Terry McCormack, President and CEO, Affinia

ANN ARBOR, MI —

Every other week, aftermarketNews.com offers an interview with high-profile individuals in the automotive aftermarket. We give executives free reign to express their views on anything from the state of their corporations to recent legislative news to future trends in their niche markets. Here you see what matters to the newsmakers themselves.

This week we catch up with Terry McCormack, president and CEO of Affinia.

When we last spoke in December 2004, you were looking forward to the future of Dana AAG, which had just been sold and renamed Affinia. Now that the company has been up and running as Affinia for nearly a year, how do you feel everything is going?

As you know, the Cypress Group was a financial buyer, with no infrastructure for us to integrate into. The good news was that we got to put Affinia together the way we want it to be. On the other hand, being jettisoned from the ‘mother ship’ (i.e., Dana) required us to create our own corporate infrastructure. In our first six months, we built a new headquarters in Ann Arbor, MI, and hired about 40 people in the areas of accounting, legal, HR and administration. Unless you walk where we’ve walked for the past year, it’s easy to forget what it takes and how much it costs to do everything necessary to meet the increasing needs of our channel partners and customers. We still have our work cut out for us, but at this point in our journey, we are where we had planned to be.

In looking over a few of the headlines from the past year, I noticed the company was the recipient of a number of awards, for example, the Spirit of NAPA, a Technology Award from CARQUEST, and also a whopping nine awards from the National Catalog Managers Association. To what do you attribute such a seamless, successful transition in just your first year as a new company?

This is a pretty easy question to answer. Simply put, the people at our Under Vehicle and Under Hood Groups are the best. Cypress Group recognized that early on, and, with a few exceptions, we are operating with the same teams today that we had in the Dana AAG. We have always put our customers first in everything we do, and always will. John Washbish and Keith Wilson have kept our people energized and focused on delighting our channel partners as they take care of our mutual customers. There is no greater honor than to be recognized for excellence by your channel partners, and Affinia continues to receive accolades on many fronts.

You used the terms “channel partners” and “customers.” Is there a difference?

We view the technicians who install our parts as customers. Without them, there would be no independent aftermarket. Nor would there be one without manufacturers. But we cannot serve our customers without channel partners. These are the folks who buy directly from us and redistribute to their jobbers, who serve the technicians directly. Although you may consider it a small point, we chose these terms carefully for two reasons. First, someone must make the parts, and someone must install them. But because of the scope and size of our market we need an efficient channel between the manufacturers and installers to get the right part to the right place at the right time. Second, today more than ever, the bonds between us and the players in that channel need to be akin to partnerships in terms of collaboration, division of labor, strategy and philosophy.

There has been a lot of talk the past couple of years about partnering and collaborating. Are you seeing any changes in relationships between manufacturers and distributors?

In today’s aftermarket I see a more realistic, more mature approach to trading relationships. If you look at this business over the last 30 years, a real shift has occurred. Back in the 1970s, there was a greater infrastructure of power and money among manufacturers. Gradually, over the course of time, the pendulum swung toward resellers. First the buying clout of program groups and large chains, and then, lots of consolidation gave resellers more leverage.

On the other side of the ball, manufacturers grew too much production capacity in most categories, and their shareholders clamored for better top line growth. These dynamics led to increasingly unrealistic requests for deeper discounts and completely outlandish requests for terms. The affect of this situation on the health of the aftermarket was already at disaster proportions … and along came China. Today, the pressure on the manufacturing base that keeps America’s wheels turning has grown too great for some companies. Consider the number of aftermarket suppliers large and small who have fallen into financial trouble, some to the point of bankruptcy.

I don’t know if any of this has anything to do with it, but recently I’ve heard a lot of concern voiced by members of the reseller community about the health of their vendor base. It’s obvious to most that only with a healthy and viable vendor community can resellers, and the industry, prosper.

Do you think the trend you mentioned with increased bankruptcies and downsizing is cause for long-term concern?

Yes I do. I was asked to speak on the “state of aftermarket business” at the AASA breakfast in Las Vegas. In that presentation I spoke plainly about the rise of a new paradigm that has changed the heart and soul of our aftermarket.

Under the old paradigm, “Made in America” was as good as it got. In fact, “Made in America” was so important that automotive technicians insisted on it for domestic vehicles. In the new paradigm, country of origin simply doesn’t matter anymore. Automotive technicians know that new vehicles are assembled with parts from all over the world. They have accepted the fact that replacement parts cannot be judged by country of origin, but on the basis of form, fit and function. If BMWs can be made in South Carolina and Dodges in Mexico, then quality parts can, and do, come from anywhere.

What kind of discernible impact might this “paradigm shift” as you call it, have on the aftermarket?

