Auto Service World
News   August 20, 2012   by Auto Service World

Extended terms put aftermarket value chain at risk


The long term impact of extended terms for the aftermarket industry is cause for concern according to a recent study by KPMG.

 “This spring, AASA commissioned KPMG, to conduct an in-depth study of this rapidly expanding practice,” said Steve Handschuh, president and chief operating officer for AASA. “AASA’s initial step was to help provide a better understanding of this trend and if it carries potential risks for the aftermarket supplier community and the entire supply chain overall,” he explained.

KPMG offered insights on the study and their findings, which included the following:

* Payment terms in the automotive aftermarket far exceed those in any analogous industry.

* There have been benefits to extended terms to customers, banks and suppliers in the near term.

* However, the conventional wisdom that extended terms is a win-win-win ignores substantive costs and future risks.

* The long term impact of extended terms on the aftermarket as a whole is cause for concern. Risks to the aftermarket value chain include:

Interest rates: Rising interest rates will require the industry to reverse extended terms – or come up with billions of dollars of capital to fund this extraordinary business model.

Exposure to the credit cycle:

* The preponderance of extended terms means the aftermarket industry is now more sensitive to credit availability and cost. Credit cycles, like economic cycles, are inevitable and hard to predict. This may be a greater near-term risk than interest rates.

* This risk exposure is a sea-change for the historically stable aftermarket. The aftermarket traditionally has been one of the most resilient industry sectors, highly insensitive to changes in external business conditions. However, this evolving business model makes that less true for all players in the aftermarket.

Inventory: Extended terms has exacerbated the long-standing industry risk of excess inventory in the aftermarket and minimized the focus and needs to improve inventory turns.

will not take a crisis or a substantive increase in interest rates for extended terms to lead to significantly increased costs for the industry.

* KPMG found that the expected increase in sales under extended terms will lead to a $12 billion increase in total receivables over the next three years that suppliers will potentially need to fund.

* These working capital increases will substantially decrease margins in likely future interest rate environments.

“In the end, the aftermarket value chain – retailers, distributors, suppliers and financial institutions – need to work together to ensure all participants are pursuing business practices that promote long-term sustainability and resiliency of the industry,” Handschuh said. “The automotive aftermarket is a healthy, growing market that is attractive to investors. All members of the aftermarket value chain should work together to keep it that way for a long time to come. AASA looks to help facilitate industry dialogue on this important area,” he concluded.

About AASA

AASA (www.aftermarketsuppliers.org) exclusively serves manufacturers of aftermarket components, tools and equipment, and related products. It is a recognized industry change agent – promoting a collaborative industry environment, providing a forum to address issues and serving as a valued resource for members. AASA is an affiliate of the Motor & Equipment Manufacturers Association (MEMA). “AASA, The Voice for the Automotive Aftermarket Supplier Industry”

About MEMA

Suppliers manufacture the parts and technology used in domestic production of new cars and trucks produced each year, and the aftermarket products necessary to repair and maintain more than 248 million vehicles on the road today.

MEMA supports its members through its four affiliate associations, Automotive Aftermarket Suppliers Association (AASA), Heavy Duty Manufacturers Association (HDMA), Motor & Equipment Remanufacturers Association (MERA) and Original Equipment Suppliers Association (OESA). MEMA represents more than 700 member companies with global motor vehicle parts sales exceeding $600 billion. For more information on the motor vehicle parts supplier industry, visit www.mema.org.


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