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I'm Lucia Raheli.
And I'm Roberta Fasaro.
Whenever you get something that has been used previously, you have a little bit of uncertainty around it.
And so having the right testing capabilities that really build and sustain the customer trust in the quality.
If the product does not perform well in the field, have a lot of failures, then it would really erode customer trust.
And trust is really critical.
That's McKinsey Senior Partner Inga Maurer.
In a minute you'll hear our conversation about remanufacturing, which is the process of restoring used parts to give them a second life, in things like cars, medical devices and electronics.
First, let's talk about what's new on McKinsey.com.
AI continues to be all over the headlines, but some leaders are having difficulty realizing the projected value of AI enterprise-wide.
If you're among them, check out a new article outlining six lessons derived from over 50
50 agentic AI builds that McKinsey led this year.
And the kind of investment that Lucia just mentioned is fueling a more expansive definition of the term infrastructure.
It's not just roads and bridges anymore.
These days, infrastructure can include data centers, fiber optic networks and even EV charging stations.
To better understand the investment opportunities, leaders can check out our report about global infrastructure.
And now let's hear from Inga Maurer.
Inga, thanks so much for joining the podcast today.
Oh, thank you so much for having me.
I'm so excited to be here.
This is a really great topic and one that maybe is not top of mind for some of our listeners.
The article that you've just written is titled Remanufacturing 101.
So, in the spirit of 101 courses and classwork, can you help us understand what is remanufacturing and why is it important, particularly now?
So basically, remanufacturing is the process of restoring a part that has been used for a couple of years typically that's called a core and then turning it into a like new condition.
So some people might be familiar that it exists for phones or computers.
But what it really involves is you take the component apart, you clean it, you inspect it.
Typically, there are some components that have wear and tear.
So typically, some rubber parts, some plastic parts, you replace those, you reassemble the part, you put it through a testing process and then you get to use it again.
And the importance of it has really grown to a couple of factors.
First of all, there is more supply chain disruptions.
And so it provides an opportunity to take some of the used products and turn them back into a like new state.
It's also more cost effective.
So we typically see it with cars or trucks when they go to the second or the third or the fourth owner.
And of course, it also helps create a more sustainable use of parts.
And so cost savings are typically anywhere between 40 and 60%.
So the affordability aspect, especially in the current macro context, can play a significant part for some customers.
And when we talk about remanufacturing, who is actually doing the refurbishing?
Is it the OEMs that go back in?
Are there other players who are primarily associated with remanufacturing?
There's actually a couple of different players that are doing so the OEMs or most OEMs do it.
And sometimes it's the company who makes the overall product, like the assembled car truck, that offers some of the solutions.
Sometimes it's what's called the tier one supplier.
So think about someone who sells components to a car manufacturer.
So in automotive, starters, alternators are some pretty common components, headlamps.
And so the original manufacturer of that starter or alternator headlamp would do it.
But then there's a whole industry of independent remanufacturers and they go out.
They acquire the core.
So let's say you take your car in to get a new headlamp.
The shop now has the headlamp of your vehicle.
They sell this core. to these independent remanufacturers.
They do the remanufacturing and then selling it back into the aftermarket channel.
Amazing.
We're on audio, but I feel like we need a flow chart to follow the product through.
But you mentioned some automotive examples there.
Are there other industries or companies that stand to gain a lot from manufacturing beyond automotive parts?
Yeah, absolutely.
So I think there's a lot of applications that we have seen in heavy equipment.
So think about your construction pieces.
There are applications in aerospace and defense, as well as in infrastructure, even components in transmission technology or power transmission points.
If you think about trains and, more recently, in medical devices, for example, in medical imaging and actually in Europe, there's a much stronger mandate that pushes towards remanufacturing, while in the US it's been more organically built, considering some of the supply chain benefits as well as the cost opportunities.
And thinking about the overall parts market, how big is the market for remanufactured parts?
The market today is around $50 billion.
It's expected to go to around $100 billion over the next three to four years.
Today, it actually only accounts for 2% of all manufacturing.
So it's actually still a fairly small part of the pie, but it's one that we are seeing grow significantly.
For example, one of the industries I didn't hit on earlier is consumer electronics cell phones, computers in the intent to also reduce electronic waste.
And so there's a lot of opportunity for it to take more share and become an even more important element in manufacturing.
So thinking about this potential growth, I know recent supply chain disruptions have started to help companies see the benefit of manufactured parts.
