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The global aftermarket industry: a state of flux

By just-auto.com editorial team | 24 March 2005

The automotive aftermarket is in a state of flux. Improved technology can mean increased service intervals and longer lasting product, thus less work and lower profit potential. However, it can also bring opportunity for those prepared to take advantage, writes Ian Wagstaff.

An obvious example of this has been the way in which Delphi, the world's largest automotive component supplier, has gone about approaching the aftermarket, particularly outside Europe. Its former parent, General Motors, had a notable spark plug manufacturer in AC, yet Delphi does not have one of these, now long life, service items in its range. A plug can now last for 60,000 miles or more. Delphi is, however, concentrating on areas such as vehicle diagnostics and multi-media.

Other examples of aftermarket opportunity range from the increasing use of air conditioning in Northern Europe, the entry into this sector of ultrasonic park assist devices (Valeo has appointed a number of specialist distributors throughout Europe to handle the aftermarket for such product) to even the introduction to the automotive world of cleaning "wipes", a product that is said to have increased the car care market in the last few years by a massive 10%.

Other factors that could influence the future face of the aftermarket include the efforts of the vehicle manufacturers to control this sector and the measures taken against them, increasing sophistication in the emerging regions and the effects of globalisation.

A global aspect

Multi-national component giants like Delphi, Visteon and Bosch have given a global aspect to the aftermarket, although Delphi's aftermarket manager Frank Ordonez points out that global is more a state of mind. "Because Delphi is a global OE company it is a lot easier for us to become a global aftermarket company. We also have people on the ground who understand the local markets and customer need, and who can build relationships that are important to the aftermarket. The local insights are critical to globally succeeding in the aftermarket."

The general consensus is that you have to think globally and act locally. Thus the US car parc is specific to the US. However, that in South America is very European. That does not necessarily mean that you can use common parts for both regions. Brake pads, for example, may use different materials; in some South American countries asbestos is used. Another example, fuel pumps have to be designed and engineered to be compatible with the fuel composition of the region.

National trends must be recognised by those wishing to operate globally. Delphi's director aftermarket - Asia Pacific, Hari Radeshwar, points out how this is the case in his region. India was at one point dominated by Maruti Suzuki which had an excellent service network capable of attracting consumers back even after the warranty period had expired. Imported cars dominate Taiwan, Thailand and Singapore while the Malaysian market is, not surprisingly, dominated by Proton. In most countries loyalty disappears as soon as the warranty has expired. Even in Japan, where there have been very strict laws on vehicle maintenance, the trend is changing with cost being taken more into consideration and customers going more to the independent sector.

The place to be?

The increasing interest of the large players in the aftermarket would indicate that, with the squeeze on prices in the OE sector, the replacement parts business is an attractive one to be in. Yet is the aftermarket the answer to an automotive component manufacturer's problems? Seasoned aftermarket practitioners are said to be "seriously worried" about its future and have predicted that, over the next few years, it will change out of all recognition.

Traditionally, the sector has been profitable.  However, Ordonez has described the idea that there are big profits in the aftermarket as "a myth" pointing out its selling and administrative expenses. There are also now a number of pressures being brought to bear, particularly on the independent sector.

Improvements in technology with parts lasting longer is an obvious one and now the fall in replacement parts sales per car is no longer offset by the rise in the vehicle parc. It is felt that the aftermarket could now be shrinking by as much as four or five per cent a year. The shock absorber market, as an example, is declining at a rate of two to three per cent a year, yet one in four vehicles in Europe are said to have some form of defective damper.

Annual vehicle inspections have, though, ensured that the replacement parts picture is not totally bleak. These, added to the increasing vehicle parc, can sometimes ensure that the market for a particular product remains at least static rather than in decline. There is also the fact that improved technology can mean that a higher price can be charged and a greater profit made, this offsetting to some degree the fact that the product will be replaced less.

There are also increasingly fewer people trained to fit such products. For every ten technicians that retire or change their careers in the USA, only two or three enter the workforce. Europe is also suffering from a similar skills shortage.

To this has been added a proliferation in part numbers making stocking difficult. The supply chain is also far too long and very inefficient. For the independents there is the added threat that the vehicle manufacturers, at last, seem to be getting their aftermarket acts together and are beginning to understand the sector.

Prices vary considerably, something that, in Europe is becoming increasingly transparent thanks to advent of the euro. The merging of buying groups and distributors is going to drive further the need for uniform pricing with a further squeeze on the profit margin.

