1. STAGNANT PRICE AND SQUEEZED MARGIN
It's a sad aftermarket fact: prices for automotive products have remained virtually unchanged since 1982.
According to the Motor & Equipment Manufacturers Association (MEMA), in an analysis of the Consumer Price Index, prices for auto parts have grown very little over the past 22 years. In fact, prices for automotive parts and equipment have risen at a rate far lower than the rate of inflation and most other consumer products. While this may be seen as a good thing for the motoring public, it is, of course, very unhealthy for an industry that continues to struggle for profitability, particularly among manufacturers.
This is the net affect of the market's long-term and (many contend) misguided aim to be the lowest-cost supplier. As a result, price is not determined by important factors such as EVA, ROIC or whether a product is a W number or an A. In the end, the aftermarket's low-price strategy leaves margins squeezed and brands dangerously close to commodity status.
This is an influence that affects nearly every facet of the market, and manifests itself, for example, in the elimination of personnel and support services such as factory representation, marketing support and training.
2. PERSONNEL & TRAINING
While it's true the aftermarket is a manufacturing and logistics business, it's also very much a people business.
But without trained professionals to accurately diagnose and repair vehicles, the aftermarket will have a tough time adhering to its "fix it right the first time" promise to the motoring public. According to the Automotive Service Association (ASA), it is estimated the U.S. will need some 32,000 technicians annually, a 17 percent increase from now until 2008.
Even on the parts distribution side, distributors routinely tout the importance of trained, competent parts specialists, yet the industry continues to have a very hard time attracting and retaining quality people in these positions. Blame it on the media, pay, image or whatever - we need good people and we need them now.
The influence of those in the field - technicians and parts professionals alike - cannot be overstated. Their brand preferences are the major driver of sales within the industry and without them, automotive brands remain just words without a promise to back them up.
3. CLEAN DATA
Bad data, either from the manufacturer or the distributor, can be very costly to the entire channel.
All too often in the industry, data between trading partners doesn't match up, which creates all sorts of problems, and wastes millions of dollars. Our industry is an application-specific parts industry, but it's more than that. It's a data industry. Without good data, parts don't move off of your shelves, cataloging is incorrect and incomplete, forecasting is off and inventories become full of irrelevant SKUs.
Across the industry, we have a problem with non-standardized product data. Critical information like price, quantity and unit of measure don't match up between trading partners. WDs, retailers and manufacturers don't agree on what a part number should look like (does it have dashes or no dashes?), what a minimum order quantity is (it is one unit or one pallet?) or even what to call something (is it Chevy or Chevrolet?).
To get a better handle on the depth of this problem, the Automotive Aftermarket Industry Association (AAIA) conducted a study to determine the extent to which this data doesn't match up. AAIA asked six suppliers and six distributors to submit a significant product line, with an average of 2,000 to 3,000 SKUs. AAIA then tried to match up important items such as part description, minimum order quantity, price and part number between the supplier and its customer. The results were disturbing. The six manufacturers, for example, provided price data for a total of 26,873 part numbers. More than half of those did not match records in their own customer's files. The six distributors provided information for 14,509 part numbers, 7 percent of which were not found in the suppliers' files.
How can the industry embrace essential technologies like e-commerce and universal bar coding when trading partner price data doesn't match up? Take catalog inaccuracies, for example. It has been estimated at least 10 percent of all cataloging is incorrect. When you consider all the product cataloged in the industry, a 10 percent error rate is a very large number.
The industry, lead by AAIA and its technology expert Scott Luckett, is making great strides. The influence of technology is far reaching: When it's clean, things move smoothly. When it's bad, the industry's efficiency is affected in terrible ways.
4. DISTRIBUTION CONSOLIDATION
While the wave of consolidation that hit the aftermarket in the late 1990s has subsided among manufacturers, it has continued to be a heavy market influence among distributors.
Many of the same names that made acquisition headlines in 2003 continued the strategy in 2004, most notably CARQUEST member General Parts Inc. In May, the Raleigh, NC-based mega distributor finalized the acquisition of fellow CARQUEST member Straus-Frank, which at the time was the 11th largest store group in the United States. The acquisition added four Distribution Centers that served 317 CARQUEST auto parts stores, including 116 Straus-Frank company-owned stores. In the fall, Parts Plus member Uni-Select purchased leading IAPA member, MAWDI, which greatly expanded Uni-Select's reach within the U.S. market by adding 31 distribution centers and 145 corporate stores across 18 states.
Even giant national retailer AutoZone got in on the act when the Memphis-based company purchased long-time RPM member ABC Auto Parts.
This is yet another indicator for many major WDs, captured distribution is one of the keys to successful top-to-bottom distribution. Apparently for these companies, owning more stores allows them to be better positioned to implement programs through more controlled, captured distribution.
For several years, the industry has known its glut of inventory has contributed to channel inefficiencies. These days, it's all about inventory: who owns it, how to best manage it, who has it (and who doesn't).
The market's ability (or inability) to manage the thousands of SKUs required to service every customer's vehicle is a major task, but it is one that must be mastered if the industry wants to succeed.
The industry's inventory management problems extend far beyond the confines of the store or warehouse. It is one of the root causes of margin compression, commoditization (and accompanying pricing stagnation) that cost the industry billions of dollars annually.
