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

Introduction
• TheCARS, or Car Allowance Rebate System, provides rebates for new
vehicles to consumers via dealerships.
• Designed to improve average fuel efficiency and stimulate auto sales.
• Thevehicles may not be re-titled or re-sold except as components. The
vehicle must be shredded no later than 180 days after trade-in.
• Theprogram was modeled after successful versions initiated across
Europe.
Source: US Dept. of Transportation, Washington D.C.; Frost & Sullivan
2

Comparable Global Vehicle Sale Stimulus Programs
Eligible Funded
Country VIU Vehicles Incentive Amount Available Funds
$300 ($274.42 No fund limit; program
Canada 4.9 million 150,000+ USD)/transit voucher/car deadline March 31,
share program voucher 2011
€1,000 €220 million
France 10.2 million 220,000
($1,422.60 USD) ($315.6 million US$)
€2,500 €4.88 billion
Germany 13.4 million 2 million
($3,556.50 USD) (7.1 billion US$)
£2,000 £400 million
UK 7.36 million 400,000
($3,234 USD) ($488.12 million US$)
US 30.3 million 718,614 $3,500-$4,500 $3 billion
Source: Frost & Sullivan
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History of the Program (United States), 2009
7/30/09- Original $1b allocation
7/1/09- Program exhausted
is signed into law 8/7/09- $2b fund
extension signed into law
7/24/09- Department of
Transportation begins processing
claims
July August September
7/24/09-7/30/09- 250,000 vehicles 8/26/09- Program is officially
sold, generating a SAAR of 19 closed; 690,114 vehicle sales
million generated, representing $2.88b
Source: Frost & Sullivan
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Analysis of Vehicles Traded In Under CARS
Requirements for new vehicles:
• Functional condition Top Ten Vehicles Traded in under CARS
• Insured for the past year 1 Ford Explorer 4WD
• EPA rating < 18 miles per gallon. 2 Ford F-150
• Manufactured after 1984. 3 Jeep Grand Cherokee 4WD
• Vehicles had resale under $4,500k.
4 Ford Explorer
5 Dodge Caravan/Grand Caravan
Trade-In Volume by Vehicle
Type 6 Jeep Cherokee 4WD
7 Chevrolet Blazer 4WD
Passenger
Cars Light Trucks 8 Chevrolet C1500
16% 84%
9 Ford F-150 4WD
10 Ford Windstar
Source: US Dept. of Transportation, Washington D.C.; Frost & Sullivan
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Consumers Choose to Downsize Vehicles
Sales Volume by Vehicle Type
Top Ten Vehicles Purchased under CARS
Light Trucks 1 Toyota Corolla
41% Passenger
Cars 2 Honda Civic
59%
3 Toyota Camry
4 Ford Focus
• Successof foreign
manufacturers follows market 5 Hyundai Elantra
trends
6 Nissan Versa
Sales Volume by Manufacturer Type 7 Toyota Prius
Domestic 8 Honda Accord
39%
9 Honda Fit
Foreign
61% 10 Ford Escape
Source: US Dept. of Transportation, Washington D.C.; Frost & Sullivan
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CARS Fuel Efficiency Requirements
Prove No Obstacle to Consumers
$4,500
$4,173.22*
$3,500
$4,500
10 MPG
9.2 MPG
$3,500
5 MPG
4 MPG
2 MPG
18 MPG 15.8 MPG 18 MPG
Fuel Efficiency Actual Fuel Efficiency Improvement Between Fuel Efficiency Requirements
Requirements and Traded and New Vehicles under CARS and Incentive Levels for Light
Incentive Levels for cars *Average Rebate Value Awarded to Customers Trucks
Source: US Dept. of Transportation, Washington D.C.; Frost & Sullivan
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Impact on the Vehicle Population
Total VIU and Average Age (United States), 2007-2012 • Strong sales and growing
average age prevents VIU
252 10.2
CAGR: 1.7% decline
250 10
• CARS scraps vehicles in
Vehicles in Use (Millions)
Average Vehicle Age
248 9.8
prime repair years.
246 9.6
VIU
244 9.4 • Only about 0.8% of vehicles
Age
242 9.2 in the target population being
240 9 replaced
CAGR: 0.8%
238 8.8 • This target population is
236 8.6 expected to grow, as average
2007 2008 2009 2010 2011 2012
vehicle age increases
CARS Market Dynamics • Potential damaging upper
limit of CARS replacements
would be impossible to put
+1.86 million
into practice
-690,114
Net Gain: 1.17 million
Source: Frost & Sullivan
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Top Aftermarket Replacement Services by Replacement
Rate and Cost (United States), 2007*
Average Average Difference in
Replacement Replacement Replacement
Rates Rates Rate between
(Vehicle Age 0-3 (Vehicle Age 8+ Old and New Average Cost for
Years) Years) Vehicles Service ($US)
Brake Jobs 10.06 23.28 13.22 280.00
Oil Change 216.03 181.25 (34.78) 32.17
Cooling System 13.73 32.78 19.05 96.33
Fuel Filters 13.56 24.97 11.41 121.33
Transmission
8.86 15.45 6.59 109.67
Service
Wheels Aligned 15.04 11.71 (3.33) 75.00
Tires Balanced 16.92 13.12 (3.8) 43.00
Tires Rotated 15.98 12.42 (3.56) 20.00
*Note: This is the latest data available through the Automotive Aftermarket Industry Association
Source: Automotive Aftermarket Industry Association, Bethesda, Md.; Frost & Sullivan
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Expected Aftermarket Retail Service Impact (United
States), 2009
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 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
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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
Source: Frost & Sullivan
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Downsizing Vehicles Reduces Average Part and Service
Cost
Services
Fuel Filters Replacement cost higher in new vehicles
Long-life coolant extends service intervals in newer
Cooling System
vehicles
Transmission
Higher percentage of manual transmissions in new vehicles
Service
• 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.
Source: Frost & Sullivan
12

