In With the Old
Wall Street Journal
By JOHN A. PEARCE I I
OCTOBER 20, 2008
Reconstructed products offer a promising market for many companies. But turning used products into new ones isn’t a sure
thing.
What Does It Involve?
Companies looking for new profit opportunities should remember one simple
idea: Everything old can be new again.
More than 130,000 companies across the U.S. have gotten into the business of
reconstruction — taking used products and processing them for resale. These
products bring in annual sales of more than $300 billion, in categories as varied
as plastic bottles, machine tools, medical equipment and furniture, and for many
companies they represent a booming business. At Caterpillar Inc., for instance,
the remanufacturing operation is one of the fastest-growing divisions in the
company.
The profit margins are also compelling. Reconstructed products typically cost
40% to 65% less to make than new ones, meaning much higher margins — an
average of 20% compared with less than 10% for new products. That is true even
though reconstructed products often sell for less than new ones. Another plus:
Reconstruction lets companies profit multiple times from an initial investment
by leveraging existing facilities and expertise.
Despite the impressive performance, there are still many opportunities for
growth in reconstruction. U.S. spending on reconstructed products represents
less than 2% of gross domestic product, compared with 10% for new
manufactured products.
What follows is an overview for companies looking to get into the reconstruction
business, drawn from reviewing dozens of corporate initiatives and resulting best
practices. I will outline the different types of reconstruction, as well as the types
of customers that companies might pursue. I will also examine some caveats
companies need to consider.
Reconstruction comes in three forms: recycling, refurbishing and remanufacturing.
Who Buys the Products?
In recycling, a used product is broken down into its constituent parts and then
used to make a new product, possibly different from the original. Products that
are frequently recycled include paper, steel, glass, aluminum, plastic and rubber.
With refurbishing, companies take a product and restore it, aesthetically or
mechanically, to its original condition. Typically, this involves a thorough
cleaning, followed by the replacement or reconditioning of component parts.
Products that are commonly refurbished include medical equipment, office
furniture, antiques, electronics and diesel locomotives. Single-use cameras are a
particularly good example of the practice: Not only are they cheap to spruce up,
they can be rebuilt as many as 10 times after customers drop them off.
Remanufacturing is very much like refurbishing, with one important difference.
When the product is rebuilt, it is not just restored to its original condition, it is
upgraded with new features or qualities.
For a closer look at the differences between these three processes, consider office
workstations. In recycling, a company might strip fabric from the workstation’s
divider panels and convert it to industrial padding. Refurbishing might involve
removing the original fabric and replacing it with new material to make the
workstation look as good as new. In remanufacturing, the fabric might be
replaced with material that not only looks better but is also flame retardant and
stain resistant.
The customers for reconstructed products fall into six basic types.
Customers who do not want to buy new equipment because it would not fit into
their processes. Consider a company that has a complex production line. It might
be tough to find new machines that can fit into the existing system precisely;
refurbishing or remanufacturing existing machines is often a much simpler
course.
Customers who want to avoid red tape. Take municipal transit authorities, which
face strict requirements for the motors that power their cars. Getting approval for
new designs can be lengthy, complicated and costly. Again, it is easier to go with
refurbished or remanufactured gear than to pursue all-new equipment.
Customers who do not have the capital to invest in new equipment, or will not
use the equipment enough to make the cost worthwhile. In many — but not all –
cases, reconstructed goods are cheaper than new ones, which makes them
appealing to buyers with limited needs or means. So, farmers with limited
acreage, for instance, often prefer remanufactured tractors. Likewise, fire
departments in small communities often choose remanufactured fire engines,
and corporations whose executives make local flights go for remanufactured
airplanes.
What Are the Risks?
Customers who want to extend the useful life of a product that has been
discontinued by the original manufacturer. For instance, a customer who is
rebuilding an antique car needs parts that are no longer made to the exact
specifications needed. However, the customer will often find that the parts are
available in “as new” condition as reconstructed products.
Customers who want to extend the useful life of a current product. This,
obviously, is one of the broadest categories of customers. People buy a wide
range of reconstructed goods that help keep products in good condition at a low
cost, including replacement automobile upholstery, kitchen-cabinet refacing,
marine compressors, heavy-duty truck transmissions and porcelain-bathtub
refinishing.
Customers who are interested in environmentally friendly products. “Buying
green” is increasingly popular among corporate purchasing departments, as well
as individual consumers. Remanufactured goods are often a perfect fit for these
customers, since reconstruction reduces the need to buy and use high levels of
energy and virgin materials in creating products.
Customers are showing that they are prepared to shell out higher prices for
environmentally sensitive remanufactured goods. Buyers of remanufactured
lumber, furniture, flooring and millwork, for instance, are willing to pay an 18%
premium over the prices of equivalent new products, and are willing to travel an
additional 35 minutes to purchase these products.
It is not just consumer interest that is driving the growth of this market. State
governments across the U.S. are implementing laws and guidelines that benefit
companies engaged in product reconstruction. For instance, nearly 30 states
have introduced legislation that calls for recycling electronic waste to keep it out
of landfills.
The biggest caveat about reconstruction is that some forms require lots of knowhow.
Indeed, the job is often best suited to companies that already make the
products in question. It is very tough for companies to simply plunge into
reconstructing products without being intimately familiar with the
manufacturing processes that initially created them. Not only that, if a company
is new to an industry, it can take lots of sales work to build up a market for
reconstructed wares.
Each variety of reconstruction has special challenges. At first glance, recycling
seems inviting. Entry barriers can be low; raw materials, for instance, are often
cheap. However, the job of collecting those materials and transporting them to a
recycling facility can vary greatly in complexity, time requirements, predictability
and expense. Companies must have the capability to do the pickup and transport
economically — and they must also have the resources, facilities and personnel
for processing the materials.
For example, an estimated 300 billion tires lie discarded in the U.S., with more
than 270 million added to the total each year. However, the cost of transporting
the raw material is high, as are the costs for plant and equipment and, in the
cases of sophisticated recycling, maintaining an educated and skilled work force.
What is more, if many companies plunge into a recycling niche, all those entrants
end up competing for market share and resources, while driving up the supply of
finished goods and driving down prices and profit margins.
Refurbishing adds another layer of complexity. Because companies are restoring
goods to new condition, they must be familiar with the design and features of the
original product and must possess the capability to disassemble and reassemble
that product. Specialized labeling and packaging may also be necessary.
Remanufacturing is even more complicated, since companies are not only
restoring products to new condition but upgrading them. Companies must have
experts on hand to re-engineer the given products, and a sound logistics system
to acquire and retrieve products and then guide them through the production
process — disassembling, sorting, reassembling, inspecting and testing.
For an example of what is involved, once again consider Caterpillar, which
remanufactures various diesel engines taken from used earth-moving equipment
and medium- and heavy-duty truck engines. The process includes the stripping,
dismantling, detailed cleaning and complete reconditioning of all 20,000 engine
components.
All engines are remanufactured using Caterpillar parts and produced to meet
new engine standards using the latest technology, even if it was not available
when the engine was originally manufactured.
—Dr. Pearce is the VSB endowed chair in strategic management and entrepreneurship at the Villanova
School of Business at Villanova University. He can be reached at reports@wsj.com.
