Scarcity of Empties Causes Big Problems For Remanufacturers

By Charles Brewer

For the remanufacturing industry, a reliable supply of high-quality, empty cartridges is essential. Simply put: without a good source of empties, there can be no “remanufacturing.” For a variety of reasons, however, the supply of empties is drying up. The situation is serious and has already resulted in spot shortages and price increases. And it’s bound to only get worse.

All the complicated physics and chemistry involved in electrophotographic printing make remanufacturing toner cartridges technically challenging. Precision toners must be matched and qualified with various components like imaging drums and fusing units to get a reconditioned cartridge to work properly. If the toners and components don’t work flawlessly every time, it will be glaringly apparent in the output--especially if it’s a color job.

While the stuff that goes into a refurb cartridge is critical to its performance, the most precious raw material is the empty cartridge itself. The best empties are OEM cartridges that are used once, properly repackaged when depleted, and then returned for remanufacturing. Because these so-called “virgin empties”--or “virgin cores”-- have never been remanufactured, they retain the characteristics of a brand new cartridge. After remanufacturing, cores begin to deteriorate and parts no longer line up like they did originally so remanufacturers always try to use virgin cores. If not, there can be problems. The risk of toner leakage increases, for example, and the tolerances are less precise making it more difficult for components to perform properly.

Recent gains in market share by the remanufacturing industry has played a big part in the draining of the empties pool. The recession sent customers looking for less expensive consumables, and many turned to remans as an alternative to expensive OEM products. Sales of new OEM cartridges plunged, which reduced the number of empties entering the pool. Demand for remans was further fueled by ill-timed price increases by virtually all OEMs in late 2007 and early 2008. Then, various OEMs encountered logistical problems that led to OEM cartridge shortages, which further limited the number of new empties entering the supply of cores. The net result was that demand for remanufactured cartridges exploded just as the availability of empties dropped because OEMs were having an assortment of difficulties selling new cartridges.

Beyond the growing popularity of remanufactured cartridges, there are other factors at play limiting empties availability. For years, empties brokers kept remanufacturers supplied with virgin cores but that business has been encroached upon. Since the middle of the decade, OEMs and large remanufactures have successfully established their own large-scale collection programs and increasingly they’ve marginalized brokers. Supplies vendors--OEM and non-OEM alike--have have been able to woo the brokers‘ suppliers especially those in the channels. They’ve done a pretty good job “closing the loop” on spent cartridges, and while they are still far from 100%, the number of exhausted inkjet and toner cartridges being reclaimed by individual OEMs and remanufacturers is growing. Millions of cores that were once available to the remanufacturing industry at large through brokers are now being captured and retained for the exclusive use of only a few large companies.

OEMs have always put a lot of time and energy into collecting empty cores to keep them out of the hands of their archrivals, the remanufacturers. Every empty they collect is potentially one fewer remanufactured cartridge an OEM has to sell against. Because of the terms of their contracts, copier OEMs always had an advantage and could leverage their dealer channels and service technicians to get back empties. Because printers are sold outright, however, it wasn’t as easy for printer OEMs to get their empties back. For years, HP had collection rates of less than 50%, although I’m sure that has changed. HP has grown increasingly active in collections. It has partnered with Staples, for example, to collect empties at the office superstore’s retail outlets. The OEM also has opened separate inkjet and toner cartridge facilities to process millions of empties so the plastics can be recycled.

Thanks to its Prebate program, Lexmark has been perhaps the printer OEM most successful at getting its empties back. The firm has achieved return rates in excess of 80%. Through the program, which is now known as “Use and Return,” if a customer agrees to return the empty at the time of purchase, Lexmark provides a discounted price on certain replacement cartridges. Using a “shrink wrap” agreement commonly featured on software packaging, opening the box and using the cartridge creates a binding legal contract guaranteeing Lexmark gets its empty back.

