Transcript AASA

Aftermarket Now and
Aftermarket 2020
Brake Manufacturers’ Council
June 3, 2011
Paul McCarthy
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Agenda
• Aftermarket Now
• Aftermarket 2020
Aftermarket Now
Market
Aftermarket
Key Drivers
AASA
Barometer
Aftermarket Now
Market
Aftermarket
Key Drivers
AASA
Barometer
Total light vehicle aftermarket is ~$180
billion; aftermarket parts are ~$75 billion
US Automotive Aftermarket Size: Parts
2009 ($B)
$179.8
$34.6
 Oil
 Tires
 Other parts
and services
(e.g., audio,
alignment)
$70.0
Aftermarket parts:
$75.2
$20.8
$54.4
Total
Aftermarket
Source: AASA, Booz & Company analysis
Excluded
Segments
Labor
OES
Parts
Independent
Parts
Aftermarket Now
Market
Aftermarket
Key Drivers
AASA
Barometer
Three key factors drive the
aftermarket outlook …
1) Vehicle Parc
Drivers
2) Vehicle Age
3.1) Economy
3) Miles Driven
3.2)
Fuel Price
… however, these factors differ in
volatility, status, and trend
Long-term drivers of vehicle parc and age are positive, but miles
driven a concern due to gas prices
Factor
1) Vehicle parc
Volatility
Stable
Status
Trend
+/-
(Long-term trend)
2) Vehicle Age
Stable
+
(Long-term trend)
3) Miles Driven
Highly variable
- [gas price]
1) US parc is enormous, and has
stabilized after recession decline
Light Vehicles in Use
245
240
235
230
Millions
225
239,300,000
v ehicles in
addressable
m arket
220
215
210
205
200
195
2000
2001
2002
2003
Source: R.L. Polk & Co. and Experian
2004
2005
2006
2007
2008
2009
2010
2) Age of vehicles is high and
increasing
Average Age of Light Vehicles in Use (Years)
9.3
9.2
9.1
9.0
8.9
8.8
8.7
8.6
8.5
8.4
8.3
2002
2003
2004
2005
2006
Source: Registration Data © R.L. Polk & Company; 2010 data is preliminary 11/10 Polk estimate
2007
2008
2009
3.1) Economic outlook is generally, if
weakly, positive
Select major economic drivers of the aftermarket
Current
GDP
+1.8%
Q1 2011
Unemployment
9.0%
4/2011 vs. 10.4% 1/2010
Disposable income
+0.3%
4/2011
Interest rates
0.125%
Fed Fund Target
Housing starts
-23.9%
4/2011 vs. 4/2010
CPI
+3.2%
last 12 months 4/2011
Status
Trend
+
+/-
+/- [higher]
Sources: Bureau of Labor Statistics, US Federal Reserve, US Census Bureau, US Bureau of Economic Analysis, US Commerce Department
3.2) But rising gasoline costs are striking
fear in the industry
Price of a Gallon of Gasoline
$4.50
$4.00
$3.50
Every $0.01 increase
moves $1 Billion
out of vehicle
owners’ pockets
$3.00
$2.50
$2.00
$1.50
Weekly U.S. Regular All Formulations Retail Gasoline Prices (Dollars per Gallon)
Source: Energy Information Administration
Jan-09
Jan-10
Jan-11
Jan-05
Jan-06
Jan-07
Jan-08
Jan-01
Jan-02
Jan-03
Jan-04
Jan-97
Jan-98
Jan-99
Jan-00
Jan-93
Jan-94
Jan-95
Jan-96
Jan-91
Jan-92
$1.00
3) Which is being reflected in stagnant
miles driven
Billions (Annual Rate)
Miles Driven
3,250
3,000
2,750
2,500
2,250
2,000
1,750
1,500
Source: US DOT, NPD
3) Recent Miles Driven Shows Volatility
Miles Driven
Billions (Annual Rate)
3,050
-1.4%
decline in
March 2011.
