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R. L. Polk & Co.’s Ask the Industry: What’s in Store for the Aftermarket in ’08

For this week’s Ask the Industry, we gather insights and predictions from leading industry experts and analysts, to provide an overview of some of the industry’s biggest concerns right now, and how the aftermarket is expected to perform in 2008.

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by Amy Antenora

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In a recent report titled “Aftermarket Expectations Heading into 2008” from BB&T Capital Markets, industry analyst Tony Cristello wrote, “ So far, 2008 looks very much like 2007 (and even 2006) for the automotive aftermarket. …Apart from conversations with several of our private company contacts that indicate stable business overall, we have little evidence to support that the aftermarket is poised for a comeback in 2008.”

For this week’s Ask the Industry, we gather insights and predictions from leading industry experts and analysts, to provide an overview of some of the industry’s biggest concerns right now, and how the aftermarket is expected to perform in 2008.

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THE IMPACT OF GAS

With gas prices continuing to creep upward, and the expectation that gas will reach $4 per gallon by summer, the service and repair segment should be smiling. Sure, if it costs more, it makes sense that motorists would drive less. However, recent research from the Automotive Aftermarket Industry Association (AAIA) shows that with higher gas prices comes increased attention to vehicle maintenance.

AAIA says that its research shows many consumers are reacting to high gas prices by driving less, but many others are seeking fuel efficiency through vehicle maintenance, creating a tremendous marketing opportunity for aftermarket service and parts businesses.

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In a study conducted by Opinion Research Corporation for AAIA, one third of consumers surveyed reported that they already changed their driving behavior when gas prices reached $3 a gallon by cutting back on driving and maintaining their vehicles better. But when gas prices hit $4 a gallon, more than 56 percent of American drivers will change their driving behavior even more.

AAIA’s research is getting national attention. Today, the association announced that national newspaper USA Today will publish a letter to the editor from AAIA President and CEO Kathleen Schmatz, in this weekend’s edition of the paper. The letter reports consumer behavior changes in reaction to rising gas prices and points out how vehicle maintenance can increase fuel efficiency.

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“If gasoline hits $4 per gallon as many economists predict, an estimated 57 percent of American car owners say they will dramatically change their driving behavior,” said Schmatz. “According to a survey conducted by Opinion Research Corporation for AAIA and the Car Care Council, 75 percent of consumers say they are maintaining their vehicle better because of rising gas prices.”

The letter went on to say that while driving less might not be an option for many motorists, performing simple and inexpensive vehicle maintenance will not only save gas money, but will also improve vehicle safety and dependability. A number of gas savings tips were listed in the letter. Both AAIA and the Car Care Council have reported unprecedented interest and inquiries from the consumer media about the recent survey and for information and advice about what types of vehicle maintenance consumers can do to take control of how much gas they use.

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THE TRICKLE-DOWN EFFECT

Addressing the impact of higher gasoline prices on miles driven, Cristello goes a step further in his assessment.

“Sustained weakness in miles driven is a concern for the entire aftermarket (as driving becomes more expensive, consumers drive less, leading to fewer part failures, less routine maintenance, etc.), but even with elevated levels of gasoline prices consumers can only defer automotive maintenance and repair for so long ­­– eventually cars break down and people still need transportation to and from work, the supermarket, etc. With rising gas prices, consumers tend to defer non-essential maintenance of their vehicles, primarily consumers in lower-income brackets. Aftermarket retailers and service providers have been particularly affected by this — especially those with greater focus on discretionary parts and repair. Although we do expect miles driven to remain under pressure in the near term as consumers adjust to less disposable income, we ultimately expect to see sustained growth in annual miles driven over the longer term.”

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High gas prices aren’t the only concern however. Raw material costs as a whole have spiked, leaving many manufacturers forced to make a choice — absorb the costs or pass them on to customers.

Again, from BB&T’s “Aftermarket Expectations” report: “Spikes in raw material prices have placed considerable pressure on aftermarket suppliers as these companies attempt to pass along the higher input costs through price increases; in addition, we believe that sluggish end-user demand has led many auto retailers and service shops to adopt a leaner approach with regard to inventory levels, creating some revenue headwind for manufacturers given fewer subsequent replacement orders.”

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Take a look at the headlines of any publication in Detroit and you will see the continuing impact of the mounting financial pressures on automotive suppliers. Bankruptcy filings, union strikes and employment cutbacks continue to make the front page. A few major players such as Federal-Mogul, Dana Corp. and Remy were able to successfully emerge from bankruptcy in recent months. Still, others, such as Delphi, continue to operate under Chapter 11 and more bankruptcy cases are announced every day (Holley Performance Products, Plastech and ROL Manufacturing to name a few). According to BankruptcyData.com, more than 15 major, public automotive suppliers and manufacturers have filed for bankruptcy in the past four years.

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DOWN, BUT NOT OUT

In January, the Motor & Equipment Manufacturers Association (MEMA) released its first-ever Motor Vehicle Parts Supplier Industry Outlook – a compilation of “business barometer” surveys for each of the three motor vehicle parts supplier market segments MEMA represents: automotive aftermarket, heavy duty and original equipment. In a recent interview, Bob McKenna, MEMA’s president and CEO, talked about the surveys and what they revealed for the industry in ’08. He pointed to certain manufacturers recent successful emergence from Chapter 11 as bellwether of sorts.

“As we expected, the survey revealed that many of us share the feeling that the business outlook is less than rosy – but I was pleased to see the optimism among many of our members about the motor vehicle parts supplier industry,” McKenna noted. “And this optimism has been borne out recently with the announcement of several of our member companies and other manufacturers successfully emerging from bankruptcy.

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“The renewed vitality of these major market players is a testament to the resilience of the motor vehicle parts supplier industry. In the face of the generally negative economic forecasts for our nation, many of us in the motor vehicle parts supplier industry share this positive outlook for 2008. Obviously, coming out of Chapter 11 is good for the stock prices of these companies. It will allow them to raise the capital to expand and take advantage of the existing market opportunities.”

Despite industry-wide concerns over rising oil prices, the weakening U.S. dollar and the consumer credit crunch, McKenna pointed out a silver lining. There are still opportunities for expansion in the motor vehicle supplier industry, he said.

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Among the opportunities McKenna pointed out were:

  • Two of the three U.S. carmakers are under new leadership, seeking innovative ways to revitalize this important national industry;
  • The global motor vehicle market place is expanding, with many new markets opening for OE and aftermarket sales;
  • The heavy duty segment is recovering from the rollout of the 2007 emission standards, poised for a period of new growth; and
  • The new CAFE standards open new areas for growth and product development.

Research from the National Association of Manufacturers (NAM) shows a little optimism as well. In NAM’s February 2008 “State of the U.S. Economy and Manufacturing Report,” the association writes, “…Economic growth will likely turn negative in the first quarter of 2008, followed by stalled growth in the second quarter and then pick up to modest growth in the second half of this year.”

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NAM’s report shows that after 1.8 percent growth in 2007, the manufacturing sector will slightly outpace the overall economy and grow by 1.5 percent in 2008. The industries expected to lead the manufacturing sector in 2008 are mostly export-oriented – aerospace, computers and electronic products, machinery, chemical producers and medical equipment. Industries closely connected with the housing market and consumer purchases (including motor vehicles) are expected to deteriorate in 2008, according to NAM.

* AMN Editorial assistant Nicholas DiSabatino contributed to this report.

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