The above problems mean that margins are down and the aftermarket is in need of significant change. As it undoubtedly becomes flatter so many of the smaller companies that take up so much of the supply chain, will disappear. A major contraction is expected over the next couple of years.

Specific plans

Survival in the global aftermarket depends upon being able to work within these changing conditions. For both Delphi and Visteon this has meant that their entries into the aftermarket have been selective and not focussed on the whole sector despite their size and OE capabilities.

In this, Visteon has perhaps been more selective than Delphi. "The key is not where the whole industry is going," says Ordonez, "but where the growth is." This may be, for example, in the obvious areas of multi-media or climate control or in the shift away from traditional products in the engine compartment. Longevity might be offset by other factors. The advent of a 42-volt system, for example, will lead to an increase in the number of batteries required. Again, the spark plug has seen a massive increase in life, but with companies like Magneti Marelli and Ford pulling out of the plug market and leaving it to the specialists, and with high technology, product-specific plugs fetching a much greater price, the opportunities are still there.

The challenge is to ensure new technology is converted for the aftermarket.

Delphi and Visteon have approached the aftermarket with enthusiasm and improved turnover. The former operates differently in Europe from the rest of the world having acquired Automotive Products' aftermarket operation and Lucas Diesel. This has meant that it does operate in the declining service sector of the aftermarket in Europe despite its policy elsewhere.  It claims to already be third in the global aftermarket behind Dana and Federal Mogul.

Branding is a problem for both Delphi and Visteon, as their names have no heritage in the aftermarket. Delphi has hedged its bets by dual branding, combining its own name with those, such as de Carbon and Lockheed, which already have a history in this sector. Visteon's European aftermarket director, Eric Lundtoft admits that his company has had to make "a huge internal effort to position this new brand." Against this he reckons that there has been so much turbulence in the industry with major names, like Champion and Lucas, changing hands or disappearing altogether that now is a good time to launch a new brand.
 
Interest of the VMs

Although both have become independent from VM parents, the entry of Delphi and Visteon showed the desire of the carmakers to dominate even the aftermarket. Hartmut Röhl president of CLEDIPA, the European Committee of Automotive Aftermarket Distributors, reckons that the independents have long been fighting "a strong discrimination to make car owners believe only the parts purchased through the vehicle assemblers' channels are of good quality."

Noting that the fast-fit movement was the quickest growing in the aftermarket, the vehicle manufacturers moved in on this sector a few years back. Ford bought Kwik-Fit (easily the largest aftermarket retailer in Europe) in 1999, Fiat-owned Magneti Marelli acquired Midas in Europe and South America, while Renault entered into an agreement with the Japanese retail chain, Autobacs. The VMs also have their own all-makes servicing operations, although these still tend to be perceived by the customer as being mainly for the franchise concerned. The carmakers have additionally tried to use design legislation and the advent of on-board diagnosis as weapons against the independents.

It is not surprising that the VMs want a major share. Aftermarket returns may be under pressure, but one estimate has it as being responsible for 80% of the component industry's total profit. Another figure says that replacement parts and repairs account for around 33 % of a car's 10-year profit potential. (According to CLEDIPA the aftermarket is worth $237 billion out of a total global components market of $1054 billion.) For the VMs the aftermarket could well account for half of their profit.

For Ford, however, the cradle to the grave dream was short lived. In 2002 it sold Kwik-Fit to private equity group CVC for around £350 million, a figure considerably lower that the £800 million it had hoped to receive, having originally bought the company for £1 billion.

Despite what has happened, Kwik-Fit founder Sir Tom Farmer still believes that the then Ford boss Jac Nasser was originally correct to buy the group. "Whatever Ford could do to keep the relationship with the driver had to be right," he observes. He adds, though, "unfortunately outside circumstance had changed and it is circumstances outside our business which make a big difference." Sir Tom has been impressed by the speed in which Ford, having made the decision to dispose of the company, had gone about selling it.

At about the same time that it bought Kwik-Fit, CVC also acquired from Boots the approximately 400 retail Halfords sites in the UK. Boots had long regarded Halfords a non-core business and had already been able to sell its service outlets to the breakdown organisation, the AA.  While not officially commenting, CVC did say that any interest in Halfords and Kwik-Fit was purely coincidental and had more to do with the fact that they came on the market about the same time. CVC already owned two automotive operations one of them, Rhiag SpA being a replacement parts distributor based in Italy and Germany.

