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ANALYSIS OF THE MOTOR BODY REPAIRERS INDUSTRYDRAFT REPORT10/07/2012

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Outline Introduction Stakeholders consulted Drivers of growth in industry Findings Observations and conclusions Recommendations Questions and inputs

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Study Objectives profile of the sub-sector - its categories, their

sizes, dynamics, and capacity; total annual revenues in the sub-sector; skills gap and skills development initiatives in

the sub-sector; key challenges prohibiting industry growth; logistics and infrastructure requirements; proposed interventions by the sub-sector

industry to empower Previously Disadvantaged Individual (PDI) – owned SMMEs

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influence of the short term motor vehicle insurance industry:i. the number of panel beaters - other than the insurance

industry (self-insured/ state-owned enterprise and large fleets);

ii. the ‘total spend’ with these panel beaters, both insured and non-insured clients;

iii. turnover from short-term insurance as a percentage of total turnover of individual enterprises;

iv. the insured spend with these panel beaters – procurement from short-term insurance companies;

v. Grading qualification used by the short term vehicle insurance industry;

vi. Short term insurance total spend on repairs, and spend on black-owned SMMEs in the industry; and

% spend and turnover from servicing and repairing Government (all spheres) and State-owned enterprises (SOE) fleets

Study Objectives

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Methodology

•Impact of technological innovation in and on the MBR Sector

•Supplier leverage in the value system of the MBR Sector

•Buyer leverage in the value system of the MBR Sector

•Barriers to entry and exit in the MBR Sector

Investigate the threat of new

entrants to the MBR Sector

Investigate the bargaining power of buyers in the

MBR Sector

Investigate the threat of subsitute products/

services in the MBR Sector

Investigate the bargaining power of suppliers in the

MBR Sector

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Data Collection Process Interviews conducted on 17 relevant

stakeholders to the industry- MBR Forum members (& their membership) and other stakeholders such as critical group service/ product suppliers to the MBR industry

Primary data collection- face to face interviews, telephonic interviews

Secondary data collection- trade statistics and publications

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Strategic fit of methodology with research objectives

Research Objective Methodological Component

Profile of the MBR industry- the categories, size, dynamics, and capacity of the motor body repair industry

Porter’s Five Forces Model:Barriers to entryBargaining power of buyersBargaining power of suppliersThreat of substitutesDegree of competition in the industry

Skills gap and skills development initiatives identified Barriers to entry

Other key challenges prohibiting industry growth; Porter’s Five Forces Model:Barriers to entryBargaining power of buyersBargaining power of suppliersThreat of substitutesDegree of competition in the industry

Logistics and infrastructure requirements; Bargaining power of buyersBargaining power of suppliers

Industry proposed intervention to empower PDI – owned SMMEs Barriers to entry

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Strategic fit of methodology with research objectivesOverview of the short term vehicle insurance (only motor body repairers excluding towing sub-sector)1. the number of panel beaters which are being used by those other than the

insurance industry (self-insured/ state-owned enterprise and large fleets);2. the ‘total spend’ with these panel beaters, both insured and non-insured clients;3. turnover from short-term insurance as a percentage of Total turnover of

individual enterprises;4. the insured spend with these panel beaters – procurement from short-term

insurance companies;5. the percentage spend from state owned enterprises;6. Total annual sales in the industry.

Bargaining power of buyers- SAIA (Short term insurance)

Grading qualification used by the short term vehicle insurance industry; Barriers to entry

Short term insurance total spend1. Total spend per on repairs;2. On black-owned SMMEs in the industry

Bargaining power of buyers- SAIA (Short term insurance)

Turnover from servicing and repairing Government (all spheres) and State owned enterprises fleet.

