Up to Standards
- Author: Mike Weinberg, Contributing Editor
An old Chinese wish (curse) says “may you live in interesting times.” We as an industry are certainly living in interesting times and have been for the past five or so years. We as technicians and sellers of repair services to the public are attached at the hip to the car manufacturers. What was good for them is theoretically good for us, but that situation has changed dramatically.
The new-car market is saturated with manufacturers fighting for market share. This has led to a significant change in marketing tactics by the manufacturer that is directly affecting the repair industry. It is very difficult to sell a customer $2,500 worth of transmission repair when that customer can walk into a showroom and lease/buy a new vehicle for no money down, thousands of dollars in cash-back incentives, low or no interest rates, and ultra-long vehicle warranties. This then puts a huge burden on the repair shop to be cost efficient, maintain good customer satisfaction, have excellent selling skills and be on top of the technology at all times.
When I speak of manual- (standard) transmission work, the category actually will include more than transmissions. This umbrella includes other driveline services: all types of transfer cases, differentials, and associated parts such as drive shafts, U-joints, and tires. The mix of transmissions in the marketplace is about 20% manual and 80% automatic.
On the light-truck side we see a decline in the use of manual transmissions as the development of better heavy-duty automatic units such as Allisons and the decline of driver skills make the automatic segment a better choice for most of our drivers.
To offset that, we have significant growth in transfer cases, which are used behind both sticks and automatics. The trend toward more four-wheel drive or all-wheel drive will continue because of the safety features inherent in having all four wheels able to provide traction. We are obviously in a cycle of rising fuel costs, which will affect the SUV market to some degree, but more and more cars are equipped with some type of four-wheel drive.
Another area that needs watching is the so-called “clutchless” manual transmissions. This is technology is about to see rapid growth. “Clutchless” is a misnomer, because these are clutch-driven transmissions that do not have a clutch pedal for the driver to operate. They do, however, use a clutch that is operated by computer control, and the transmission can be shifted either manually with paddle shifters on the steering wheel or automatically by the vehicle powertrain control module.
An example of this is the SMG transmission used in the BMW M3. SMG stands for sequentially shifted manual gearbox. If you have never driven one of these units it will be a new, exciting experience. The computer control is truly amazing; upshifts are smooth without the use of a clutch pedal, and when the PCM commands a downshift, it blips the throttle to help match the engine speed to the lower gear.
This technology is a direct payback from racing, where these types of units have been used for years in Formula One and other advanced open-wheel-series and road-rally cars. This technology will only continue to grow as it fulfills two badly needed market demands: fuel economy and driver skill. No matter what you do to a torque converter, there will always be some inefficiency because of the designed-in slippage to prevent engine stalling when the vehicle stops in gear.
Better lockup systems and more-efficient converters are here now, but nothing will exceed the physical disconnect possible through a clutch. This clutchless type of unit also allows operation by people who have not acquired the skills to operate a manual transmission or lack the physical coordination required.
These units also are found in medium- and heavy-duty trucks, and that market will continue to grow, since it is tied directly into fuel savings. The more expensive fuel gets, the more development will be done to increase this market. The doom-and-gloom media have predicted the demise of the larger cars and the SUV market, but they are always wrong when it comes to the American mentality. People will get used to higher fuel prices, just as they have learned to accept cars and trucks in the price range of $20,000 to $50,000.
When I bought my first home, I paid $33,000 for a new house built on a half-acre lot; it now has a market value of $450,000. At that same time, I could buy a new car with most of the bells and whistles available for $3,000. Cars like it today sell for $30,000, and the public is buying them.
There is much talk about alternative fuels such as hydrogen, and about fuel cells, but we are probably 10-20 years from having the infrastructure to support nationwide use. The media love to tout hybrid vehicles, and that technology is developing, but if you price one of these vehicles out, you could never save enough money in fuel to offset the high cost of a low-production vehicle. Regardless of the fuel sources, all the next-generation vehicles will still require transmissions, which eventually will need repairs.
The outlook for manual transmissions is still good for the future. They will retain their 20% of the transmission market, as what is lost to automatics on the light-truck side will increase on sport and enthusiast models.
The transfer-case market is growing rapidly, and look for new technology in differentials to enhance that market. BorgWarner and several other manufacturers are working diligently to develop the next generation of differentials. These units will not have traditional differential carriers with spider gears and pinion gears; the carrier will be nothing more than a spool-type mount for the ring gear. The axles will be driven off the spool and will be splined into clutch packs on each side of the differential case. Computer control of these clutch packs will allow differentiation on turns and complete lockup on the straights. This technology will be integrated into traction control and antilock-brake systems and will permit less unsprung weight in the vehicle for better handling.
The transmission shop is facing many new and tough forms of competition. The overcapacity for new-vehicle production will keep sales incentives around for the foreseeable future. Longer new-car warranties will channel work to the franchised dealers instead of the aftermarket. Many people have become used to leases or continuous car payments and will always be in a car that is under warranty. On the automatic side, many of our traditional wholesale customers have begun to install readily available factory reman units. This leaves the manual market open to us, because with the low production numbers the car manufacturers have not created reman programs. Transfer cases will be a growing market for us, because you can still be price competitive against the dealer. There is plenty of differential work available if you seek it out. When it makes economic sense, you can use reman units yourself to get more customers on the road quicker without warranty liability.