I'm wondering, with recent news around tariffs, how it's affecting people's impressions of remanufacturing.
There's a couple of different things to unpack.
So, from a supply chain disruption perspective, it's definitely shown us hey, we're really reliant on new parts.
And so remanufacturing has actually stepped in, for example on some of the aircraft components, to ensure you can maintain fleet operations and in a world of supply chain shortages, it's typically a much shorter lead term item because you start with the core.
So you typically start with somewhere between 70% and 90% of the final product.
And then you improve it.
And the reason a lot of people have a lot of confidence in remanufactured parts is that they actually go through the same amount of rigorous testing.
So it's not just a clean it, I'll put a new label on it and sell it.
But there's a real testing requirement, which I think is very important to understand.
You're not getting a part from the junkyard that gets plugged into your car, but there is a real manufacturing process in between.
And so when you now think about that in the context of tariffs, a lot of the value sits in the core.
And the core is... generated in the US.
So let's say you take your iPhone in, you take your car in, they take out the starter or the alternator, which becomes the core that accounts for 70 to 90 of the manufacturing value.
So even if I now have to import, typically you replace some rubber, some plastic parts, some seals.
Those I might either make in the US or import in, but they're a pretty small portion of the entire product value.
And so, even if you are applying a tariff on 10 or 20 Of the component cost, you're still having this big core that's in the US.
Now, some remanufacturing happens today in Mexico.
So the cores get shipped from the U.S. to Mexico and then come back in the U.S.
But there's also actually quite a lot of facilities that are existing in the US, that are being expanded in the US, And so it's definitely something that allows you to hedge your tariff exposure, because you're not importing the entire product and you're starting with the core value being generated in the US.
Inga, the article mentions this notion of remanufacturing isn't just about cost savings.
How do you measure the value of customer satisfaction that you're getting from remanufacturing?
First of all, we're basically looking at what is customers proactive seeking of this product or of a product that offers a different pricing tier.
And so we see that kind of There's actually a more customer awareness that this exists.
And so especially, yes, if your car is three years old, you might still want the new OEM part.
If your car is seven years old, you might want the new. but aftermarket part.
And then, if your car is 10 years old, you don't want the cost to maintain the car being higher than the value of the car itself.
And so.
So remanufacturing provides something there to the customer that has the reliability.
And so we are showing warranty data and how the product performs in the field.
And is it actually reliable? in the field and we see, no, it actually performs really well.
It has high reliability.
And so that's one of the things that drives customer satisfaction.
The second piece is that availability is pretty good.
Like the remanufacturers have really built out their assortment.
And so you can now find it for most make model trims.
You actually see that return rates are pretty low, which is more an indication for the satisfaction of the installer.
So the mechanic who puts the part into use.
And then lastly, of course, it is a more cost efficient way.
And so that's another big element that drives customer satisfaction.
If we look at it from two sides right the make side and the buy side what are the opportunities for the make side?
What are some areas of improvement for them so they can capture more value as this market grows?
There's a couple of different pieces.
The most challenging thing, and that most of the companies in the space spend the most time on, is how do you actually access the course?
And so there is a lot of different mechanisms on...
How do I get the customer to ship the used part back to me?
There's a whole ecosystem of core brokers that go to repair shops or to medical facilities.
So they collect the cores.
And so that's really the most important thing, as people are growing their business is to get this critical ingredient.
I think the second piece is there are some tools and some specialty equipment required to A disassemble the component in the correct way.
So if certain parts are, for example welded, it's much harder to disassemble them and it will require different tools than if they're just whatever screwed together.
And so having the right tools to do that.
And then really most critical we see is people's testing capabilities, because if the product does not perform well in the field and would have a lot of failures, then it would really erode customer trust.
And trust is really critical.
Whenever you get something that has been used previously, you have a little bit of uncertainty around it.
And so having the right testing capabilities that really build and sustain the customer trust in the quality.
And now, with the onset of AI and Gen AI, much more focus on how can I in real time track where the parts are, manage the inventory.
So, for example, cars you want to understand, but what do i know?
2012 toyota cameras we saw were sold, so that now that the car is 13 years old, it's really getting into the sweet spot for remanufactured components.
So then, i need to make sure I've collected enough cores.
I've set up my supply chain to get any of the additional components.
I need to do the remanufacturing and then placing them back into the channel.
And so there's a lot of steps that happen and a lot of pieces that need to come together.
