performed during out-of-frame rebuilding, which can be outsourced to local, independent
machine shops. Parts (e.g. engine block, crankshaft) that have been machined outside
the dealership are re-installed by the dealer.

Another service occurring frequently at truck dealerships is the removal and
replacement of engines. As illustrated in Exhibit 3-1, approximately 24,000 engines were
removed and replaced at truck dealerships. As the number of trucks that receive only
removal and replacement service from the dealer (11,106 trucks) suggests, dealerships
actually perform out-of-frame rebuilding on just over half the number of trucks that have
engines removed at their location.

EXHIBIT 3-1
CLASS 6, 7 & 8 OUT-OF-FRAME OVERHAULS PERFORMED ON ENGINES
REMOVED AT TRUCK DEALERSHIPS

Fae obey

SZ PUIG FOCdHOL POE os
Factory Remanufactured 11,106 (46.3%)
Dealer Rebuilt 12,833 (53.6%)
Total 23,939

Source: DataMac database, MacKay & Company, 1995.

Truck dealerships are frequently the place where new and factory remanufactured
engines are installed. In these situations, the vehicle owner trades in the old engine for
either a new or factory remanufactured engine. The vehicle owner may also choose to
remove the old engine, ship it to the factory for rebuild, and re-install it. Because this
option is more time-consuming, it is done less frequently, usually by owners of engine
makes and models that are not readily available.

According to MacKay & Company, one consistent characteristic of dealerships is
their sources of revenue and profit illustrated in Exhibits 3-2 and 3-3. Heavy-duty truck
dealerships have historically priced new trucks competitively with low profit margins.
While new truck sales make up roughly 65 percent of truck dealership revenue, they
comprise only 28 percent of total profits. Conversely, sales of service and parts are only
22 percent of revenues, but 63 percent of total profit contribution.

On average 32 percent of the parts and service revenue and profit is related to
engine overhauling. Engine overhauling, therefore, contributes roughly 7 percent to total
revenue and 20 percent to total dealer profits. Given that some dealerships may perform
significantly more engine servicing than others, these percentages will vary.

Page 16 -


Page 10


part durability over the life of the engine. Indeed, some manufacturers of aftermarket
parts also supply OEMs. These parts obviously meet OEM specifications, since identical
components are delivered to the OEM and to the engine rebuilder. Because of the high
quality of these parts, rebuilt heavy duty truck engines can be assumed to meet or exceed
OEM specifications when they re-enter service.44 OEMs have acknowledged this
generally high level of aftermarket parts quality, and monitor the aftermarket
manufacturers as competitors in the parts market.45 OEMs have expressed concern that,
in the interest of increasing profit margins, independent rebuilders may be using cheaper
non-OEM parts during rebuilds. However, aftermarket replacement parts often have no
price advantage over OEM parts, and are in some cases more expensive than OEM
parts.46

There are several estimates for the number of independent garages and employee:
at these garages: .

(1) James Moss, publisher of Truck Parts & Service, estimates 8,200 truck repair
garages with a total of 75,000 employees;

(2) Michael Duebner, Executive Vice President of Automotive Engine Rebuilders
Association, estimates 9,600 to 12,000 garages; and

(3) MacKay & Company estimates 2,800 to 3,000 independent garages.

These industry experts attribute this variation to the fact that a significant number
of shops only occasionally service heavy-duty diesel trucks, and primarily service other
types of engines, such as passenger cars, off-road heavy duty diesel equipment, or marine
equipment. The higher estimates listed in (1) and (2) above may also include engine
parts remanufacturers (e.g., a shop that turns crankshafts, but does assemble/disassemble
engines), in addition to actual engine remanufacturers considered in this report.

MacKay & Company bases its estimates on distribution surveys to vehicle owners
and service providers. The surveys reveal that, on average, the estimated 2,800 shops
have 12 employees and average revenues of $1.25 million. Eight of the twelve
employees are generally engaged in service work. Nearly two-thirds of the independent
garages have revenues below the market segment average (less than $1 million).*” The
surveys indicate, not surprisingly, that a strong correlation exists between revenue and
employee data: shops with less than $500,000 in parts and service revenue have greater
than 10 employees, while the 1 percent of shops with parts and service revenues greater
than $10 million have more than 30 employees.®

** The Automotive Engine Rebuilders Association membership list provided another source for
estimating the number of Independent Garages. In a recent survey, 1,621 active members indicated that
they have the ability to perform diesel heavy-duty and industrial engine rebuilding. However, only 67 listed
this as their only line of business; most indicated several lines of business primarily dealing with passenger
car engines.

Page 20


1. Introduction

The purpose of this report is to characterize the heavy duty diesel engine (HDDE)
rebuild industry. This report is prepared under the direction of EPA, as part of their
tulemaking support for revisions to the emissions standards for HDDEs. For purposes of
EPA’s proposed regulations, HDDEs are those with gross vehicles weights (GVW) of
8,500 pounds and greater, also known as Class 2B through Class 8 (see Exhibit 1-1).
However, as documented previously,’ and as confirmed by research conducted for this
Teport, the engines in the market segment defined by Classes 2B through 5 (light-heavy
duty diesel engines or LHDDEs) are generally not rebuilt. The bodies of these trucks are
not designed for long-term use (i.e., several hundred thousand miles). The body - not the
engine - is generally the limiting factor in the LHD duty truck lifetime. By contrast, in
the medium-heavy duty diesel engine (MHDDE - Classes 6 and 7) and the heavy-heavy
duty diesel engine (HHDDE - Class 8) markets, the vehicle body is designed for long-
term use. A 1987 study found that heavy duty truck engines are rebuilt an average of four
times over the course of a lifetime, and may be rebuilt as many as six times.” Rebuilds as
a percentage of population illustrated in Exhibit 1-1 show that rebuilds are significant in
the MHDDE and HHDDE markets. Therefore, this industry characterization focuses only
on the MHDDE and HHDDE rebuild/remanufacturing markets. Urban buses are not
considered in this report.

EXHIBIT 1-1
HEAVY DUTY TRUCK CHARACTERISTICS

23S 8,500 - 19,500 Light Low

6-7 19,501 - 33,000 Medium 1%
8 33,000 and over Heavy 14%

Source: DataMac database, MacKay & Company, 1995.

The current population for Classes 6, 7, and 8 trucks in service is a key factor in
the number of annual rebuilds that occur. As shown in Exhibit 1-2, the 1995 HDDE
universe contains approximately 2.8 million vehicles, the majority of which (59 percent)
are in Class 8. Over the next five years; the medium and heavy HDDE populations are
projected to increase to approximately 3.1 million vehicles. While the Class 7 share of
the heavy duty truck population is increasing, Class 8 will still account for roughly twice
as many diesel trucks as Class 7. The Class 6 population decreased 25.8 percent during
the 1990 to 1995 period.? The trucking industry is replacing Class 6 trucks with larger
Class 7 vehicles, as evidenced by the population increase of 26.0 percent in Class 7 over
the same 1990 to'1995 period.*

Pagel


References

Automotive Engine Rebuilders Association (AERA), Membership Database, 1995.
Birkland, Carol, “Engines All But New,” Fleet Equipment Journal, March 1, 1996.

Block, Michael. Executive Vice President, Engine Manufacturers Association (EMA).
Interview on April 5, 1996. (312) 644-6610

Commercial Carrier Journal (CCJ), Census of the Professional Truck Fleet Market, 1993.
DataMac database, MacKay & Company, December, 1995.

