clear view of the aftermarket

Aftermarket speaks to Clearwater International about the trends affecting the aftermarket, as laid out in their recent report

Published:  15 April, 2019

While many garage businesses in the sector probably have a pretty firm idea of what trends and changes are affecting their businesses, it is always helpful to be able to look at the whole picture and see where you fit in. This means you can see where you are, and gives you an idea of what to expect going forward.
    
With this in mind, a recent report on the global automotive aftermarket from corporate finance house Clearwater International provides a useful view of the trends influencing the sector, taking in the local, regional and global landscape.  Overall, liberalisation of the market, changing technology and shifting consumer habits and expectations are identified as being the key drivers in the way the sector is moving.
    
On liberalisation, the changes have a range of aspects. On one hand there is increasing penetration by OEMs looking to claw back market share in terms of supplying parts to the traditional garage sector. At the same time, OEMs are obliged to provide information about the exact identification of replacement parts, albeit on their own terms. The report pointed to ‘European automotive aftermarket landscape,’ a report from BCG, which observed that independents have been effective in broadening their market share at the expense of the manufacturers and their networks.
    
OEMs are also looking to take back a piece of the market through the formation of aftersales networks. Another part of this trend has been the increasing ability consumers have had to use aftermarket providers to service and repair newer vehicles, as seen through the Block Exemption Regulation (BER).
    
Changing technology in terms of the emergence of electric vehicles and hybrid drivetrains is having an impact. Back in the workshop, key drivers going forward, according to the report, include digitally enabled services, telematics, e-commerce and 3D printing. Remanufacturing is also seen as having a strong place in the future, with OEMs investing in the segment.
    
The report found that the average age of cars in the EU is 11 years, an age that puts a major chunk of the transcontinental car parc firmly in independent garage territory, is certainly good news for garages.
    
The picture looks bright in fact. The report cites a finding from Frost & Sullivan’s ‘Global automotive aftermarket outlook 2018’ that showed global automotive aftermarket demand was set to rise by 4.4% in 2018, a view shared by many sector analysts according to Clearwater’s report. Another forecast that the report pointed towards, ‘The changing aftermarket game’ from McKinsey, predicted that the market will have a worldwide worth of €1,200bn by 2030. On that basis, underlying global growth on a year-by-year basis would be 3%.
    
Speaking to Aftermarket about the report, Tobias Schätzmüller, Partner and International Head of Automotive at Clearwater International said: “There are a lot of challenges out there for the aftermarket, as well as  opportunities. First of all, the liberalisation of the independent aftermarket. I think this gave it a boost. Also, technology-wise, there are new entrants. Some pose a threat but also offer many opportunities. Then, of course, there is the powertrain discussion, connected vehicle, and autonomous driving, which will all change the picture.”
    
One of the aspects the report covered was the ongoing trend of mergers and acquisitions taking place in the sector. The report cited the ongoing purchase activities of LKQ Corporation and Euro Car Parts as an example. It also pointed out the purchase of The Parts Alliance by Uni-Select two years ago, as well as the acquisition of Borg Automotive by Denmark’s Schouw.
    
Tobias thinks the smaller suppliers will continue to gravitate towards larger companies:  “We see from the M&A analysis that there are still a lot of small and medium-sized businesses around, in small units but with a relatively limited range of products. They are now trying to redefine themselves in terms of international reach, as well as in terms of covering additional markets, and product ranges. For some of them, they recognise it is not possible to gain scale on their own, so they are joining forces with others.”
    
Expansion is the keyword: “There have been a host of cross-border transactions. In the report we have published a list of many of the deals that have been completed in recent years. Every month there are new deals going through. We are advising players to grow and refine their strategies, and they are bringing access to new product categories. We also advise those players to invest in technology, into automatic warehousing etc. That is the challenge, but for some of the players it is an opportunity to develop greater professional capability, and grow through investment.”
    