And so analytics, AI and gen AI can really play a very critical role to make you more efficient at managing this process.
Inge, you talked about the use of Gen AI in data and analytics in particular parts of the process.
Where could Gen AI have the most impact in the remanufacturing process?
So I think it can have the biggest impact in three different areas.
The first one is really the forecasting and analytics.
So really understanding where are different parts in their life cycle?
When are different designs getting phased out?
And so based on that, what is the right part?
The second piece is it can also be a thought partner to engineers on actually optimizing which components should I replace, which components should I clean and reuse and being a thought partner and providing engineering support as you are designing, because you're starting with the component that comes and then at some point you have to design the remanufacturing operations.
The first time you're remanufacturing and new headlamp that you haven't remanufactured before, you want to understand how to approach it.
The other thing is on testing.
We're actually now using a lot of simulation model, digital twins of the components.
Like you can actually get to the point where you can run a lot of this in simulations and then do more confirmatory testing.
And then also on the core logistics, because a lot of these supply chains in construction, medical devices auto, consumer electronics, they're very global.
And there are some markets that have a higher propensity to recycle effectively, collect cores and so to make the supply side easier.
And so thinking about a global optimization of the network.
Thinking now on the buy side.
What are some things that companies need to think about if they are purchasing remanufactured products?
I think it's understanding the application that you're using it for and getting ahead of the demand planning.
And so sometimes in very complex, expensive technical application, you might actually take the core out of your own product, ship it to the remanufacturer and then get that same core back and put it back into your product.
And so that means you have some product downtime.
And again, this is just for the highest and most technical, very limited core availability applications there.
But you then have to think about how do I schedule the downtime.
I think for the more mass market applications.
You also don't want to put too many cores or too many parts into inventory because inventory If you don't continue to use the part, managing obsolescence becomes pretty expensive.
And then I think the last part is if you have components which have a very heavy software layer.
So if you think about things like an engine control unit or like any of the electronics, the advanced driver safety features in your vehicle.
Some of these components, they need both a hardware upgrade, but also a software upgrade.
And then integrating that back into kind of the vehicle or the application sometimes has some limitations.
That's really helpful.
So, Inga, I wanted your take on the longer-term sustainability advantages of remanufacturing.
What are they?
There's a couple of different things.
So, of course, it is resource conservation.
There's, for example, some recycling, remanufacturing, even on batteries now, on... had lamps which have argon gas in them on metal components where you have to create new steel.
So it really reduces how much raw material you consume.
It also has some energy savings because you use less energy compared to when you produce a new part, because you're only focusing on 10 to 30 of the value add in the component.
You actually extend the life of the product.
And then it also reduces a bit your carbon footprint because you don't ship as far.
You typically keep the core more in a geography.
And so that also helps significantly on the overall carbon footprint.
And so it really gets framed in this theme of like circular economy.
You keep it in this circle.
You're adding small incremental ingredients, but you're not starting from scratch.
At the end of the day, can everything old be made new again, or are there limitations to remanufacturing?
I think there's definitely some limitations.
First of all, there are just some components which either, given the way they were initially designed and engineered, they might not be suitable to do this.
The other thing is there are certain materials that degrade over time.
So even steel at some point can crack and break.
Plastic components can break if they get exposed to too much heat.
And so you want to make sure that the additional five or 10 years of life that the core can actually sustain it.
I think there are also some components in the safety space where there is just a trade-off between the safety of the customer in the application and the benefits of using a remanufactured component.
And so, as people correctly err on the side of caution, they might choose that that is not the best way to go with a remanufactured component.
And then it's sometimes hey, as the car gets too old.
So now, let's say, instead of my 2012 car, I have a 1995 car, unless you're going into old timers and collections.
Those cars will get retired.
And so I can't take an alternator out of that car and put it into a 2020 vehicle, because there's something called design obsolescence.
And so you will have a natural sunsetting of parts, because that vehicle is no longer in operation or there's very few of them in operation.
And so it's really the ability of the material, the safety concerns, and then do we phase out specific designs?
But based on our conversation, though, Inga, it does sound like there's also great opportunity.
And so I'm grateful that you've taken the time to do this 101 class with us here today.
Thanks for joining the podcast.
Oh, absolutely.
Thank you for having me.
Thank you.
Thanks so much for listening to the McKinsey Podcast.
I'm Lucia Rahilly.
And I'm Roberta Fasaro.
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