Hunting Together for Success

OEMs and independents must get together and use their combined capabilities to address customer needs faster, more efficiently and more effectively, suggest Ramesh Subramoniam and Mike Rayne.

For most of its history, the automotive remanufacturing space operated as a largely unacknowledged and unofficial parallel process among 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% cheaper to consumers than new ones. This made remanufacturing a recession-proof industry. For example, according to the US International Trade Commission, during the economic crisis of 2009-2011, remanufacturing posted15% revenue growth and 8% job growth even as auto sales hit a 30-year low. 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 has also made reverse engineering them problematic (if not impossible) for the independents, of which there are approximately 2,000-3,000 in the US.

This means the independent remanufacturer’s basic business model is being challenged by technological innovation and is at risk. At the same time, automotive OEMs see enormous growth opportunities in the estimated annual $240 billion automotive aftermarket parts market, 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 grey market and counterfeiters (especially in emerging economies) on the other. Indeed, a US Department of Commerce report estimated that auto suppliers lost as much as $45 billion worldwide in 2011 to counterfeiting, $3 billion in the US). 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.

‘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 facing 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 grey market will take over the aftermarket, providing no benefit to the OEMs, or to consumers who would have no reliable guarantors of quality as a result. 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, because 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.

The barriers for OEMs

After years of focusing on selling new products, OEMs lack a general understanding of remanufacturing, the aftermarket and what they both entail. Often, OEMs attempting to enter the aftermarket encounter push-back from their dealers who believe that a partnership between their parent and an independent remanufacturer would erode their market share and revenues. In reality, those dealers do not have the market they fear losing.

Second- and third-tier vehicle owners, for example, do not go to dealerships for replacement or remanufactured parts. They go to convenient local independent distributors with whom, in many cases, they have had long and positive relationships. OEMs, frequently, are also concerned about diluting their brand by getting into the all-makes-and-models programme required to support the broad array of remanufactured products that will attract customers.

Again, in reality, the all-makes strategy already has moved from an exclusively independent aftermarket offering into the mainstream of OEMs, and quite successfully. For example, according to Transport Topics, Navistar’s Fleetrite brand, encompassing brands from Ford to Mercedes, has grown from $10 million to $150 million over the last six years.

Moreover, Tier 1 component manufacturers have learned to reverse engineer other OEM products. They can now remanufacture products they did not design or develop to the same quality specifications as their own using the same factories. Tier 1 OEMs that have ventured into the all-makes-and-models sphere, have increased market share without damaging their brand value.

The barriers for independents

Today, with the increasing electronic sophistication of almost all vehicles, customers need technical support as much, if not more, than parts. To provide that support, independents require access to proprietary technologies and information, and access to special tooling, not to mention training in both. Without that access, independents maybe doomed to a low-tech, low-margin future.

This looming reality should trump the independents’ fear of losing their identity by being swallowed up by large OEMs. If they wait too long to find an OEM partner, independents may find their competitors have already made their peace with them, leaving the laggards on the outside, looking in. That’s a dangerous place to be. The lower technology remanufactured products those independents may be left with are under extreme price pressure.

Increasingly, this product category is being led by the grey market and, for some product families, by foreign OEMs offering low-cost new units which are further collapsing the independents’ margins and eating away their market share.

A classic case of disruption

While technology has created challenges and disruption within the remanufacturing industry, it has also brought opportunities and real growth potential. By leveraging their combined strengths, market access, and capabilities, OEMs and independents will fully realise the potential that the automotive market offers. With new automobile and light truck sales only recently returning to what they were 12 years ago, both OEMs and independent remanufacturers seeking growth need to adjust their business models accordingly.

That means joining forces, each contributing their particular strengths and expertise, to collaboratively address business challenges strategically and holistically. There is valuable – but dispersed – knowledge in the supply chain, relating to distribution and product characteristics, that needs to be captured and integrated into remanufacturing processes and go-to-market strategies. This will ensure continued success and growth for both OEMs and independent remanufacturers.

The recipe for achieving this success is a well-defined partnership between an OEM and an independent. However, those alliances must begin with a comprehensive, well-defined due diligence process that looks to optimise the strengths of the prospective partners while minimising the risk of a poor strategic or cultural fit.

It goes without saying that there are significant opportunities in remanufacturing for companies, investors, and, most importantly, for society – and not just in the automotive sector. Recycling, reuse, and remanufacture, according to a 2014 Ellen MacArthur Foundation report, Towards a Circular Economy, could generate more than $1 trillion for the global economy by 2025, and create 100,000 new jobs in the next five years. At the same time, remanufacturing can help preserve a global environment and biosphere increasingly suffering from the depredations of the old linear manufacturing model, characterised by high energy usage, waste, and pollution. In the automotive sector, reaping the benefits of remanufacturing will take time, effort and a reordering of mindsets. But it will be well worth it.

A carefully crafted merger or acquisition, partnership or joint operating agreement, with the strategic intent clearly defined for both parties, can provide stronger solutions, more quickly, to the remanufacturing industry. This will generate enhanced revenue and profits for all stakeholders, and provide value throughout the supply chain.

The image displays Ramesh Subramoniam (left) and Mike Rayne (right): both are MD, corporate finance/performance improvement, FTI Consulting