Analysis of the North American Remanufactured Engine Aftermarket

Growing Demand for Diesel Engine Cushions Market Decline

NABD-18 July 2013

3 NABD-18

Contents

Section Slide Numbers

Executive Summary 4

Research Scope, Objectives, Background, and Methodology 13

Definitions and Segmentation 20

Market Overview 26

Total Market -- � External Challenges: Drivers and Restraints 31 � Forecasts and Trends 44 � Market Share and Competitive Analysis 59

Remanufactured Gasoline Engine Aftermarket Breakdown 63

Remanufactured Diesel Engine Aftermarket Breakdown 76

Conclusions and Future Outlook 89

Appendix 93

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Executive Summary

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Executive Summary Key Findings Overall demand for remanufactured engines will decline, but growth opportunities exist for suppliers that can � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �

Source: Frost & Sullivan

Demand for remanufactured engines is in decline because improving product quality makes original engines last longer, and increasing technological complexity complicates remanufacturing. � Companies specializing in remanufacturing diesel engines will likely thrive in the coming years. � Diesel engine revenue will grow from 17% to 21% (2012 to 2019) as rising fuel prices and

economic pressures drive demand for fuel-efficient remanufactured engines to support the growing share of imported light-vehicle nameplates across North America. � The fractured aftermarket is consolidating; more than 1,000 remanufacturers have exited the industry since 2008. � The increased technological complexity of newer engines challenges small remanufacturers to find qualified technicians and to keep pace with changing product requirements. � Remanufacturers must invest in the tools, equipment, and expertise needed to properly remanufacture modern engines. � Auto dealerships in the original equipment service (OES) channel will quickly contribute greater revenue over other stakeholders as newer, more complex engines enter the aftermarket. � Extended service warranties keep many fleet vehicles out of the aftermarket. � Warehouse distributors (WDs) and retailers face potential market share loss as small remanufacturers exit the industry. � Competition from vehicle salvage companies will increase.

1

2

3

4

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Executive Summary Market Engineering Measurements Revenue will decline by 0.5% to a total of $3.49 billion by 2019.

For a tabular version, click here.

Note: All figures are rounded. The base year is 2012. Source: Frost & Sullivan

Compound Annual Growth Rate

(0.5%)

(CAGR, 2012� 2019)

Market Stage

Mature

Market Revenue

$3,618.9

M (2012)

Market Units/Volume

1.87 M

(2012)

Average Price Per Unit

$1,935.28

Market Size for Last Year of Study Period

$3,491.7

M (2019)

Base Year Market Growth Rate

(2.1%)

Total Remanufactured Engine Aftermarket: North America, 2012

Market Overview

Stable Increasing Decreasing ng

Market Concentration

18.1% (% of market share held by

top 5 companies)

Number of Competitors

2,000 to 2,500

(active market competitors in base year)

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Executive Summary Top-level Strategic Fact Sheet/Market Snapshot Gasoline engines represent more than 80.0% of the unit shipment demand for remanufactured engines in the aftermarket.

Total Remanufactured Engine Aftermarket: Percent

Revenue by Country, North America, 2012 and 2019 Total Remanufactured Engine Aftermarket:

Percent Unit Shipment Breakdown by Fuel Type,

North America, 2012

0.0

20.0

40.0

60.0

80.0

100.0

Sp

lit

(%)

Gasoline Diesel

16.6%

83.4%

Total Remanufactured Engine Aftermarket: Key

Market Participants, North America, 2012 Total Remanufactured Engine Aftermarket: Product

Price Range, North America, 2009, 2012, and 2019

Engine Type Suppliers

Remanufactured

Gasoline Engine

JASPER Engines & Transmissions; LKQ

Corp.; Springfield Remanufacturing Corp.;

AER Manufacturing Inc.; Marshall Engines

Remanufactured Diesel Engine

JASPER Engines &Transmissions; LKQ

Corp.; Springfield Remanufacturing Corp.;

AER Manufacturing Inc.; Marshall Engines Note: Above is the average market selling price (vendor to buyer) of

remanufactured engines. Note: All figures are rounded. The base year is 2012. Source: Frost & Sullivan

Engine Type Price Range ($)

2009 2012 2019

Remanufactured Gasoline Engine

1,450 to 1,550 1,500 to 1,600 1,550 to 1,650

Remanufactured Diesel Engine

3,500 to 3,750 3,750 to 4,000 4,000 to 4,500

0.010.020.030.040.050.060.070.080.090.0

100.0

2012 2019

US 91.7 92.7

Canada 8.3 7.3

Rev

en

ue (

%)

Year Fuel Type

8 NABD-18

Executive Summary Total Market Revenue Snapshot Frost & Sullivan expects total unit shipments to decline from 1.9 million in 2012 to 1.7 million by 2019.

