The European aftermarket is facing substantial change. Block Exemption and new rules governing competition will bring a major shake-up. The sector is also subject to factors such as trend changes in the quality of OE parts and their longevity. A new report by Autobusiness examines European aftermarket prospects in some detail. Will there be winners and losers?
The Block Exemption is the name given to a set of European rules that govern the way new vehicles can be supplied through the European Union. It provides a dispensation for the car industry from free-for-all competition within the European Union, enabling vehicle makers to control their distribution channels through a number of captive dealers with territorial areas.
Since its introduction in 1995, the exemption has been constantly challenged on the basis that manufacturers have been using their networks to maintain high prices in certain areas of the EU, and to stop parallel importers from taking advantage of those differentials. The European Commission published measures to revise this regulation in September 2002.
In February 2002, the Commission issued a set of proposals for consultation with industry organisations and representatives. The proposals included a new regulation that would allow dealers to sell new cars from different makers under the same roof (the so-called car supermarket). The Commission has also proposed that vehicle makers be entitled to sell directly to supermarkets. If these proposals are sanctioned, dealers should be able to develop greater bargaining power with their suppliers, increasing the volume of sales to private buyers and enabling them to offer lower prices. In the post-Block Exemption scenario, the all-makes auto centres should continue to enjoy a steady stream of business for the 4-8 year-old vehicle. The rapid emergence of new car superstores in retail parks across Europe could be seen. This in itself may prompt auto centres to locate a site nearby, providing all-makes back-up service to the car retailers.
Another post Block Exemption scenario could see more vehicle makers buying dealerships and running their own retail operations, ensuring they have a strong influence over their networks.
Given the current set of proposals, parts suppliers look like being the winners. Currently, franchised dealers are forced to offer repairs and maintenance, using only spare parts authorised by the vehicle maker. Under a new set of rules approved by the EC, parts makers may supply directly to independent repair shops. The Commission hopes that these measures should lead to more spare parts being sold directly to repairers by the spare part producers, thereby lowering prices for the consumer.
In an effort to increase their business, most vehicle makers have extended their warranties from one to three years on the basis that the customer returns the car to a franchised dealer for servicing at regular intervals. For example, BMW in the UK is offering a full service and parts package for the 7-Series for five years or 75,000 miles for just £500. Independent garages would find that hard to match. Despite these moves, franchised dealers have gradually lost some of this business over the years by raising their prices too high, to offset declining profits on new car sales.
In a bid to regain the ground they lost over the last 20 years, vehicle makers are trying to emulate the fast-fit operations. Most have already applied similar concepts within their own dealer networks. Vehicle makers have also been reducing their spare parts prices in an effort to attract owners of older vehicles. Despite their efforts, the decline of dealerships’ share of the older vehicle service market is likely to continue.
The move towards onboard diagnostics and factory-fitted multi-media technologies, however, will likely work in the franchised dealers’ favour through this decade. Although this will result in initially higher profits, it may attract new entrants over the medium term. The extent to which these areas intensify competition in the market place remains to be seen.
Looking ahead, while franchised garages will still sell and service cars in 2005, there will be fewer of them. Most of them will have cloned the fast-fit operations within their service and repair retail operations. Some of them may relocate their vehicle preparation service area to nearby industrial premises, releasing space for the lucrative 4-8 year vehicle service and repair market. The dealerships that survive will be those that have invested in their aftersales operations in response to intensifying competition.
More reliable new cars slow growth of traditional sectors
Demand for aftermarket products is mainly driven by:
the number of vehicles in operation,
the average age of the vehicle parc,
the quality of OE parts, and
the average useful life of vehicle parts.
Although more vehicles are on the road than ever before, the aftermarket has experienced weakness due to improved quality of OE parts and increases in average useful lives of automotive parts as a result of technological innovation. While there are some opportunities for aftermarket replacements to increase as the average age of the newer vehicles on the road increases, suppliers are increasingly being required to deliver innovative aftermarket products that upgrade the performance or safety of a vehicle’s original components to drive aftermarket demand.
