There has been much debate and hand wringing by the European Automotive industry over the EU’s ELV directive, which is shortly to become law. There seems little chance that a significant share of the recycling burden will shift to the motorist unless car prices are increased to ‘compensate’ – a long-term possibility but one which is unlikely to be politically acceptable to the EU. Given that this burden is unlikely to go away shouldn’t the automotive manufacturers be looking for a strategic solution?

Environmental concerns drive new directive

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Growing concerns over the environmental impact of vehicles prompted the European Commission to draft legislation in July 1997, regulating the environmentally friendly disposal of ‘end of life vehicles’ (ELVs) for the re-use, recycling and recovery of vehicles and their components. The ‘end of life vehicle’ (ELV) Directive has now been passed by the European parliament and is expected to become legislation during the autumn of 2000. The directive means that the manufacturers will face the lion’s share of the cost of disposing of old cars, with a top-up from national government. Approximately 9 million ELVs are currently discarded each year in Europe with around 25% going to landfill. Several voluntary programmes have already been established by car manufacturers, but hardly any of these meet the recovery percentages proposed by the ELV Directive, 80% by 2006 and 85% by 2015.

The re-use of used parts from damaged cars has traditionally had little application in the UK car bodyrepair market aside from the repair of written-off vehicles purchased as being damaged-repairable by bodyshops or by private individuals from salvage companies. In Europe, parts recycling, refurbishment and re-use in car repairs is more common, but still not widespread. In Sweden, for example, Folksam Auto AB is a subsidiary of the Folksam insurance company which acquired a large car workshop with the aim of speeding up the repair process and to increase the re-use of used parts to bring down the cost of new OE parts. Folksam Auto’s operations now include the dismantling of damaged cars and the recycling of used parts for car repairs and there is a well-developed system for the re-use of used parts in bodyrepairs in Sweden.

The Commission has proposed that a rate of re-use or recovery of 80% and a rate of re-use or recycling of 85% by weight be achieved by 2006, and that these percentages should rise to 85% and 95% respectively in 2015. Although a number of voluntary vehicle recycling programmes have been established by vehicle manufacturers either independently or as part of a consortium such as the Automotive Consortium on Recycling and Development (ACORD), the European Commission is seeking to regulate and increase the penetration of vehicle recycling through legislation from an average achieved at present of 75% of materials recovery to 85%-95% by 2015.

The Motor Vehicles Dismantlers’ Association (MVDA) sees the ELV directive as an opportunity to re-position their industry in a more visible role. John Hesketh, the new MVDA Chairman, appointed on 24th September 1999, believes that despite the ‘doom & gloom’ forecasts the MVDA has a great deal to be positive about. Firstly the number of ELVs continues to rise, secondly parts re-use is much more environmentally friendly than re-cycling and thirdly, that whilst a complete structure is not in place yet, there is a VAST potential for used parts in insurance repair. The fact that they also carry higher margins than original parts also helped to convince the MVDA to launch PARTS, in April 1999. PARTS is an electronic database system designed to facilitate inter-trading amongst MVDA members and whose aim is to increase re-use parts sales.

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Other such first stage systems are also coming into existence. An Internet based auction system for insurance write-offs has been launched by Alternative Business Solutions Ltd (ABS) and Glass’s Information services, known as eSalvage™. The system currently only caters for insurance companies wishing to dispose of total write-offs. However, adding to it to achieve internet trading in re-use components should be feasible in the future. DA Autoparts Ltd have already seized the nettle, with a web site that allows visitors to interrogate a list of vehicles scheduled for dismantling for their parts. DA spokesman Douglas Bogie reported than in its first three months of operation over 15,000 hits were recorded, with around 50% from overseas, and a large number of sales has resulted. It seems the internet and re-use parts will have a linked future.

Ford must agree. In May 2000 their President Jacques Nasser announced his company’s entry into vehicle dismantling in the US, accompanied with a definite ‘we may also expand this operation into Europe’. Ford’s first site in Tampa will disassemble cars and commercial vehicles for parts, as well as collecting from other Ford plants for recycling. Ford intends to sell the re-use parts to body shops, insurance companies and directly to the public. Nasser commented, ‘We see this as potentially a billion dollar or more business.’ Interestingly the internet is to feature as the major distribution media to offer, “high quality used parts with a quick turnaround to benefit all customers.” The move is also thought to tie in with Ford’s purchase of Kwik-Fit, Europe’s largest independent fast-fit repair chain, which would make a ready avenue for re-use part sales.