Deierlein, Bob, “Engines,” Fleet Equipment, May, 1990.

Deierlein, Bob, “Engines,” Fleet Equipment, April, 1993.

Deierlein, Bob. Contributing Editor, Fleet Equipment Magazine.
Interview on June 11, 1996. (914) 946-1297

Detroit Diesel Distributor/Dealer Directory, 1995.

Digdagian, Haig. Information Specialist, Commercial Carrier Journal (CCJ).
Interview on June 20, 1996. (610) 964-4510

Duebner, Michael. Vice President, Automotive Engine Rebuilders Association (AERA).
Interview on May 23, 1996. (847) 541-0250

Ford Motor Co. response, dated May 23, 1991, to EPA’s Request for Information.

Hackman, Scott. Market Research Manager, Babcox Publications, publisher of Automotive
Rebuilder Magazine. Interview on May 31, 1996. (216) 535-6117.

Herring, Bill. Executive Director, National Engine Parts Manufacturers Association.
Interview on May 10, 1996. (419) 734-2501

Jarvis, Tony. Marketing Department, Franklin Power Products.
Interview on May 28, 1996. (317) 738-2117.

Luttman, Mark. Diesel Recon. Interview on May 24, 1996. (901) 320-3200.

MacKay & Company, “1995 Heavy Duty Parts Aftermarket Market Monitor and Forecast
Service,” 1995.

McCullough, Patricia, “Aftermarket Outlook: Who'll Buy the Parts”, Newport Communications
White Paper, April, 1996.

Niedhardt, Jack. Branch Manager, Alban Engine Power Systems.
Interview on May 17, 1996. (703) 450-6700.

Page 31


EXHIBIT 3-2 EXHIBIT 3-3

REVENUE CONTRIBUTION PROFIT CONTRIBUTION
Used
Used Trucks
Parts & Trucks
Service 14% s%
22%
New
Trucks
28%
New
Trucks
Parts &
4% Service
63%

Source: “Understanding the Independent Service Aftermarket,” MacKay & Company, 1995.
3.2 Engine Distributors

Engine distributors are locations licensed by each OEM to sell new engines from
the factory, remanufactured engines from the factory, and parts that meet OEM
specifications. Some of these locations also have service bays and perform in-frame and
out-of-frame overhauls on-site. The major distributor brand names are Caterpillar,
Cummins, and Detroit Diesel. The engine is the only part of a truck that can be sourced
separately through a distributor.** Distributors typically deal in large-volume engine
orders. Large truck orders through distributors often are given manufacturer’s incentives
to encourage fleets shopping for new vehicles to select that distributor’s engine brand. As
with truck dealerships, profits from engine sales are small. Distributors anticipate profits
from future parts and service sales over the lifetime of trucks.*°

As diesel trucks became popular for long-haul transportation over the past
decades, manufacturers, specifically Cummins, established distributors to sell and service
diesel engines. Over time, truck dealers, and independent shops have developed the
ability to supply and service parts for diesel trucks. Distributors are more integral to the
Class 8 truck service market for historical reasons. Class 8 trucks historically have had
the ability to accept engines made by several manufacturers. This fact has perpetuated the
existence of engine distributors that primarily solicit large volume orders for engine
manufacturers. As the distributor is frequently the point of final sale for the engines, the
distributor has also provided the more lucrative engine repair services. Class 6 and 7
trucks generally are engineered to accept engines from only one specific manufacturer,
and are more frequently serviced at the dealer. In addition, Navistar has a substantial
share of the Class 6 and 7 market, and does not have engine distributors. These facts
explain why the overhaul market share of Class 6 and 7 distributors is smaller than that of
Class 8.

Page 17


OEM-factory remanufacturers receive engine cores used in this rebuild process
from dealers, distributors and directly from vehicle owners (fleets) as part of the core
trade-in industry practice. Remanufactured engines are typically priced at 50 to 60
percent of the cost of new engine, if the replaced engine core is traded in. *” Credit is
given for those reusable or rebuildable parts of the engine returned by the truck owner. In
exchange, customers receive a remanufactured engine that can be installed quickly.
Purchasing a remanufactured engine through OEM-factory remanufacturers can eliminate
much of the time needed to perform an out-of-frame overhaul at a fleet facility,
distributor, dealership, or independent garage. For example, Mack remanufactured
engines are kept in stock at the company’s distribution centers and, in many cases can be
delivered the next working day. Removal and replacement is the only down-time
required if a factory remanufactured engine is installed.

Page 23


independents remanufacture engines to OE specifications. Although their rebuilt engines
are not warrantied by the OEM, the production-style independent generally offers a
similar warrantee. As seen in Exhibit 3-5, large independent garages perform out-of-
frame rebuilds only. Out of the 18,237 out-of-frame rebuilds performed at independent
garages, about 14 percent were done by these large garages in 1995. Vehicle owners
receive out-of-frame rebuilding services from large independent shops by removing their
old engines and either trading them in for remanufactured engines, or shipping them to
the independent shop for rebuilding. Removal and replacement does not take place at the

independent facility; engines must be shipped to the facility from another removal and
replacement location.

EXHIBIT 3-5
SIZE BREAKDOWN OF INDEPENDENT GARAGES
— : RES ——

Large Independent Garages - 2,618
Small Independent Garages 17,469 15,619
Total 17,469 18,237

Source: DataMac database, MacKay & Company, 1995.

A large number of small independent garages perform both in-frame and out-of-
frame rebuilding. As illustrated in Exhibit 3-5, these small independent garages
performed approximately 17,000 in-frame and 15,600 out-of-frame rebuilds in 1995.
These rebuilds are not warrantied by the manufacturer, but are often warrantied for short
periods of time (e.g., 30 days) by the independent garage performing the service. The
out-of-frame rebuilds performed at small independent garages will generally involve
removal and replacement of, or rebuilding of more engine parts than in-frame rebuilds
performed at similar facilities. Independent garages of any size may have the ability to
completely remanufacture engines, replacing all important parts regardless of wear, and
may test the rebuilt engine on a dynamometer, although most locations do not have all of
these capabilities. Even if an independent garage has technically advanced service
capabilities and is performing out-of-frame rebuilds, its service practices are likely
significantly different from those of a production-style facility. Generally, each engine
part is judged independently, and replaced on an as-needed basis. For instance, rather
than remove and replace fuel system and turbo components as a standard practice, an
independent garage will often elect to keep existing components on a rebuilt engine, as
long as they remain within OE specifications.

Some independent shops do not use OEM parts to rebuild HDDEs. Because
OEM part suppliers are sometimes required by contract to supply parts only to the OEM,
and not to other non-affiliated outlets, there is a market for non-OEM parts. A 1987
study estimated that non-OEM aftermarket parts accounted for 10 to 15 percent of the
parts market.43 The vast majority of these non-OEM parts are well manufactured, and
meet OEM specifications. The part may even be improved and customized, increasing

Page 19


Plaxton, Bruce. Senior Vice President, MacKay & Company. Memorandum dated August 7,
1996.

Plaxton, Bruce. Senior Vice President, MacKay & Company. Initial interview on June 11, 1996.
(630) 916-6110.

Polich, Joe. Executive Vice President, Production Engine Remanufacturing Association
(PERA). Interview on May 10, 1996. (847) 439-0491.

Production Engine Remanufacturers Association (PERA) Market Report, 1994.