The AutoBusiness European Aftermarket Report includes estimates of the retail value of selected wear and tear aftermarket products from 1995 through 2007 for France, Germany, Italy, Spain and the UK. These are based on estimates of a number of factors, primarily the replacement volume of parts sold in Europe and the average retail price of those products, excluding installation charges and local taxation, all expressed in Euros. In arriving at the total replacement volume of units sold through 2007, industry estimates of regional car parc and product life and the number of components per vehicle were used. The forecasts for aftermarket volumes in this report are not extrapolative – based simply on trends – but dependent on the underlying drivers of supply and demand. Our estimates are supported by interviews with experts at components manufacturers and OEMs across Europe.
The following table sets out estimates of the volume of selected aftermarket products. Most products show only slow growth. Apart from traditional service items already fitted as OE to 100% of cars, there are still a few areas with room for growth. The wiper blade and shock absorber markets have the potential to grow.
The European aftermarket for shock absorbers, for example, has been hit by sluggish growth in replacement rates over the last five years largely due to low installer and consumer awareness. There are some installers who will automatically replace shock absorbers at around 34,000 km, while others will change them only if they show signs of deterioration. There seems little consistency in this, something that is aggravated by the shortage of reliable test equipment. Motorists often fail to replace shock absorbers with the frequency that they should. It is thought that around one in four cars in Europe require new shock absorbers at any one time. However, the product deteriorates so gradually that many motorists are unaware of the problem.
In theory, the wiper blade is a service replacement item. However, the truth is that vehicle owners often wait until the product is disintegrating before replacing it. This is despite the fact that this is, in reality, a safety-critical item with impaired performance leading to a hazardous reduction in visibility. It has been said that around three-quarters of vehicles on European roads probably need to have their wiper blades changed at any one time. It has also been suggested that wiper blades are replaced so infrequently that the price paid on the previous occasion has usually been forgotten, leading to surprise at current prices. In real terms, however, the retail price of wipers is less than it was in the mid-1970s.Then, a large number of individual parts references had to be stocked in order to maintain a reasonable range. Since then the introduction of the universal blade, with its collection of alternative fixings, have made matters easier for both the garage and the retailer.
The key to growth in both markets lies in educating the motorist about the dangers of using worn out parts. From the marketing point of view both businesses are, however, still undeveloped and manufacturers have some way to go to change consumer habits.
The aftermarket has traditionally been an important and profitable sector of the automotive business. Both vehicle manufacturers and first tier suppliers have traditionally found the aftermarket to be less price sensitive than new vehicle sales and a steady source of profits in periods of weak new car sales. Small and emerging market suppliers have found the aftermarket to be a route to breaking into niches in mature vehicle markets without the long delay and investment of meeting vehicle manufacturer original equipment demands, in the face of high volume competition.
For some time, many areas of the global automotive aftermarket have shown slow growth. Improved quality parts have meant that cars are being driven for longer, dampening aftermarket demand for wear and tear parts and industry growth. The Do-It-Yourself (DIY) market is also in decline across Europe, Japan and North America as the increased complexity of cars and rising disposable income combine to make home repairing less attractive.
Due to declining parts usage by cars in the 0-4 year age group, franchise dealer networks are struggling to maintain their share of the parts aftermarket, which form their key customer base. These newer cars are also accounting for a reduced proportion of the vehicle parc as the tail of older vehicles grows longer, thanks to better quality parts. Consequently, many dealers have tried to emulate the fast-fit operations, offering while-you-wait services for owners of vehicles over three years old.
Fundamental changes are also occurring at the wholesale level. For example, a distinctive feature of the European aftermarket wholesale distribution channel is buying groups. These allow affiliate companies to share common infrastructure such as logistics and delivery points, warehousing, and a central referencing system. In addition, distributors are able to reduce purchasing costs with higher volume orders and lower individual unit prices.
The formation of pan-European buying groups is seen as a defensive move in response to the strong competitive forces from vehicle makers, fast-fits and auto centres. They are using their size and procurement influence to obtain better prices, altering the balance of power between themselves and their customers and suppliers.
