Influencing the Future

by Richard White

Among the pressure points that are impacting parts distribution in the U.S. automotive aftermarket, four trends stand out as key influencers for the future: industry consolidation, the shortage of technicians, government regulations and e-commerce. These four trends are influential in a market environment that looks like this: Today about 187 million car owners drive more than 208 million vehicles about 1,000 miles a month, with an average vehicle age of 9.1 years. This customer base generated an estimated $250 billion in parts, accessories and service sales last year.

A Merging Market

Consolidation is a business response to the market environment. While the number of mergers and acquisitions in 2000 dropped by more than 50 percent compared with the previous three years, the impact of industry consolidation has changed the face of the aftermarket. The greatest number of mergers and acquisitions were made between 1997 and 1999, but in 1998 the value of deals exceeded $23.7 billion, well above the $6.7 billion and $8 billion in deals in 1997 and 1999 respectively.

Merging factory suppliers are wreaking havoc with reps and traditional WDs. As lines are consolidated under a single owner, competing lines become one. At the same time, increased competition at the distributor level is resulting in fewer accounts available to suppliers. For example, the consolidation of Murray, Everco and 4 Seasons into Standard Motor Products resulted in a loss of rep contracts and WDs. This and other mergers like it continue to alter the competitive advantage and widen the competitive gap between big and small companies.

Fueled by greater competition, the consolidation movement casualties have been many WDs, jobbers and smaller retailers who were pushed aside or gobbled up by the bigger companies. Today, eight auto parts chains dominate this segment of the aftermarket: AutoZone, Advance Auto Parts, CSK Auto, General Parts, Genuine Parts, Pep Boys, Discount Auto, and O'Reilly Automotive.

Where Are the People?

Few in the aftermarket would argue that there is a shortage of qualified technicians. This is not a new trend, but it is getting worse and will soon reach epidemic proportions unless corrective measures are taken. Today there are an estimated 800,000 full-time working automotive technicians. Experts predict that 60,000 new technicians will be needed each year, but only 40,000 are available.

In 1990, there were 6,900 high school automotive programs in the country. Today the number has dropped to 5,900. The most experienced technicians have been retiring at a rate of 15,000 annually. The number of new technicians entering the field has decreased by 3,500 annually. For every 10 technicians who retire or change careers, only two to three new technicians enter the workforce.

In the last 20 years the number of repair outlets have fallen by about 40,000 while the number of vehicles per outlet has nearly doubled from 425 to more than 800. Dealers and independents alike are feeling the pinch. The average new car dealership has 16 service bays, but only 11 technicians.

A number of demographic, economic and sociological factors have converged to create a technician shortage that threatens the aftermarket industry. They include:

• More vehicles on the road
• Average vehicle is aging
• Fewer repair outlets
• More vehicles per outlet
• Higher technical skills required
• Greater competition from other industries
• Negative image of industry and profession

Each year presents battles to be fought to protect the independent aftermarket.

Big Brother is Meddling

Federal and state legislation and regulations have kept the industry vigilant and aggressive at the grassroots and national levels for decades. Each year presents battles to be fought to protect the independent aftermarket.

OBD II

State and federal requirements regarding on-board diagnostic systems that monitor emissions systems and alert motorists to defective components will likely spur more car owners to obtain necessary emissions related repairs. However, the increased sophistication of emissions systems also will require better-educated technicians and significant investments in off-board diagnostic equipment by repair shops.

Passage of SB 1146 in California late last year will help ensure that independent service facilities and parts manufacturers have access to the information and tools necessary to stay competitive. But the costs of obtaining information and tools, and the need for educated technicians, will remain a major concern for aftermarket companies.

Emissions Warranty

The California Air Resources Board requires that cars certified to super low emitting vehicles standards need to be warranted for 15 years/150,000 miles. While these vehicles will only make up a small part of the vehicle fleet introduced by car companies, the extended warranties demonstrate a frustration by regulators that emissions-inspection programs have not done a good job of improving vehicle emissions performance.

Regulators, especially in California, now believe that the only way to improve maintenance is to build more durable vehicles and to provide for free repairs should the emissions system break down. Of course, little regard is being given to how much this will cost consumers or how the impact on reduced competition in the repair market will impact the price of maintenance and parts.

Product Environmental Regulations

While they account for only a limited source of pollution, automotive products including paints, chemicals and appearance products have been a major target of regulators. EPA adopted regulations controlling the content of volatile organic compounds (VOC) for paints and chemicals two years ago. California has adopted more stringent restrictions on VOC content for a wider variety of automotive products, including waxes and polishes.

Not only are the new products more costly to consumers, they are often not as good as the original products. Northeastern states are now looking at adopting the California regulations due to pressure from the EPA to further reduce pollution.

Environmental regulation will likely play a more dominant role in the development and marketing of automotive products. Companies cannot ignore the fact that regulators will be closely monitoring the content of their products and how consumers use them.