Bargaining power of Buyers- National Treasury

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Drivers of growth in the industry Increased number of registered vehicles Increased road congestion that cause

higher frequency of accidents (incidence & magnitude of accidents)

Inflation pressures that increase the cost of repair per vehicle

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Barriers to Entry and Exit into the motor body repair industry- Economies of Scale

Economies of scale - highly volume critical - sustain the heavy fixed costs (investment in facilities and equipment) - variable costs (direct material and direct labour costs)

Economies of learning

i. Heavy impact of technology into the industry e.g. motor body materials, micro dotting

ii. High level skills e.g. competence shifts

iii. Cost structures have seen the industry be replacement part driven e.g. the motor insurance industry spent R16 billion on component parts in 2010.

o Economies of scope

i. Investment into the tow truck business, motor dealerships

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Capital/ investment requirementsi. Facilities and equipment required to meet the grading/ standards ii. Skills required in the industry e.g. artisans/ panel beatersiii. Access to formal business networks is difficult

Barriers to Entry and Exit into the motor body repair industry- Capital/ Investment Requirements

Capital invested Scale of investment relative to the Industry

< R1,000,000.00 Small enterprise

R1,000,001- R5,000,000 Medium enterprise

R5,000,001- R30,000,000 Large enterprise (fully approved OEM workshop)

Turnover by Motor Body Repairer/ Month Classification relative to industry

< R800,000 Micro-enterprise

R800,000- R1,000,000 Small enterprise

R1,000,001- R2,000,000 Medium enterprise

R2,000,001- R5,000,000 Large enterprise

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target markets for motor body repairers:i. Insured motor vehicle market that constitutes 30-35% of

the South African car parc. ii. Uninsured motor vehicle market that constitutes 65-70%

of the South African car parc

Business networks that need to be infiltrated are:i. Insurance industry comprising the motor insurers - panel

lists - insurance estimators and assessors - insurance brokers (undertake claim management processes)

ii. Motor vehicle dealers - small touch ups or cosmetic repairs on used or premium select used vehicles

iii. Fleet managers both in the public and private sectors

Barriers to Entry and Exit into the motor body repair industry- Access to distribution channels

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typical customers to motor body repair companies dependent on these factors:

i. Level of capitalisation - first economy or second economy - access to market and distribution channels

ii. Type of market targeted defined by insured motor vehicles and the uninsured vehicles

iii. Extent of market depth of a motor vehicle brand in South Africa and the distribution of those vehicle owners across the geographic expanse of the country

Switching costs are thus classified in three categories, namely:i. informal segment of the market - high volume of panel beaters clustered

in the respective geographic areas e.g. Ivory Park, Bambanani - switching costs for clients low;

ii. SAMBRA graded and approved motor body repairers - motor insurance companies and fleet managers - price takers - switching costs are low for motor insurance and fleet managers

iii. OEM approved motor body repair workshops - niche operators - restricted by geography - high capital investment - harness brand equity - switching cost high - highly integrated supply chain

Barriers to Entry and Exit into the motor body repair industry- Customer switching costs

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Barriers to Entry and Exit into the motor body repair industry- Impact of brand equity/ loyalty

Factors drivingi. Globalisation- consumerism movementii. Brand consciousness - Brand Equity

Consequences OEM approved workshops across a spectrum of motor vehicle

brands. i. Fully approved OEM approved motor body repair workshops

exclusive only to motor vehicle brands e.g. Mercedes and BMW

ii. Multi-approved OEM approved workshops - obtain badges from motor vehicle manufacturers that identify them as licensed to conduct motor body repair on those brands e.g. Toyota, Nissan, VW, Audi

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increased insolvencies and liquidations in the industry - diminishing market due to the following factors:

i. Technological improvements in the motor vehicles such as mitigating accident technologies e.g. lane assist, park distance control etc. which mitigate the risk of accidents

ii. Facilities and equipment - using technology - enhance throughput and enable market access

iii. Technology that is mitigating the extent and magnitude of corruption in the industry e.g. Audatex system

iv. Policy and regulatory environment - enhance road safety - Arrive Alive Campaign

v. Increased role of OEM’s in controlling their brands - protection of their brand in the product lifecycle, - standards and approvals for certified motor body repairers