The increasing complexity of the car could play into the vehicle manufacturers hands. If information is not passed on to the independent sector, then the only place the consumer will be able have his car serviced or repaired will be the franchise dealer.  The independent sector is fighting this both in Europe and North America. In the USA the Automotive Parts and Service Alliance (which comprises the Automotive Aftermarket Industry Association and the Automotive Warehouse Distributors Association) is concerned over a deal that the Automotive Service Association has struck with the VMs in the shape of the "Alliance of Automobile Manufacturers and the Association of International Automobile Manufacturers." According to this, the car companies have promised to release "emission and non-emission related service information, training information and diagnostic tool" to the independent repair sector.

As the APSA points out, this agreement fails to ensure the availability of diagnostic capabilities through aftermarket work tools. Instead, it would require the aftermarket to purchase the VMs' own tools that can often be too expensive for independent operators.  AAIA president and CEO Alfred Gasper has said that he is "concerned that the agreement does not contain sufficient measure to ensure the service information and enhanced diagnostic capabilities will be available to the independent service industry."

The APSA intends to continue monitoring VM information availability issues and to support the passage of the Motor Vehicle Owners' Right To Repair Act currently working its way into US legislation.

Brian Spratt, the chief executive of the Automotive Distribution Federation in the UK has warned that "what happens in the US first, happens (in Europe) next. Although European legislation on OBD (on-board diagnosis) is framed different from the US, "the patterns of the (vehicle manufacturers) are not that different, and they will always be seeking a better way to tie up the market."
 
Think globally - act locally

In order to compete, the major players are having to think globally for the aftermarket. Visteon had already been established for a year in the US aftermarket before it took on Europe. Delphi, initially unable to operate in this sector in the US because of an agreement with GMSPO, started in the European aftermarket, Ordonez commenting, "The foundation for our growth is right here." It has followed up in 2000 by rolling out its program elsewhere. In 2001 it became free to move into the US replacement parts business. Ordonez admitted that it has had to be very careful in the way the company approached the USA. "It's so big, you can't just go in and not deliver."

Others have contemplated heading in the same direction. When Autodistribution, which enjoyed over 40% of the French wholesale business bought one of the then two leading UK distributors, Finelist, the latter's now discredited founder Chris Swan began to talk of expanding not only to Holland, Belgium, Spain and Portugal, but also to North America and perhaps, eventually to India. Paul Forman, managing director of the European aftermarket division of another UK based operation, Unipart, which owns Finelist's main distribution rival, Partco, also expressed an intention to "expand overseas".

Finelist, however, collapsed in 2001, while Forman left the industry at the end of 2002 and Unipart shows little sign of expanding outside the UK, despite having first attempted to do so in the early 1980s.

Europe, though, has seen major consolidation among its distribution operations. The UK, in particular now only has, thanks to acquisition, only one truly national distributor.  In Europe, as a whole, a major shake-up in aftermarket distribution is currently taking place. National wholesale chains are finding the aftermarket a struggle in terms of margins, with many of them not covering the cost of capital. The buying groups, which dominate continental Europe, are acquiring each other. Entrepreneurs who set up during the post-war period and who have no family to leave their businesses have been selling up in recent years, particularly in Germany.

On the retail side, Kwik-Fit itself led the way in acquisition having purchased, among others the Speedy and Pitstop chains in France, Belgium, Spain and Germany. The leading European autocentre chains, such as French market leaders, Norauto and Feu Vert, have tended to grow organically. By contrast, in the USA, chains like AutoZone and CSK Auto have expanded rapidly by acquisition. In 2002 Advance Auto Parts became the second largest auto parts chain in the USA when it acquired certain assets of Trak Auto. The group now has some 2,400 stores in 38 states.

Such retailers have been surrounding competitors with outlets and squeezing them out with low prices and greater product variety.

The larger retail chains are benefiting at the expense of the smaller throughout the world. In the UK, for example, the market leader, Halfords is thought likely to dramatically increase its market share.

Joe Elliott, the founding chairman of A1 Motor Stores, Britain's leading group of independent retailers, points out how difficult the aftermarket has become for retailers. He believes that they must also supply to the trade to survive, the DIY motorist being on the way to extinction. "The old motor accessory shop business is running out of time." There has, certainly, been a blurring of the lines between retailer and wholesaler. This is nothing new in certain areas of Europe, although it seems to have grown apace in the USA over the past two years.

