The aftermarket is set to become the retail motor industry's biggest battleground over the next few years. Gradual liberalisation of the servicing and repair functions following the block exemption revisions implies a blurring of the edges between the official and independent trade, putting a strain on traditional alliances - not least between vehicle manufacturers and their franchised dealers.
'The changing face of UK aftermarket operations: challenges and opportunities in a dynamic marketplace' was the theme of a recent conference at the Heritage Motor Centre in Gaydon. It was organised by the Automotive Research Unit and IMS Automotive Conferences, with Motor Industry Magazine acting as media sponsor.
Setting the scene, conference chairman Professor Garel Rhys, director of the Centre for Automotive Industry Research at Cardiff University Business School, highlighted the growing scope for aftermarket activities. Despite components lasting longer, the ever growing number of vehicles on the UK's roads implied that the aftermarket would provide significant selective expansion opportunities and continue to be an important source of profitability for the motor industry.
The critical importance of the aftermarket to vehicle manufacturers was described by Tim Gilchrist of Accenture who pointed out that aftersales typically account for between 10%and 25% of a vehicle manufacturer's revenues and 25% to 50% of its profits.
In the quest to retain and expand aftermarket business, manufacturers have several key objectives including a greater retention of servicing of older vehicles. Figures from Accenture show that the ability of franchised networks to hold on to servicing declines noticeably the older the vehicle, and also that independent garages have been successful in expanding their share of the servicing and the repair of older vehicles. Vehicle manufacturers are also investing to improve their penetration of the independent sector through the supply of original equipment parts and services to independent motor traders.
Gilchrist pointed to a complex pattern of factors, including decreasing brand loyalty, the introduction of new retailing concepts, a stagnating market for servicing and repairs due to better product quality, increasing environmental requirements and many others, which was causing the aftermarket to become increasingly competitive throughout Europe. At the same time the expectations and demands of customers are increasing.
Speaking on behalf of the franchised trade, Alan Pulham, chief executive of NFDA, noted that franchised dealers have been under constant threat for many years but have continued to flourish despite the best attempts of the likesof supermarket groups and dotcom retailers to capture their business. With regard to the aftermarket, franchised dealers have been affected adversely by a number of prevailing trends, such as better component quality and extended servicing intervals, which nevertheless have been to the benefit of consumers.
Meanwhile, block exemption revisions hold the prospect of enhanced competition from members of the independent trade, some of whom have gained approved repairer status and more are likely to enter authorised networks, while those who remain outside will benefit from the availability of technical information. For good measure, the position of franchised dealers has not been helped by the Office of Fair Trading study on warranties.
More positively, Pulham noted that franchised dealers have the potential to turn the threats into opportunities. For example, there is nothing to stop them becoming multi-brand servicing centres and taking the battle to the independents.
Tim Parker, CEO of Kwik-Fit, examined the evolution of the fast fit sector and indicated the importance of tyres and exhausts which account for over 50% and nearly 25% respectively of Kwik-Fit's gross sales. However, the outlook for these two product groups differs markedly. In the case of tyres, replacement demand is forecast to rise in line with the growth of the car parc, whereas the market for exhausts is decreasing by 5-7% a year in volume terms due to the better quality of original equipment.
Parker highlighted three characteristics which were likely to determine the fast fit sector's future development: the likelihood of increasing competition for a slice of the tyre action; a consolidation in terms of outlets and players; and a shift into additional services - especially MOT testing. With regard to the first, the bigger fast fits are expected to increase their dominance in the fleet market and there will be a move towards fewer but larger tyre depots with large stock and throughput capability. Major chains like Kwik-Fit will improve their equipment, tyre expertise and retail standards to compete with the independents, while franchised dealers will look for a bigger share of the tyre market.
MOT testing offers strong scope for an expansion in the activities of fast fits. Around 20m cars require an MOT annually with 6m or so failing the test. According to figures from the Vehicle Inspectorate, brakes and tyres feature prominently in the reasons for failure, both being core competences for fast fit operators. MOT testing therefore represents a natural development, especially as fast fits often occupy good roadside locations. The additional of MOT testing would fill the extra ramp space available dueto fewer exhaust jobs while the reduction in exhaust stock would free up operational area. Industry interviews suggest that 50-75% of MOT related servicing business is carried out by the garage which performs the MOT.
