Growing demand for diesel engines to cushion market decline for remanufactured engines

Increasing technological complexity to improve the performance of vehicles and meet tighter emission standards, increased safety requirements, and fuel economy requirements are driving the need for better and more advanced engine technologies.

Because original equipment manufacturers (OEMs) are improving the product quality of engines to meet these needs, remanufacturers, installers and distributors in this market are operating under extreme competitive pressures.

There are two types of competitors in this market — production engine remanufacturers (PERs), which produce more than 1,200 units per year, and custom engine remanufacturers (CERs), which make less than 1,200 units per year. CERs are small, family-operated enterprises that, individually, hold very small revenue market shares.

The increased technological complexity of newer engines makes it difficult for many small remanufacturers to find qualified technicians and keep pace with changing product requirements.

The on-going trend of manufacturing high-quality engines is slashing the replacement rates in this market, thus threatening the existence of smaller players that are vulnerable to constricted profit margins. The issue of core availability and the core fall-out rate is also challenging because of rapid progress in technology, increasing number of import nameplate vehicles in the North American vehicle parc, and the consolidation of the salvage industry, which is becoming more organized and provides used engines at lower prices.

Drivers that Contribute to the Unit Shipment and Revenue Growth of Replacement Remanufactured Engines

Frost & Sullivan research on the remanufactured engine aftermarket in North America shows various drivers that are impacting the unit shipment and revenue growth of remanufactured engines.

• The economic downturn in 2008–2009 increased the number of cars and light trucks into prime replacement age because new vehicle sales plummeted as consumers kept their vehicles longer, rather than buying a new one. This boosted the unit shipment demand as well as total revenue for engine remanufacturers.

• Government regulations on new emissions controls and enhanced fuel economy requirements in the U.S. forced OEMs to make advances in engine technology. This requires additional training, engineering, materials, and advanced equipment, which drives prices and revenue for remanufactured engines.

• The continuing demand for better fuel economy is expected to make diesel engines a viable alternative. Remanufactured diesel engines will gain importance because a sizable number of light pickup trucks and package delivery trucks are shifting from gasoline to diesel engines. Demand for remanufactured engines will be supported by a growing diesel population, which will push average prices and revenue higher.

• Rising costs for raw materials due to volatile commodity prices, such as steel and other raw materials found in engines, drive prices higher. When steel prices rise, the scrap metal value of used engines also rises and results in more of them being sent to recyclers rather than to remanufacturers. High steel prices also raise core prices, resulting in higher core charges for customers.

Industry Challenges and Restraints

The major issue for the remanufactured engine aftermarket is consistent improvement in quality caused by market participants building durable products with improved technologies that are reducing the replacement opportunities, thus lowering growth rates. The issue of core availability and the core fall-out rate is also challenging because of rapid progress in technology, increasing the number of import nameplate vehicles in the North American vehicle parc. The consolidation of the salvage industry, which is getting more organized and provides used engines at lower prices, is emerging as a threat to remanufacturers. The salvage market is becoming a more acceptable alternative because it is providing more information on used units; for example, the model year of the engine and the number of miles remaining on the engine.

In today's difficult economic environment, the growing popularity of hybrid vehicles in North America is expected to result in hybrids emerging as a potential alternative to conventional technology. This is because of hybrid vehicles’ unique advantages of providing better fuel efficiency, high torque, and horsepower. Vehicle owners and installers prefer better warranties than those associated with remanufactured products. Hence, to keep more customers, many new vehicles are providing longer warranty terms and extended service, which is keeping customers, particularly fleets, out of the aftermarket.

Market Size, Growth Trends and Forecasts

Frost & Sullivan’s latest research on replacement remanufactured engines in North America indicates that the market has been shrinking due to a rise in Asian imports and reduced sales and margins of small remanufacturers. The long-term growth in the revenues for this segment is likely to reduce to $3.39 billion in 2018 from the market-earned revenues of $3.54 billion in 2012. Diesels will grow from 17 percent to 21 percent of revenue from 2011–2018 as fuel prices are high and will remain high in the long term, which is making diesel passenger cars more appealing. Economic pressures drive demand for fuel-efficient remanufactured engines to support the growing share of import light-vehicle nameplates across North America.

Competitive Landscape

The fractured aftermarket is starting to consolidate, as more than 1,000 remanufacturers have exited the industry since 2008. High costs and complexity will continue to force small suppliers out of the aftermarket. Frost & Sullivan expects the number of active competitors to decrease by 30 percent in the coming years, and the new entrants will attempt to consolidate the aftermarket by aggressively acquiring PERs. Original equipment suppliers (OES) hold an advantage over independent remanufacturers since they are supported by longer warranties, strong core collection programs from the automakers to drive more business, expertise in new technologies, and are able to win higher-value contracts from OEMs.

However, warehouse distributors and retailers face the prospect of market share loss as small remanufacturers exit the industry. The consolidation of gasoline engine remanufacturers will create opportunities for high-volume PERs to grow and strengthen their positions in the aftermarket and to specialize in products that help them penetrate the in-warranty OES channel. But companies specializing in remanufacturing diesel engines are best positioned to thrive in the coming years.

Janardan Damani is a Research Analyst with Frost & Sullivan’s Automotive Aftermarket research group. Frost & Sullivan, the Growth Partnership Company, works in collaboration with clients to leverage visionary innovation that addresses the global challenges and related growth opportunities that will make or break today's market participants. For more information on Frost & Sullivan’s Automotive Aftermarket research or any questions on this article, you can contact Jeannette Garcia, Corporate Communications at [email protected] or 210.477.8427.                 

Subscribe to Aftermarket Business World and receive articles like this every month….absolutely free. Click here.