Barriers to Entry and Exit into the motor body repair industry- Likelihood of retaliation - High

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Government regulations in the industry have been minimal except in the provision of:

i. Company registration through Companies and Intellectual Property Commission (CIPC)

ii. Certificate of compliance to the Occupational Safety, Health Act from the National Department of Labour

iii. Zoning of the premises as compliant to business use through the respective local municipality with respect to new businesses

iv. Motor Industry Bargaining Council (MIBCO) - Labour Relations Act

v. Compliance to tax - annual tax clearance provided by the South African Revenue Services (SARS).

vi. Compliance also to the Broad Based Black Economic Empowerment Act - access the motor insurance, fleet management and OEM approved workshops

Barriers to Entry and Exit into the motor body repair industry- Government regulations impacting on the industry

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Barriers to Entry and Exit into the motor body repair industry

Conclusion:

Barriers to entry/ exit in the industry are high – Formal / Informal Economy

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Bargaining power of suppliers to the motor body repair industry in South Africa- Supplier concentration in the industry

Suppliers comprise:i. Original Equipment Manufacturers (OEM’s -7) and component

manufacturers in the automotive industry - motor group holdings

ii. Approved (by auto manufacturers) workshop equipment suppliers to the motor body repair workshops such as Cellete South Africa and Aerocure.

iii. Labour provided by various training institutions under the aegis of merSETA

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commands a price premium - communicates quality, safety and reliability - integral to the brand equity of the motor manufacturer

Variables considered of MBRi. Locationii. Facilities and equipmentiii. Labour competenceiv. Financial positionv. Throughput of workshopvi. Customer relationship experience

Bargaining power of suppliers to the motor body repair industry in South Africa- Branding among the suppliers

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Highly integrated supply chain defined by business model of OEM

Bargaining power of suppliers to the motor body repair industry in South Africa- Profitability of suppliers

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Threat of forward integrationAmong suppliers to the motor body repair industry is increasing - motor holding groups Importance of volume to the suppliersCapital intensive nature of the industry - technological lifecycle of motor manufacturing - optimise their return on assets - panel lists of motor body repairers in the insurance industry - geographic positioning of OEM approved motor body repairers - Mercedes and BMW -importance of volume to the supplier - profitability and sustainability of supply chain partners

Bargaining power of suppliers to the motor body repair industry in South Africa

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Role of quality and servicei. ensuring the motor vehicle brands perception as

one of impeccable quality and conditionii. motor manufacturers and their respective supply

chain partners - vehicle brands lifecycle - ensure that the vehicles are roadworthy and restored to motor manufacturers standards

Importance of industry customer groups to the suppliers

i. competitive paradigm from company to company competition to supply chain against supply chain

ii. motor body repairers becoming an important customer group in the automobile supply chain.

Bargaining power of suppliers to the motor body repair industry in South Africa

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Cost of suppliers getting new customers is very high - enhance brand equity of motor brands - increased shorter ownership lifecycles (5-7 years) among motor vehicle buyers

harnessing brand equity among customers and customer groups mainly for the following reasons:

i. Acquisition costs for new customers are high ii. Harness brand loyalty among existing clientsiii. Referrals from existing clients to new/ potential

customers on the worthiness of the motor vehicle brand

iv. Back end sales and lifetime value created for the motor brand

v. Enhances the market value of the motor manufacturer brand through its clientele.

Bargaining power of suppliers to the motor body repair industry in South Africa - Switching costs

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Conclusion

Bargaining power of suppliers to the MBR’s is very high – Control their Brands- Brand Equity- Brand Loyalty

Bargaining power of suppliers to the motor body repair industry in South Africa

25Bargaining power of buyers to the motor body repair industry in South Africa

Classified as institutional and non-institutional buyers

Institutional buyers being:i. Motor Insurance market comprising of

vehicles under warranty and those withoutii. Fleet managers in the public and private

sectorsiii. Motor Dealerships

Non-institutional buyers comprising:i. Uninsured motor vehicles.