Not only are the end users legally bound to return their Prebate cartridges, for years Lexmark contended that the deal extended its rights as a patent holder. The company claimed the Prebate contract under U.S. Patent law meant remanufacturing Prebate cartridges violated Lexmark’s intellectual property. Although remanufacturers scrupled with Lexmark’s interpretation of patent law, most were unwilling to risk a lawsuit so Lexmark retained the majority of the cartridge market for machines using Prebate replacement cartridges. Then, after years of legal wrangling, a U.S. federal district court determined in 2008 that the Prebate contract did not extend Lexmark’s patent rights, although the court indicated that the agreement satisfied the requirements of a binding contract. The firm says its Use and Return program is very popular with customers and they continue to honor the contract and return their empties.

As I mentioned earlier, large remanufacturers are also collecting empties by the millions. Take, for example, Clover Technologies. According to Golden Gate Capital, a private-equity group that purchased the remanufacturer in April, Clover has annual revenue in excess of $450 million. It is the largest remanufacturer in North America, perhaps in the world. Clover is a supplier of private-label products to wholesalers, distributors, and retailers and is believed to be a key vendor to office superstores including Staples and Office Depot. The relationships with the various channels provide Clover with the opportunity to collect a lot of empties. The company says it collects over 60 million spent cartridges each year and claims to be the industry’s “largest collector and remanufacturer of empty cartridges.”

In addition to collection programs run by OEM and non-OEM supplies vendors, U.S. patent law is also restricting the supply of cores in this country for remanufacturing. Under what is referred to as the “repair doctrine,” a cartridge can be repaired--or remanufactured--without violating any patents. This concept was worked out in the U.S. courts in the 1990s and it’s what keeps the remanufacturing industry out of legal troubles. Over the past eight years or so, however, the courts have added a wrinkle to the doctrine. They’ve ruled that the patent holder rights are only exhausted if the first sale of a product occurs within the U.S. If instead a cartridge is first sold outside of the country and is later remanufactured and sold in the U.S., the remanufacturer and its distributors have then violated any patents originally covering the cartridge. Strange but true!

Because case law has significantly changed the concept of patent right exhaustion after the first sale, the supply of empties that can be remanufactured and sold in the U.S. has been dramatically reduced. The change means that no empties can be imported and remanufactured for sale in the U.S. OEMs are vigilantly monitoring third-party supplies vendors to make sure none of them refill empties first purchased overseas and resell them in the U.S. Epson has already successfully sued a number of remanufacturers and their distributors for doing just that with empty Epson ink cartridges that were sold abroad. In August, Lexmark filed suit against 24 companies for selling or remanufacturing toner cartridges first sold outside of the country and imported for sale in the U.S.

The scarcity of empty cores has had an adverse impact on the remanufacturing industry. Supply and demand has driven core prices into the stratosphere. Depending on the SKU, some cores can cost 300 X what they cost several years ago--if you can get the core at all. Sensing growing desperation, some unscrupulous firms with injection-molding capabilities are offering “new plastic,” which are empty clone cores that trample on OEM IP and are direct knock-offs of the original cartridge.

It remains to be seen how the dire empties situation be resolved. For sure, it will force empties-starved firm to outsource production. So more small remanufacturers in the U.S. will change business models and become distributors, a trend that has been ongoing for years. In addition, big players will need to invest in their own programs and cozy up to firms in the channels that have access to empties. I would expect that more large remanufacturers will gobble up brokers, another trend that has been ongoing. And you can bet there will be more lawsuits--and plenty of them. Beyond those givens, it’s interesting to speculate. Could empties become so valuable that OEMs allow some cores to flow to a select few that are willing to pay a premium? Will the cost differential between legitimately remanufactured cartridges and OEM supplies close? If so, what happens to the remanufacturers’ value proposition? Or will the price of all consumables continue to rise? Only time will tell!



Charles Brewer is the President of Actionable Intelligence, a market research firm based outside of Boston, MA that follows the digital imaging hardware and consumables industry. Brewer previously served as Managing Editor for Lyra Research, a company which collaborates with imaging industry decision-makers worldwide, enabling clients to strengthen their market position and achieve profitable growth, where he wrote and managed a monthly newsletter.