Rorke, Dan. Vice President and General Manager of Heavy Duty Division, Springfield
Remanufacturing Corporation. Interview on May 21, 1996. (417) 862-2337.

Ryder, Andrew. Senior Editor, Heavy Duty Trucking Magazine.
Interview on June 12, 1996. (714) 261-1636.

Schultz, Brent. Power Systems Research.
Interview on April 9, 1996. (612) 454-0144.

Tressler, Rahn. Mack Truck. Interview on May 24, 1996. (717) 939-1338.
“Understanding the Independent Service Aftermarket,” Truck Parts & Service, February, 1996.

U. S. Environmental Protection Agency, Manufacturers Operations Division, “Heavy Duty
Engine Rebuilding Practices, Final Report,” March 21, 1995.

Wallis, Jeff. Vice President, Remanufacturing Detroit Diesel Corporation.
Interview on May 22, 1996. (313) 592-5000.

Wooldridge, David. Editor, Automotive Rebuilder Magazine.
Interview on May 31, 1996. (216) 535-6117.

Zaritz, David. Editor, Truck Parts and Service Magazine.
Interview on June 14, 1996. (847) 498-3180.

Page 32


Page 14


Qut-of-Frame Overhaul

Out-of-frame overhauls involve the removal of the engine from the truck. Major
components can be replaced where the engine is removed, or at another facility (e.g., an
OEM factory). In addition to replacing the same parts as an in-frame overhaul, out-of-
frame overhauls may replace the camshaft bearing, and the crankshaft may be reground.
Most service items that are optional during an in-frame rebuild (e.g., turbocharger
service) are performed during an out-of-frame overhaul. Out-of-frame overhauls also
allow the machining of non-lined engine cylinders, a process commonly required when
MHDDEs are overhauled.'? When the cylinder bore becomes irregular on these non-
lined engines, the block is machined out-of-frame by over-boring the cylinders. Sleeves
which match the original specifications of the engine are then inserted into the machined
cylinders, allowing normal compression.

The ratio of in-frame to out-of-frame overhauls was approximately 2:1 in 1995,
compared to a 4:1 ratio in 1975. Because engines are traveling much farther between
overhauls, operators can afford the additional time and expense associated with an out-of-
frame overhaul (see Exhibit 1-7). The first rebuild tends to be an in-frame rebuild, which
does not allow for a full inspection of all engine components (e.g., camshaft bearings are
not accessible). This lack of inspection may also lead to an operator being cautious,
contributing to shorter mileage periods between first and second rebuilds.'? The longer
distances traveled require that the camshaft bearing be serviced, in addition to other
engine parts commonly replaced during an in-frame overhaul. The out-of-frame
procedure allows for a more complete disassembly of the engine, and is therefore more.
likely to identify and replace worn parts than an in-frame rebuild. Out-of-frame
overhauls also offer the possibility of decreased down-time, by allowing installation of
an engine that was previously rebuilt or remanufactured,’ which requires removal and
replacement service time only.

EXHIBIT 1-7
AVERAGE HOURS TO COMPLETE OVERHAUL

In-Frame ‘59
Removal and Replacement 20
Out-of-Frame 74

Source: Plaxton, Bruce, MacKay & Company, fax August 7, 1996.

A complete overhaul also involves inspecting and replacing (as necessary) fuel
system components and the turbocharger. Not performing this service will save the

* A ‘remanufactured’ engine is reassembled from new or rebuilt parts, to original equipment
manufacturer (OEM) specifications. ‘Remanufacturing’ usually is performed in an assembly-line type
operation, where all components are removed until only the block remains. The new/remanufactured parts
are then installed to yield the remanufactured engine.

Page 6


“ibid.
“ DataMac, MacKay & Company, December 1995.

“Survey of Heavy-Duty Diesel Engine Rebuilding, Reconditioning, and Remanufacturing
Practices,” Sierra Research, August, 1987.

“ Testimony of Michael Duebner, President, Automotive Engine Remanufacturers Association,
Hearing on Notice of Proposed Rulemaking, August 12, 1996.

ibid.
“ibid. -

*’ Plaxton, Bruce. Senior Vice President, MacKay & Company. Memorandum dated August 7,
1996.

° ibid.

“ DataMac supplemental materials.

* DataMac supplemental materials, page 66.

5! MacKay & Company, distribution survey results.

% Plaxton, Bruce, Senior Vice President, MacKay & Company. Interview on August 1, 1996.
® ibid.

* Ford Motor Company response, dated May 23, 1991, to EPA’s Request for Information.

* Birkland, Carol. “Engines All But New,” Fleet Equipment Journal. March 1996.

5 Rorke, Dan. Vice President and General Manager of Heavy Duty Division, Springfield
Remanufacturing. Interview on May 21, 1996.

5” Birkland, Carol. “Engines All But New,” Fleet Equipment Journal. March 1996.
5 Plaxton, Bruce, Senior Vice President, MacKay & Company. Interview on August 16, 1996.

Page 29


When comparing business types within the “small” categories, the small
independents perform fewer rebuilds, on average, than the small truck dealerships.
However, as detailed in section 3.3, the small independents are likely comprised of 400 to
500 garages that perform 40 to 50 rebuilds per year, with the remaining 2,300 to 2,400
garages performing three to seven rebuilds per year. Thus, the small independent garage
that focuses on HDDE rebuilding performs more rebuilds annually than the average truck
dealership.

The “large” businesses fall into two categories. Engine distributors and truck
dealerships perform labor-intensive out-of-frame and in-frame rebuilds. The average
number of rebuilds performed by these businesses, approximately 125, is quite similar.
The production-style rebuilders, represented by the large independents and the OEM-
factory rebuilders, perform an average of 650 and 3,650 rebuilds per year, respectively.

In Exhibit 4-2, a similar profile is presented for fleets. Because rebuilding is an
expense for fleets, revenue is not an appropriate indicator of fleet size. In this exhibit,
small fleets are those with 24 or fewer trucks and large fleets have 25 or more trucks.

EXHIBIT 4-2
NUMBER OF REBUILDS PERFORMED BY SMALL AND LARGE FLEETS
Small Large Total
(1 to 24 trucks) _ (25 or more trucks)
# fleets 391,426 16,349 407,775
# rebuilds 72,627 102,936 175,563
tebuilds/company 0.2 6.3 0.4

Source: DataMac. MacKay & Company, December 1995.

The overall trends in the HDDE rebuilding business are primarily determined by
large fleets that make the decisions of whether, when, and how to replace or rebuild
engines. It is anticipated that fleets which newly out-source rebuilds will select
independents approximately 50 percent of the time, and select other sources (i.e., truck
dealerships, engine distributors, and OEM-factory rebuilders) approximately 50 percent
of the time. Due to cost advantages, the overall market share for the independent garages
is predicted to increase to 10 percent by the year 2000. Within the other distribution
channels, OEM-factory remanufacturers and large independents are well-positioned by
offering quick-turn-around service and “like-new” engines. Truck dealerships and engine
distributors seek to match this competitive advantage by carrying an inventory of rebuilt
engines, and offering warranties as well.

