Hunting for success, part 1: A paradigm shift in remanufacturing leads to new opportunities

This blog is part 1 of a 4-part blog series
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A paradigm shift in remanufacturing leads to new M&A and partnership opportunities

Remanufacturing – the process of restoring used products (cores) to like-new condition – occurs across a wide range of industrial sectors and is now a $43 billion in the U.S., but it was first broadly adopted in the U.S. automotive industry in its earliest days.

For most of its history, the automotive remanufacturing space operated as a largely unacknowledged, and unofficial parallel process among Original Equipment Manufacturers (OEMs) and independent remanufacturers. As the OEMs worked to design and build new and better vehicles, independent remanufacturers and distributors developed the capabilities to work with the OEM cores. 

This effort resulted in long-lasting relationships with second-and-third tier vehicle owners who brought their used, out-of-warranty vehicles to independent remanufacturers to keep them on the road with remanufactured parts estimated to be up to 40 percent less costly to consumers than new ones. This made remanufacturing a recession-proof industry. For example, according to the U.S. International Trade Commission, during the economic crisis of 2009 – 2011, remanufacturing posted 15 percent revenue growth, and 8 percent job growth even as auto sales hit a 30-year low, and the industry employed half as many people in 2009 as it did in 2000

Today, however, that de facto understanding between OEMs and independents is beginning to fray. The technology that goes into cars and trucks (sophisticated electronic systems, designed by OEMs with proprietary and well-guarded intellectual property) has changed the nature of the vehicles we drive. It also has made reverse engineering them problematic (if not impossible) for the independents, of which there are approximately 2,000 – 3,000 in the U.S. This means the independent remanufacturer’s basic business model is being challenged by technological innovation and is at risk.

At the same time, automotive OEM’s see enormous growth opportunities in the estimated annual $240 billion automotive aftermarket parts market (forecast to grow at almost 4 percent CAGR through 2017), and remanufacturing is a fundamental component of this growth strategy.  Tier 1 OEMs are moving aggressively into the remanufacturing space. As they do, independent remanufacturers are being squeezed. They have the OEMs on the one hand, and the gray market and counterfeiters (especially in emerging economies) on the other. Indeed, a Department of Commerce report estimated that auto suppliers lost as much as $45 billion worldwide in 2011 to counterfeiting, $3 billion in the U.S.)

However, as OEMs attempt to move into the remanufacturing space, leveraging their new proprietary technologies, and their brand power, to capture a greater part of the aftermarket and generate needed new revenues and growth, they confront significant barriers.

OEMs and Independents: “How Can We Hunt Together?”

To date, there is little evidence that OEMs can successfully capture those second- and third-tier vehicle owners, design products to be remanufactured easily, or develop the returns forecasting models that make for efficient remanufacturing processes. Moreover, for fear of diluting their brand’s value with customers who might wonder why one OEM would be providing another OEM’s parts, OEMs have long resisted the all-makes-and-models remanufacturing standard that is part of what has made the independent remanufacturing business model so successful.

Both OEMs and independents are confronting challenges and opportunities. The OEM’s challenge is to take advantage of the remanufacturing opportunity, reaching out to out-of-warranty vehicle owners who have long avoided dealerships and gone instead to independent suppliers for parts, and independent garages for repairs. Meanwhile, independents must learn to survive in this new environment.

If the OEMs eliminate the independents, the gray market will take over the aftermarket, providing no benefit to the OEMs, or to consumers who then would have no reliable guarantors of quality. And if the independents cannot work with the OEMs to access their new technologies, they will be consigned to a future product portfolio of lower-margin, lower-growth cores, such as brakes and shocks.

The solution for both OEMs and independents pursuing growth is clear. As the president of an automotive OEM remanufacturer recently put it, the question to ask is: “How can we hunt together?”.

OEMs and independents must acknowledge their interdependencies, and use their combined capabilities to address customer needs faster, more efficiently, and more effectively. To do so, OEMs and independents need to join in partnerships, joint ventures, or mergers, as both have what the other needs to thrive. OEMs, however, must identify the right remanufacturing partners. That means performing due diligence that goes beyond the classic examination of financials to include the target remanufacturer’s:

  • Brand reputation
  • Distribution channels’ depth and breadth, product range, and customer base
  • Margins and cost structures
  • Reverse logistics capabilities and core management team
  • Ability to work with new technologies that help companies track products, product defects, schedule work, and respond to customers

In the remanufacturing world, this work has begun.

This blog is part 1 of a 4-part blog series - Next »

Read the original and full article at FTI Journal.

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