Note: The graph in the center represents unit shipment data for 2009 to 2019. Outside graphs represent revenue. All figures are rounded. The base year is 2012. Source: Frost & Sullivan

$3,618.9 Million

2012

$3,491.8 Million

2019

Total Remanufactured Engine Aftermarket: Unit Shipment/Revenue Forecast North America, 2009-2019

0.0

0.5

1.0

1.5

2.0

2.5

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Gasoline 1.7 1.7 1.6 1.6 1.5 1.5 1.4 1.4 1.4 1.3 1.3

Diesel 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3

Un

its

(M

illi

on

)

Year

1,189.6

2,429.3

1,412.6

2,079.1

,491.8$3,618

CAGR: (0.5%)

CAGR: (1.8)%

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Executive Summary Comparative Analysis by Segment Diesel engines are specialized and more expensive because they cater to a smaller base of vehicles.

Application Market Growth Vehicles in Operation (VIO) Pricing Trends

Gasoline engine

Units: Decline from 1.6 million in 2012 to 1.3 million in 2019 Revenue: Decline from $2.43 billion in 2012 to $2.08 billion in 2019

2012: 263.7 million 2019: 276.4 million

Relatively stable increase from $1,500 to $1,600 from 2013 �2019 (excluding core charge)

Diesel engine

Units: Increase from 0.31 million in 2012 to 0.34 million in 2019 Revenue: Increase from $1.19 billion in 2012 to $1.41 billion in 2019

2012: 7.9 million 2019: 12.6 million

� Relatively stable increase from $3,800 to $4,150 from 2013� 2019 (excluding core charge)

Note: All figures are rounded. The base year is 2012. Source: Frost & Sullivan

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Parameters Current Future

Market Status

� Total unit shipments and revenue in decline because of increased product complexity and longer service life � High growth for diesel engine segment because of � � � � � � � � � � � ! � " ! # � $ % � & ' $ � ( � ! ) " ! * $ � + �

� Market decline supported by growing sales of high-priced diesel engines and inflation

Competition

� Fragmented, with top 5 suppliers (JASPER Engines & Transmissions, LKQ Corp., Springfield Remanufacturing Corp., AER Manufacturing Inc., Marshall Engines) capturing only 18.1% of revenue � Many small custom engine remanufacturers exiting aftermarket

� Continued market exit for many small custom engine remanufacturers � Additional openings for engine remanufacturers with large production rates to grow positions

Distribution channel

� Distribution of remanufactured engines much different than traditional aftermarket channels because of product size and complexity � Suppliers increasingly eliminating WDs and retailers from the value chain and selling directly to vehicle owners

� Original equipment suppliers (OES) channel gains the most as complex engines with strict requirements and proprietary technologies enter aftermarket � Additional weakness in warehouse distributors (WD) and retail channels as small remanufacturers exit aftermarket

Technology

� Fuel economy regulations driving continuous improvements in engines � Advanced technologies (electronic controls, variable injection timing, improved combustion chamber configuration, common rail fuel injection, and turbocharging) making diesel engines appealing

� Regulations to drive continued migration to cleaner and more fuel-efficient engines , Remanufacturing more complex and expensive � Finding skilled workers more difficult

Executive Summary Key Conclusions and Future Outlook The remanufactured engine aftermarket faces a serious technological threat.

Source: Frost & Sullivan

11 NABD-18

Key Distribution Groups Compared in This Study

Group Participants

Traditional NAPA, Carquest, Federated, Automotive Distribution Network, National PRONTO Association, Aftermarket Auto Parts Alliance

OES Ford, GM, Chrysler, Toyota, Honda, BMW dealerships

Direct to installers/ fleets

Engine/transmission shops, taxi and car rental fleets, local/state governments

Retailers AutoZone, Advance Auto - $ ! & � . / � 0 � � % % ' 1 2 3 4 . - � 5 " ' � .Canadian Tire

Direct to jobbers Independent auto parts stores

Direct to do-it-yourself (DIY) and other consumers Individual vehicle owners

The distribution groups compared in this study are as follows:

Source: Frost & Sullivan

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Product Segmentation

Gasoline Engine Diesel Engine

Salvaged Engine Remanufactured Engine

Short Block Engine

Long Block Engine

Engine

Total Remanufactured Engine Aftermarket: Product Segmentation, North America, 2012

Rebuilt Engine

This research examines only the remanufactured engine category.

