CHICAGO — New-car model proliferation will lead to more parts challenges for distributors and suppliers, according to Wall Street analyst Jonathan Steinmetz of Morgan Stanley. “This is one of the critical points for the aftermarket in general. Those better able to manage it will fare better.”
Steinmetz, who spoke at the Global Automotive Aftermarket Symposium in May, says foreign and domestic OEs have increasingly been under pressure to deliver more niche vehicles, and that this trend will drive the “need to keep more inventory on hand” for the aftermarket. So far, vehicle model proliferation has increased by about 6.6 percent, causing massive SKU growth for aftermarket parts distributors.
“The problem will get worse before it gets any better,” claims Steinmetz.
The growth of electronics integration will also create one of the most complex generations of vehicles, a key factor that is driving more do-it-yourselfers to local shops and dealerships for parts and service.
Working in the aftermarket’s favor is the fact that the car parc is still growing and miles driven hasn’t declined, says Steinmetz. “This year will be solid but not spectacular.”
Vehicle population shift
Most of the new-car growth is the result of foreign model sales. DaimlerChrysler, Ford and General Motors, or what Steinmetz refers to as the D3, are increasing the quality of the vehicles they are producing but are currently losing share. “Whereas with foreign brands, their car parc is increasing as reliability is increasing.”
These shifts in vehicle population by brand are pronounced, says Steinmetz. “Foreign brands like BMW and Mercedes-Benz” are growing and market share shifts will continue in this direction, naturally creating a “slow and steady march” toward what he tabs as the “foreign aftermarket.” Currently, Toyota and Honda account for 21 percent share of market. All Japanese OEMs accounted for 30 percent of the market in 2004, up from 26 percent in 2000.
Even though the domestic vehicle manufacturers have majority share, Steinmetz believes the Japanese and European companies are more aggressive, enticing consumers with special incentives.
More truck and luxury car sales will also influence aftermarket parts carried. Small SUVs have seen a 40-percent growth from January to May 2005 compared to the same timeframe last year, says Steinmetz. Crossover vehicles have witnessed 10 percent growth; and luxury cars and SUVs are up 6 percent and 4 percent, respectively.
Large pickups are up 2 percent, and mid-size and large SUVs are down 10 and 20 percent, respectively.
Steinmetz believes these trends will continue, though the vehicle mix on today’s roads still favors trucks, which is beneficial to the aftermarket since a truck costs more to maintain in its first year. His research suggests that a truck costs $600 to maintain in year one, compared to just over $200 for an SUV priced between $35,000 and $45,000 and more than $500 for an economy sedan.
Manufacturers under pressure
Steinmetz says manufacturers will also continue to experience increased demands from their retail and wholesale customers. “There is a lot of inventory being pushed out into the channel, and you can debate the merits of POS, but the fact is, that is what is happening,” he says, adding that Genuine Parts extended their payables from 41 to 50 days and AutoZone is currently at 157 days’ payable.
Retailers are also taking advantage of direct foreign sourcing, particularly from China. The country accounts for almost 18 percent of imported tires, about 10 percent of imported brakes and 4.5 percent of all automotive aftermarket imported electrical components. “It’s an economic reality.
“For the manufacturers, the key to effectively winning is to increase consolidation where there aren’t enough scales to compete,” says Steinmetz, who also warned that it won’t be a major “cure all.” Low value-add products will need to be produced in lower cost markets, like China, Mexico, Turkey, Thailand and the Philippines, he suggests.
Overall, investors are favoring retailers and wholesalers to manufacturers. They view the group as stable but aren’t expecting much growth.