David Callery, managing director of Leyland Auto and formerly managing director of FSG, addressed the topic of motor factors and the role of buying groups, and tackled the question of whether buying groups should be viewed as a friend or a foe in the industry. He argued that these organisations - of which there are four in the UK, FSG, IFA, UK Parts Alliance and United Aftermarket Network - will dominate the independent aftermarket of the future, providing they maintain a strong focus on member requirements andnot on squeezing the cheapest price out of suppliers.
Callery signalled an end to the term 'buying group' and stated that such organisations should be viewed more as 'trading groups' since they now have a much more important role to play than just buying. Looking ahead five years, he indicated that membership of trading groups will increase as they offer motor factors better buying terms, marketing, increased professionalism, national sales opportunities and less administration. Moreover, a trading group which was prepared to work for its customers and suppliers as well as its members should be treated as a friend since it can bring stability and structure to an otherwise fragmented marketplace.
Brian Spratt, chief executive of ADF, discussed the future prospects for the independent trade. In particular, he addressed the likely impact of block exemption on independent garages but noted that the issue was surrounded by confusion and that everyone, not just the independents, was 'in the dark' concerning the likely outcome.
He highlighted the '4 Freedoms' with regard to maintaining competition in the distribution of spare parts: freedom of component producers to brand original equipment parts with their logo; freedom of parts suppliers to sell their OE components without restrictions to the independent aftermarket; freedom of franchised dealers and authorised repairers to purchase original spare parts and matching quality parts from the independent aftermarket; and the right of franchised dealers and authorised repairers to sell vehicle assemblers' own original spare parts to independent repairers.
Spratt noted that there were now two definitions of spare parts, corresponding to 'original' and 'matching quality'. The former covers parts produced by vehicle assemblers together with original equipment parts produced by component suppliers and distributed either through franchised networks or the independent aftermarket. Matching quality parts are defined as 'spare parts made by any undertaking which can certify at any moment thatthe parts in question match the quality of the components which are or were used for the assembly of the motor vehicles in question'.
In the case of matching parts the parts supplier can issue its own quality certification and quality is therefore self regulated. Clearly there is potential for abuse and the subject of matching parts generated considerable interest from delegates during the panel discussions. During the components industry panel discussion, which featured Andrew Hecker, managing director of ArvinMeritor Aftermarket, and Bob Saunders, managing director of Aftermarket Operations at GKN Driveline, Bob Saunders noted that the qualityof original equipment parts was rising constantly and that non-OE producers would find it increasingly difficult to claim that their standards matched the OE level. However, they would undoubtedly continue to make the claim, and the general consensus of the panel and delegates was that the issue of matching quality will be tested at some stage in the courts.
Hecker agreed with Tim Parker's reading of the exhaust market and said the decline would continue for another four to five years. He noted also that the market for replacement shock absorbers is in slight decline. On a brighter note, demand for catalytic converters is increasing, although the rate of growth is slowing.
There was agreement that the rationalisation of component manufacturing capacity, which has seen UK plants close and operations transferred to lower cost regions overseas, would continue. Professor Rhys noted, though, that labour costs represent a small proportion of total manufacturing costs and therefore the lure of low labour cost countries is not always as great as would appear from a stark comparison of annual labour rates.
Rob Pritchard, senior consultant of LogicaCMG's Automotive Division, examined the e-commerce challenges faced by the aftermarket under the new block exemption regime. The independents now have a legitimate claim to operate in the aftermarket alongside the franchised networks but levelling the playing field will not be achieved overnight.
The provision of information to the independent aftermarket can be achieved relatively easily, enabled by the internet. But from the vehicle manufacturers' standpoint the market opens up for predatory component suppliers who are looking to supply parts and information services directly to the servicing and repair community, thereby posing a further threat to VM's aftermarket business.
One of the key challenges, as always when a sector is deregulated and moves from point-to-point connectivity (for example, between a vehicle manufacturer and its dealers) is to make sense of the mass of information and make it available to all on an equal footing.
Brian Sneyd, managing director of Lex Fleetserve, commented on the aftermarket from the logistics viewpoint. He noted that the entire spectrum of participants is gearing up to exploit the opportunities which are presenting themselves under the new business conditions. There was a requirements to extract costs and improve efficiency which was dependent on a variety of factors. For example, it was feasible for repairers to sourcetheir body requirements from a single supplier which has significant ramifications for the logistics function.