Page 26



EXHIBIT 1-3 ;
MILEAGE TO OVERHAUL (IN- OR OUT-OF- FRAME) &

NUMBER OF OVERHAULS (1995)
Aperace sikeage lx Grerkan Sobol Vamber-o 3
Ses oe eens Se zi
6 260,797 344,137 297,654 20,720 16,429
7 389,676 447,264 411,300 28,599 17,196
8 468,003 593,992 511,119 160,163 83,327
Total NA NA NA 209,482 116,952

(*) Weighted average for overhauls, by number of in- and out-of -frame overhauls performed.
Source: DataMac database, MacKay & Company, 1995.

overhaul is generally performed. If the gasket and seals are failing, the operator will
notice increased oil consumption. This problem is also remedied by most overhaul
procedures, because engine gaskets and seals are generally replaced. An overhaul may
also repair an engine that has failed completely, depending on the cause of the failure. If
the break-down is due to a catastrophic failure such as a cracked engine block, a new
engine (or a remanufactured engine using another block) is required.

Although many diesel engine blocks and moving parts have retained design
features for decades, newer engines differ in that they are often electronically controlled.
The engine computer, or ‘black box,’ monitors various aspects of engine operation such
as compression, timing, and fuel/air mixture. These units make hundreds of adjustments
to engine operating parameters each minute, depending on operating conditions. The
added complexity of computer-controlled engines has narrowed the field of mechanics
capable of servicing modern heavy duty trucks.’

Time to engine overhauls is increasing. This increased time between engine
overhauls (some engines travel 600,000 miles between overhauls, as discussed later in
this report) has resulted in fleets out-sourcing more overhauls. This trend is likely to
continue. Increasing engine durability has produced a downward trend in the number of
rebuilds performed each year. After a peak in 1991, the number of rebuilds has decreased
each year. This trend is forecast to continue past the year 2000 (see Exhibit 1-4).
Exhibits 1-5 and 1-6 illustrate the projected increases in years to in-frame and out-of-
frame rebuilds respectively.

Page 3


Cost is the major factor influencing an owner’ s decision to rebuild an engine. A
new Class 8 engine costs approximately $22,000,* and a new Class 6 or Class 7 engine
costs $12,000 to $13,000. By comparison, a Class 8 engine rebuild performed out-of-
frame (i.e., the engine is removed, rebuilt, and replaced) typically costs $6,500 to $8,500,
while Class 6 and 7 rebuilds cost $4,000 to $5,500 depending on what components are
replaced.’ Rebuilds restore engine performance at a substantial savings over buying new
equipment.

EXHIBIT 1-2
HEAVY DUTY DIESEL TRUCK POPULATION CHANGE, 1990 - 2000

6 464,993 354,370 (-23.8%) 283,630 (-20.0%)
7 685,832 793,540 (15.7%) 972,370 (22.5%)
8 1,411,409 1,650,112 (16.9%) 1,817,860 (10.2%)
Total 2,562,234 2,798,022 (9.2%) 3,073,860 (9.9%)

Source: DataMac database, MacKay & Company, 1995.

Other factors determining the number of rebuilds conducted annually are the
number of vehicle miles traveled between rebuilds and the average annual vehicle
mileage (see Exhibit 1-3). Mileage is the key indicator, because vehicle age does not
always correlate well to the amount of wear an engine has experienced (i.e., hours of
operation). Mileage to the second overhaul is generally 15 to 20 percent lower than the
mileage to first overhaul.® This drop in mileage reflects the fact that wear rates are not
linear (i.e., as an engine gets older, its parts deteriorate at an increased rate).

As with any piece of complex machinery, parts of an internal combustion engine
will wear out and eventually fail after extended periods of use, even with routine
maintenance as specified by the manufacturer. Although rebuilds may be performed as
preventative maintenance (at a specified mileage, for example), this is rarely done for
truck engines. Engine overhauling is a matter of economics, and is generally not
undertaken unless physical evidence suggests rebuilding is the only alternative that will
maintain engine performance. Conducting unscheduled maintenance and parts
replacement is the preferred, less costly alternative. Diesel engines run at high
compression ratios. When compression is reduced, engine performance and fuel
economy decrease. Reduced compression is caused by irregularities in the cylinder wall
that develop as the engine ages. When these factors are noticed by the operator, an

Page 2


3. External Sources of Rebuilds

In this section, the characteristics of truck dealerships, engine manufacturers,
independent garages (including production-style independents), and OEM-factory
rebuilders are examined. The typical revenue sources, profit sources, and number of
employees for businesses in each category are presented, to the extent data are available.

3.1 Truck Dealerships

Truck dealerships sell new trucks and parts. These locations also service trucks
through franchise agreements with truck and engine manufacturers. Truck dealerships
sell trucks that can be equipped with one of several types of engines from several engine
manufacturers. The major truck dealership networks include Mack, Peterbuilt, Kenworth,
General Motors, Volvo, and Navistar. These truck dealerships have a total of 1,800 truck
franchise locations. These 1,800 franchise locations are controlled by 1,200 truck
franchises, which are in turn owned by roughly 1,000 companies and/or individuals.
Generalizing about these 1,000 companies is difficult because the dealership market is
highly concentrated: approximately 150 to 200 companies have greater than $50 million
in revenues, maintain multiple locations, and frequently own multiple franchise
agreements, with multiple truck companies.”” Truck dealerships with greater than $25
million in revenues perform 37 percent of the in-frame and 27 percent of the out-of-frame
truck dealership rebuilds.”* In addition, 25 to 30 of the 1,800 dealer locations account for
approximately 25 percent of all truck sales.”

Overall, for Classes 6, 7, and 8, truck dealerships performed 22 percent of the
overhauls in 1995. Dealerships completed 43,366 in-frame and 17,826 out-of-frame
rebuilds at the approximately 1,800 truck franchise locations in the United States.° The
number of parts in the engine replaced or remanufactured during these in-frame and out-
of-frame overhauls performed at truck dealerships can vary. One option offered by some
truck dealerships is a service program that is backed by OEM warranties.°' By following
manufacturer guidelines on which parts to replace, the brand of replacement parts to use,
and overhaul procedures to follow, rebuilds performed at truck dealerships can be
authorized and warrantied by the manufacturer. Examples of well-established programs
include the Cummins National Overhaul Warranty (NOW) and Caterpillar’s Overhaul
Protection for Trucks (OPT). Warrantied engines can be dynamometer tested by the truck
dealerships to ensure power performance, but are not tested for emissions integrity.°?
Roughly 59 percent of the 17,826 out-of-frame rebuilds performed by truck dealerships
are extensive enough to be warrantied under such OEM-sponsored programs.

Alternatively, at the request of the vehicle owner, truck dealerships may provide
in-frarne or out-of-frame overhaul service that is not manufacturer warrantied. Because
few dealerships have machining equipment,” they frequently contract out specific jobs
associated with rebuilding. This is particularly true for cylinder block machining work

Page 15


Source: DataMac database, MacKay & Company, 1995.

1.1 Introduction to Terminology

The two major types of rebuild service available are in-frame and out-of-frame.
In-frame rebuilds occur when the engine is still in the vehicle, while out-of-frame
rebuilds occur after the engine is removed from the vehicle prior to service. In research
for this report, no meaningful distinction was found between the terms “rebuild” and
“overhaul.” Thus, they are used interchangeably in the text of this report.

In-Frame Overhaul

The major data source used as the basis for this report, the DataMac database
produced by MacKay & Company,’ defines an “overhaul” occurring in-frame as
replacement of the following parts: cylinder heads, pistons, piston rings, rod and main
bearings, gaskets and seals, and valves and springs. The injection system is recalibrated,
and the injectors and heads are disassembled and cleaned. Accessories such as the oil
pump are rebuilt or replaced, and in some cases the turbocharger cartridge is replaced.'°
In engines displacing greater than 10 liters (nearly all Class 8, or HHDDEs), most
cylinders contain removable liners as original equipment.'’ These engines are designed
to make engine rebuilding more cost-effective. During an in-frame overhaul, the engine
liners (which have become irregular and have caused performance deterioration) are
removed. They are replaced with new liners that restore the cylinder bore to OEM
specifications and allow normal engine compression.