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Motor Insurance Market short term insurance - insured vehicles on South African roads

average 30-35% of the registered motor vehicles variables considered to be on the panel system include:i. car parc of motor policy holders by vehicle brandii. Geographic positioning of these vehicle brand car parc of

policy holders by their residencesiii. Motor body repair technical checklist within the geographic

areas identified by vehicle brand catering for the following perspectives:

Type, brand and age of equipment Type of premises and safety of the premises with aspects such as

zoning of the area Staff complement Good business practices - good administrative systems and

procedures

Bargaining power of buyers to the motor body repair industry in South Africa - Buyer concentration - Institutional Buyers

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Bargaining power of buyers to the motor body repair industry in South Africa - Buyer concentration - Fleet Managers

segmented by public and private sectors i. Private sector fleet managers include motor group holdings ii. Public sector fleet management through the following

methodologies: Outsourced service provider - public private partnership contract

with National Treasury - contract RT46/ 2009CV - Wesbank First Auto - three quote system of panel members graded and compliant to OEM global standards of motor body repair

Subsidised government fleet - 70% work, and 30% private - transfer 4 years or 160,000 km - maintenance through RT 62 and insurance through RT 58 - Mmela Financial Services that utilise the warranty and therefore the OEM approved motor body repair workshops - approximately 15, 000 vehicles - Toyota, Nissan, and General Motors.

Government owned fleet that is purchased through RT 57 either through ownership by the National Department of Transport (complies with trading account) or a respective Department owning the vehicle (complies with Budget system)

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Bargaining power of buyers to the motor body repair industry in South Africa - Buyer concentration - Motor Dealerships offer opportunities for cosmetic motor body

repair - classified into two market segments:i. Conglomerate/ corporatisation motor holding

groups - have their own motor body repair businesses to service their dealerships

ii. Independent Motor Dealerships - utilise franchised or independent motor body repairers - networking and long established relationships with motor dealerships.

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Bargaining power of buyers to the motor body repair industry in South Africa - Buyer concentration - Non-Institutional Buyers drive in customers who seek to repair accident damages in both

the formal and informal economy motor body repair players choice of motor body repairer is heavily dependent more on price

than quality informal economy of the industry constitutes mainly emerging

players in the industry Challenges experienced

i. Lack of resources to buy or rent facilities/ premisesii. Lack of financial resources to buy new equipment( ageing

infrastructure)iii. Lack of support from RMI (institutional leverage)iv. Unable to obtain the required technical qualification (i.e. trade

test) due to financial barriers, approximately costing R12, 000 per head

v. Do not meet required grading standards vi. Policy and regulatory issues from business zoning, grading and

accreditation, to waste management

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Bargaining power of buyers to the motor body repair industry in South Africa - Buyer concentration

Extent of product/ service differentiation Mass market - insured and uninsured vehicles out of warranty

- extent of facilities and equipment, skills to cater for the 70% of the highly fragmented market

Niche market - OEM brand equity and loyalty - insured vehicles that have warranties

Profitability of these buyers sensitivity of the motor insurance industry to the magnitude

of motor body repair done - affordability, profitability and sustainability of motor insurance

i. Automatic number plate recognition project - mitigate vehicle theft

ii. Lobbying for third party compulsory motor insurance to mitigate third party motor accident losses

iii. Cost of parts project aimed at mitigating the cost of OEM parts in the repair process

31Bargaining power of buyers to the motor body repair industry in South Africa - Role of price, quality and service to the buyer decisionQuality: Adherence to the global standards set by OEMs - vehicle brands with

warranty agreements - guarantees certain standards of safety Facilities and equipment that have to adhere to OEM global standards or

SAMBRA standards (vehicles out of warranty)

Service: turnaround times in the repair of the vehicles has to adhere to global

OEM standards Customer relationship management is critical as the customer

experience -brand equity and loyalty

Price: Formal economy motor insurance segment is sensitive to price of motor

body repair as this impact on the affordability of motor insurance and depth of the industry in any given country

informal economy price is also sensitive - negotiate pricing with informal economy motor body repairers, sometimes to the detriment of quality and service