For Elliott the key to survival has been to concentrate on multi-media. In this, his small business mirrors that of Delphi and Visteon.
 
Show time

An increasing interest in the global aftermarket is perhaps indicated by the proliferation of aftermarket exhibitions in the Middle and Far East. Japan's first international aftermarket show, the International Auto Aftermarket Expo took place in Tokyo during 2002. Other new exhibitions have sprung up in such countries as Thailand while Dubai and New Delhi both have two this year, the Indian shows both taking place during the first two months of 2003. Mexico City, by contrast, has seen though the inefficiency of two, almost simultaneous shows, PAACE Automechanika having outlived its rival InAuto.

Australia's aftermarket has also taken control of its own exhibition future. This June will see the first Australian Automotive Aftermarket Association organised event at the Melbourne Exhibition Centre. Such has been the demand for stands at this show that the AAAA has had to go back to the venue operator to negotiate additional exhibition space.

Contrasting fortunes in the aftermarket were arguably indicated by last year's Automotive Aftermarket Industry Week in Las Vegas. AAPEX, the half of the show devoted to conventional service and repair components, did not seem to have recovered from the post-September 11 doldrums into which it had drifted the previous year. However, the SEMA Show, the exhibition devoted to performance and speciality parts and accessories and held at the same time, positively buzzed with optimism. In the UK, the lacklustre performance of AAPEX has been mirrored by the fact that the Society of Motor Manufacturers and Traders has cancelled its biennial automotive trade show, the newly renamed "auto1". The alternating Automechanika (Frankfurt) and Equip Auto (Paris) easily remain the dominant aftermarket exhibitions in Europe and the only ones to rival the Las Vegas event.
 
Growth in the developing regions

Potential growth can be seen in the developing countries, and in particular India. It has been said that the latter is "fantastic in terms of aftermarket opportunity." Both Delphi and Visteon, who already have manufacturing footprints on the sub-continent, are now active in India's replacement parts business. Bosch has operated in the country for around 50 years and is part of a joint venture with its own, unique distribution channel. MICO-Bosch has an extensive aftermarket sales and dealer network and operates 16 depots nationwide.

L. Ganesh, former President of ACMA, the Indian component manufacturers association, perhaps surprisingly, describes the Indian aftermarket as mature. It already has in place a dozen or more major distributors including TVS and JMA. Ganesh reckons that consolidation could occur in the near future. Traditionally these distributors have been regional, but there is now a move for some of them to become all-India.

The second level in India is mirroring what is happening in the other areas of the world. The line between wholesaler and retailer is becoming blurred. However, India does have its own peculiarities not found in the West. There is still a high level of spurious parts and there are low awareness levels. The vehicle parc is increasing rapidly although it is said that as much as 98%of all vehicles sold in India over the last 30 years are still on the roads. The metro regions are just starting to insist that only cars under 15 years old should be used.

Such a situation presents different challenges for newcomers to the Indian aftermarket. In the cities there is an increasing emphasis on the authorised service centre, but out in the countryside, the roadside mechanic still operates. The infrastructure is also unsuitable for the rapid delivery of parts but the Indian government has ambitious plans to develop highways. "The market, says Ganesh, "is open."

One problem, mainly for the emerging markets, is that of counterfeiting. ACMA hit out against this at the Auto Expo 2002. It feared that, should the supply of spare parts prove inadequate as newer vehicle models are released onto the market, counterfeiters could be able to "proliferate the market with fakes."

Counterfeiting in countries such as India, is well organised. However, Pushpinder Singh, vice president of the All India Automobile Spare Parts Dealers Association, reckons that a new generation of educated retailers and consumers are aware of the problems. He contends that the spurious parts industry is much smaller than it was 10 years ago.
 
The importance of brand

One thing the counterfeiters certainly understand is the importance of brand names. Brands are vitally important in the aftermarket. In recent years many have been gobbled up by large companies eager to have a global OE footprint. Companies like Dana, traditionally thought of as OE suppliers, have become major aftermarket players through acquiring firms that manufactured for both sectors. At the same time famous brands have completely disappeared or, like Lucas, been split between a number of different owners

Not all of these companies seem to understand the aftermarket. Federal Mogul in purchasing T&N, Cooper Automotive and Fel-Pro rose to become one of the two largest companies in the replacement parts business. However, it grew too fast, stock prices fell dramatically and two class action lawsuits were filed against it claiming false and misleading statements had been made about the company's financial status, claims that Federal Mogul said were groundless.