* The DataMac database is a engine parts database, which predicts future demand for engine parts
based on surveys of current truck owners regarding replacement frequency. Another survey element
provided by truck owners is the location of parts and service purchases.

Page 5


The extent to which small independent garages rely on revenue from engine
rebuilding depends on how many rebuilds they perform. According to MacKay &
Company, roughly 400 to 500 companies focus mainly on HDD trucks and likely perform
40 to 50 rebuilds annually. The remaining 2,400 shops perform rebuilds infrequently,
averaging 6 per year.

The customer base of the independent garage is much the same as for the other
market segments. For-hire carriers represent 27 percent of the demand for overhaul parts
from independent garages, while construction/ mining/refuse fleets constitute 20 percent
of the demand.” Independent garages have increased their overhaul parts and service
market share in the last five years by shifting focus from gasoline to diesel engines.” In
addition, because fleets are looking for service alternatives as truck durability increases
and regulations proliferate, independent garages will likely see an expanding customer
base of cost-conscious, smaller fleets. Small independent garages generally charge 20
percent less for service labor than the industry average, are conveniently located, and are
open 66 hours a week.*! Mitigating this expected increase in market share are
environmental statutes governing the disposal of hazardous waste, at the federal, state and
local levels.” This “checkerboard” of regulations makes compliance difficult for the
smaller garages. Many of the waste products of engine rebuilding are considered
hazardous by EPA, adding substantially to the costs of garages wishing to perform
rebuilds.*? All engine rebuilds involve removing and cleaning the oil pan. The residue in
the oil pan contains heavy metals such as chromium (used as a coating for piston rings
and engine bearings), which are regulated under the Resource Conservation and Recovery
Act (RCRA). States such as Florida, California and Dlinois require that used oil filters be
crushed before disposal and waste disposal companies are unlikely to haul or dispose of
uncrushed oil filters in other states. As with oil pan residue, the oil crushed from the
filters is contaminated with heavy metals. Garages must incur the costs of hiring a waste
disposal company to haul and dispose of hazardous waste. In addition to waste disposal
regulations, when cleaning the engine block, small independent garages may use highly
caustic chemicals with reporting requirements under the Toxic Chemical Release
Inventory

3.4 OEM-Factory Remanufacturers

OEM-factory remanufacturers represent assembly-line rebuilding facilities that
perform OEM-authorized overhauls. Production-style independent remanufacturers use
the same processes as these OEM facilities. These facilities include OEM
remanufacturing programs and some production-style independent rebuilders (in the
DataMac database, these are a subset of the independents performing out-of-frame
rebuilds) that maintain preferred business relationships with OEMs. This market segment
performs out-of-frame rebuilds only, and is not involved in engine removal and
replacement. In 1995, OEM-factory remanufacturers performed approximately 21,900
out-of-frame rebuilds on Classes 6, 7, and 8 on-highway trucks, 20 percent of the total
out-of-frame rebuilds. The largest percentage (roughly 50 percent) of these rebuilt

Page 21


United States Air and Radiation EPA 420-R-97-008
Environmental Protection Januar 'y 1997
Agency

SEPA Industry Characterization:
On-Road Heavy Duty
Diesel Engine Rebuilders

&B Printed on Recycled Pape


Exhibit 1-8
Class 6,7 & 8 In-Frame Overhauls

In-Frame
Overhauls
209,482
Cc I I l
Engine Truck Vehicle Independent
Distributor Dealer Owner Shop
(18,006) 8.6% (43,366) 20.7% (130,641) 62.4% (17,469) 8.3%

Source: DataMac database, MacKay & Company, 1995.

When owners choose to perform out-of-frame rebuilds, the interactions get more
complicated in several ways (see Exhibit 1-9). Two separate activities take place:
removal and replacement of the engine, and mechanical rebuilding/remanufacturing of
the engine. It is important to note that the engine installed (replaced) in the truck is not
necessarily the same engine removed from the truck. This feature of external rebuilds
allows for additional locations: OEM-factory remanufacturers, and production-style
independent remanufacturers. Remanufacturing operations are performed on an assembly
line, replacing identical parts on all engines regardless of wear. In Exhibit 1-9, these
remanufacturing operations are included in “OEM-Factory Reman” (OE remanufacturing
programs), and in “Local Rebuilt” (larger independent operations such as Springfield
Remanufacturing). Note that not all “Local Rebuilt” engines are remanufactured by these
larger assembly-line type operations. The “Local Rebuilt” category also includes out-of-
frame overhauls performed by smaller independents, which may not replace as many
engine parts as the OEM and larger production-style facilities. Generally, when
purchasing a factory/independent remanufactured engine, the owner trades in the existing
engine, thereby ensuring a supply of engine blocks for the factory. Finally, when an out-
of-frame overhaul takes place, some portion of owners elect to install a different engine
type (new or used). EPA requires that in this switching process, any rebuilt or
remanufactured engine must be at least of the same emissions era as the engine being
removed.

The two levels of the chart in Exhibit 1-9 show the market share for each step of
the out-of-frame overhaul. The line labeled “Removal and Replacement,” breaks down
the number of older engines physically removed and replaced with rebuilt engines at a
given location type, regardless of where the actual rebuild took place. Vehicle owners
removed and replaced approximately 58 percent of engines that were overhauled. While
some of these overhauls were performed outside the owners’ maintenance shops,
approximately two-thirds of the engines removed by the owner were overhauled on-site.
Relative to in-frame overhauls, the market share for independent shops is slightly lower.

, Page 8


customer roughly $2,000. However, ignoring these parts of the power train during a
rebuild may result in lost performance. Approximately 90 percent of out-of-frame
rebuilds, and 50 percent of in-frame rebuilds replace the fuel and turbo systems.'* Out of
frame overhauls lead to the replacement of more engine parts than in-frame overhauls.
This is particularly true in the case of a factory remanufactured engine, when all engine
components are removed from the block and replaced by new or remanufactured parts!5,

1.2 Introduction to Market Players

The DataMac database is organized around the point of contact for the end user by
five industry segments: vehicle owner, truck dealership, engine distributor, independent
garage, and OEM-factory rebuilder. Vehicle owner includes individuals and fleets;
further discussion of fleet composition and practices is included in Section 2. Engine
distributors are primarily players in the HHDDE segment, and include franchises of
Cummins, Detroit Diesel, and Caterpillar that are licensed to sell and service on-highway
diesel engines. Truck dealerships include locations for Mack, Kenworth, Peterbuilt, Ford,
International, GM, Navistar, Volvo, and other smaller players. They are locations where
the truck, as well as the engine, can be purchased. Class 6, 7, and 8 dealers are all
represented in the truck dealership category. Most independent shops are small garages, -
though a few larger independent remanufacturers (e.g., Jasper, Springfield) have been
identified. OEM-factory rebuild centers perform out-of-frame overhauls only.
Discussions of truck dealership, engine distributor, independent garage, and OEM-factory
remanufacturers are found in Section 3 of this report.

