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.

For U.S. Remanufacturers, MPS Is Both A Blessing And A Curse

by Charles Brewer

It’s increasingly difficult to make money marketing remanufactured toner cartridges in the United States. Remanufacturing cartridges that perform well consistently has always been a challenge and that challenge has been compounded significantly with the introduction of new imaging technology, particularly color. Finding vital supplies has also become an issue. The supply of empty cores--the remanufacturing industry’s life blood--has been drying up for the past few years and the price of empties has skyrocketed. And most importantly, years of fierce competition led by large companies both foreign and domestic has resulted in severe price compression and razor thin margins.

Medium-sized remanufacturers in the U.S. have been hit the hardest. Many mid-sized players were established at a time when they could cover the majority of the market producing only a handful of cartridges. Now, remanufacturers must offer dozens of different SKUs to supply today’s diverse installed base. Many mid-sized firms, however, lack the capacity to produce such a wide array of cartridges. These firms now must outsource the majority--if not all--of their production. This has caused a fundamental shift in the industry, and many companies have changed their business models from that of a producer to a distributor. Outsourcing can be expensive and being profitable while selling cartridges from a third party is a difficult proposition especially when selling monochrome SKUs, which have become increasingly commoditized.

Those mid-sized companies that continue to produce cartridges in-house also find it difficult to turn a profit. Often they lack the economies of scale needed to negotiate lower raw material prices with suppliers so their costs are high compared to the big guys. The smaller firms get little respect from empties brokers and must pay top dollar for the most popular cores--if they can get them at all. Suffice it to say that for those firms that have been able to continue to produce their own products, the overhead has grown to a point where they find it hard to operate profitably.

Managed print services seemed to offer remanufacturers relief from some of their most vexing problems. First and foremost, MPS was seen as a way to add value to commoditized products. Just like it does for hardware vendors, MPS held the promise of improved margins by providing remanufacturers with a way to wrap valuable services around their consumables. It could also give mid-sized firms a vehicle to differentiate themselves as a service provider in the marketplace. Depending on how they shaped their MPS services, remanufacturers could reap added benefits like having some say as to the type of equipment their clients would employ, which would limit the range of SKUs the remanufacturer had to provide. And, it would allow the remanufacturer the ability to collect precious empties--a service that the clients would also value.

The remanufacturing industry as a whole became aware of print management solutions about five years ago. Initially, interest was strong, but remanufacturers recognized they faced a number of hurdles if they were to offer MPS packages. They lacked technology, for example, to monitor their clients’ machines even for the most basic MPS offering. And they had to move from the transactional sale associated with selling cartridges to the solution sale required for an MPS contract. Remanufacturers also faced logistical changes as they moved from providing some fixed number cartridges to supplying customers with cartridges as needed.

As the industry continued to demonstrate a desire to offer MPS, various companies have come forward to support remanufacturers. Technology to monitor printer fleets, for example, has been increasingly available from firms like PrintTracker, PrintFleet, and others. Likewise, various companies have stepped up to help remanufacturers successfully transition from transaction sales to marketing MPS solutions. There are now scores of seminars and workshops aimed at helping smaller remanufacturers launch and manage MPS programs.

Despite all the support and interest, however, it’s not clear that MPS will be the panacea the mid-sized remanufacturers have been looking for. In fact, it’s quite likely they will not be able to offer a profitable managed print service.

It’s difficult for a company that markets supplies exclusively to offer a real managed print program. For clients to realize the full benefits of MPS, there needs to be some degree of fleet optimization, and optimizing a printer fleet requires swapping out hardware. While this may include physically moving devices within an organization and taking some off-line, often it requires deploying new hardware. There are some remanufacturers that are also VARs and they succeed in the MPS market. But those companies that only sell cartridges ultimately will find it impossible to compete with the MPS contracts that dealers and VARs can offer.

Another big challenge that mid-sized firms face are the expenses associated with MPS. It can be costly to acquire the equipment and software required to support monitoring technology. There are companies that will host the services, but outsourcing can get expensive especially for a small company. Remanufacturers also face new cash flow issues. Rather than collecting full payment at or near the time of delivery as they had when they sold cartridges, companies may have to wait months for MPS payments to come in before they can cover their costs. Moreover, often companies must stock up their customers’ supplies closets with inventory and that cache of cartridges may not yield any cash for months.

Some mid-sized firms are learning that rather than offering a new path to profits, MPS really represents new threats. First, large remanufacturers are increasingly active in the space and can undercut the mid-sized players. And, rather than losing one sale, losing an MPS bid means the customer is lost until the contract is up, which is typically between three and five years. Remanufacturers also have to do battle with new competitors as more and more companies offer some type of MPS solution. OEMs are providing new supports to their channel partners, which further strengthen the value proposition of those competing with the remanufacturers.

I don’t want to suggest that MPS is all doom and gloom for remanufacturers. It can open new doors and some new opportunities are emerging. Independent dealers, for example, are increasingly aware of the improved margins remanufactured cartridges can offer them compared to OEM, which is expanding the market for remans. But MPS is not good news for everyone in the industry and it will put further pressure on many remanufacturers doing business in the United States.



With over 12 years of experience, Charles Brewer is an independent consultant for the digital imaging industry. He is a contributing editor to Lyra Research's Hard Copy Supplies Journal published, which he managed from 2005 until 2009. Brewer has authored numerous articles, reports, and white papers on hardware as well as toners, inks, and media and has worked with various OEMS and third-party supplies vendors.