Tobias then pointed out the key trends where businesses need to pay strongest attention: “On the environmental side, it is certainly the change in the drivetrain, with electric vehicles coming in. Nobody knows in the future when, or even if, this dramatic shift will happen but I think everyone still believes we are in a mixed period of combustion engines, hybrids, and electric vehicles. However, if you look 10 or 20 years into the future, the prevalence of electric vehicles will be much stronger. This will of course change the complexities of the engine, and the powertrain. This means less components and less moving parts which is a threat to the spare parts market, although the components in an electric vehicle might have a higher average value per unit. However, this would probably not compensate for the very complex engine that is now in use in combustion engines. There will be a reduction of complexity and, assuming that with the numbers driving there may be less accidents, which will also have an impact on the spare parts business.
  
“On the exterior side, there will be pressure from OEMs because they now see an opportunity. While increasing liberalisation has seen the independent aftermarket gaining market share, with all the e-solutions in the car, it is possible for an OEM to be the first to provide pre-emptive maintenance. If the car has to go to the garage, they are the first to know that and can make use of this information. They are all desperately looking for alternative profit streams beyond the process of selling hardware, i.e selling a car, which is also a driving factor.”
    
For the garage on the ground this may seem a long way off, but there is a way forward. “I think it is important to offer the whole spectrum of products, to be present everywhere and to reach a critical size so the parts can be sourced cheaply, and they have more marketing power. Additionally, they also need to increase their competencies, to be able to offer customers the wider range of products.”
    
On the potential impact of Brexit on the aftermarket, Tobias said it was too early to be drawn on likely outcomes: “Parts supply either comes from the OEMs or tier one suppliers, or it is sourced in Asia. I don't know, looking at the UK market, whether they would have problems sourcing parts from abroad. It depends on what the regulations will be, but Brexit will probably have an impact.”
    
On whether concern over Britain’s exit from the bloc is warranted, Tobias speculated: “I trust that they will find an economical and reasonable solution. Brexit concerns the UK most, but given the highly integrated automotive value chain, it will also affect the continent.”
    
Looking ahead, Tobias concluded: “There will be continued consolidation in the market. In the independent aftermarket there is a lot of activity, with many M&A transactions coming up. We are actively tracking this. Companies will seek to be more international, aiming to cover more markets, and will get a broader cross-section of products. On the technological side, advancements in connectivity will mean more preventive maintenance, and overall professionalism within the market will increase. Transparency will also continue to increase thanks to the impact of the online world, and that will have an impact on price.”

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    How about, for a change, we go and see a business in its very early days, and see how a garage is built from the ground up? Yes, we like that idea. When we found out that 2018 Top Technician Shaun Ferguson-Miller was opening his own business, we knew we just had to be there.

    Fergie’s opened its doors, and unveiled its big, bright and very orange sign for the first time in late February. Based in a converted warehouse on a business park on the outskirts of Thatcham in Berkshire, Fergie’s has been set up as a German marques specialist, catering for drivers of the VAG group output, as well as cars from BMW and Mercedes-Benz.
    With Shaun is a small team covering marketing, sales (front of house), finance, and of course Shaun’s area of expertise, all things technical in the workshop. The technical team will grow as the business picks up. All being well, he’s looking to take on two more technicians this year.

    Differentiation
    Starting out is hard, particularly if you are aiming to start at the top, but Shaun was upbeat about the businesses potential: “We’ve had a great start. Each member of the team is very focused on their individual roles and we’re hitting our targets that were set out in the business plan. It’s very early days but we’re all putting in the hours and committed to making this a success.”

    They are getting the customers they want too: "The marketing team are busy behind the scenes. From day one we’ve had a defined focus on who our clients are and we’ve built a marketing plan based around that. We’re very keen to get off on the right foot and build a strong reputation based around outstanding customer service. It’s the part of the business the customer sees and touches. It’ll be our point of differentiation.”

    A new chapter
    Readers may remember that when he won Top Technician in 2018, Shaun was head technician at Millers Garage in Newbury. What a difference a year, and a big trophy, can make: "I have been on a journey over the last three or four years, and have met some great people in the industry. Like they say, It’s good to talk, and my new network gave me a different perspective.
    “I’ve fancied going it alone for a while and it seemed like the perfect opportunity. I started planning at the end of last year, and got the keys for here on 1 January."

