Aftermarket Overhaul

A frequently asked question at industry events dealing with the auto market in Canada is, “What has changed since last year?” The answer lately has been one of the biggest changes is the softening of used vehicle values, largely as a result of the dramatic drop in new vehicle sales in the country since the financial troubles of 2009.

Statistics Canada reports that sales that year were the lowest in a decade, and sales in the following two years, 2010 and 2011, were not as robust as those seen in previous years.

Those conditions set in motion a kind of domino effect that led to an increase in the value of used vehicles, which was further driven by two additional factors: financial institutions restricted leases; and rental car and fleet companies (the major suppliers of late model two- to four-year-old used vehicles to the used market) kept vehicles in service longer. The law of supply and demand kicked in, increasing resale values across the board.

Eventually, the effect of diminished supply bled over into the claims environment, causing an increase in the values of vehicles being appraised. As a result, instead of being declared total losses, more and more borderline vehicles fell into the repair category. Canada saw total loss rates tumble to percentages not seen in more than 10 years.

However, all economic bubbles have to burst some time, and that time is now for used vehicles. In the last two quarters, the values of vehicles being appraised have fallen more than $500 from the preceding quarter, signalling an increase in the number of damaged vehicles that will be declared total losses. Based on these trends, it is anticipated that total loss percentages of claims made will increase by a full percentage point or more in 2013 compared to 2012.

The second condition worth examining when discussing total losses is the value of salvage and the factors influencing them. The second chart above tracks the Canadian dollar to Euro exchange rate over the last five years, illustrating the strengthening value of the former. That stronger rate means fewer Canadian salvage vehicles will be sold to international buyers, reducing competition and inevitably lowering salvage values.

STAYING PUT

Ultimately, the stronger Canadian dollar should benefit alternate parts supplies, both aftermarket and recycled. With fewer vehicles going overseas, the salvage for harvesting parts will also stay in Canada, increasing supply and lowering salvage part prices.

A stronger Loonie will also benefit the aftermarket parts supply. Because the vast majority of aftermarket parts come from Taiwan, favourable exchange rates against the recession-weakened Chinese Yuan will likely result in more attractive aftermarket parts pricing.

Add to these factors LKQ Corporation’s plans for greater expansion in the Canadian market in coming years, and the industry could see a better parts supply at competitive prices with a solid delivery infrastructure in more provinces, something that has been lacking in the past. When one considers how Canadian insurance claims parts performance in repairable estimates has been lagging against companies in the United States, the lack of ability to supply alternate parts beyond the major metropolitan cities is seen as one key reason for the performance gap.

The second area to examine regarding Canadian aftermarket parts performance is actually an advantage for the Canadian market. When looking at the market share of top-selling nameplates in the country, the Honda Civic has had a 15-year run at the top. On the truck side, the F-150 is tops in sales and the remaining spots are taken by the Corolla, Silverado and Dodge Caravan.

Why is this important? These vehicles all have fairly long styling cycles that are very attractive to aftermarket parts producers.

The vehicles are very popular in the U.S., Canada and Mexico, meaning there are fewer parts – or in parts distribution terminology, “stock keeping units” or SKUs. The fewer SKUs to warehouse to serve a large market, the better.

Longer product cycles mean a longer selling life for a particular part, so the cost of development and stamping of the part can be amortized over a longer run of parts, lowering the cost of production and increasing the cost advantage over the original equipment manufacturer (OEM) part. While OEMs may counter with putting more of their OEM parts on “beat the competition” pricing programs – and have in recent years – the advantage is still on the aftermarket part producer’s side. The ability of the aftermarket parts producers to “cherry pick” the most profitable parts to replicate is an undeniable advantage.

The aftermarket producers can also eliminate production of a part when they find it to be less profitable, a luxury that the car makers are prohibited by law from doing for a period of time after the car model styling edition ends.

TRUE WORLD VIEW

The OEMs have long used the term “world car” to describe new model launches (Ford used the term to launch the North American version of the Escort in 1980, though it was vastly different from the European model). But as time progresses, large car makers are actually developing true “world car” platforms that share sheetmetal, also creating an advantage for the aftermarket parts producers.

Suddenly, the top-selling Ford model is not only a North American model, but the sheetmetal is the same in the Americas, Europe and Asia and Australia. Also as quickly, the market for aftermarket parts for the vehicle has tripled, as the fenders, hood and grille are identical in four continents, increasing the demand and lowering the per part production price because larger production runs can be done.

An interesting outlier to this comes in at Canada’s 7th best-selling car, the Volkswagen Jetta. In order to increase sales in the U.S. and Canada, the company has introduced two models that are unique to North America.

The North American models have unique sheetmetal from their European-made counterparts. The combination of being unique to North America and smaller sales volume compared to the Japanese and domestic nameplates noted above, make them a much less likely target for aftermarket parts production.

BREAKING THROUGH

Looking out at the next five years in the Canadian collision repair market, a few conclusions can be drawn. Because of falling resale values related to the increase in new vehicle sales, the percentage of claims made that result in a total loss will climb. The repairable average severity will likely also go up because of labour rate increases brought about by an improving economy.

To help offset this, parts will become an increasing area of focus for cost containment, pressuring the production, supply and distribution networks of both aftermarket and salvage parts to break through the barriers limiting the increase in the Canadian market.

The improvement of the distribution infrastructure in Canada of alternative parts can be seen today by the advent of online salvage parts sourcing and the increased presence of LKQ/Keystone in Canadian provinces through the acquisition of Cross Canada collision parts specialists.

With these pieces in place, the alternate parts performance in the Canadian market can only increase. The question remains – by how much?