Decline
likely
continued in
April and
May
3,000
2,950
2,900
2,850
Fuel Price Spike +
Recession
Source: US DOT, AASA Analysis
Fuel price decline +
Recovery
Higher fuel
prices +
Weak
economy = ?
Aftermarket Now
Market
Aftermarket
Key Drivers
AASA
Barometer
Afttermarket suppliers’ sentiment is positive,
but has become considerably more mixed
Describe the outlook for your business. Over the past
month, has your opinion become:
100%
80%
40%
12%
20%
39%
Positive
60%
0%
-40%
Negative
-24%
-20%
-60%
-80%
2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1
Significantly More Optimistic
More Optimistic
More Pessimistic
Significantly More Pessimistic
No te : Unc hange d is s ho wn as ne utral (as a ze ro v alue ) o n
the c hart to allo w a v is ual de pic tio n o f s e ntim e nt tre nds
Higher fuel prices had a negative impact on the
sales of a majority of aftermarket suppliers
What impact have rising fuel prices had on your sales?
60%
72%
50%
40%
30%
53%
20%
28%
10%
19%
0%
No impact
Moderate
Substantial
Rising fuel prices have had an even greater
impact on supplier costs
What impact have fuel prices had on your overhead
(freight, input/raw material costs, etc.)?
80%
70%
97%; 25%
substantially
60%
50%
40%
72%
30%
20%
10%
25%
3%
0%
No impact
Moderate
Substantial
Cost of raw materials is the top supplier concern
How significant are these issues facing your company?
More
Availability/cost of raw materials
Supplier margin erosion
Lack of Pricing Power
World economic conditions
Healthcare costs
Globalization
Excess inventory
Weak Sales
Product returns
Less
Availability/cost of credit
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Top supplier issues have shifted over time
Focus on raw materials is a return to 2007-8; current problems are likely
better to have than the fears over weak sales of 1-2 years ago
Top Issues Over Time
Rank
2011 Q1
2010 Q1
1
Raw
Materials
2
Margin
Erosion
Economic
Conditions
3
Lack of
Pricing
Power
Lack of
Pricing
Power
2009 Q1
2008 Q1
2007 Q1
Healthcare
Costs
Raw
Materials
Economic
Conditions
Raw
Materials
Weak Sales
Healthcare
Costs
Lack of
Pricing
Power
Healthcare
Costs
Weak Sales Weak Sales
Agenda
• Aftermarket Now
• Aftermarket 2020
AASA Aftermarket 2020 Study
 Landmark study
 Goal: realistic description of the automotive aftermarket
in 10 years
 Designed to be an essential strategic planning tool –
exclusively for AASA members
 Completed with extensive input from members and
AASA by Booz and Co.
 Key finding: Though the market itself isn’t expected to see
huge changes, how we do business and relationships along
the value chain has and will continue to change dramatically
 We’ve seen eroding margins, incredible concentration
among our customers, and a shift of power downstream
to the channels – like manufacturers have felt in many
other industries in the post-Wal-Mart era
No real growth in the auto
aftermarket through 2020
+1.6%
Nominal
$174B
2005
Source: AASA Aftermarket 2020 Report, Booz & Co.
$185B
2010F
$217B
$193B
2015F
2020F
Many dynamics at play in the industry
Future Replacement
Rates?
OES vs. Independent
Repair Shops?
Future of DIY vs.
DIFM Share?
Shifts in PARC Mix?
Impact of Low-CostCountry (LCC) Imports?
Channel Consolidation
Impact?
Impact of Electrified
Vehicles?
Right to Repair
Legislation?
Repair Generalists vs.
Specialists?
Larger Independent
Chains vs. Smaller
Garages?
Consolidation of
Suppliers?
Internet Affect?
Source: AASA Aftermarket 2020 Report, Booz & Co.
Manufacturer vs.
Channel Brands?
New Safety, Emissions
Regulations?
