Did you know that the overall "Reconstructed" Industry (which includes remanufactured and rebuilt engines) comprise:

§  130,000 companies involved in U.S.

§  $300 billion in sales

§  1/5 the size of new manufactured products

§  Encompasses recycling, refurbishing, remanufacturing

And the rationale for purchasing these products include:

§  A new version not fitting into an existing process (precisely)

§  Avoid redtape to qualify new

§  No capital or justification for new

§  Extend life of discontinued product

§  Extend life of current products

§  Buying green – 18% premium seem to be ok

With the Diesel Engine Industry:

§  World diesel engine industry revenues of $129 billion: Asia largest, NA fastest growing with heavy vehicles and increased use in light vehicles, stationary power fastest growing segment

§  U.S. of $16.6 billion in 2008 growing 6.5% annually to 20.5 billion in 2013 with strong growth in light-duty, passenger; Off-highway slowing but helped by new emissions regulations

§  NAFTA breakdown is Auto 5.1%, On-Highway 72.8%, Agriculture 5.1%, Off-Highway 11.5%, Gen/Ind. Stationary/loco/marine 5.5% (1.6 million non-auto diesel engines sold in 2006.)

Remanufacturing (vs. rebuilding which does not replace and recondition all components):

§  Cat helped popularize reman beginning in 1972 -- customer acceptance, quality assurance, engines designed for reman -- product cost savings of 40-65% vs. new with 20% margin vs. 10% for new engines

§  Generally:

Ø  Labor/ovhd 60% of cost – overall cost less than 70% of new build

Ø  Determining core value (and sourcing cores) – critical part of business

Ø  Usually complete with fuel system

Ø  Long block demand – by reman or end-users without machine shops

Ø  Potential role in fine tuning engine electronics, emissions modifications

Ø  Cost of “trim” to overall cost/complexity – accessories, pumps, emission-controlling hardware

Few facts for Over-the-Road Trucks:

CLASS 8

§  200,000 Class 8 engines in 2008 vs. 42,000 Class 7

§  Big bore engines with 30-50% cost premium to smaller

§  Cummins 2006-8 share 32% to 40% or 80,000 engines (Cat 28% - 13% getting out of business in 2010 with Paccar’s Kenworth and Peterbilt which was 67% of Cat’s business building own); rest from integrated truck makers

§  NA Shares: Cummins 40.6, DD/Mercedes 24.3, Volvo/Mack 13.2, Cat 12.5%, Navistar 9.3% (now with Cat)

§  Daimler Freightliner – 79% from DD, Mercedes – 14.2% from Cummins, 6.7% from Cat

§  Daimler Sterling – DD/Mercedes 55%, Cummins 31%, Cat 14%

§  Daimler Western Star – DD/Mercedes 62%, Cat 36%, Cummins 1.6%

§  International Trucks – 55% from Cummins, 40% from Navistar, 5% from Cat

§  Kenworth/Peterbilt (25% of Class 8) – 70% from Cummins, 30% from Cat

§  Mack – 100% Mack

§  Volvo – 57% Volvo, 43% Cummins

CLASS 4-7

§  Class 4-7 – Isuzu, Mercedes gaining share

§  Light Truck Diesel – Dodge/Cummins, Ford/International, GM/Duramax

§  New engine or OEM reman – too expensive for old truck (better to replace truck)

§  Trend to vertical integration: Paccar – moving to own engines, Volvo & Mack make own engines, Freightliner (Mercedes – also Sterling, Western Star, Thomas Built Buses) has DD with DD15, 13, 16 (Cummins for medium+  ISX heavy-duty engine)

§  Potential need for independent reman for Cat CLASS 8 as they reduce support (also, most Paccar customers are independents and smaller fleets.)

§  Paccar 9 and 13 liter, overseas built, assembled in Miss.

Overview of Green trends include:

New recognition of resource shortages – particularly as populous developing countries (China, India, Brazil, Indonesia develop) – with appeal for sustainability (reman engines with reconditioned used parts).

Emissions key items:

§  Impacts in 2002, 2007, 2010, and 2014 Tier 4 emissions control standards for off-road

§  Reman gets around requirements for new engines

§  Risk:  EPA may require reman engines to meet original emission standards (vs. current assumption that they do based upon original design)

The 2007-2009 Recession has become a positive for the reman and rebuild industries:

§  More frugal buyers, delayed purchases and maintenance – good for reman as economy recovers

§  Truck rotation, less new purchases – revival of reman with economy already seen

§  American Recovery and Reinvestment Act (AARA) of 2009 provides $300 million to heavy duty diesel owners for retrofit  – Wisconsin, South Carolina – matching dollars www.epa.gov/otaq/eparecovery/progstate.htm

§  AARA – significant funds for infrastructure construction

Overall trends continue:

§  Continued entry of Japanese, Korean, and Chinese equipment and engine players

§  Continued OEM vertical integration in the trucking arena

§  Consolidation of the reman industry with Cat acquiring companies in rail, reman in the UK, and JVs in China, Singapore, etc.

* Note: Various data source have been used.  Specific citations are available upon request.