The world’s largest producer of automotive exhausts has revealed a fourth quarter net loss of $US153 million. A challenging aftermarket has affected sales, and the company is to sell its light vehicle aftermarket business, writing off $190 million in the process. However, by exiting the aftermarket, ArvinMeritor increases its dependency on supplying manufacturers, which is a very low margin game.
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Even taking into account the $190 million write-off for its light vehicle aftermarket business unit, ArvinMeritor’s Q4 results were far from a roaring success. Excluding the charge, Q4 net income would have been $37 million compared with the previous year’s $38 million.
The disposal of its light vehicle aftermarket business is indicative of wider trends in the aftermarket, which is going through a period of restructuring. Higher quality components are resulting in lower replacement rates and therefore lower volumes. In such an operating environment, pricing is coming under continued pressure as all players look to boost their share of a declining market. It has, therefore, become increasingly difficult to grow profits and, as a world leader in aftermarket exhausts, ArvinMeritor has not been able to avoid the pain.
In the past, parts manufacturers appreciated the higher margins on aftermarket products in contrast to the razor thin margins on original equipment sold to vehicle manufacturers. As margins have shrunk, several have concluded that aftermarket operations represent a distraction from the core vehicle manufacturer-focused business. Targeting thousands of aftermarket retailers and installers requires quite different skills and distribution infrastructure to targeting a handful of vehicle manufacturers. Return on investment therefore suffers.
Dana, another of the world’s largest parts manufacturers, has already disposed of its aftermarket operations and others are likely to follow. However, while ArvinMeritor’s decision to sell the unit will lessen its worries of an aftermarket in decline, it will increase the company’s reliance on the major vehicle manufacturers. Automakers are themselves squeezing their suppliers to help reduce the costs of manufacturing vehicles. In selling the aftermarket business, on which it could previously have fallen back if required, ArvinMeritor is putting its trust in a low-margin market and will have to generate sustained and substantial volume increases to ensure a comfortable ride.
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By GlobalData