Three most important drivers of change
for the aftermarket
1
Channel consolidation
AASA VisCon
Feedback:
2
Part complexity
3
Low-cost-country imports
Source: AASA Aftermarket 2020 Report, Booz & Co., AASA VisCon 2011
Overarching issue is
the lack of leverage
with Customers
Power shifting downstream in many
industries
Sources of
Manufacturer Power
Sources of Channel
Power
New Paradigm
Traditional View
•
•
•
•
•
Unique product
Brand pull
Installed base
Broad product range
Fragmented channels
Source: AASA Aftermarket 2020 Report, Booz & Co.
•
•
•
•
•
Availability
Convenience and variety
Service
Purchasing scale
Private label and channel
brands
Many Examples of Channels Winning …
Common Characteristics
• Established brand
• Assured “best price”
• Low-cost, advantaged
availability
• Service and support
… at the expense of losing channels and weakened
manufacturers
Source: AASA Aftermarket 2020 Report, Booz & Co.
Channel consolidation has been
significant over time…
Market Share of Top 4 Aftermarket Channel Players
2005-2009 (% of Total Aftermarket Parts Market Excluding Labor)
%
36
34
32
30
28
26
24
28%
28%
29%
2005
2006
2007
34%
35%
2009
2010
31%
22
20
Source:
2008
Booz & Co, Company financials; Analyst reports
…and will continue, although may slow
O’Reilly
NAPA
AutoZone
Advance
Suppliers’ leverage reduced by
consolidation in the value chain …
Value Chain:
Raw Material
Aftermarket Suppliers
Resellers
20
2009 Revenue (billions)
18
16
14
12
10
8
6
4
2
0
Alcoa
Source: Company Reports, PwC, AASA Analysis
Dorman
SMP
UCI
AutoZone
… leading to a profit shift from
manufacturers to retailers …
Average Gross Margin
47%
48%
47%
49%
48%
Top 3
Retailers
(+ ~2% points)
21%
21%
19%
17%
19%
Select
Manufacturers
(– ~2% points)
2005
1)
2006
2007
2008
2009
Average of gross margins weighted by company sales; includes global aftermarket segment of Federal Mogul, Standard Motor Products, Tenneco, and
Dorman.
2) Includes AutoZone, Advance Auto Parts, and O’Reilly. Average of gross margins weighted by company sales.
Source: Company financials; Analyst reports; Booz & Company analysis, AASA analysis
… and terms of doing business that
appear unequal
Days in
Accounts
payable (est.)
Advance
AutoZone
O’Reilly
1/2/10
8/28/10
12/31/09
134
256
125
Source: Automotive Auto Parts Alliance, AASA Vision Conference 2011
There are several success models to
regain leverage and margin
Success Model
Example
A. Customer-centricity
P&G
B. Know your (end)
customer
Coke
C. Structural leverage
GE / Pratt & Whitney
JCI OE
Note: only a few examples and comparative models are listed here
A) P&G Model
Aftermarket channel “pain points”
provide opportunities for manufacturers
• Growing SKU complexity (more & more complex parts)
– Difficulty managing inventory and part information
– Increasing working capital costs (inventory)
– Weak response to new part needs
• Poor fill rates to end-customers (95% supplier fill-rate = 80%
customer fill rate)
• Desire for shorter lead times
• Difficulty managing multiple brands
• Concern about low-quality, LCC parts
• Limited understanding of different customers’ needs
Source: AASA/Booz Allen Aftermarket 2020 report
A) P&G Model
What successful manufacturers can
do when the channel is strong
 Build capabilities that are valuable to the channels
 Work in partnership with the channel to make
improvements
 Focus on delivering tangible value improvement
 Offer unique channel offerings for different customer
segments and/or channels – product and service
 Win in winning channels as well as traditional channels
 Take more responsibility for the end-customer
Source: AASA/Booz Allen Aftermarket 2020 report
B) Coke Model
Power in knowing the end customer
better than your buyers
“How does Coke make huge margins
manufacturing colored sugar water?