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Threat of backward integration Potential backward integration emanates from:i. Motor dealerships which due to evolving business

models of the OEM’sii. Motor insurance companies - high incidences of

corruption and fraud within the industry – cost of repair

Switching costs to buyers The depth of motor vehicle brands and their pricing

impacts on the switching costs of buyers - price is a discriminator as to the brand of vehicle purchased - entry level cars (or starter packs) to niche premium brands such as Mercedes or BMW

Bargaining power of buyers to the motor body repair industry in South Africa

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Effect of buyer volume critical to the profitability and sustainability of motor body

repair industry players – desire for motor insurance business carrying capacity of the industry relative to the car parc of

brand in the country and by geography (provinces)Price sensitivity Price sensitivity is high among the insured and uninsured

market segmentsi. Insured segment - formal economy, motor accident claims

are the major cost centre of a motor insurance firm - to control and manage the risk so as to enable affordability, profitability and sustainability of motor insurance

ii. Uninsured segment - clients have less disposable incomes to take on motor insurance – motor body repair added cost

Bargaining power of buyers to the motor body repair industry in South Africa

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Conclusion

Bargaining power of buyers to the motor body repair industry in South Africa – high – second to the power of suppliers – MBR’s Price Takers

Bargaining power of buyers to the motor body repair industry in South Africa

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Threat of substitute products and services to the motor body repair industry in South Africa - Impact of technological innovation on the operations of the industry Technological innovation in the industry -

redefined the players and competitive forces in the industry

i. Evolving technological life cycles - incorporated in the motor vehicle brands e.g. growing use of vehicle obstacle detection systems

ii. Evolving product lifecycles through the immense number of motor variants per brand - requires constant training at the cost of the motor body

iii. Evolving operational efficiencies - enhance efficiencies in the motor claim processes and mitigate avenues and cases of corruption and fraud.

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price performance trade off in the industry is very low

Two perspectives notedi. Uninsured market segment, good quality motor

body repair serves as a client referral system especially for informal economy players

ii. Insured market segment good quality work and fair pricing that does not compromise road safety is the driving force among motor insurers

Threat of substitute products and services to the motor body repair industry in South Africa - Relative price performance or price performance trade off

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Structure of competition in the motor body repair industry in South Africa

Competition in the motor body repair industry is categorised within the dual economy of South Africai. Second economy or informal economy - highly fragmented comprising many

panel beaters who lack critical mass to influence the industry - structural factors Low barriers to entry as they require low capital requirements -absence of

physical facilities, grading and policy and regulatory requirements; Lack industry defining standards to comply - perspective of how much the

customer is willing to pay Given the nature of their customers high levels of trust are required due to

payment methodologies adopted ii. First economy or formal economy that can be classified as:

Insurance approved motor body repairers utilising SAMBRA standards of accreditation who - highly fragmented lack large market share to influence the industry’s trajectory in the future

OEM approved motor body repairers utilising the OEM global standards that allows them access also to the insured segment of the market - moderately fragmented market segment - increased corporatisation - most lucrative segment of the motor body repair industry.

market structure of the motor body repair industry in South Africa is oligopsonic - has many motor body repairers who interface with a small group or cluster of buyers (institutional and non-institutional).