Recycled Original Parts – an opportunity for the OEMs?

Although the proposed legislation is primarily concerned with reducing the environmental impact of vehicles upon society in Europe, there is also a commercial opportunity from parts recycling for the car manufacturers. As a result to amendments made to Block Exemption, car manufacturers’ OE parts sales face increasing competition from pattern parts. Indeed HeadWhay Limited’s independent research has indicated that the use of pattern parts has become substantial and is still increasing, in some cases the estimate is that pattern parts now account for roughly 30% of the parts market. Recycled parts present an opportunity for car manufacturers to compete directly with pattern parts – something that some manufactures and dismantlers have already realised and taken advantage of. Used or reconditioned original parts supplied with a manufacturer-backed warranty could compete at a similar price point with pattern parts, thereby increasing the manufacturers’ penetration of the replacement parts market with original parts. Such a ‘beta’ or ‘fighting’ brand strategy has been common practice in a number of markets, which have numerous price-market segments, most notably in consumer markets such as cigarettes, ice cream, confectionery and washing powders. Indeed a system akin to that currently operated for alternators, where a trade-in of old for new is operated would work quite well, and give a similar end result, perhaps also helping the industry to prove its recycling credentials. It is also in the tradition of good marketing strategy: converting a threat to an opportunity and a possible weakness to a strength, which is what SWOT analysis is all about!

Cars repaired using manufacturer approved used or reconditioned parts would comply with the manufacturer’s warranty conditions while supplying the market with a lower cost alternative to OE parts, for which pattern parts meet current demand. In addition to the potential environmental and economic benefits of parts recycling and re-use, insurance companies and car owners could benefit from lower average repair costs and reduced insurance premiums. Given the moves by the MVDA, Ford and the US Automotive Recyclers Association (ARA), moves towards such a scheme would seem to be in the interests of all concerned.

Market Acceptance

To achieve acceptance for the use of used original parts in bodyrepair, car manufacturers and the suppliers of used parts will need to overcome the following obstacles:

  • Achieving uniform parts quality
  • High stocks of low value or unwanted parts
  • Establishing a network of authorised vehicle dismantlers
  • Establishing a distribution system for used parts
  • Gaining customer acceptance of used parts
  • Matching parts to model derivatives
  • Matching parts condition to vehicle condition
  • Lower margins for bodyshops on used parts than OE parts.
  • The most significant obstacles to overcome from the above list are customer acceptance of used parts and building in sufficient margin for bodyshops for used parts compared with OE parts. Customer acceptance of the use of used parts in insurance funded bodyrepairs, rather than new OE parts, may only be achieved if the benefits of used parts in the form of lower parts costs are passed on to policyholders in the form of reduced premiums. For repairs where the car owner is liable for all or a proportion of the repair cost, customer acceptance of used parts may be greater but will be influenced by the degree of cost saving provided in relation to OE parts and pattern parts prices.

    The key to gaining bodyshop acceptance of used parts is in enabling them to share in the benefit in terms of profitability. Bodyshops are increasingly dependent on the margins they can charge on parts, paint and materials for their overall profitability so the margin on used parts for the bodyshop would need to be comparable with new OE parts. Franchised dealers in particular may resist the use of used parts in bodyrepair because of the threat used parts could pose to their OE parts sales.

    “If they could actually get those parts stripped down and ready for use, I think there is a tremendous area of opportunity for both insurers and salvage companies and the repairer providing we were allowed to share in that benefit.”
    Manager, large independent bodyshop.

    Overall it would appear that what at first has been seen as a threat by the automotive industry, is in fact an opportunity – almost a blessing in disguise.

    Andy Whalley
    Commercial Director
    HeadWhay Limited
    20, Range Green, Tipner, Portsmouth PO2 8RE
    07974 188057
    email: andy@headwhay.com
    website: www.headwhay.com
    ÓHeadWhay Limited 2000