Coke spends more on understanding their
customers in one state than market research
spending by the entire aftermarket supply base”
- AASA member who used to work for Coke
C) Structural Leverage
Few selling to many can be a powerful
way to gain leverage
JCI Case Study
GM
JCI Case Study
Ford
VW
JCI
OE
Toyota
Hyundai-Kia
Renault-Nissan
Honda
PSA
BMW
Mercedes
SAIC
Success Factors
• Structural leverage with customers
• Only 2 major players in core OE
products (batteries, seats)
• Consolidation gave them:
• Ability to afford R&D and
differentiated service and
technological capabilities
• Economies of scale
• High profit and leverage with
customers before industry collapse
Sales driven by customer centricity;
but strategy driven by JCI’s needs
We’ve started down this path in the
aftermarket
Case Study: Reman Starters and Alternators
2006
Top 3
Others
2009
Top 3
Others
We’ve seen similar stories in many product sectors
Source: Freedonia, Frost and Sullivan, BBB, AASA Analysis
Consolidation is continuing in recent
M&A activity
Target
Investor
TMD Friction
Discussion of IPO or sale
Motorcar Parts (MPA)
Fenco
Federal Mogul
Various; Explored options
Keystone
Platinum Equity
Lubrizol
Berkshire Hathaway
Honeywell Auto CPG
Rank Group
Pennzoil-Quaker State car care ITW
ATK VEGE
LKQ
UCI
Rank Group
Wolverine
Wynnchurch
Interesting recent
consolidation
attempts include
filters (Rank)
Expect more consolidation going forward (‘helped’ by Private Equity)
Source: Capstone, BB&T, AASA Analysis
Sustainable strategic options for an
aftermarket product line
Options
Dominance
Strategic
Options
Go niche
Source: PwC, AASA Analysis
Strategy
Description
Leading market share and
rationalized competition
Achieve consolidation of scale and expertise
to maximize leverage and minimize cost
Migrate to QA
distribution model
Focus on vendor relationships and adopt a
quality assurance distribution model for key
aftermarket parts
Invest in items with high
cost barriers
Focus on aftermarket items with high cost
barriers (i.e. items with high shipping costs,
high-end quality parts)
Invest in Americancentric products
Focus on American segments where the is less
competition like large pickups
Invest in highly
differentiated products
Focus on items with high technology barriers,
brand impact, luxury segment, etc.
How do we know when we’ve gotten
there?
We will:
 We create more value for
resellers and barriers to entry
through:
 P&G-type reseller partnering and
value-creation
 Powerful knowledge about end
customers and technology
 Control customers’ supply
options through smart
specialization and
consolidation
Resulting in:
 Discussions with resellers as
equals
 More balanced terms
 End erosion of addressable
markets
 More equitable supplierreseller profit pools
A Winning Aftermarket Model
Focus
• Focused business model for the aftermarket
Meet channels’
needs
• Help the channel customers succeed
• Help address growing part proliferation, technology
shifts, and non-Detroit 3 brands
Differentiated
capabilities
• Make investments over time in know how, skills,
processes and IT required for differentiated capabilities
Best cost
• Have best cost footprint. Value-add manufacture, not
just sourcing
End-customer
centric
• Know thy customer – better than the intermediaries do
• Fast, flexible response to changing needs
Structural
leverage
• Sustainable business model: Dominate or go niche
• Address issues of # of competitors and excess capacity
(consolidate and/or create barriers)
Source: AASA Aftermarket 2020 Report, Booz & Co., AASA Analysis
Thank You!
Contact Information
Paul T. McCarthy
Vice President
Industry Analysis, Planning & Member Services
AASA | Automotive Aftermarket Suppliers Association
10 Laboratory Drive | Research Triangle Park | NC | 27709
Office: 919.406.8812 | Mobile: 248.914.2567
www.aftermarketsuppliers.org