For in-frame rebuilds, the owner (or fleet) brings the truck to the location where
the rebuild is performed. There are four defined market segments for in-frame rebuilds:
fleet locations (i.e., work performed by vehicle owner), engine distributors, truck
dealerships, and independent rebuilders. Exhibit 1-8 indicates the total number and
percent market share of Class 6, 7, and 8 in-frame rebuilds performed by each of these
segments.’ Vehicle owners perform the majority, 62.4 percent, of in-frame rebuilds. The
largest external suppliers of in-frame rebuilds are truck dealerships, who perform 20.7
percent of the total number of rebuilds (55.0 percent of the externally supplied rebuilds,
i.e., those not performed by the owners). The remaining market share is split about
evenly between independent shops (8.3 percent of total and 22.1 percent of externally
supplied rebuilds) and engine distributors (8.6 percent of total and 22.8 percent of
extemally supplied rebuilds).

* While these production-style independents perform services similar to OEM remanufacturing
programs, their remanufacturing activities are discussed in section 3.3, “Independent Garages”.

Page7


'? “Understanding the Independent Service Aftermarket,” Truck Parts & Service, February, 1996.
» ibid.
>" Deierlein, Bob, “Engines,” Fleet Feedback, April, 1993

* McCullough, Patricia, “Aftermarket Outlook: Who'll Buy the Parts”, Newport
Communications White Paper, April, 1996.

® “Survey of Heavy-Duty Diesel Engine Rebuilding, Reconditioning, and Remanufacturing
Practices,” Sierra Research, August, 1987.

4 ibid.

s McCullough, Patricia, “Aftermarket Outlook: Who'll Buy the Parts”, Newport
Communications White Paper, April, 1996.

6 Deierlein, Bob, “Engines”, Fleer Feedback, April, 1993.

7’ Plaxton, Bruce, Senior Vice President, MacKay & Company. Interview on August 1, 1996.

8 DataMac, MacKay & Company December 1995.

® ibid.

> DataMac, MacKay & Company December 1995.

>! U.S. Environmental Protection Agency, Manufacturers Operations Division, “Heavy Duty
Engine Rebuilding Practices, Final Report,” March 21, 1995. Confirmed by
conversation with Bruce Plaxton.

® Plaxton, Bruce, Senior Vice President, MacKay & Company. Interview on August 1, 1996.

33 Duebner, Michael, Executive Vice President, Automotive Engine Rebuilders Association.

¥ Polich, Joe, Executive Vice President, Production Engine Remanufacturers Association.
Interview on May 10, 1996.

> Plaxton, Bruce, Senior Vice President, MacKay & Company. Interview on August 1, 1996.
% ibid.

* ibid.

8 ibid.

® Detroit Diesel Distributor/Dealer Directory, 1995.

* Plaxton, Bruce, Senior Vice President, MacKay & Company. Interview on August 1, 1996.

Page 28


Endnotes

"U. S. Environmental Protection Agency, Manufacturers Operations Division, “Heavy Duty
Engine Rebuilding Practices, Final Report,” March 21, 1995.

2 “Survey of Heavy-Duty Diesel Engine Rebuilding, Reconditioning, and Remanufacturing
Practices,” Sierra Research, August, 1987.

31995 Heavy Duty Parts Aftermarket Market Monitor and Forecast Service,” MacKay &
Company, 1995.

* ibid.

* Conversation with Detroit Diesel, June 1996.

° Conversation with Cummins, June 1996.

7 Plaxton, Bruce, Senior Vice President, MacKay & Company. Conversation August 1, 1996.

5 “Survey of Heavy-Duty Diesel Engine Rebuilding, Reconditioning, and Remanufacturing
Practices,” Sierra Research, August, 1987.

° Browning, Lou, Acurex Environmental. Conversation May 20, 1996.

“Survey of Heavy-Duty Diesel Engine Rebuilding, Reconditioning, and Remanufacturing
Practices,” Sierra Research, August, 1987.

" Plaxton, Bruce, Senior Vice President, MacKay & Company. Conversation August 1, 1996.

"2 “Survey of Heavy-Duty Diesel Engine Rebuilding, Reconditioning, and Remanufacturing
Practices,” Sierra Research, August, 1987.

* ibid.
'* Plaxton, Bruce, Senior Vice President, MacKay & Company. Conversation October 14, 1996.

'S “Survey of Heavy-Duty Diesel Engine Rebuilding, Reconditioning, and Remanufacturing
Practices,” Sierra Research, August, 1987.

6 Digdagian, Haig, Information Specialist, CCJ. Interview on June 20, 1996.

‘7 “Survey of Heavy-Duty Diesel Engine Rebuilding, Reconditioning, and Remanufacturing
Practices,” Sierra Research, August, 1987.

'8 Plaxton, Bruce, Senior Vice President, MacKay & Company. Conversation August 1, 1996.

Page 27


Source: DataMac database, MacKay & Company, 1995.

Source: DataMac database, MacKay & Company, 1995.

Page 4


Each of the major OEMs have approximately 25 to 40 distributorships
nationwide. Caterpillar has 29 distributorships,** while Detroit Diesel has 28.°°
Distributors usually have three to seven locations within their sales region.“ Caterpillar
distributors typically generate over $100 million in annual revenue, while a few locations
have revenue in the range of $40 to 50 million. One location in Texas has revenue in
excess of $300 million per year.*!

For Classes 6, 7, and 8, engine distributors performed 7 percent of the overhauls
in 1995. Distributors completed 8.6 percent of in-frame overhauls, and removed and
replaced 10.0 percent of engines which were overhauled out-of-frame. Engine
distributors performing in-frame overhauls are certified by the OEM to perform
maintenance. These repairs are warrantied through the OEM.

EXHIBIT 3-4
CLASS 6, 7 & 8 OUT-OF-FRAME OVERHAULS PERFORMED ON ENGINES
REMOVED AT ENGINE DISTRIBUTOR

Factory Remanufactured 5,860
Distributor Remanufactured 4,925
Total 10,785

Source: DataMac database, MacKay & Company, 1995.

Approximately 11,000 engines were removed and replaced at the distributor for
out-of-frame overhauls in 1995 (see Exhibit 3-4). Of these engines, approximately 5,900
were removed from the vehicle at the distributor’s garage and replaced with an engine
from a OEM-factory remanufacturer. Only 4,900 of the engines removed at the
distributor were rebuilt in the distributor’s garage.

3.3 Independent Garages

Independent garages are shops that are not affiliated with engine or truck
manufacturers through franchise agreements and are not authorized by manufacturers to
perform service. This market segment performed roughly 17,500 in-frame and 18,200
out-of-frame rebuilds in 1995. Several thousand shops fall into the independent garage
category, ranging from very large production-style independents such as Jasper Engines,
to the very small one- to three-person shop. Smaller shops make up the vast majority of
independent garages.