Despite the emergence of pan-European wholesale buying groups, the euro, e-business trading platforms and industry consolidation at every level, the European aftermarket is still far from resembling a single market. There are, however, a number of changes occurring in the marketplace that will significantly alter the way in which the industry operates over the next few years. Because of the pace of change, it is very difficult to forecast what this will do for the market by the end of this decade. We can, however, make some sense of how things will likely develop by 2005 by observing the drivers for the market and the direction of change.
Scenarios – winners and losers
Here we set out some likely scenarios for all those involved in the aftermarket going forward.
As noted above, high reliability of modern vehicles and extended service intervals mean visits for repair or service are becoming fewer and farther between. The electronic content of a new car is also increasing, as is the overall complexity of major systems and individual components. This presents major challenges to any organisation and individual service technician to offer high quality aftercare for vehicles, something which necessitates access to and familiarity with the latest on-board diagnostic equipment, up-to-date technical service data, and a supply of approved replacement parts.
The increasing complexity of vehicle technology is inevitably driving demand for new types of vehicle diagnostic equipment. However, the initial investment can be a challenge for the generalist garage trying to serve a range of brands. It is possible that separate sales and workshop concepts be created especially for electronic parts in the long term.
This situation may also lead to a declining number of under-resourced and uncompetitive independent garages. Some industry observers believe that the small, independent local garage will remain under pressure. Its profits will be too low to fund the investment required to service increasingly complex vehicle technology. On the other hand, when new technology is introduced fears are often expressed that independent garages will not understand how to deal with it, but they usually do and tend to adapt more quickly than most people appreciate.
The major motor factors will increasingly operate ‘soft franchises’, in an effort to increase the number of parts sold by each of their customers. In return, the factors provide some branding to workshops. Faced with intense competition in a stagnant market, the motor factors will attempt to build strong consumer profiles for their brands.
The fast fit industry will have also changed radically by 2007. There could be national, regional and even global fast-fit chains. It is likely that over half of tyre fitting will involve companies visiting customers’ homes or work places with mobile services. Existing fast-fit tyre centres will not completely disappear, but may move to higher-profile sites next to major traffic flows, rather than hidden away on industrial estates.
OEM fast-fit clones are expected to grow rapidly. The consensus among the vehicle makers is that there is a huge opportunity to develop and clone their fast-fit operations. By 2005, it is expected the OEMs will be some way down the road towards owning all-makes serving chains that deliberately have no link with the brand. These will combine service with excellent parts availability.
However despite the vehicle makers’ efforts to emulate the fast-fits as well as strengthen their franchised dealers’ through all-makes parts ranges, such as Renault’s Motrio, and some attempts to offer reduced parts prices for older vehicles, the decline of dealerships’ share of the older vehicle service market is likely to continue. This situation will be exacerbated following the rule changes to block exemption of the motor industry from normal EU competition laws.
An increasingly popular route for parts manufacturers to gain market share is via ‘soft franchising’ of independent outlets. This means the manufacturer creates a type of approved stockist network of independent wholesalers, retailers and service centres, providing them with signage, training and marketing support. It is an effective and established way in which to compliment the manufacturer’s brand name. It looks set to become popular in promoting the ‘new’ aftermarket product areas, such as air conditioning, navigation, multimedia systems and computer-controlled vehicle systems in engine management, braking, traction and stability control.
A distinctive feature of the European aftermarket wholesale distribution channel is buying groups. These allow affiliate companies to share common infrastructure such as logistics and delivery points, warehousing, and a central referencing system. In addition, distributors are able to reduce purchasing costs with higher volume orders and lower individual unit prices. The formation of pan-European buying groups is seen as a defensive move in response to the strong competitive buy-side forces from vehicle makers, fast-fits and auto centres. They are using their size and procurement influence to obtain better prices, altering the balance of power between themselves and their customers and suppliers. The real question, however, is how large will these groups become and how large will the manufacturers become with their own brand in the marketplace. There are also opportunities for parts manufacturers as buying groups to enter and develop new markets, providing new scope for volume growth.