Top Aftermarket Replacement Parts by Replacement Rate
and Cost (United States), 2007
Difference in
Average Average Replacement Average Cost for
Replacement Replacement Rate between Total Replacement
Rates (Vehicle Rates (Vehicle Old and New of Parts
Age 0-3 Years) Age 8+ Years) Vehicles ($, Retail Level)
Tires 33.77 48.335 14.57 474.75
Batteries 8.24 31.85 23.61 90.00
Brake Pads and
7.86 18.58 10.72 110.00
Shoes
Oil Filters 171.61 142.34 (29.27) 6.95
Air Filters 66.53 56.45 (10.08) 13.75
Wiper Blades 21.86 24.96 3.1 30.50
Fuel Filters 13.56 24.97 11.41 25.30
Spark Plugs 5.2 19.25 14.05 25.50
Transmission
5.3 10.79 5.49 30.75
Filters
Note: This is the latest data available through the Automotive Aftermarket Industry Association
Source: Automotive Aftermarket Industry Association, Bethesda, Md.; Frost & Sullivan
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Expected Aftermarket Retail Part Sales Impact (United
States), 2009
Expected Parts Revenue Loss for the Aftermarket (United States), 2009
Transmission Filters,
$0.91
Spark Plugs, $1.93
Fuel Filters, $1.56
Wiper Blades, $0.51
Air Filters, $(0.75)
Oil Filters, $(1.10)
Brake Pads and Shoes,
$6.36
Batteries, $11.45
Tires, $37.28
(10) 0 10 20 30 40
$ Millions
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
14

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
Source: Frost & Sullivan
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Comparing Part Costs Between New and Traded Vehicles
Part Cost Comparison Between Typical New and Traded Vehicles*
Ford Explorer: $152
Tires
Toyota Corolla: $82
Brake Pads and Ford Explorer: $70
Shoes Toyota Corolla: $40
Ford Explorer: $10
Fuel Filters
Toyota Corolla: $40
Ford Explorer: $10
Spark Plugs
Toyota Corolla: $6
Transmission Ford Explorer: $25
Filters Toyota Corolla: $0-35
*Part cost is approximate average
• Manufacturers affected by lower average sale prices for parts, except for life-of-
the-vehicle parts
• Participants will need to adjust to vehicle downsizing anyway
Source: Frost & Sullivan
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Remanufactured Replacement Parts Vulnerable to CARS
Effect
Market Share by Volume for Replacement Parts by Source
(North America), 2009
1.1% 4.0%
• Remanufactured
Manual Trans mis s ion 94.9%
engines, transmissions,
2.0% 2.2%
A utomatic
starters, and alternators
95.8%
Trans mis s ion
are the dominant
3.5%
0.8% replacement part choice.
Diesel engine 95.7%
• As such, the CARS act
0.8% 5.0%
will have the strongest
Gasoline engine 94.2%
effect on this segment.
0% 20% 40% 60% 80% 100%
New Remanuf ac tured Salv age
Source: Frost & Sullivan
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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 • Destabilization
effect serious detriment
starters and alternators to engine core market
• TheCARS act would ease traditional • Transmissions
will see a lack of
core transaction program, which demand as chief hurdle
remanufacturers prefer.
Source: Frost & Sullivan
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Are Sales Sustainable?
Consumer Income
• Sustainable benefit required
Vehicle
• Sales in August/September
Dealership traditionally higher
• Convincing consumers to “buy
Vehicle
right now” instead of “buy at all”
OEM Labor • IncreasingOEM production is
expected to be beneficial
Material
Part
Supplier
Supplier
Labor Labor
Source: Frost & Sullivan
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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.
Source: US Dept. of Transportation, Washington D.C.; Frost & Sullivan
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Is There a Positive Environmental Impact? (cont’d)
• The average reduction in CO2 emissions is 12 Tons, 4 year break-
2.88 tons/year. even
• Average vehicle produces the equivalent of 3
to 12 tons of Co2
• Environmental benefit of CO2 reduction is
not an immediate one.
3.0 Tons, 1 year
break-even
2.88 Tons (based Production CO2 High Value
on average fuel
economy
improvement of Production CO2 Low Value
9.2 mpg)
Saved CO2
Source: US Dept. of Transportation, Washington D.C.; Frost & Sullivan
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Conclusions
• The aftermarket impact of the CARS act will be small, yet significant
The Good
• Negative effects will be dispersed enough to avoid damage to any one company.
• Minimal loss of vehicles in operation among the target aftermarket age.
The Bad
• Remanufacturing will face real difficulty standardizing prices and recovering the equilibrium.
The Ugly
• Act was passed without real concern for the impact it would have on the automotive
aftermarket.
Source: Frost & Sullivan
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For Additional Information
Jake Wengroff Mary-Beth Kellenberger
Global Director Global Program Manager
Corporate Communications Automotive Aftermarket
Tel: 210-247-3806 Tel: 416-490-1997
E-mail: jake.wengroff@frost.com E-mail: mkellenberger@frost.com
Matthew Scruggs
Research Analyst
Automotive and Transportation
Tel: 210-477-8491
E-mail: matthew.scruggs@frost.com
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