There are four large, production-style independent shops; each has revenues of
greater than $25 million and each is involved in other services in addition to HDDE
rebuilding. These shops are production-style facilities that work on hundreds of engines
annually. They are factory-type assembly line operations with remanufacturing processes
similar to those of an OEM (discussed in Section 3.4). The production-style

Page 18


Page 24


EXHIBIT 1-1
EXHIBIT 1-2
EXHIBIT 1-3

EXHIBIT 1-4

EXHIBIT 1-5
EXHIBIT 1-6
EXHIBIT 1-7
EXHIBIT 1-8
EXHIBIT 1-9
EXHIBIT 2-1
EXHIBIT 2-2
EXHIBIT 3-1

EXHIBIT 3-2
EXHIBIT 3-3
EXHIBIT 3-4

EXHIBIT 3-5
EXHIBIT 4-1
EXHIBIT 4-2

List of Exhibits

HEAVY DUTY TRUCK CHARACTERISTICS
HEAVY DUTY DIESEL TRUCK POPULATION CHANGE, 1990 - 2000
MILEAGE TO OVERHAUL (IN- OR OUT-OF- FRAME) & NUMBER OF
OVERHAULS (1995)
CLASS 6,7 & 8 IN - AND OUT-OF-FRAME OVERBAULS
BY TRUCK CLASS
YEARS TO IN-FRAME REBUILD, BY TRUCK CLASS
YEARS TO OUT-OF-FRAME REBUILD, BY TRUCK CLASS
AVERAGE HOURS TO COMPLETE OVERHAUL
CLASS 6, 7 & 8 IN-FRAME OVERHAULS
CLASS 6, 7 & 8 OUT-OF-FRAME OVERHAULS
DISTRIBUTION OF CLASS 6, 7 & 8 TRUCKS BY FLEET SIZE
CLASS 6, 7 & 8 OVERHAUL LOCATION

CLASS 6, 7 & 8 OUT-OF-FRAME OVERHAULS PERFORMED ON ENGINES

REMOVED AT TRUCK DEALERSHIPS
DEALER REVENUE CONTRIBUTIONS
DEALER PROFIT CONTRIBUTIONS

16
15
17

CLASS 6, 7 & 8 OUT-OF-FRAME OVERHAULS PERFORMED ON ENGINES

REMOVED AT ENGINE DISTRIBUTOR
SIZE BREAKDOWN OF INDEPENDENT GARAGES
NUMBER OF REBUILDS PERFORMED BY BUSINESS TYPE AND SIZE

18
19
25

NUMBER OF REBUILDS PERFORMED BY SMALL AND LARGE FLEETS 26


2. Internal Sources of Rebuilds: Fleets and Vehicle Owners

Fleets, as defined by MacKay & Company, are groups of one or more trucks
owned by a single entity that are used in a variety of applications including lease/rental,
for-hire carriers, manufacturing, mining/construction/refuse, and agriculture. As
illustrated in Exhibit 2-1, there are approximately 41,400 fleets with 10 or more trucks,
representing 1,752,900 vehicles in the United States. Fleet locations are facilities where
trucks can be stored and/or serviced. Larger fleets often operate more than one location
and may also have centralized maintenance facilities. According to Commercial Carrier
Journal there are approximately 83,000 fleet locations for fleets with 10 or more trucks.'®
Although fleets are a very important part of the rebuild market, a combination of fewer
rebuilds being performed (because of increased engine reliability) and increased skill
needed to service more complex engines will result in fleets performing fewer rebuilds in
the future.

EXHIBIT 2-1
DISTRIBUTION OF CLASS 6, 7 & 8 TRUCKS BY FLEET SIZE
Eee = ieemchceD]
19 366,375 661,964
10-24 25,051 383,486
- 25.99 12,547 350,657
100-499 2,947 313,473
500+ 855 1,088,770
Total 407,775 2,798,350

Source: DataMac database, MacKay & Company, 1995.

As can be seen in Exhibit 2-1, the vehicle population within fleets is bimodal,
with a large percentage of trucks in small and large fleets. Thirty nine percent of heavy
duty trucks are in fleets with 500 or more vehicles.

Fleets with more than ten trucks have found it practical to own garage facilities
where both preventative maintenance and more complex repairs such as in-frame and out-
of-frame rebuilds can be performed. Very large fleets (over 1 000 trucks) often use
sophisticated databases to track the performance of their vehicles.'’ These systems can
track the details such as: personnel, maintenance procedures, parts, and engines. Unlike
other players in the rebuild market, however, overhauls are an expense for fleets, rather
than a source of revenue. Performing engine service work at fleet locations requires
hiring skilled mechanics. Nonetheless, it has been cheaper historically for fleets with ten
or more trucks to perform their own engine service work than to have them serviced at
independent garages, truck dealerships, engine distributors, or OEM-factory
remanufacturing facilities. On the other hand, smaller fleets with 1 to 9 trucks typically
do not benefit from the economies of scale and therefore likely out-source engine work to
independent garages, truck dealerships, engine distributors, or OEM-factory
remanufacturing facilities."

Page Il


who perform routine maintenance such as oil changes. Since 1989, electronic engines
have betome more common in the heavy duty market. These engines are more difficult
for fleets to service. In a survey of fleet owners, 88 percent felt that truck dealers have
acceptable service capabilities for electronic engines, while only 61 percent of fleet
owners rated their fleet shop as acceptable.”° More durable and more complex engines
require fleets to either hire skilled mechanics for increasingly infrequent rebuild jobs, or
to out-source this work.

Page 13


Table of Contents

1, INTRODUCTION 1
1.1 INTRODUCTION TO TERMINOLOGY 5
1.2 INTRODUCTION TO MARKET PLAYERS 7

2. INTERNAL SOURCES OF REBUILDS: FLEETS AND VEHICLE OWNERS i

3. EXTERNAL SOURCES OF REBUILDS 15
3.1 TRUCK DEALERSHIPS 15
3.2 ENGINE DISTRIBUTORS 17
3.3 INDEPENDENT GARAGES 18
3.4 OEM-FACTORY REMANUFACTURERS 21

4. CONCLUSION. 25



engines were sold through truck dealers; 23 percent were sold directly to vehicle owners;
and 22 percent were sold through engine distributors.

All four of the major Class 8 HDDE engine manufacturers (Caterpillar, Cummins,
Mack, and Detroit Diesel) operate remanufacturing programs. In addition, Navistar
International has established preferred-supplier relationships with Springfield
Remanufacturing Corporation and Franklin Power Products to perform OEM-authorized
rebuilds. These six companies account for the vast majority of OEM-factory rebuilds.
Ford and GM, producers of light HDDE, have confirmed that there is no real demand for
light diesel rebuilds.'' GM has no rebuild facility for diesel engines, and has not
authorized any facility to perform this service. Although GM has authorized
remanufacturers for their trucks, these facilities are assumed to contribute little to the
overall production attributed to OEM-factory remanufacturers.

All OEM-factory remanoufacturers have revenues exceeding $25 million. For the
OEMs, remanufacturing represents a small fraction of overall revenues. In addition to
maintaining other, more significant lines of business, these OEM remanufacturing
facilities are generally not limited to on-highway HDDEs. For example, Detroit Diesel
Corporation has a high horsepower and industrial engine remanufacturing center. The
preferred suppliers for Navistar, Springfield Remanufacturing and Franklin Power,
attribute 50 percent and 20 percent of their revenues to HDDE rebuilding respectively.
OEM-factory remanufacturing companies typically have 300 or more employees working
in one or more locations on rebuilding. Some companies, such as Cummins, have
separate locations for rebuilding cores, components, and fuel injectors. Springfield
Remanufacturing, on the other hand, has only one on-highway rebuilding facility. The
number of rebuilds per company ranges from roughly 1,000 to 9,000 rebuilds annually.