    Winning Top Technician was a factor: "I realised that I had to do it this year. If I left it for three or four years, I couldn't advertise that I was setting up, and that I was the winner of Top Technician. It would be old news. I was speaking to a lot of people in the industry about it, and I just decided it was time to go. I set about doing the business plan, looked at what I wanted to do, arranged additional finance on top of the money we had, then set about finding the right equipment to meet our budget.  I started planning in November and into December, got the keys on 1 January, and that was it. From that point we were here full time. This was a warehouse that had been used by a parts supplier. It was just a bare shell. We turned it into this within three months, and opened on 25 February, and we have been open a month now.”

    Shaun was thoughtful for a moment, and then said with a laugh: "When you look back, you think 'how did this even happen?' I still don't know how it happened!"
        
    That was then, and this is now. Let's look at what Shaun has set up: "We have four two-post service ramps, a dedicated wheel alignment ramp, and a Class 7 MOT ramp. We are setting up as an MOT station at the moment too. In the meantime, are working with a local garage that is carrying out the MOTs for us. In return, we are doing their diagnostic work. It’s a system that works well for both of us currently.

    “On the tooling side, as we are a German marques specialist, all the diagnostic tools are for the VW -Audi Group, Mercedes and BMW. We have to have that as a specialist. We have some generic scan tools as well as a backup but, factory tooling is a must.”
    Shaun and the team are thinking long-term. One of the things he wants to create for Fergie’s is a positive working environment. With this in mind, upstairs, we found the bones of a staff lounge: "We’re focused on building a great team and staff retention is a big part of that. Having a great place to work as well as the right culture in the company is really important. You need somewhere they can relax, and eat in comfort.”

    Next door, Shaun has set aside a room for training. Training is really important to Shaun and having the right environment to do that is essential. “When we do training in the evening, they will come up here. Treating the staff right is the biggest thing for me. I want to get great techs here, so they need to be treated well.”

    The staff are not the only ones getting good treatment. Shaun also became a father for the first time last year, and they have found room for a little creche for son Quinn also. We told you it was a modern place didn't we?

    Customers
    Apart from the technical stuff, you always need to remember that a garage business needs customers. When they arrive, Shaun has presentation covered thanks to a comfortable, warm-wood-and-armchairs reception that could be an upmarket high-street cafe: "I initially wanted it to be all white and fresh and clinical, but I had my mind changed and this is so much better. Everyone who comes in says how nice it is, and wants to chill out, read a paper, have a hot drink, they love it. Because we are a little bit out of the way, we wanted to create somewhere people can wait."

    To have them waiting, you need to have them in the first place. With this in mind, Shaun sought out advice: "I did a lot of business training with John Batten at Auto iQ and he has helped me massively. I didn't think advertising was important before I started the business. As far as I was concerned it was all word of mouth. Starting a new business, that is not going to happen though. We are literally at the bottom of a road with no passing trade. I’m too busy in the workshop to give marketing the focus it needs which is why we bought in someone to do this from the start. That and our front of house team are every bit as important as the technical ability we have in the workshop.”

    It's a hard slog starting from scratch, but with a young family, a big vision and a great team, Shaun is on his way: “I am doing long hours at the moment- I am here until 11pm every night. I just want to set everything up, systems, equipment, etc. All of that effort will be worth it in the long run, getting it all right from the beginning. Doing this, I have learnt almost everything in one go, from a business point of view, which is really cool. Luckily my mum is an accountant with a massive company, so she has helped with it as well. With mum's, my wife’s, and my friends support as well as a great team, it was the ideal time, and the ideal recipe. Now we’ve all just got to put in the hours and do the work.”
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  • Walkabout: The Australian adventure 

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    The visit began several months ago with an invitation from a good friend Bob Whyms, Australia’s prominent Porsche specialist in Sydney. The offer comes as part of a training group called Australian Aftermarket Service Dealer Network (AASDN). This is a group of totally independent service and repair independents across the whole of Australia.