It's like an invisible black hole deep in outer space: You may not be able to see the inventory problem, but even from a distance, you can feel and measure its effect, often on store, WD and manufacturer balance sheets. And, like a black hole, mismanaged inventories and their related inaccurate pricing, brand sameness and forecasting models threaten to pull everyone down into a singularity of red ink.
Simply, there is too much inventory in the channel. No one really knows where inventory is, how much is out there and, as a consequence, how much needs to be manufactured, stocked or, worse, how to price it accurately. The data used to forecast manufacturing is generally incorrect or, at best, an educated guess. Re-boxes, changeovers and inventory shuffling only feed the black hole, making it hungrier, larger and more damaging.Without accurate and realistic inventory control, the industry will sink under the weight of its own product.
6. OE DEALERS AS PARTS SUPPLIERS
Over the years, unimpressive new and used car profits have forced vehicle makers and their dealership networks to new find new profit centers elsewhere. This includes a much stronger commitment to vehicle service and wholesale parts programs that are in direct competition with traditional aftermarket distribution.
In fact, much of the average dealer's profit is not in the sale of new and used vehicles. It's in parts and service, and even though dealership parts and service departments comprised just 11.8 percent of the typical dealer's total sales, it contributed a whopping 48 percent of the total operating profit.
For vehicle manufacturers and their franchisees, a focus on parts and service is a smart strategy: High margin labor and parts sales for new car dealers provide a two-fold advantage by relieving some of the pressures stemming from flat new car sales and also by encouraging previous new car buyers to return again and again to new car showrooms.
But for the aftermarket, the influence of the OE dealer has some damaging consequences, particularly in the erosion of the aftermarket brands.
How the aftermarket responds to the OE invasion will ultimately determine the future of aftermarket brands as they search for ways to counter the cachet of the "genuine" OE brand.
7. VENTURE CAPITALISTS
For far too long, investors and the Wall Street crowd ignored the aftermarket. Recently, however, venture capitalists such as the Carlyle Group and the Cypress Group have taken a keen interest in our business, acquiring such companies as Airtex, Wells Manufacturing, Cooper-Standard and the Dana Automotive Aftermarket Group. Now with other aftermarket brands up for sale, such as the ArvinMeritor Light Vehicle Aftermarket operations, a likely candidate might just be venture capital organizations.
Of course, these venture capitalists aren't looking for strong businesses - they're looking for underfunded, underappreciated and oftentimes underperforming businesses (with strong brands) they can turn around and sell for a profit. The fact these venture capitalists see opportunity in the aftermarket is both a blessing and perhaps a sign of danger ahead.
As more aftermarket entities are gobbled up by venture capitalists, their influence will be heavily felt across all levels of distribution.
8. THE COST OF RAW MATERIALS
You can't make a water pump out of coconuts. It takes steel, and increasingly the cost of raw materials such as steel and other raw materials are proving to be a costly thing for automotive suppliers.
When President Bush eliminated the "Section 2001" tariffs on foreign steel last December, everyone in the industry breathed a sigh of relief. But now, a year later, that relief was just a hot-rolled mirage. In fact, the average price for hot-rolled coil steel is up 120 percent for the year, with cold-rolled steel up 30 percent. The overall average price manufacturers are paying for steel has risen 30 to 50 percent.
Pricing stagnation in the aftermarket, coupled with OEM and aftermarket refusal to grant price concessions, have made life very difficult for manufacturers.
Twelve straight months of increases have more than doubled steel prices - and there's little immediate sign that end-users in the manufacturing, construction or automotive industries will be getting a break anytime soon. Even OE suppliers are feeling the pinch: Two of the largest auto parts suppliers, Delphi and Visteon, have warned of lower-than-expected earnings this year because of high steel prices.
Even looking forward to 2005, experts anticipate more of the same, an influence that will either manifest itself in higher prices or bankrupt suppliers.
9. MOTOR VEHICLE OWNERS' RIGHT TO REPAIR ACT
It's a fight being waged not only within Congress, but within the aftermarket as well.
The Motor Vehicle Owners Right to Repair Act simply puts legislative teeth behind the industry's need to access OE repair information. There is currently a "hand shake" agreement by the vehicle manufacturers and certain aftermarket organizations to provide the information. Some, such as the Automotive Service Association (ASA), say this is enough; others, particularly the Automotive Aftermarket Industry Association (AAIA), are in favor of pressing on for the bill to be made law.
What is not at issue is whether the aftermarket needs access to this repair information - it must if it is to succeed. What is in question is how best to hold OEs to the agreement. The U.S. Congress is watching this issue closely; whether the industry unites behind it or not will ultimately determine how the industry's access to repair information influences a technician's ability to competently and completely service vehicles.
10. COUNTERFEIT PRODUCT
If you've ever been to a flea market or a big city, you know knock offs abound - from a $15 "Rolex" to "genuine" Nike shoes. And now, the problem has extended to include automotive products.
This is a world-wide problem. Currently, 5 to 8 percent of all goods sold worldwide are counterfeit. At this point, the U.S. government has been unable to calculate what percentage of those goods are automotive product, but according to government statistics, counterfeit product costs the global automotive industry nearly $12 billion annually. A quarter of that total is shouldered by the U.S automotive industry alone.
The influence this fact wields manifests itself in many ways, most notably in the damage it does to the genuine brand being counterfeited. But even more damaging is the potential harmful effects that installing these low-quality, illegal products can have on the motoring public.