OEM-factory remanufacturers rebuild engines to the latest OEM specifications
using new and remanufactured OEM parts. The complete replacement of all engine parts
is the defining characteristic of the OEM-factory remanufacturer out-of-frame rebuild.
Each engine component is tested prior to assembly and the completed engine is also
tested on a dynamometer. In addition, remanufactured engine emission integrity is
confirmed to the engine model year specifications. Remanufactured engines come with a
factory warranty. Manufacturers recommend replacing several additional parts when
installing -a remanufactured engine. These parts include valve filters, oil pump, oil pump
screen, water pump, fuel system components (when applicable), and remanufactured
turbocharger (when applicable).°*

** This fact has been reiterated by numerous industry experts. Rebuild work on light HDDEs
typically is performed in response to catastrophic engine failure. The useful life of light-duty trucks is
primarily limited by body deterioration.

Page 22


Industry Characterization:
On-Road Heavy Duty Diesel Engine Rebuilders

prepared by:
ICF Incorporated

9300 Lee Highway
Fairfax, VA

prepared for:
U.S. Environmental Protection Agency

Office of Mobile Sources
Ann Arbor, Ml

Contract Number: 68-C5-0010
Work Assignment Number: 102

Final Report: January 3, 1997


Page 30


4. Conclusion

Data for the number of rebuilds performed by business type and size are
summarized in Exhibit 4-1. In this exhibit, in-frame and out-of-frame rebuilds are
summed. Small companies have less than $25 million in annual revenue, and large
companies have greater than $25 million.

EXHIBIT 4-1
NUMBER OF REBUILDS PERFORMED BY BUSINESS TYPE AND SIZE
Business Type Smail Large Total
Truck Dealer
# companies 1,625 175 1,800
# rebuilds 39,169 22,023 61,192,
rebuilds/company 24 126 34
Engine Distributor
# companies - 180 180
# rebuilds 22,931 22,931
rebuilds/company 127 127
Independent Shops
# companies 2,796 4 2,800
# rebuilds 33088 2618 35,706
rebuilds/company 11.8 654 12.8
“| OEM-Factory Remanufacturers
# companies - Sto7 Sto7
# rebuilds 21,919 21,919
rebuilds/company 3,653 3,653

Source: DataMac and Bruce Plaxton

Definitions: Large businesses have revenue of more than $25 million; small businesses have revenue
of less than $25 million.

Only truck dealerships and independent shop universes are comprised of both
small and large companies. The median number of rebuilds for large truck dealerships is
126, approximately five times the median number of rebuilds for small truck dealerships.
The median number of rebuilds for large independent shops is more than 50 times higher
than the median for small-shops. This reflects the fact that small independent shops
perform labor-intensive rebuilds, while large independent shops perform exclusively out-
of-frame rebuilds using an assembly line process. Smaller independent shops are less
specialized than the larger independent rebuild shops. Smaller independents offer a full
range of truck maintenance services, such as oil changes and belt replacement. Engine
rebuilding makes up a small part of their revenue. Similarly, small truck dealerships lack
the large volume of rebuilding business required to justify investing in specialized
rebuilding equipment. Smaller dealers focus on preventative maintenance, leaving larger
dealers to perform the majority of dealer-based rebuilds.

Page 25



Exhibit 1-9
Class 6, 7 & 8 Out-of-Frame Overhauls

Out-of-Frame Overnauis
107,829

Removal r and Replacement

——_———_ —_.—— I 1

Engine Distributor | Vehicle Owner | Truck Dealer | Independent Shop |

(10,785) 10.0% | (62.442) 57.9% | (23.939) 22.2% | | _(10.663)9.9% |
= ——————

r 1 f i T 2 —— ia

1 OEM-Factory| | Distributor Fleet Local OEM-Factory| | Dealer [OEM-Factory Dealer | Local j

Reman Rebuilt Reduit Rebuit Reman |} Rebuilt | Reman Rebun. || Rebuilt
5,860 4.925 sagr2 || 7.874 4953 || 4993 | | tntos | | 12033 | | t0.663

Source: DataMac database, MacKay & Company, 1995

The overlap between participants becomes clear when examining the third level in the .
exhibit. For instance, the removed engine can be replaced by an engine overhauled at the
factory/production style independent remanufacturer, at the truck dealership, or at the
facility where the engine is removed and replaced.

The 1995 EPA report, “Heavy-Duty Engine Rebuilding Practices,” broke down
rebuilding practices of fleets, original equipment manufacturers (OEMs), and
independents. Within the independent rebuilder market segment, practices were
discussed separately by the non-production style and production style independents. In
this report, fleets continue to be discussed as a location where rebuilds are performed.
The OEMs, as described by EPA, are included in the OEM-factory rebuilders category.
The other OEM-related categories in this report, truck dealerships and engine distributors,
were not explicitly discussed in the EPA report. Finally, both non-production style and
production style independents are included in this report’s category of independent
garages. There are four confirmed large independent rebuilders that constitute the
production style independents.

§ The four confirmed production-style independents are: Springfield Manufacturing, Franklin
Power, Dealers Manufacturing, and Jasper Engine. Each maintains an assembly-line type operation for on-
road diesel engine rebuilding and generates at least $25 million in annual revenues.

Page 9


Currently, fleet owners perform far more rebuilds than any other market segment.
Exhibit 2-2 presents fleet rebuilding frequency relative to all other service locations in the
United States. Fleets perform 62 percent (130,641 rebuilds) of all in-frame rebuilds.
Given that this service requires fewer mechanic hours and less machine work than out-of-
frame rebuilding, it is not surprising that fleets with service locations frequently opt to
perform in-frame rebuilds themselves.

EXHIBIT 2-2
CLASS 6, 7 & 8 OVERHAUL LOCATION

Fleet Garage 130,641 (62%) 44,922 (42%)
All Other Locations 78,841 (38%) 62,907 (58%)

Total 209,482 107,829
Source: DataMac database, MacKay & Company, 1995.

Fleets also perform 42 percent (44,922 rebuilds) of all out-of-frame rebuilds. As
previously illustrated in Exhibit 1-9, fleets are the location for the removal and
replacement of 62,442 engines. While 44,922 of the engines removed are rebuilt at the
fleet service locations, 17,520 engines are serviced by independent garages, dealerships,
distributors, and OEM-factory remanufacturing facilities. In these instances, fleets out-
source the rebuild to other players in the rebuild market.

When fleets out-source truck work they use certain criteria to determine where
work should be done. Based on MacKay & Company surveys, fleets established the
following priority for service determinants: quality of work; turn-around time; warranty;
uniformity of service; good value; convenience of location; and low price. 9

Companies that own private fleets which transport, raw material or finished goods
are increasing concentration on their primary businesses.” As a result, these companies
are contracting out more of their shipping needs. In addition, for-hire carriers and
lease/rental fleets are out-sourcing their more complex engine service work for a variety
of reasons. One reason is engine durability; engines are becoming more reliable, and may
go as far as 600,000 miles between rebuilds. Twice as many heavy duty engines were
expected to run 500,000 miles or longer before their first overhaul in 1993 compared to
1991.71 By the year 2000, heavy duty diesel engines are predicted to average 639,000
miles before their first overhaulTM which represents a 48 percent increase over the
mileage to first overhaul reported in 1987.

Truck fleets are composed of newer vehicles: 23 percent of trucks were 1 to 2
years old in 1995, as compared to 19 percent in 1991. 24 As a result of this increased
durability, many fleets are choosing to out-source overhaul work. In addition, large fleets
such as Schneider and J.B. Hunt typically trade in their trucks before an overhaul is
required.” The cost of the specialists who perform overhauls is another reason fleets are
turning to external sources. Specialists are more expensive than less-skilled mechanics

Page 12