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    BWA provide a parts service across Australia importing directly from Germany. They also provide a comprehensive machine shop service, which supports their engine remanufacture and performance business. Bob and I had fun reflecting on Bosch D Jetronic and other early evolutions of fuel injection, grumpy old men and all that!

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  • BER: What next 

    Following last month’s article about the European Commission’s launching an ‘evaluation roadmap’ to consider if the existing Automotive Block Exemption Regulation (BER) should be renewed when it expires in May 2023, I explained the background and how important BER is to the abilities of the UK aftermarket to conduct their day-to-day business and offer the motoring consumer competitive choices for the service and repair of the vehicles.
        
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    Aftermarket perspective
    Most importantly, where does this leave BER from the aftermarket perspective? Clearly, the original key elements need to be maintained, namely the honouring of warranties, servicing in the context of leasing contracts, the supply of spare parts, the use/purchase of tools, access to technical information and access to authorised repairer networks to buy original parts. Some important aspects are also covered in other legislation, such as the access to the repair and maintenance information (RMI) under the Euro 5 vehicle type approval, but this is complimentary legislation and is not a replacement for the BER.

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    It is very welcome that the European Commission has rightly emphasized that competition policy needs to "make sure that our markets stay competitive enough to give consumers the power to demand a fair deal." However, this pre-supposes alternative choices exist.

    It is therefore critical that the legislator considers how small businesses can continue to compete, as only focusing on the repair level is too myopic and does not capture the influence that BER needs to have on the entire aftermarket and its competitive eco-systems. The complexity of the aftermarket sector and the nature of the respective economic activities throughout this value chain should be taken into account to allow a better understanding of the different competitive conditions at each level of the supply chain and then legislate accordingly.

    Examples of this include the trend for vehicle manufacturers to require replacement parts to be re-coded, but then either restricting access to the code (e.g. ADAS components) or charging a inflated price for the code for non-OEM parts to ensure that their own total price for the part and the code are cheaper. This is an example of another developing trend from vehicle manufacturers where ‘software as a product’ is becoming another way that competition can be distorted.

    As the vehicle becomes a ‘computer on wheels’, there is an increasing concern that the (already) existing imbalance between OEMs and the independent aftermarket will further increase due to vehicle manufacturers being able to control access to the vehicle data. Vehicle manufacturers have evolved since 2010 into new and additional roles, entering as direct competitors into traditional independent aftermarket areas. Increasingly repairs are being done today directly and remotely (e.g. resetting of fault codes, coding, reprogramming, software updates) via the ‘connected car’ and this also needs to be addressed in any revision of the BER.  
    There are also now the first examples of vehicle manufacturers joining forces on a common Internet ordering platform for their original spare parts and consequently corresponding to the role/function of an independent multi-brand spare parts distributor. The main competitors of independent repairers/operators are no longer only the authorised repairers/networks, but are now also the vehicle manufacturers themselves, who have much more power and much more (in)direct technical and commercial means to frustrate effective competition by independent aftermarket operators.

    The traditional comparison between the position of the dealer/authorised repairer and the independent operator (the vertical ‘non-discrimination principle’) is no longer valid, due to the proprietary design of the in-vehicle telematics systems, the vehicle-generated data/functionalities go directly to the vehicle manufacturer, who then decides with whom it shares the data, or not and under what contractual conditions.

    The proprietary closed design of their in-vehicle telematics systems and the unique access to the vehicle, its data and functions, enables manufacturers to vertically integrate additional services, e.g. to offer bundled telematics services over the life-time of the vehicle, and even ‘free of charge’ (e.g. remote diagnostics, remote programming, fleet management, insurance policies etc.). This has a de-facto competitive knock-out effect on all other service providers around the car.

    Clearly a lot has changed since the original BER was implemented - given that it is the vehicle manufacturer itself who is now the privileged controller of the in-vehicle data and resources/function and subsequently the whole downstream aftermarket, so any new version of BER must now consider a different approach and re-assess how a competitive aftermarket can continue to offer consumers a competitive choice.

    xenconsultancy.com

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