Commodity price hikes drive the viability to the point where it just makes total sense today

REMANUFACTURING is a strategic part of the operations of two companies whose executives appeared on a panel in “Supplier Strategies for the New Aftermarket.”

Pedro Ferro, president of aftermarket and trailer for Meritor, said it's a very valuable way to mitigate the lower growth rates in other areas.

“I think we're all going to have an issue with profit growth in the future,” he said. “Remanufacturing has to be seen as, it's happening to the engine side, it's going to happen to the undercarriage and drivetrain — a professional remanufacturing system where we're really treating the cores with a very sophisticated system. I was very pleased to see we have one operation in Indiana where we make seven million brake shoes per year. Very few people are touching those brakes. That's the kind of remanufacturing I'm talking about it if you want to bring more value and offset those issues.”

Kelly Dier, president of Marmon Highway Technologies, said his company remanufactured a number of platform trailers for the US military, so a few years ago, he raised this question with his team: If we can remanufacture military trailers, why can't we remanufacture a commercial trailer and really do it right?

“To do it right, you've got to have quality metal-cleaning equipment, shot-blast booths, prime booths, and paint booths,” he said. “When we remanufacture platform trailers, it extends the life of the trailer from seven to nine years at about half the cost of a new trailer, with no FET involved. We started this business a year and a half ago, and we have three lines set up. It's proving to be a very good business for us. It's great for end users, and the margins in the business are significantly higher than the new-trailer business.

“The commodity prices drove the viability. When you look at the trailer today from the suspension system to the frame to the flooring, you think about the amount of metal — either aluminum or steel — and what's happening to the prices of those commodities over the last five or six years, and it just makes total sense today.”

Also appearing on the panel were Mike McGrath, president of vehicle service aftermarket for SKF, and Joseph Saoud, president of Cummins Filtration. They answered questions from moderator Tim Kraus, president/COO of the Heavy Duty Manufacturers Association.

Q: Regarding your global operations and general strategy, is that something you feel is driven more by the corporate entity on a global basis or are you allowed to tailor to each one of your markets?

McGrath: There really is a global approach. We have centers of excellence throughout the world. Those areas are where specialty products are made. When we went into the OE business, it was decided among the technical people where that will be placed. Sometimes that's right near the manufacturing and sometimes it's through North America. Most of our manufacturing is done in North America.

Q: What about products and price strategy as it relates to markets?

McGrath: That's exactly why. A lot of our factories in China are there to support the growth of the business and industry in China. In North America, most of the products we're making here are for North American customers to support the markets primarily where they're at.

Dier: We have a small global footprint — a little bit in Europe and Brazil, and a little bit of sourcing of components out of China. We acquired the axle business in Finland last year, but at the end of the day, 90% of our focus is in North America. We tend to focus on niches where people look for value, and we try to bring value-added products to the marketplace. The North American market is uniquely tuned for us and how we do business. I've consciously kept our focus on North America because we've been growing rapidly here. I expect a strong focus on distribution channels and end users to sell our value proposition.

Saoud: Cummins Filtration has more aftermarket as a percentage of our total sales than the rest of Cummins. We have our strategy. Of course, it's approved by the board and Cummins leadership team, but the execution is on our side. The way we work with the engine business with Cummins is the same way we work with any other OEM.

Ferro: We recently announced that we went back to two segments: the OEM segment with the truck industrial segment, and the aftermarket segment. We have a little bit of a different approach in North America and Europe versus emerging markets. In emerging markets, we try to get more synergies with our local manufacturing engineering centers. In North America and Europe, the aftermarket is very dependent with its own facilities and engineers.

Q: You guys were selected for the panel because you're all selling premium brands that require selling. Not pricing but selling. When you make stuff so good that it lasts 300,000 miles, it has an impact on things. There are parts that look exactly like yours that last half the amount of time. How does that affect your cycle with utility and complexity?

McGrath: That is a good point, because heavy-duty wheel seal product is the poster child for what's happened. That was product that used to be taken out with every brake job. Back in the late '80s and early '90s, your seal was pulled when you did a brake job, so literally the warranty was almost nonexistent. And then as it progressed, it lasted longer. Today, that seal lasts 300,000 to 500,000 miles, so we've lost anywhere from two to four replacement cycles. How do you make up that profit? The bottom line is, you can't. You'd have to triple the price. That's not going to happen. There's margin compression, margin pressure. So you develop the best product you can. It sounds cliché, but the new normal is, that's how long the product lasts. So make it the best you can, support it, and then do training. The reality is, selling wheels seals is not what it used to be.

Dier: Our strategy we embarked on 12 years ago was to really invest heavily in research and development to try to bring product to the marketplace that we developed with input from our channel and the input of end users that brings significant added value in terms of the lifecycle of the product, and what we found was that if you bring that value to the marketplace and have statistics to prove the value is there, that's really what the American market wants. Our products are US-manufactured. You've got to be one of two things to succeed in this market: If you're going to sell a commodity product, you have to be an absolute low-cost producer or you've got to bring a value product to the marketplace. The model we have today is good. I'm pretty excited about it.

Q: Decommoditization. We're in the business of decommoditizing our product. I think that's the future of this industry. It was certainly confirmed by panelists earlier today. What about filtration?

Saoud: It's a highly fragmented market. The products ship well. But only a few companies who are technology leaders have about 30% to 40% of the market. So as the market becomes more complex, the engines and integration on vehicles becomes more complex. Barriers to entry become higher.

Q: Pedro?

Ferro: This is not a new phenomenon. It's been happening for a while now. If you look at the brake system, it has twice the life as it used to 10 years ago. We deal with that while taking some nasty metals out of brakes, so we actually also helped the environment during that process. Nobody really knows what stopping-distance solutions are going to do for brake life. It's too early to tell. But you can see how strong the value proposition of drum brakes is. If you don't touch a drum brake for 400,000 miles, it's going to be very difficult to convince someone that disc brakes are the solution for getting job done. I also see the importance of managing the lifecycle of the truck. Different customers have different lifecycles. One guy wants to sell the truck at 500,000 miles. The other wants to keep the truck longer because he has more sophisticated implements on top of it, so we need to continue to cater to the first, second, third owner. We have to continue to accelerate innovation. That's the only way we can deliver the value proposition.

Q: Talking about the uncertain value chain and if brands are a worthwhile investment long term. With this group, you're very heavily invested and are well-known brands. What is the effort to sell the lower-priced product with your premium brands?

Dier: That's an important part of our strategy, but at the end of the day, it's the product, the service, the manufacturing, the quality that makes the brand. So the way I approach it is, we have a lot of wonderful brands people pay premium prices for. The key is to make sure that brand denotes an absolute premium-value product, so to the extent you create that value or product, whether it's a Webb wheel or Fontaine fifth wheel or any of our brands, they think about quality and service and support when they see that name.

Q: Joseph, you're in a business in filtration that probably is one that has been infiltrated most by look-alikes and will-fits, and still maintained huge market share.

Saoud: Our goal is to take care of the customer, whether it's uptime, total cost of ownership, inventory, logistics. If the customer wins, we will win. It's being able to depend on the brand, being able to trust the brand when you need it, and work well and keep improving on it.

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