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  1. Analysis
June 23, 2003

ELVs: could e-commerce help contain OEMs’ costs?

Distribution and aftermarket specialist Toby Procter investigates whether expanding the re-use of parts through e-commerce in the aftermarket could help defray OEMs' future ELV liabilities. It looks tricky.

By bcusack

Distribution and aftermarket specialist Toby Procter investigates whether expanding the re-use of parts through e-commerce in the aftermarket could help defray OEMs’ future ELV liabilities. It looks tricky.

Implemented way behind schedule by several Member States, the EU’s End-of-Life Vehicle (ELV) Regulation is proving a bit of a nightmare. Aimed at reducing landfill disposal of ELVs, and requiring de-pollution of cars before they’re crushed, the ELV regime targets, in two stages, an eventual recycling or re-use of 95% of car content by volume. On the ‘polluter pays’ principle, OEMs will become responsible for the cost, and have set about planning for their new responsibilities in different ways – collaboratively and otherwise.

The cost per unit may be relatively modest (though estimates vary – de-pollution in respect of fluids and batteries is estimated to cost inside €100 per unit), but the total impact won’t be, since the liability will be retrospective. That’s because after 2007 manufacturers will be responsible for the environmentally-regulated disposal of all their own-brand vehicles – regardless of age.

This will penalise those OEMs whose cars last longest (the environment-conscious Volvo is one such) and those whose current sales volume and profitability look weak in relation to the massive parcs they generated in the past (Ford, Opel/Vauxhall, for example). While Britain is one of the laggards that have yet to pass ELV legislation, MG Rover contests its potential liability for old Rovers, Triumphs and MGs with some force. Not surprisingly, since the cumulative cost of retrospective liabilities for its previous owners’ cars would ensure that it never stood a chance of turning a profit, notwithstanding the princely £10 it cost to buy the business from BMW. The case isn’t closed, since the legislation is not yet in place. Nor is the case made by official importers that they should bear no responsibility for ELVs deriving from ‘grey imports’.

One, theoretically ‘green’ way of mitigating recycling costs would be to increase the proportion of ELV parts that are re-sold for distribution to repairers. But there seem to be insurmountable obstacles to the emergence of an efficient market operating between breakers and repairers. The biggest of these is structural, and it mirrors the structural problems that make profits hard to come by in the new vehicle market.

Supply-side
The European light vehicle parc comprises some 200m still-functioning examples of some 5,000 current and obsolete vehicle models from over 40 brands – and this diversity is likely to increase as model replacement cycles accelerate. There are no Europe-wide data on the age profile of ELVs, but the UK sees some 1.8m cars a year scrapped after ‘death from natural causes’ at an average age of 13, and some half a million ‘dying’ prematurely after insurance write-offs. So nearly 80% of ELVs are beyond economic repair. This being so, the near-contemporaries that their recycled parts could fit are mostly living on borrowed time, awaiting only the next repair bill worth more than the car’s notional, sub-€500 that will consign them to scrap.

There are, then, relatively few cars on the road aged 13 or more, so the market for their innards is limited by numbers as well as resale value. Secondly, their parts will for the most part have little life left in them. Thirdly, the dismantlers are largely small, independent businesses with no pre-existing links to OEMs, little or no control over their incoming inventory, and little or no fast channels to market for the parts they retrieve.

Demand-side
On the demand side of the used parts market is a highly fragmented mechanical and body repair market, mediated largely by OEM franchises for cars still under their warranty, and by thousands of independent garages and bodyshops for everything else. What parts bodyshops buy depends largely on the insurers who pay them. And with long-running contention concerning design copyright and quality issues with ‘spurious’ parts to contend with, insurers have made little use of non-OEM new parts or used parts to date. In the US, a little more progress has been made; policy holders there are increasingly prepared to accept replacement of a six-year old body part with another of the same vintage, according to Antoine Jove, AXA’s procurement manager, speaking at this year’s International Bodyshop Industry Symposium at Montreux.

The majority of repairers for older cars are small, often owner-driven independent businesses, largely lacking electronic parts procurement facilities. That means that contact local breakers by phone as and when a part may be needed – and if as often it’s obsolete, the repair may have to await the unscheduled availability of a donor car. As a result, used part prices are highly localised and volatile. Whether they could ever be strong enough to finance a more efficient and self-funding market mechanism is doubtful. The total European replacement parts market is worth about €50 billion, but it’s not a single market, and since there are in the order of 10 million parts in OEMs’ European inventories, the average revenue yield of most slow-moving parts can only be low, even before they’re devalued by, say, two thirds through part-use.