Source:Frost & Sullivan

New Engine

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OES Auto Retailers

Internet/Mail Order

OEM Exporter

New Car Dealer Parts Departments

Parallel Importer

New Car Dealer Service Departments

Vehicle Owners

Offshore Manufacturer

Mass Merchandisers

Production Engine

Rebuilders

US Parts Manufacturer

Remanufacturer Salvage Yard

Warehouse Clubs

Body Shops

Collision Parts Distributors

Independent Installers

Jobbers/ Wagon Jobbers

Redistribution Jobber

Service Chain Outlets

WDs & PGs Service Chain

Distribution Centers

Market Structure The on-demand nature of repair services spawned a complex structure with a variety of service outlet opportunities.

Step 1

Ste

p 2

Note: PG = program group. Source: Frost & Sullivan

Total Remanufactured Engine Aftermarket: Market Structure, North America, 2012

Step 3 Jobber and dealer involved

Retailer Service Bays

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Market Overview Distribution Channels About 60% of installers and vehicle owners avoid traditional wholesale and retail distribution channels to purchase an engine directly from a remanufacturer.

Total Remanufactured Engine Aftermarket: Distribution Channel Analysis, North America, 2012

Note: In many cases, DIY consumers are also the owners of the vehicle.

Source: Frost & Sullivan

Engine Remanufacturers

Vehicle Owners

Direct to Jobbers

Original Equipment Suppliers

Traditional Warehouse

Direct to Installers/

Fleets

Automotive Retailers

Direct to DIY

Consumers

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Aftermarket Roadmap The aftermarket demand for most products and services is affected by economic conditions, fuel prices, vehicle sales, and usage patterns.

Total Remanufactured Engine Aftermarket: Aftermarket Roadmap, North America, 2005 2020

Source: Frost & Sullivan

Stable

Stable increase F

uel

Pri

ces

Th

e

Eco

no

my Sudden crash6 high levels of

unemployment, reduced disposable income Threat of weakened dollar and inflation could drive prices higher and lead to prolonged recession Sub-prime mortgage

crisis Credit crisis

2005 2010 2015 2020

Veh

icle

S

ale

s

Veh

icle

U

se

Sales drop6 16.5% in 2008 and 21.1% in 2009

Sales expected to pick up and grow at a CAGR of 2.6%; 2016 represents recovery to 2007 levels

Increasing share of import brand vehicles; Asian brands increasing in popularity

Domestic brand vehicles to face even greater competition

Increased usage of older vehicles (7+ years of age)

Continued steady growth in VIO of 1.0% annually

Miles travelled stabilizes, dips slightly Increased usage of small cars and fuel-efficient

vehicles

Th

e

Aft

erm

ark

et Maintenance deferred during recession helps drive recovery

Skilled technician shortage

Increasing competition from distributors, offshore suppliers

Technology changes 7 8 9 : ; 7 : < = > ? ? @ A : 9 = Bpositions

Prices hit peak

Stable increase, with potentially dramatic fluctuations

Prices begin to decline, with periodic spikes

Slow, steady growth

VIO increase with a CAGR of 1.4%

Increasing miles travelled

Revenue declines slightly through

recession

Slow, steady growth

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Drivers and Restraints The increasing number of vehicles of replacement age and rising raw material costs will drive growth.

Denotes long-term impact

Denotes current impact

Source: Frost & Sullivan D

rivers

R

estra

ints

Driv

ers

R

estra

ints

DeDe

De

Increasing number of prime replacement-age vehicles

drives unit shipments.

Increasing diesel light-vehicle population drives

demand for higher-priced remanufactured

engines.

Improvements in OE engine quality and durability restrains demand.

Longer warranty coverage and extended service warranties keep some vehicles out of the

aftermarket.

Increasing engine complexity and shortage of qualified technicians restrain aftermarket unit

shipments.

Total Remanufactured Engine Aftermarket: Key Market Drivers and Restraints, North America, 2013 2019 Rising costs for raw

materials and labor drive prices higher.

Advances in engine technology drive the

weighted average price higher, boosting

revenue.

Increasing competition from the salvage

industry restrains unit shipments.

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The Last Word Three Big Predictions

Source: Frost & Sullivan

The viability of aftermarket core collection programs is threatened as replacement rates decline, as the OES channel strengthens its position, and as salvage companies increase their participation in the aftermarket.

New entrants will attempt to consolidate the aftermarket by aggressively acquiring PERs.

The number of active competitors will decrease by 30% over the forecast period, as costs and complexity will continue to force small suppliers out of the aftermarket.

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Appendix

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Table of Acronyms Used

Source: Frost & Sullivan research.

