Will OE Gain Cause Aftermarket Pain?

Will OE Gain Cause Aftermarket Pain?

The Downstream Impact of the Car Allowance

Rebate System

Matthew Scruggs, Research Analyst

Automotive & Transportation

Tuesday, October 6th, 2009

2

Introduction

• The CARS, or Car Allowance Rebate System, provides rebates for new vehicles to consumers via dealerships.

• Designed to improve average fuel efficiency and stimulate auto sales.

Source: US Dept. of Transportation, Washington D.C.; Frost & Sullivan

• The vehicles may not be re-titled or re-sold except as components. The vehicle must be shredded no later than 180 days after trade-in.

• The program was modeled after successful versions initiated across Europe.

3

Comparable Global Vehicle Sale Stimulus Programs

718,614

400,000

2 million

220,000

150,000+

Funded Vehicles

30.3 million

7.36 million

13.4 million

10.2 million

4.9 million

Eligible VIU

£400 million($488.12 million US$)

£2,000 ($3,234 USD)

UK

No fund limit; program deadline March 31,

2011

$300 ($274.42 USD)/transit voucher/car share program voucher

Canada

$3 billion$3,500-$4,500US

€4.88 billion(7.1 billion US$)

€2,500 ($3,556.50 USD)

Germany

€220 million($315.6 million US$)

€1,000 ($1,422.60 USD)

France

Available FundsIncentive AmountCountry

Source: Frost & Sullivan

4

History of the Program (United States), 2009

July August September

7/1/09- Program is signed into law

7/24/09- Department of Transportation begins processing

claims

7/30/09- Original $1b allocation exhausted

7/24/09-7/30/09- 250,000 vehicles sold, generating a SAAR of 19

million

8/7/09- $2b fund extension signed into law

8/26/09- Program is officially closed; 690,114 vehicle sales

generated, representing $2.88b


5

Passenger

Cars

16%Light Trucks

84%

Analysis of Vehicles Traded In Under CARS

Requirements for new vehicles:

• Functional condition

• Insured for the past year

• EPA rating < 18 miles per gallon.

• Manufactured after 1984.

• Vehicles had resale under $4,500k.

Top Ten Vehicles Traded in under CARS

Ford Windstar 10

Ford F-150 4WD9

Chevrolet C1500 8

Chevrolet Blazer 4WD7

Jeep Cherokee 4WD6

Dodge Caravan/Grand Caravan 5

Ford Explorer 4

Jeep Grand Cherokee 4WD3

Ford F-150 2

Ford Explorer 4WD1


Trade-In Volume by Vehicle Type

6

Foreign

61%

Domestic

39%

Light Trucks41%

Passenger Cars59%

Consumers Choose to Downsize Vehicles

Sales Volume by Vehicle TypeTop Ten Vehicles Purchased under CARS

Ford Escape 10

Honda Fit9

Honda Accord8

Toyota Prius 7

Nissan Versa6

Hyundai Elantra5

Ford Focus4

Toyota Camry3

Honda Civic2

Toyota Corolla1


• Success of foreign manufacturers follows market trends

Sales Volume by Manufacturer Type

7

4 M

PG

10 M

PG

CARS Fuel Efficiency Requirements Prove No Obstacle to Consumers

18 MPG

$4,500

$3,500

2 M

PG

5 M

PG

$4,500

$3,500

Fuel Efficiency Requirements and

Incentive Levels for cars

Fuel Efficiency Requirements and Incentive Levels for Light

Trucks

18 MPG

Actual Fuel Efficiency Improvement Between Traded and New Vehicles under CARS

15.8 MPG

9.2

MP

G

$4,173.22*

*Average Rebate Value Awarded to Customers


8

Impact on the Vehicle Population

• Strong sales and growing average age prevents VIU decline

• CARS scraps vehicles in prime repair years.

• Only about 0.8% of vehicles in the target population being replaced

• This target population is expected to grow, as average vehicle age increases

• Potential damaging upper limit of CARS replacements would be impossible to put into practice

Total VIU and Average Age (United States), 2007-2012

236

238

240

242

244

246

248

250

252

2007 2008 2009 2010 2011 2012

Vehic

les in U

se (

Mill

ions)

8.6

8.8

9

9.2

9.4

9.6

9.8

10

10.2

Avera

ge V

ehic

le A

ge

VIU

Age

+1.86 million

-690,114

Net Gain: 1.17 million

CARS Market Dynamics

CAGR: 0.8%

CAGR: 1.7%


9

Top Aftermarket Replacement Services by Replacement Rate and Cost (United States), 2007*

(3.56)

(3.8)

(3.33)