Vehicle Scrappage

In the push to obtain emission reductions demanded by the Clean Air Act, states are enacting legislation that permits car owners to sell their older vehicles to the state for up to $1,000. The state then obtains emissions reduction credits based on the difference between the pollution of the older vehicle and a newer vehicle that will be purchased by the motorist.

These programs have not been found to be cost-effective. Since the money that the motorist receives for the older car cannot go very far toward the purchase of another, newer vehicle, lower-income motorists cannot take advantage of the offer. Therefore, only middle-class car owners really benefit by cashing in vehicles they would have otherwise scrapped.

Despite the obvious shame, scrappage seems to be garnering increased attention as pressure continues on states and localities to reduce emissions. How this will impact the older vehicle populations - the long-time mainstay of the aftermarket - is difficult to predict.

Crash Parts Legislation

The 1999 ruling by an Illinois jury that State Farm Insurance use of aftermarket parts in body shop repair did not return vehicles to their pre-crash state has spawned considerable attention to the use of non-original equipment parts in collision repair. While the State Farm case only focused on crash parts, most of the publicity failed to make the distinction. Therefore, all aftermarket parts were brought into the public eye.

Many state bills have been introduced that would require the use of original equipment crash parts during the warranty period. Others have gone as far as ten years. So far, none of the bills introduced were enacted. However, this year will likely bring another batch of bills.

The crash parts legislative initiatives raise two major concerns for the industry. One is the precedent established by requiring the use of an original equipment part in repairs. While most of the bills focus on crash parts, car companies clearly have their eye on the entire aftermarket and the scope of these bills could easily be broadened. Second is the general bad name that this issue has given to the aftermarket, portraying a negative view of aftermarket parts among consumers.

e-Commerce has turned every industry upside down, forcing companies to completely rethink their distribution strategy in order to remain competitive

e-Commerce

e-Commerce has turned every industry upside down, forcing companies to completely rethink their distribution strategy in order to remain competitive. The e-commerce revolution has presented challenges to the aftermarket and spawned a cadre of dot.com companies competing for the precious profit margin in the traditional distribution channel. This new technological business model has also created opportunities for much-needed standards in the aftermarket.

AAIA has established itself as a leader in electronic commerce standards. Through the association's e-commerce committee, it has successfully developed tools and practices that have come to be recognized by the aftermarket as industry standards. They include: Electronic Catalog Standards, Product Information Exchange Standards and Shop Integration Standards.

Electronic Catalog Standards

More than 170 companies subscribe to the AAIA e-catalog standards, an open electronic format for manufacturers to use in exchanging applications catalog data.

When the electronic cataloging trend first hit the aftermarket, the typical method of entering data for these systems was to hand-key from the paper catalog. In the absence of industry standards, this was the only way of dealing with the wide variety of descriptions for a particular vehicle or part type. These methods were labor-intensive, expensive, slow and prone to error.

In 1997 AAIA introduced its e-cat standards for suppliers. The standards allow suppliers to:

• exchange catalog updates with multiple e-catalogs in a single electronic format
• integrate their data into other e-commerce applications that are standards-based
• leverage their catalog database investment to publish in other media such as CD-ROM, paper or the Internet.

Product Information Exchange Standards

AAIA's Product Information Exchange Standards (PIES) are recognized as the industry standard for exchanging more than 140 attributes of product information in a structured electronic format. The standards accommodate information on pricing, packaging, UPC and bar codes, product description, warranty, shipping and Web site links for product images, MSDS and installation instructions.

PIES has been proven to lower suppliers' costs, reduce returns and increase customer satisfaction. PIES offers a competitive edge to both buyers and sellers with access of comprehensive product information.

Integrated Shop Standards

i·SHOP, created by AAIA's Shop Integration Task Force, is an example of cooperation between competitors in the automotive equipment segment of the industry. Participants include ALLDATA, Hunter Engineering Company, Mitchell Repair, Snap-on, SPX Corporation and Vetronix.

The modern vehicle repair shop has multiple pieces of PC-based diagnostic and repair equipment. Multiple servers supply shop management, parts and labor, and service and repair information to the technicians and other shop personnel. This often requires data about the customer, vehicle, and work order or diagnostics results to be re-keyed a number of times throughout the service experience.

With an i·SHOP equipped repair shop, all relevant data is available when and where it is needed because the open standard connects every workstation from the front to the back shop. To date, 23 companies subscribe to the i·SHOP standards.

Sunny Side Up

Some of the seeds have already been planted to address these issues. Consolidation could have peaked in the late 1990s. A recession might entice more employees to look at becoming technicians. AAIA e-cat standards are solving the e-cataloging challenges. And the recent OBD II victory in California has helped convince regulators to work with the aftermarket instead of against it. But even if these issues don't continue to be a thorn in the side of the aftermarket, new ones will surely surface. And AAIA will be there to monitor, inform, and offer solutions.

Reprinted with kind permission by the Automotive Aftermarket Industry Association.