Now is the time to really evaluate every job you do and make sure it is profitable, offers quick turnaround and lets you concentrate on the things you can do efficiently and cost effectively. The game plan for the future will be to develop those smaller niche markets that are undeveloped because of lack of expertise or talent. It has been no secret that this country has a massive shortage of skilled technicians. The way around that is to invest in yourself with further education to stay with the developing technology, and to use reman units for added profit centers. If the builder who did all your standards is retiring and there is no one to take his place, why not buy units until you can hire someone else or bring one of your employees up to speed?
A game plan for the future will look like the following checklist:
- Become technically adept at all forms of powertrain and driveline diagnosis. You cannot be profitable unless you can consistently determine what you should be working on.
- Learn the basics of correct pricing to give you the profits you need to stay in business. Do you know the difference between markup and margin? Markup is the percentage you add to parts purchased and is actually what your profit is after your markup. In case you don’t realize it they are not the same. For example, a 40% markup produces a gross profit margin of 28.5%.
An easy formula for arriving at the gross-profit margin you want from a parts sale is to divide the cost of the goods by the difference between 100% and the profit percentage you want. Say a part costs you $15 and you want a 40% gross-profit margin. Since 100% minus 40% is 60%, divide $15 by 0.60, and you get a sale price of $25 for a 40% gross margin.
If you merely multiply $15 by 140% markup, you get only $21. How much money have you been giving away? Remember that if you want a profit margin of 40%, that means the cost of the parts can be only 60%. You must establish your costs of doing business and create a model for the gross-profit margin you need to pay your fixed costs and generate the profit you want. If you are not pricing your work properly, you may as well be working for someone else and stop taking the headaches home with you.
- Learn the art of selling. Sales technique is really nothing more than being a good listener and understanding your customers’ wants and needs. Take a Dale Carnegie course, go to a Terry Greenhut seminar, and always think about the basics. You need a certain number for the profit you have to make, and if you cannot make that sale for that number or more, you have done the job for no gain for yourself. Any education in sales that you get is the investment of a lifetime that will guarantee your future. Failure on the sales side is not an option, because you will not need to know how to fix anything if you can’t get the work.
- Look at potential new profit centers that have an additional revenue stream without a big startup expense. If you have half the car apart to pull a transmission, why not offer to replace the customer’s brakes, CV axles, radiator, shocks etc. if that work is needed? You are equipped for this general-repair work with no added costs in equipment.
Look at tires; I know you are not a tire store, but 85% of what is wrong with modern transfer cases starts with mismatched tires. Why not cut a deal with your local tire chain so that replacing tires becomes a profit center while ending potential comebacks and diagnostic nightmares?
Look at performance upgrades for your customers. These are items that people want to spend money on. Look beyond transmissions, as there are endless performance upgrades for engine-management systems to give better performance to diesel and gas trucks. You can dramatically change the performance and fuel mileage on many of these vehicles with a Super Chip or other program. When fuel gets expensive and SUVs are hard to trade, would any of your customers invest some money in more horsepower and less fuel consumption? You will never know until you get some of the performance magazines and look at what is available and do some test marketing.
Look into the enthusiast market for performance enhancements that you can provide to the import market. Today’s young people invest tons of money in various imports to improve handling and performance. High-performance clutches, bulletproof race-transmission upgrades, heavy-duty CV axles, short-throw shifters, heavy-duty transfer cases for off-road people, extreme-use U-joints and driveshafts, and changing differential ratios can be quite profitable.
The performance aftermarket generates $67 billion a year in sales. On the drivetrain side that probably translates into a market of $6 billion to $10 billion that you can easily take advantage of. It will not come to you; you have to go after it. Every time a customer comes into your shop with oversize wheels and tires on a truck or SUV, can you offer them some ratio changes or other performance option to make the vehicle work correctly?
- Become ruthlessly efficient in all your processes. Look at what you do well on a daily basis and what jobs are either not priced right or are big time wasters. Buy the units you have trouble with or those for which parts availability is a problem or the learning curve is too steep. Every shop will have jobs that it would have been better off not seeing. Part of this is educational, and part is common sense.
If you can crank out a variety of units quickly and profitably, does it seem smart to let that work sit while you struggle with a tied-up lift on a unit that you could have bought for less than the cost of the wasted time and lost opportunity? You don’t have to send the work away; you do have to find sources for the units you need but don’t build efficiently. Getting the right price for each job will be based partly on your efficiency in the shop.
Another plus is being free of the warranty burden. Most shops don’t realize the warranty liability they carry. If you were going to buy a transmission shop, one of the questions you would ask is, “How many units do you build each year and what is the length of your warranty?” Say a shop does 500 units a year and the warranty is one year. If you bought this business, you would have 500 units under warranty. If the average comeback rate for this shop were 10%, you could expect 50 of those units to return for rework of some type. It would be smart to write into your purchase contract a deposit into an escrow account to offset the expense of those comebacks, with the balance to be returned to the seller after the expiration of all his warranties.
Despite the endless expansion of bad news by the media, and the difficult business climate we are in, life will go on. Everything we experience is a cycle. This means that the changes we can make are to adapt to the current cycle, but the forces that control the cycle are well beyond our control. As the Marines are fond of saying, “Adapt, improvise, overcome.”
To do nothing is to go backward rapidly, to make minor changes just keeps you steady with the current, and to explore new avenues puts you ahead. There will be plenty of stick and transfer-case business, but it will not be the same. Don’t look now, but GM is developing an eight-speed automatic for 2007. Things will be different, and yet they will be the same.