CAGR Compound annual growth rate PERA Production engine remanufacturers association

CER Custom engine remanufacturers PG Program group

CUV Crossover utility vehicle SKU Stock-keeping unit

DIFM Do-it-for-me SUV Sports utility vehicle

DIY Do-it-yourself US United States

GVWR Gross vehicle weight rating VIO Vehicles in operation

IAM Independent aftermarket WD Warehouse distributor

IRF Independent repair facility

OE Original equipment

OEM Original equipment manufacturer

OES Original equipment service

PERs Production engine remanufacturers

21 NABD-18

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Source: Frost & Sullivan

22 NABD-18

Relevant Research 2012 Global Aftermarket Program

Date Title

2012 A Strategic Analysis of Aftermarket Remanufactured Part Opportunities in North America for Light and Commercial Vehicles

2012 A Strategic Analysis of Aftermarket Remanufactured Part Opportunities in Europe for Light and Commercial Vehicles

2012 Evaluating the Importance of Various Brand Positions in Developing Aftermarkets of APAC, India, and Russia

2012 Building Product Awareness, Trial and Loyalty in the North American Automotive Aftermarket through the Development of Internet Apps

2012 An Evaluation of the Impact of Mass Merchants on the North American Automotive Aftermarket

2012 Strategic Analysis of the Battery Replacement and Charging Services Markets

2012 20/20 Vision of the North American Automotive Aftermarket

2012 Benchmarking of Category Management Practices in the North American Automotive Aftermarket

2012 Strategic Analysis of the North American Replacement Wiper Aftermarket

2012 Market Engineering Analysis of the North American on-road Commercial and Light Vehicle Replacement Tire Aftermarket

2012 Market Engineering Analysis of the North American HVAC, Heating Ventilation, and Air Conditioning Components Aftermarket

2012 Evaluating the Development of the North American Light Vehicle Steering and Linkage Components Aftermarket

Source: Frost & Sullivan

23 NABD-18

Date Title

2012 Strategic Evaluation of OE and Aftermarket Interior Electronic Accessories in the North American Passenger Vehicle Market

2012 Strategic Evaluation of OE and Aftermarket Exterior Mounted Accessories in the North American Passenger Vehicle Market

2012 Best Practices Analysis of Aftermarket Product Sourcing and Distribution Practices

2012 Strategic Analysis of the North American Fleet and Vehicle Lease Markets

2012 Understanding Vehicle Owner Attitudes and Behaviors toward Vehicle Maintenance and Repair 2012

2012 Technicians Choice (Parts) Frost & Sullivan Professional Choice Program 2012

2012 C D E C F G 3 G H � & " * " & � I � J � + K � � + � $ � � � 2 K " � + � ) " ! H � & " * " & � I � J " " % �

Relevant Research 2012 Global Aftermarket Program (continued)

Source: Frost & Sullivan

24 NABD-18

Date Study Number Title

2012 N9DD 360-degree Perspective on Commercial Vehicle Maintenance in North America

2012 N944 Supply and Demand of Starters and Alternators in the North American Automotive Aftermarket

2012 9832 Supply and Demand of Selected Filters in the North American Automotive Aftermarket

2012 N9A6 Voice of Customer: U.S. Vehicle Owner Attitudes and Behaviors toward Vehicle Maintenance and Repair

2012 NA3E 360-degree Perspective of the Original Equipment Service Channel

2012 N91E Opportunity Analysis of Selected Pumps in the North American Automotive Aftermarket

2012 N9E9 How to Grow Revenues for Fuel System Components in the North American Automotive Aftermarket

2012 NA06 Market Engineering Analysis of the Canadian Brake Components Aftermarket

2012 9832 Understand North American Fuel Systems: CAFE Standards and their Impact on the Aftermarket

2012 NA85 A Strategic Analysis of the U.S. Automotive Point of Sale Finance Market 2012

2012 9832 Market Engineering Analysis of the Canadian Cabin Air Filter Aftermarket

2012 N90F 360-degree Perspective of the North American Automotive Aftermarket

2012 N84B Strategic Analysis of the Impact of Extended Minor Maintenance Intervals

2012 N8F2 C D E C F G 3 G H � & " * " & � I � J � + K � � + � $ � � � 2 K " � + � L 0 � % $ + � * � � & - $ ! & �

2012 N885 Strategic Analysis of the North American Transmission Repair Market

2012 N996 2012 U.S. Automotive J � + K � � + � $ � � � 2 K " � + � L J " " % � $ � ( M # � � * � � &

Relevant Research Published or In-progress Studies

Source: Frost & Sullivan

25 NABD-18

Market Engineering Methodology

is its Market Engineering studies. They

are based on our proprietary Market

Engineering Methodology. This approach,

developed across 50 years of experience

assessing global markets, applies

engineering rigor to the often nebulous art

of market forecasting and interpretation.

A detailed description of the methodology

can be found here.

Source: Frost & Sullivan research.