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Structure of competition in the motor body repair industry in South Africa- Structure of industry costs

Cost Component Proportional contribution of cost component to total cost

Parts/ Components- OEM 60%

Mechanical labour 20%

Paint labour 10%

Paint 10%

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globalisation of the automobile supply chain - increased supply chain integration - motor body repair industry evolve from a commodity market to differentiated market based on the motor vehicle brand car parc in the country

OEM business model - development and reconfiguration of motor body repair business - brand equity - guarantees no compromises are made on safety

tie in motor warranties have impacted on the motor repair industry and the extent and amount of motor claims paid out

Structure of competition in the motor body repair industry in South Africa- Degree of product/ service differentiation among industry players

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Cost/ shake out phasei. Economies of scale/ scope and learning - high

number of liquidations and insolvencies of motor body repairers, industry consolidation through acquisitions

ii. Barriers to entry and exit into the industry have increased astronomically due to global nature of the automobile industry and its integrated supply chain

Maturity phaseiii. established and well capitalised OEM approved

motor body repair workshops - increasing market share - increased corporatisation

Structure of competition in the motor body repair industry in South Africa- Stage of the industry in the life cycle

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Major observations and conclusions Lack of trust/ transparency in sharing

information Skills development of artisans - scarce

occupations required are:i. Automotive motor mechanicii. Panel beateriii. Diesel motor vehicle mechaniciv. Automotive spray painterv. Automotive mechanistvi. Vehicle body buildervii. Automotive electrician

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development of the motor body repair industry has as its core the sustainability of vehicle financing and motor insurance in the country

panel system though controversial among some stakeholders is also a method for ensuring the motor insurers do not lack adequate motor body repairers

business networks in the industry have been harnessed through long term relations that mirror the supply chain collaboration of the automobile supply chain

Technology in motor vehicle production and operational processes of the motor body repair processes is heavily defining who plays in the industry

Motor manufacturers have realised that to harness optimal returns on their motor vehicle brands they have to invest in the products life cycle through harnessing brand equity

increasing power of OEM brands into the product life cycle of the motor vehicle entails that relevant key stakeholder associations are incorporated into the MBR Forum

global nature of the automobile supply chain and the strategic fit with the country’s history and stage of economic development needs to harnessed and managed well so as to realistically manage the expectations of various stakeholders to the industry

Transformation in the motor body repair industry cannot be adequately addressed without looking at transformation in the financial services

Major observations and conclusions

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RecommendationsRegulatory/ Policy Strengthen the MBR Forum including all relevant key

stakeholders e.g. merSeta, OEMs, SaTec motor body repair industry standards that serve as access to

market tool - developed with input from the other representative MBR stakeholders in the Forum and segmented according to target markets and capitalisation requirements with clear stipulations on how to grow within those standards- consolidation of standards

definition and role of the consumer should be noted and identified so as to enable appropriate targeting and understanding among stakeholders- consumer code of conduct

panel system of motor insurance companies should be open to qualifying motor body repairers and the grading and accreditation of who can be on the panel should be open for independent audit to ensure fairness and consistency of standards

Government look into the prospect of compulsory third party insurance to ensure the affordability and sustainability of motor insurance

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SMME Development Development of enterprise development fund anchored within code 600-

enterprise development (BBBEE scorecard elements) e.g. 50% of 1% of turnover into the fund

Strategic linkage of Financial Sector Charter to MBR industry- enterprise development, procurement, skills development, employment equity

Skills Development Marketing and communications campaign should be collaboratively

developed by the MBR Forum members so as to adequately manage the expectations of MBR association stakeholders

Align and synchronise initiatives on skills development by stakeholders from merSETA (FET’s), RMI, AIDC

MBR Industry Development Government harness the Automotive Incentive Scheme within the APDP to

promote OEMs (make it one of the pillars)- assist emerging motor body repairers strengthen their contribution in the industry - enterprise development, skills development within the OEM approved motor body repair workshops

Recommendations

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Competitive Forces- Ecosystem• Standards of the OEM’s• Standards of the motor

insurer• Business model- parts,

labour, paint- independent or franchised

• Warranty• Parts• Business model• forward integration into

financial industry (motor financing and insurance

• Affordability of car finance• Affordability of motor

insurance

• Role of the consumer• Road safety• Affordability of cars and

insurance• Road density and

infrastructure• Alternative transport modes

e.g. public transport

Sustainability of MBR’s

Sustainability of OEM’s

Sustainability of financial sector

Sustainability of human life

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Conclusion Questions Thank you