Staring down commoditization

Jan. 1, 2020
The aftermarket as we know it will be forever changed, say panelists at a recent industry breakfast event.

“We really didn’t see what was coming,” declared Terry McCormack, president & CEO of Affinia Group, when discussing how quickly our country changed from being predominantly “Made in America” focused to a nation of consumers with little regard for “country of origin.”

“Ten years ago, we started seeing Chinese brake parts enter the United States market. Our engineers told us they were junk. We reasoned that brake parts were safety related and the Chinese would never be able to reach the requirement level required here. We thought American automotive techs would never accept Asian parts regardless of the quality.” How times have changed.

The 500 attendees who showed up bright and early for the first annual Automotive Aftermarket Suppliers Association (AASA) Executive Breakfast, held during Automotive Aftermarket Industry Week, were quickly awakened by the realities, challenges and opportunities that McCormack and the other speakers shared with the crowd.

An aftermarket reality

McCormack, at the risk of being politically incorrect, decided not to focus his time talking about Right to Repair or Be Car Care Aware, though he agreed that they rightfully deserve the attention they receive. “I’m going to talk about the next aftermarket reality, a major paradigm shift or change, that if ignored, could commoditize the aftermarket and change it forever.”

The truth is that replacement parts are no longer judged on anything other than form, fit and function since quality parts can and do come from anywhere. Due to the ability to produce parts overseas at lower prices, “the once loud battle cry by Americans has been supplanted by an even louder cry aimed at placing blame at American manufacturing jobs that have been exported to low cost countries.” But, McCormack shared, this is the new reality and American manufacturers that want to compete must become international players.

This shift to the acceptance of foreign-made products is largely due to China’s success, said McCormack. Add to that India, and “these two countries make enough goods to change the rules in the manufacturing game all around the world.”

“This is a global market,” said Dick Morgan, president of the Aftermarket Auto Parts Alliance program group, who suggested that attendees read Thomas Friedman’s book, “The World is Flat,” to help make sense of the changes that are occurring on a global scale. “We now live in a time where one individual can do business all around the world by using the Internet,” explained Morgan.

Model behavior?

The low cost country model is significantly different than the model used by most U.S. manufacturers. “Not better or worse, just different,” said McCormack.

Typically, when parts are purchased from an LCC supplier, channel partners get the product and no support or value-added service. “For some of us manufacturers with a major North American presence, this mix shift from premium products to value line has been extremely painful in terms of market launch. As I said, we didn’t see it coming. It’s becoming extremely difficult to support full line strategy on launches of a combined premium/value line approach.”

McCormack pointed out that many traditional North American suppliers are “heavily invested in supporting our customers with value-added services,” offering full lines of products, return privileges, cataloging support with proper data and product attribute information, as well as “technical assistance through the form of toll free service lines, tech bulletins and training programs for increasingly complex auto systems, and on top of all this, we field a substantial sales force.

“Full line suppliers formulated the assumption that our channel partners would purchase the full line from us — the bread and butter of our high value parts as well as the tail end. If the fast movers are sourced away, the manufacturing model becomes compromised,” he told the crowd.

But McCormack isn’t complaining or looking for sympathy, he’s just telling it like it is. Because of these changes, he said, Affinia will transform into a true global supplier in order to compete. “It’s incumbent on us to become a low-cost, high-quality manufacturer,” and to do that, they’ll manufacture anywhere they must, while still offering the key value-added services their channel partners are looking for.

Morgan, though very encouraged by McCormack’s presentation, said, “I’m concerned about [the manufacturers’] profitability because for them to be viable, long-time suppliers to us, they’ve got to start making money, and we would like to do anything we can to help the manufacturing base to be able to do that. I’m concerned about the ability of our current domestic partners to keep us competitive with offshore products. We have depended on our domestic vendors to do that. We would much rather them make the investment to go overseas,” so that they can continue to support their channel partners.

Morgan is also concerned about aftermarket vendors’ ability to cope with inflation. “It can really sneak up on you if you don’t understand what’s happening. You think you are doing well because you are making money, but you’re losing market share at the same time.”

Keeping focus

With so much change happening in this industry, it’s important to keep a keen eye on what the future holds. Unlike other markets, a growth rate of 4.5 percent means the industry is poised for success.

“The number of vehicles in use is growing every year,” said Peter Zaglio, senior VP of Gabelli/Gamco Investors Co., who added that we are also approaching a practical limit for the life of the car, which will help drive more repairs. Plus, the car parc, after being stagnant for almost 15 years through 1999, has been on the rise.

The industry will also continue to experience a shift in the DIY/DIFM ratio. With increased vehicle complexity and an aging group of 78 million baby boomers, there will be fewer DIYers and more DIFM consumers. Zaglio told the crowd, half jokingly, that there are going to be three types of aftermarket customers in the future: “women, Hispanics and geezers.”

“I think people underestimate how much of a generational change we are seeing in the capability for people to do work themselves,” said Harry Yanowitz, senior vice president and chief financial officer for Pep Boys. “As installers, we are every day going out to try and find skilled staff who can do that work — it’s a constant process for us.”

This major shift from DIY to DIFM means that the real customers of the future, the “rock stars” as Morgan likes to call them, will be the repair shop owners and technicians. Retail sales are still available, but most of the emphasis is being placed at the service dealer level, said Morgan.

Maybe that’s one reason why Yanowitz believes we’ll continue to see some substantial blurring between wholesale and retail, and that the amount of overlap in inventory capability will look “more alike than they do dissimilar.”

In terms of market performance, aftermarket suppliers, wholesalers and retailers all have higher valuations than OEMs and OEM suppliers, according to Zaglio. But the aftermarket is also somewhat affected by the overall economy and our trade deficit, which is over $600 billion. “Add to that $400 billion from the federal deficit...and a trillion dollars is real money,” said Zaglio.

And as our trade deficit grows, “we will continue to become dependent on the kindness of strangers,” he explained. “Foreign entities own more than $3 trillion in U.S. securities,” and if they just stop buying them, the value of the dollar will fall, interest rates will skyrocket and the economy may tumble.

On top of this, homeowners have extracted more than $500 billion in equity for their homes, said Zaglio, and are using it to pay off other debt but “some of these people are renting money that will never be repaid.”

The demand for energy and raw material costs also creates volatility in our marketplace, as demand for gas has met capacity, said Zaglio.

This same supply and demand scenario sings strong with our need for qualified employees. Training and education is where it’s at, believes Morgan. “People want to do good at all levels. But they have to be held accountable.” It’s easier for people to sell what they know and understand, he explained, adding that an educational alliance between the Automotive Aftermarket Industry Association, Automotive Warehouse Distributors Association, the Motor & Equipment Manufacturers Association and the Specialty Equipment Market Association is something that he would like to see in the future.

“We need to collectively put our money together to educate our industry. If our industry is sick at any level of distribution, it’s sick throughout, so we’ve got to educate people all the way through, and we have to do it collectively.” 

We must also be able to keep up with new technology, he added, pointing out that our biggest threat and No. 1 challenge on the street is helping the independent shops compete with the OE dealer. “We must continue to fight for repair information.”

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