(The truly massive mark-ups on some OEM parts prices was a specific target of the EC in its new block exemption regulation; the cost of ten-year inventories of parts that move once in a blue moon makes at least part of those high margins necessary.)

Aside from an absence of shared used parts sales data, there’s another obstacle in the way of creating an efficient used parts market that could redeem more of the cost of ELV recycling – and that’s an absence of quality certification for used parts. Only the major powertrain, drivetrain and electrical parts that some OEMs remanufacture themselves can be guaranteed.

There’s no universal system for quantifying the damage to reclaimed body parts from collision write-offs, nor any means of determining the durability of part-worn components. Just cataloguing used parts would be tricky for a national or international market exchange. At present, they are seldom cross-referenced to OE part numbers, and it doesn’t always make sense for them to be. An OEM catalogues and distributes a given door skin and all its rigid, mechanical, electrical and trim components as separate items. A breaker takes off the door, notes its colour, accessories, general condition and perhaps interior trim, and supplies the lot as one item, because the sum of the parts will be worth substantially less than the whole once dismantling, storage and inventory costs are absorbed – and dismantling would only add a re-assembly labour cost at the repair shop. At the same time, the OEMs’ frenzied attempts to offer endless variety in paint colours, trim levels and option pricing indicate the difficulty of finding precise matches among breakers’ inventories at any one time.

The increasing electronic content of the wrecks of the future will only make it harder to establish the value of reclaimed sub-assemblies – and harder for small garages to re-fit and test them.

Even if they’re available off the rack, used parts are seldom delivered by logistics systems anything like as efficient as OE and factor networks, so a lot of time is spent by commercially inefficient but conscientious garage operators saving owners money on parts for their old cars.

A role for e-commerce?
Almost everywhere e-commerce has been able to extend and streamline the availability of goods to wider markets, and with the likes of eBay, has also revealed market prices for goods of previously uncertain value. But in B2B environments, e-commerce cannot overcome the internal failings of its participants. The supplier-OEM exchanges such as Covisint or SupplyOn have yet to cut much of the waste in the supply chain, because so much of it derives from OEMs’ internal processes, according to recent studies from PwC and Planning Perspectives International, inter alia.

In the case of used parts – and in the aftermarket generally – it may be the structure of the industry on both supply and demand sides that prevents the emergence of efficient, self-sustaining e-enabled markets that could squeeze more value from ELVs. There are too many operators in the aftermarket, and too few of them are able to communicate electronically. It’s hard to see common standards being agreed for used parts to underpin trade so long as OEMs, OE suppliers and their rivals, let alone authorised and independent repairers and insurers continue to defend their turf.

Governments may not be that keen to see an expanded role for used parts from ELVs – a field replete with opportunities for fraudsters and consumer risk. Aside from the safety issues that may arise with used parts for which product liability may be uncertain, cars over 10 years old are the heaviest polluters. Meanwhile OEMs who keep 10-year inventories of unused spare parts won’t want to see their market cannibalised by cheaper alternatives.

Engineering better solutions
Of course there is another strand to OEMs’ and suppliers’ planning for ELV liabilities, and in the longer term, it’s what will probably make a much bigger difference to ELV cost containment than any expansion of re-used parts trade. That is, designing-in more easily recyclable content at source. At present, the more exotic materials weight-saving materials (aside from aluminium) present particular problems. Tailored steel blanks and laminates are inflating the cost of crash repairs, thus joining electronic complexity in writing off more cars ahead of their allotted lifespan. There’s a complex trade-off between lightweighting, safety and recycling priorities in current auto technology, and no clear ‘win-win-win scenario’ yet in sight.

Environmental lifecycle planning is still in its infancy in the auto industry. The ELV regulations now forcibly direct its attention to the post-warranty product lifecycle that OEMs have largely left to others to exploit. Cutting ‘downstream’ costs at the ELV stage and capturing more of the car’s lifetime revenue potential will require OEMs to revisit the downstream strategies that Jacques Nasser failed to bring off at Ford – and to plan ahead for an economical and decent funeral for their products, before they’re born.

In some areas, recycling components might usefully give way to composting them – a concept less fanciful than it might appear; a concept vehicle shown at the 2003 Detroit Show sported a largely bio-degradeable interior. Which reminds me; a ship that ran aground off the Cornish coast this year spewed a tide of finely-minced auto interior plastics into the sea. Getting rid of it was a nightmare; apparently only one plant in Germany, the ship’s intended destination, was equipped to convert the stuff into anything useful. A problem worth solving.

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