6.59

11.41

19.05

(34.78)

13.22

Difference in Replacement Rate between Old and New

Vehicles

15.98

16.92

15.04

8.86

13.56

13.73

216.03

10.06

Average Replacement

Rates (Vehicle Age 0-3

Years)

20.0012.42Tires Rotated

43.0013.12Tires Balanced

75.0011.71Wheels Aligned

109.6715.45Transmission

Service

121.3324.97Fuel Filters

96.3332.78Cooling System

32.17181.25Oil Change

280.0023.28Brake Jobs

Average Cost for Service ($US)

Average Replacement

Rates (Vehicle Age 8+

Years)

Source: Automotive Aftermarket Industry Association, Bethesda, Md.; Frost & Sullivan

*Note: This is the latest data available through the Automotive Aftermarket Industry Association

10

Expected Service Revenue Loss for the Aftermarket (United States), 2009

Tires Rotated, $(0.38)

Tires Balanced, $(0.88)

Wheels Aligned ,

$(1.35)

Transmission Service,

$3.90

Fuel Filters, $7.46

Cooling System, $9.89

Oil Change, $(6.03)

Brake Jobs, $19.95

(10) 0 10 20 30

$ Millions

Expected Aftermarket Retail Service Impact (United States), 2009

Expected revenue losses, considering the difference in replacement rates per service by vehicle age, service cost, the number of vehicles taken off the road, and typical consumer vehicle maintenance behaviors as determined by

Frost & Sullivan’s consumer behavior study N5ED-18.

(Note: Negative numbers on the graph translate to positive revenue growth.) Source: Frost & Sullivan

11

Expected Aftermarket Retail Service Impact (United States), 2009 (cont’d)

Expected Revenue Loss = $32,556,257

•Growth in new vehicle maintenance will not be evenly distributed enough to compensate for the loss

•Dealership in best position to capitalize on maintenance and repairs because of warranty status

•Vast majority of financial loss will be taken by local or regional IRFs, specialty service centers, or tire company chains

•Almost all gains will be directed into the OES channel


12

Downsizing Vehicles Reduces Average Part and Service Cost

Higher percentage of manual transmissions in new vehiclesTransmission Service

Long-life coolant extends service intervals in newer vehicles

Cooling System

Replacement cost higher in new vehiclesFuel Filters

Services


• Service cost generally comparable between trade-in vehicles and new vehicles.• Driven by OE trend towards life-of-the-vehicle parts• This increases average service cost • Lower frequently of repair has the net effect of decreasing service revenues.

13

Top Aftermarket Replacement Parts by Replacement Rate and Cost (United States), 2007

5.49

14.05

11.41

3.1

(10.08)

(29.27)

10.72

23.61

14.57

Difference in Replacement Rate between Old and New

Vehicles

5.3

5.2

13.56

21.86

66.53

171.61

7.86

8.24

33.77

Average Replacement

Rates (Vehicle Age 0-3 Years)

30.7510.79Transmission Filters

25.5019.25Spark Plugs

25.3024.97Fuel Filters

30.5024.96Wiper Blades

13.7556.45Air Filters

6.95142.34Oil Filters

110.0018.58Brake Pads and Shoes

90.0031.85Batteries

474.7548.335Tires

Average Cost for Total Replacement

of Parts ($, Retail Level)

Average Replacement

Rates (Vehicle Age 8+ Years)

Note: This is the latest data available through the Automotive Aftermarket Industry Association

Source: Automotive Aftermarket Industry Association, Bethesda, Md.; Frost & Sullivan

14

Expected Parts Revenue Loss for the Aftermarket (United States), 2009

Tires, $37.28

Batteries, $11.45

Brake Pads and Shoes,

$6.36

Oil Filters, $(1.10)

Air Filters, $(0.75)

Wiper Blades, $0.51

Fuel Filters, $1.56

Spark Plugs, $1.93

Transmission Filters,

$0.91

(10) 0 10 20 30 40

$ Millions

Expected Aftermarket Retail Part Sales Impact (United States), 2009

Expected revenue losses, considering the difference in replacement rates per part by vehicle age, part cost, the number of vehicles taken off the road, and typical consumer vehicle maintenance behaviors as determined by Frost & Sullivan’s

consumer behavior study N5ED-18.