It’s already changed the aftermarket profoundly in one way: It has paved the way for what are euphemistically called “value” lines. For the most part they are, in fact, economy lines. And there’s another major result of the paradigm shift. It is causing us as manufacturers to take a different, more analytical view of our value-added services and our intellectual property.

What do you mean by “value” lines?

In our North American aftermarket, overseas low-cost-countries like China and India have created a whole new class of products that are fit for purpose, and usually are offered without any kind of reference, technical, warranty or returns support at all. They are cheap — as much as 50 to 70 percent cheaper than premium products and their quality is getting much better. In just a few short years they have come from nowhere to command more than half of the volume in many product categories.

And it’s not only the price side of the margin equation that is being affected by globalization. The rapid emergence of these low-cost manufacturing powerhouses is contributing significantly to skyrocketing costs of raw materials and fuel. As long as this unprecedented shift and growth in the world’s manufacturing base is going on, raw material prices are likely to remain volatile.

In your opinion, how are value-added services impacted by this increasing globalization?

Traditional North American suppliers like Affinia are heavily invested in supporting our customers with numerous value added services. We offer a full line of products for a broad range of applications, and we continually add to and manage our offering. We provide return privileges. We catalog our offering in paper and electronic formats including year, make and model, but increasingly with supporting data like product attributes, photographic images and specifications. We offer technical support in the form of toll-free service lines, tech bulletins and training programs for increasingly complex automotive systems. On top of all this and more, we field a substantial sales force. That’s quite a menu of services, isn’t it?

The low-cost country model is significantly different. Typically, when you buy product from a low cost offshore supplier, you get the product and “none of the above.” They usually offer higher volume parts only, with no returns, no service of any kind and no help in the streets.

Think about what it takes to support these services. Yet, some channel members are torn between the value-added services and the low cost of the imported product. If this leads to too much emphasis on the economy stuff from Asia, full line manufacturers will have to reconsider their entire aftermarket offering, including value added services.

Are you suggesting that those services will have to go away?

No. That would be the biggest mistake this industry has ever made. We’ll just have to verify which of the many services being provided are actually worth something to our channel partners and customers. All activities have a cost associated with them and unless someone is willing to pay that cost, they will need to go away. In the end, it’s as simple as this: Any value adds that resellers don’t find valuable, will no longer be provided.

What role does intellectual property play in the situation you are describing?

Intellectual property is something we are hearing more and more about these days. Mostly, we hear about it in the context of unscrupulous offshore parts counterfeiters. But the fact is, the threat goes well beyond that.

At Affinia alone we spend millions of dollars every year maintaining and publishing data like catalogs, photographic images and technical specs. The figure for our industry at large is staggering. Yet, if you ask some overseas low cost providers for a catalog, you may hear something like, “We’ll put any part numbers you want on the boxes, and you can just use someone else’s catalog.” Already we’ve seen that in the marketplace. Some channel members are taking and using our intellectual property against us. Some expect to have use of our full range of services, even though they are buying only a short range of products, the ones they can’t get anywhere else. If manufacturers can’t make money on parts because of mix shift or cherry picking, their full line depth of support will go the way of the full service gas station. It’s just that simple.

It seems like you’re painting a landscape of downward spirals, where the need for lower cost drives reduced service, and the reduction of services increases demand for lower prices. When does it end?

Perhaps when our customers and channel partners experience pain. For example: When parts for older vehicles become nearly unavailable and their price skyrockets; when more and more aftermarket manufacturing businesses shrink or fold; when innovation and new products slow to a trickle; when technicians, with less technical support available from the aftermarket turn more to OE dealers. But hopefully, and more likely, when people realize what road we are on.

How does Affinia plan on coping with the profound changes you are talking about?

We are transforming ourselves into a true international supplier. We cannot, and will not, chase our channel partners to China or India, or anywhere else in the world, because we are unwilling to face the new reality.

We need to re-segment our product offerings into two very identifiable lines … a standard grade that is quality/cost-competitive with anyone else in the world… and a premium line that is better than the OEM offering. We must adjust our cost structure to compete anywhere around the globe. We will make our channel partners and our customers keenly aware of our total value proposition with the many services we wrap around our lines that do add value.

We must aggressively defend our intellectual property — data, catalog, patents — worldwide. Like our products, these things are a vital part of who we are and what we do. It all works together to form our full-line competitive advantage.

Simply put, we cannot allow the aftermarket to be commoditized! We can’t let price become our only selling tool. Because if we do, that will be the end of the aftermarket as we know it. I implore your readers, and everyone in our industry, not to sit passively through this paradigm shift. The new aftermarket reality will roll over those who don’t see it coming.

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