The Automotive Industries Association of Canada's Annual Automotive Aftermarket Forum speakers painted a positive picture of the economic times ahead for Canada. And they explained why they're not here now for the aftermarket.
The new economy is outstripping the old economy, but Canada is well positioned both economically and geographically for investment and growth in the global automotive industry.
That was the message heard by a record 232 participants at the AIA’s Annual Aftermarket Forum in Toronto. In all, the speakers sought to cover the ground of the forum’s stated theme: “Perceptions, Illusions, and Realities.”
DaimlerChrysler’s stake in Mitsubishi, and myriad more examples, were offered as proof of the globalization of the aftermarket and the confluence of players by economist Dr. Michael Graham, back for his third kick at the can at the forum.
“Magna, one of the largest international component producers, supplies 1,500 dollars worth of parts on every Ford Escape, 1,700 dollars worth for every Chrysler minivan. By 2010, Ford will look more like Cisco. It will look more like an outsourcer over the Internet,” says Graham.
“How global and how transparent your industry is becoming,” he added.
Proof is found in many ways: I took notes for this story using a pen with a “Mini” logo on it, a car manufactured in Britain by Germany-based BMW. It was given to me at the launch of the new Mini, at the Paris Auto Show. The pen itself was made in Switzerland. Globalization indeed.
Graham painted a picture of a North American economy as outstandingly buoyant, though he offered some cautions.
“There are always surprises. You can still be blindsided. The Y2K surprise, the world oil price surprise. All this while, the market starts swinging and we hasten the world of alternative energy.
“Volatility is here to stay. Hundreds of points this way and that. Miss your earnings by a penny and lose 20% of your stock value. We’ve had a couple of dandies this year, huge corrections.
“Storms will sweep through. They’re not going to go away. I try to keep my perspective–step back and remind myself that superior investing is a long-term proposition made up of trends, turning points and surprises.
“The oldest investment maxim of all is that the trend is the investor’s friend.” And that trend is toward a more solvent Canada–having put the deficit days behind us, if not the legacy of those times (debt)–with a strong dollar relative to other currencies and an outlook that should outpace the world economy. And the world economy, says Graham, is in unprecedented good times.
That may be hard to translate, considering the way the automotive market has been behaving. Automotive industry consultant Dennis DesRosiers explained that the age of the vehicle fleet, or rather the number of vehicles in their prime aftermarket years, is low right now, but that there are other issues at play too.
“I do think the aftermarket has issues it needs to address,” says DesRosiers. “There is some softness out there.”
Scrappage rates and new car purchases are driving factors that affect the aftermarket.
“The early returns show definitively the number one reason is my vehicle became too costly to repair or my vehicle became too old. That’s the automotive aftermarket. The catalyst that makes this whole thing work is the automotive aftermarket.”
The four pillars (new car sales, finance, aftermarket, used car market) are interrelated, and the aftermarket is the small part. “You have a 220 billion dollar entity and the automotive aftermarket represents about 7% of that. The aftermarket isn’t the tail that wags the dog.”
The result of all the factors at play with the other industries that make up the automotive business is that DesRosiers is “a bit soft” on the aftermarket.
One of the most critical factors affecting the aftermarket is the retention of the service business by new car dealers. While it is no news that retention of new vehicle service by the new car dealer is high, a similar scenario plays out in the realm of the used life cycle too.
“What is GM Optimum (but a way to retain the used car business). GM knows this and that’s why they have a certified used car program. Ford Certified too.” He who sells the used car can generally count on retaining the service for that vehicle for the next few years.
Interestingly, DesRosiers said that there is no evidence that the high rate of leased vehicles has had a negative effect on the aftermarket.
One unavoidable factor that is affecting the aftermarket, though, is the change in replacement rates resulting from cars that are built better and last longer.
“The Japanese entered and brought this concept of quality. The industry has spent trillions across the entire value chain focusing on the world ‘Quality.’ Guess what happens when you spend two decades focussing on quality? Well, quality goes up.”
He says that the evidence of this is in the average mileage of vehicles being scrapped. “If you look at the odometer readings, the average is 251,000 km. Fifteen to 20 years ago, it was 150,000 km. These were vehicles bought in the 1980s. The vehicles being bought today are likely to come off the road at 300,000 plus km.
“Do you not think there is a little bit of aftermarket demand tied to that extra 100,000 km?
“We see it in scrappage rates too. There is less vehicle scrappage.
“Increased quality and longer lasting vehicles forces more attention to be put on the ‘value chain’ of the vehicle.”
The outcome for the Canadian market is partly expressed in the fact that Canada is the only country in the world that bought fewer vehicles in the 1990s than they did in the 1980s.
And, if you want to know where you’ll be in the future, DesRosiers has a solution. “The new vehicle market is your predictor for the future. It has made the market a heck of a lot less cyclical. But there is also the potential for six equal players.” Those are DaimlerChrysler, GM, Ford, Toyota, VW, and Nissan/Renault.
“Everybody can match the quality and the resources. We’re going to end up in a world where everybody has about 15% of the share. There are implications for the aftermarket and for training. You can’t rely on the domestic guys to screw up.
“GM, Ford and Chrysler will have about 45% to 50% of the demand for new vehicles in North America. You’re dealing with less than half the pie unless you have the training and skills and SKUs to fix the other half of the pie.”
Critical Factors Facing The Aftermarket
Many factors were covered during the AIA forum, too many to cover in depth. In a nutshell, here are some:
You are better to have a $15 billion aftermarket growing at 1.5% for 15 years than one that grows at 5 to six percent for a few years then falls back.
More than 50% of the automotive dollars are spent on vehicles 10 years old or older.
An added factor is the soft used vehicle market for cars two to eight years old, due to the competitive price of new vehicles because of incentives. So, they’re exporting them, now at about 100,000 per year.
Satisfaction levels are very important in determining who gets the future business. Satisfac-tion really is the key supply side issue. If you can’t satisfy the consumer, he goes elsewhere.
The importance of the player is much more important than the vehicle itself.
Interestingly, in this high tech world, oil, a pretty low tech item, becomes a critical battle ground. Whoever does the oil changes gets the maintenance.
Succession planning is a critical issue. With so many owners nearing retirement age, who will take over the business is a question not being asked and answered often enough.