(Note: Negative numbers on the graph translate to positive revenue growth.) Source: Frost & Sullivan

15

Expected Aftermarket Retail Part Sales Impact (United States), 2009 (cont’d)

Expected Revenue Loss = $58,151,124

•Many suppliers will be balanced through OE/OES orders

•“Biggest Loser” retail parts are very dispersed

•Buy-back agreements can lead to trouble, especially with exclusive parts, though not in many cases


16

Comparing Part Costs Between New and Traded Vehicles

Ford Explorer: $25Toyota Corolla: $0-35

Transmission Filters

Ford Explorer: $10Toyota Corolla: $6

Spark Plugs


Fuel Filters


Brake Pads and Shoes


Tires

Part Cost Comparison Between Typical New and Traded Vehicles*

• Manufacturers affected by lower average sale prices for parts, except for life-of-the-vehicle parts

• Participants will need to adjust to vehicle downsizing anywaySource: Frost & Sullivan

*Part cost is approximate average

17

Remanufactured Replacement Parts Vulnerable to CARS Effect

• Remanufactured

engines, transmissions,

starters, and alternators

are the dominant

replacement part choice.

• As such, the CARS act

will have the strongest

effect on this segment.94.2%

95.8%

94.9%

1.1%

2.0%

0.8%

0.8%

95.7%

5.0%

4.0%

2.2%

3.5%

0% 20% 40% 60% 80% 100%

Gasoline engine

Diesel engine

Automatic

Transmission

Manual Transmission

New Remanufactured Salvage


Market Share by Volume for Replacement Parts by Source

(North America), 2009

18

Impact on the Core Markets

• Key for re-man engine and transmission profitability is the steady price of cores

• CARS destabilizes equilibrium in core prices in several major product categories


• CARS act could flood core market for starters and alternators

• The CARS act would ease traditional core transaction program, which remanufacturers prefer.

• Destabilization effect serious detriment to engine core market

• Transmissions will see a lack of demand as chief hurdle

19

Are Sales Sustainable?

• Sustainable benefit required

• Sales in August/September traditionally higher

• Convincing consumers to “buy right now” instead of “buy at all”

• Increasing OEM production is expected to be beneficial

OEM

Dealership

Consumer

SupplierSupplier

Labor

LaborLabor

Vehicle

Vehicle

PartMaterial

Income


20

Is There a Positive Environmental Impact?


• Environmental benefit must come with reduction in annual use

• Scale of the program restrains the benefits achieved

• Fuel economy gain limited to 0.28% of the total vehicle population.

• New vehicles have mileage ratings 19% higher than the average vehicle.

• Approximately 0.45% of the vehicle population consists of hybrid vehicles with mileage ratings

50% better than the average vehicle.

21

Is There a Positive Environmental Impact? (cont’d)

2.88 Tons (based on average fuel

economy improvement of

9.2 mpg)

3.0 Tons, 1 year break-even

12 Tons, 4 year break-even

Saved CO2

Production CO2 High Value

Production CO2 Low Value


• The average reduction in CO2 emissions is 2.88 tons/year.

• Average vehicle produces the equivalent of 3 to 12 tons of Co2

• Environmental benefit of CO2 reduction is not an immediate one.

22

Conclusions

• Negative effects will be dispersed enough to avoid damage to any one company.

• Minimal loss of vehicles in operation among the target aftermarket age.


• Act was passed without real concern for the impact it would have on the automotive

aftermarket.

• The aftermarket impact of the CARS act will be small, yet significant

• Remanufacturing will face real difficulty standardizing prices and recovering the equilibrium.

The Good

The Bad

The Ugly

23

Next Steps

� Request a proposal for a Growth Partnership Service to support you and your team to accelerate the growth of your company. ([email protected])1-877-GoFrost (1-877-463-7678)

� Join us at our annual Growth, Innovation, and Leadership 2009: A Frost & Sullivan Global Congress on Corporate Growth, September 12-15 2010, San Jose, CA (www.gil-global.com)

� Register for the next Chairman’s Series on Growth: The CEO's Perspective on

Competitive Intelligence (November 3rd) (http://www.frost.com/growth)

� Register for Frost & Sullivan’s Growth Opportunity Newsletter and keepabreast of innovative growth opportunities(www.frost.com/news)

24

Your Feedback is Important to Us

Growth Forecasts?

Competitive Structure?

Emerging Trends?

Strategic Recommendations?

Other?Please inform us by taking our survey.

What would you like to see from Frost & Sullivan?

25

For Additional Information

Matthew Scruggs

Research Analyst

Automotive and Transportation

Tel: 210-477-8491

E-mail: [email protected]

Mary-Beth Kellenberger

Global Program Manager

Automotive Aftermarket

Tel: 416-490-1997


Jake WengroffGlobal Director

Corporate Communications

Tel: 210-247-3806


Will OE Gain Cause Aftermarket Pain?

Business

Transcript of Will OE Gain Cause Aftermarket Pain?