the remanufactured engine and transmission aftermarket. “Business is very good, and continuing to grow,” says Eric Liebovitz, director of sales for Fenwick Automotive. “It’s an interesting time to be talking about this issue; right now, the parts that are really driving the remanufactured market are steering parts, rack and pinion assemblies, cylinder heads, and CV drive shafts.”
The Salvage Challenge
In some markets, increased competition from the salvage industry is curtailing demand for remanufactured engines and transmissions. The salvage market provides used engines and transmissions at lower prices; however, this is emerging as a threat to remanufacturers, since the field is experiencing consolidation and organization. “Salvagers/recyclers have unified computer systems so as to be more organized in the finding and distribution of used parts, including engines and transmissions to jobbers, installers, and independent mechanics,” notes Frost & Sullivan research analyst Magdalena Borkowski. “These salvage unit vendors offer a facility to the end users, where they can order a used part online and get it shipped within two to three days at much cheaper rates.”
The challenge of obtaining cores for older model engines and transmissions may heighten. OE remanufacturers, in collaboration with automakers, have a core collection program in which automakers ensure the return of all cores, and this could make it difficult for aftermarket remanufacturers to obtain those cores in the future.
“Vehicles that may not last much longer, and those in immediate need of parts, turn to salvage yards that have used transmissions in stock,” says Ghosh. “However, remanufactured units carry longer warranties, although they may not be available at every distributor site when a vehicle owner approaches for replacement.”
However, the very nature of the salvage market provides remanufacturers with key differentiators, given the often-difficult OE spec game. With technological developments, it is difficult for used engine and transmission suppliers to warrant their engines and transmissions without correct quality information on those units. This provides opportunities to remanufactured engine and transmission suppliers to fight competition from the salvage (used) market.
While remanufactured engines represent a mature market that is expected to decline eventually, the remanufactured transmissions market is likely to see revenue growth, due to an expected increase in the number of replacement-age vehicles in use and the decreasing supply of qualified labour to repair transmissions.
Offshore Market Challenges
Quite distinct from the possible scrappage challenge, the remanufactured business in Canada also faces a significant threat from offshore manufacturers, who can make brand new parts at an unprecedentedly low cost. “China is undoubtedly our biggest challenge, as they are building new parts especially in price-sensitive lines,” says Leibovitz. The idea of new parts flooding the market from low-cost countries is certainly not a new one, and remanufacturers have been monitoring their own business impacts for years; but as Liebovitz also notes, the nature of that competition is starting to shift. While it used to be that competition with overseas manufacturers was based entirely on price, it would now seem that quality is an emerging battleground. “The product coming from China is getting better, and people would be lying if they said there has been no improvement,” he says. With that understood, he also goes on to note that this particular market challenge is likely to remain in constant flux. “There are good manufacturers and bad ones, and so there is a real mixture of competition from the overseas new parts manufacturers, and even those operations are seeing their costs start to rise, as China expands its infrastructure and deals with rising energy costs,” he says.
What’s more, as vehicles get longer in the tooth, there is a simultaneous double knock on the remanufactured business, as cores become ever more difficult to source, and overseas companies become ever more able to mass-produce and commoditize those parts.
In order to combat the recent challenges posed by low-cost imports, Leibovitz insists that remanufacturers need to stick to their key messages and core competencies. “The great thing about remanufactured is that it is absolutely fit, form, and function,” he says.
In terms of pure dollars and cents, Liebovitz also cites the overall reman advantage. “I think the reman business will remain very strong,” he says. “If you look at all of the vehicles on the road, and in particular the ’05s, ’06s and ’07s, that’s our business right there. If you look at the cost to tool up for a brand new identity, it’s extremely expensive. For example, the price for tooling-up for a new Escalade that you’re not likely to see any sales for is just way too high; that’s where remanufacturing has the advantage, because we don’t have to do any of that tooling,” he says.
The continuous introduction of new engine and transmission models by both foreign and domestic automakers has resulted in a proliferation of parts. This implies an increase in the number of parts that remanufacturers need to develop, stock, and warehouse before shipment. Given the very nature of the remanufactured business, some parts simply no longer lend themselves well to the remanufacturing process. “Some older parts have become easier and more profitable for importers to manufacture as new, and the cores for those parts have become tough to find,” says Liebovitz. However, given the price point of many older, common parts, remanufacturers don’t seem concerned, given that low-cost importers have all but commoditized those part segments. In short, remanufacturers say they are more than happy to leave the commoditized part segments to the new breed of importer, and stick with their more profitable segments. With that kind of high value core product line-up, remanufacturers appear poised to continue their success for at least the foreseeable future.
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