The issue of efficiency and reducing costs was a central theme of René Schrama, director of Zetes, who spoke on going lean in aftermarket warehousing. The automotive aftermarket presents a unique set of warehousing issues including a high volume of small orders, multi-brand packaging operations and the need to handle and store odd size parts. Overlaying this is the need to accommodate emergency orders, order incentive programmes and complicated reverse logistics issues in connection with recycling and warranty.
Under these circumstances, the adoption of lean principles in warehousing holds the potential to achieve significant cost savings. In essence, thinking lean means doing more with less through the ruthless elimination of waste - waste being defined as any activity that consumes time or resources for which the customer is unwilling or unlikely to pay for. Waste in warehousing stems from seven factors - faster than necessary pace, waiting, material movement, processing, excess inventory, unnecessary motion and correction of mistakes.
Schrama said the use of a voice-activated system to input data and receive instructions in the warehouse represents the most naturaltechnology. For example, during the picking process the warehouse operativelogs on through the voice terminal which provides the location and number ofitems to pick, and then gives the next location. Experience indicates thatvoice picking has increased productivity by 15% with accuracy rates of99.99%. Other benefits may be seen in the form of better safety and improvedergonomics.
Assessing the evidence from the presentations and panel discussions, it iseasy to believe that the aftermarket will become the retail motor industry'sbiggest battleground over the next few years with consequences yet to bedetermined. The gradual liberalisation of the servicing and repair functionsfollowing the block exemption revisions implies an inevitable blurring ofthe edges between the official and independent trade, and already there isclear evidence of this occurring.
During the process it is possible that traditional alliances may come underconsiderable strain, not least between vehicle manufacturers and theirfranchised dealers. The former will be keen to exploit every opportunity tomaximise their share of parts sales which necessarily will mean a moreassiduous wooing of the independent trade, while franchised dealers will bevigilant to ensure that they are receiving the best deals with regard toparts sourcing which could result in the frequent use of sources other thanthe vehicle manufacturer's parts warehouse.
Meanwhile, the independent sector presents a mixed bag. Undoubtedly thereare some formidable contenders who are sensibly led and financially strong,but many businesses appear flaky and are unlikely to survive in the new eraof competitiveness.
The overall mood as speakers and delegates returned to base from theconference is that the sector is in a melting pot, and one wherethe temperature is beginning to rise.
For the 'official' aftermarket and independent trade alike, there can be nodoubting the crucial role of training in the search for lower costs, higherstandards, greater profitability and enhanced customer satisfaction. Underthe heading 'Why Train?' Sarah Sillars, chief executive of the Institute of the Motor Industry, quizzed Tim Milsom MIMI, partner of Exminster Garage, into thewhys and wherefores of training.
The main reasons for training stem from cost reduction, recruitment andstaff retention. Milsom stated that 'in basic terms it's about survival'and he regards training very much as an investment which, if performed well,has a measurable impact on the bottom line. There is an obvious need to keepskills up-to-date in the context of the new technology and new equipmentwhich characterise the motor industry. Structured training processes andappraisals can assist in achieving business objectives.
Training may be used as a marketing tool and has clearly assisted in theraising of standards at Exminster Garage which has benefited from thefavourable publicity surrounding its success in winning a number of awards including Independent Garage of the Year 2000 andMotorTrader National Training Award 2003. Tim Milsom commented that trainingat Exminster applies to all staff so that there is an overlap of skills.This minimises the impact of staff being away or leaving the company.
Looking ahead, it is important for the motor industry to raise its image andwork closely with the schools and colleges from which the next generation ofpeople with the required skills will come from. However, this is easier saidthan done since the process needs to be organised, initiated and funded.There is much that can be achieved at the local level, through raising yourprofile in the community, forming relationships with educationalestablishments and, of course, investing in staff, equipment and the future.
Sarah Sillars concluded by saying that the motor industry faces an importantstaff retention issue. There is a need to work with the Skills Council tomake the industry attractive as an employer and to ensure that recruits areretained and constantly upskilled. The performance of individuals should bemeasured and credit given where it is due. She noted that in the past themotor industry has not been very good at saying 'thank you' to its employeesfor a job well done.