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Remanufactured Products: A New Business Model For Light-Vehicle OEMs, Part I of III

giuntini, ron, giuntini & coThe light-vehicle (automobiles and Class 1-3 trucks) US-based OEMs, and their suppliers, are currently in a state of malaise due to:

  • Massive financial loses for their investors.
  • Dislocations of hourly and professional workers due to downsizing.
  • Accelerated governmental intrusions into future product design due to aggressive energy efficiency standards.
  • Market share loses to foreign-based OEMs.
  • Shrinking market size.
  • Perceived irrelevancy by the financial investment community.

As a result of the above elements, the combined market value of GM and Ford is about equal to that of combined value of Deere and Caterpillar, which have only 50% of the annual sales volume. GM and Ford have for decades been ranked within the top 25 largest US-based corporations, measured by market capitalization (stock price time number of outstanding common shares); today they do not currently even rank within the top 100 corporations. A high tech company such as Cisco has a market value of more than double of that of GM and Ford combined and annual sales of only 40% of GM and Ford.

But there is hope, if the Big-3 OEMs (GM, Ford and Fiat/Chrysler), working with their suppliers, create a new business model that will deliver a different value proposition to a selective segment of the light-vehicle market. This article will recommend that the Big-3 carve-out a new business unit that focuses upon the delivery of light-vehicles which are classified as “remanufactured”.

The remanufacturing process, as applied to this discussion, assures that a not-new product has “like-new” condition characteristics of reliability levels, energy efficiencies, operational capabilities, maintainability, safety and others. Note that the US military has operated vehicle remanufacturing programs for decades for many of their weapon system platforms.

This new remanufacturing business model is foreseen to:

  • Materially increase the profit margin of the light vehicle fleet market segment
    Remanufactured products typically have profit margins that are 50-100% higher than new products. This data is obtained from the author’s management consulting engagements of durable goods OEMs remanufacturing operations (i.e. United Technologies, Oshkosh, Textron, BAE, General Dynamics, Navistar, Timken and others) over a 20 year span. Note there is less than half a dozen known publically-held “pure play” remanufacturers in which financial records are available to the public (i.e. LKQ and Remy International). The 4-6% Profit Before Taxes [PBT], as a percentage of revenues, currently experienced by the Big-3 would be transformed into a PBT of 8-12% for their fleet sales, which is aligned with that of the average “healthy” U.S.-based durable goods manufacturer (i.e. Eaton, Parker-Hannifin, and Dresser-Rand) . Note that the PBT of the Big-3 is currently difficult to truly ascertain due to the massive write-offs they incurred during their recent corporate restructuring; many of their liabilities that would presently be negatively impacting their bottom line, as well as into the foreseeable future, have been eliminated.
  • Decrease the market share of imported designed-for-manufacturing components employed in the vehicle production process
    Currently many foreign suppliers have penetrated the US market by designing their parts for manufacturing efficiency. There is little consideration by these suppliers for ease of repair/remanufacturing; it’s all about providing the lowest purchase price. With a new business model focused on remanufactured vehicles, parts designed-for-repair/remanufacturing would become of greater value to the owner of the vehicle because they could be employed in the remanufacturing process, versus the designed-for-manufacturing foreign part that would have to be discarded.  Also it is this author’s belief that the volume of imported aftermarket parts would also be decreased as a result of this initiative.
  • Reduce the manufacturing impact of light-vehicles upon industrial energy consumption and waste generation
    The new-condition manufacturing process has large amounts of materials and energy inputs, while that of the remanufacturing process has large amounts of labor employed in disassembly and reassembly activities. A 1996 study by Boston University professors estimated that a remanufactured item employs only 15-20% of the energy required to produce a like-kind new condition product.
  • Mitigate the loss of control of the design of a vehicle to the Federal Government
    A robust remanufacturing process would enable the Big-3 to partially circumvent the EPA requirements that new-condition light vehicles meet the average fuel economies of 54.5 average mpg by 2025. Extending the life of a model by employing a remanufacturing process will decrease the overall new light vehicle production rate, which in turn would reduce the amount of vehicles subjected to the new EPA fuel economy standards. It is the author’s belief that the remanufacturing initiative would also save lives due to the retention of a “robustly” designed vehicle; heavier vehicles are presumed to be “safer” than the lighter vehicles required meeting future fuel economy standards.
  • Other areas of favorable impact
    • Intellectual Property [IP] issues would be minimized regarding aftermarket parts.
    • Dealer networks would retain a closer relationship with their fleet operators.
    • Product Support End Of Life [EOL] challenges for components with rapidly changing technologies would be mitigated by keeping their supply chains “hot”
    • Financial markets would change their “image” of the Big-3 to that of an innovative solution provider; this would open the door for greater financial investment over the long-term.

In part II and part III of this article, an overview of the following nine elements of this new business model will be discussed:

  1. Who is the customer?
  2. What is the value proposition for the customer?
  3. What are the channels employed to deliver the value proposition to the customer?
  4. How are customer relationships established and maintained with the customer?
  5. What are the revenue streams?
  6. What are the key processes that deliver a value proposition?
  7. What key resources are required to be employed in the processes?
  8. What are the key sources-of-resources employed in the process?
  9. What is the cost structure?

Ron Giuntini is principal and Remanufacturing/PBL/Outcome-Based Product Support subject matter expert with Giuntini & Company.

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