Champion's fall from pre-eminence as an aftermarket spark plug supplier seems to have been hastened since it became part of Federal Mogul. Indeed, by putting all its aftermarket operations together, Federal Mogul seems to have blurred their identities. A specialist approach is often required, with dedication to a particular product category.

Not just hard parts

The nature of the aftermarket customer is changing. While DIY declines, the 'do-it-for-me' segment of the repair market has grown, certainly in the USA. According to the Automotive Aftermarket Industry Association, this rose by 6% last year grossing almost $123 billion. DIY sales only accounted for around $35 bn. In all according to the AAIA total aftermarket sales in the USA were about $178.8 billion, a 4.8% increase from the previous year.

The automotive aftermarket does not, of course, just concern hard parts. Other potential can be found, sometimes in the not always obvious places. Car care is an important sector for the retail trade, although much of it is sold in non-automotive outlets. The car care market has been driven by new marketing concepts and packaging rather than new product. However, as mentioned in the introduction, the US manufacturer, Armor All is claiming that its introduction of "wipes" to the automotive market has grown the car care business by a staggering 10%.

Research carried out by Armor All's parent company Clorex has indicated that motorists' attitude to car care is changing profoundly. Pride in car ownership among the young is very much a thing of the past except among true enthusiasts. The weekend car wash is no longer a common phenomenon and retailers cannot rely on the sale of conventional car shampoos and polishes.  The company points to the fact that 20% of Armor All Wipes consumers are, in fact, new to the car care category.

A once thriving and very diverse market, the true car accessory sector has declined rapidly as cars become better appointed and technology develops. It is usually true to say that, if an accessory becomes popular, it is taken up by the vehicle manufacturers to become original equipment. Hence the fact that there are no longer sales for products such as stick-on rear screen heaters or aftermarket pump-action windscreen washers. Other accessories may also be transient. The rear seatbelt could once have been regarded as an accessory until legislation made it a standard feature of every car.

Even in this sector, though, opportunity can be found. Multi-media is an obvious example. In car entertainment has expanded from conventional audio to such as DVD, mobile phones and route information. Another example is that of luggage carriers where roof rack sales may have declined but roof boxes give a much healthier margin.

Unlike the replacement part market, which has, at least been supported by annual vehicle tests, the car accessory sector has been thrown no such lifeline. Technically, the UK's annual MoT test could actually work against the accessory market as a car should fail if an object hanging from the rear view mirror obscures forward vision.

The youth performance market is the only one in the accessory sector that continues to thrive, as this sector desires its cars to be "something different". Thus there are, for example, still a large number of alloy wheel manufacturers. These tend to be clustered for historical reasons, the best in Europe, for example, being manufactured in Italy and Germany.

For the accessory supplier the question of distribution is an important and complex one. Fritz Altmann, the owner of Italian car air freshener manufacturer reckons that the methods of distribution with which he works can change "from day to day." France, for example, has a simple system he observes, "large chains such as Carrefours and Ocean. Germany is similar to France; Italy has small shops and the UK specialist automotive buying groups." Obviously, distribution in Europe is far more complex that this, even for an air freshener supplier. For example, the so-called "new distribution" in France consists not only of the food retailing organisations that have moved into the automotive sector, but also the specialist chains like Norauto and Feu Vert.

Establishing an autocentre business, such as that of Norauto, is not, though, necessarily an easy option. In Britain alone, Unipart, B&Q and Charlie Browns, have all failed in this respect.

Aftermarket distribution is certainly a complex business varying in style and even terminology throughout the world. North America talks of "WDs" (warehouse distributors) and "jobbers", the UK has its "motor factors". Some may be unique to a particular region. This was so of the wholesale "cash and carry" movement that sprang up in the UK to support the growth of car accessory shops. This declined as rapidly as it had grown and is now almost solely the preserve of the Maccess group. Italy is another example of a unique system, possibly the most complex in Europe with such as its ricambists and ellettrauto. The more hands that the product has to pass through, the higher the cost to the end-user.

This article is extracted from a just-auto members' management briefing first published in 2003. For a full list of management briefing topics click here and scroll down the page:  /membersclub/