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US AUTOMOTIVE AFTERMARKET

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US AUTOMOTIVE AFTERMARKET

  1. 1. US AUTOMOTIVE AFTERMARKET Industry Report ALBI DHIMITRI
  2. 2. 1. AUTOMOTIVE INDUSTRY • The US is home to 13 different automotive manufacturers (GM, Ford, Chrysler, Honda,Toyota, Nissan, Hyundai-Kia, BMW, Mercedes-Benz, Volkswagen, Mazda, Mitsubishi, and Subaru) which produce an average of over 8 million passenger vehicles annually. • The automotive industry, including dealerships and suppliers, employs over 7 million people and accounts for approximately 3.5% of US gross domestic product. No other manufacturing sector employs moreAmericans.
  3. 3. • In 2015 sales of light vehicles in the US increased by 2.4%YoY bringing the total of new vehicles sold that year to 16.9 million.This is up 62% from 10.4 million, which was the number of vehicles sold in 2009 at the height of the financial crisis, a testament to the recovery the industry has undergone since then. • The chart below shows historical sales and new vehicle sales projections until 2018. Increase in NewVehicle Sales
  4. 4. • The automotive industry is among the most innovative, ranking third out of the 40 largest industries, on a global basis, on R&D spending. In the United States, automakers and suppliers invested $118 Billion in R&D in 2013. • The industry is becoming increasingly high-tech as software applications play a growing role in the functioning of the approximately 30,000 components in an average vehicle. • The industry was recently described as making the transition from being mechanically based to being software-based. • To illustrate, while a new smartphone contains one microprocessor, a car or truck contains about 60. • In 2013, GM invested $7.5 Billion in R&D and increased its staff of software engineers from 1,400 to 8,000. Toyota and Hyundai lead the industry in new patent requests. • To improve fuel efficiency, safety, and performance experience, vehicles are expected to become 10% lighter by the year 2020 through the use of different materials and manufacturing and design methods. Some of the biggest developments in materials technology involve application technologies such as joining (resistance spot welding, adhesives, fasteners, laser welding) and fabrication techniques (hot forming, composite molds, aluminum forming, etc.). Innovation andTransformation
  5. 5. 2. AUTOMOTIVE AFTERMARKET INDUSTRY
  6. 6. 2a. IndustryTrends • Despite strong new vehicle sales, the automotive aftermarket industry is poised for a positive future with steady growth. • In 2013, total US automotive aftermarket sales were $238 Billion. • With industry compound annual growth rate expected to be at 3.4% until 2017, revenues are forecasted to exceed $273 Billion by 2017. • Several trends are contributing to strong industry growth.
  7. 7. 1.Growing Age ofVehicles in Circulation • There are currently about 90 million vehicles in the US in the “sweet spot” ages of 6-12 years old.This represents approximately 35% of the total light-duty vehicles in circulation. • The total number of vehicles on the road is also the highest it has ever been at 264 million, which represents an increase of 2.1% from last year. Light-duty vehicles make up over 97% of this total. • Looking at “sweet spot” vehicles in the US by region, we see that Northeast has the highest percent of vehicles aged 6-12 years old, followed by the South and then Midwest.TheWest is last. • The average age of vehicles currently in circulation is 11.5 years old -- the oldest it has ever been, with the age mix of vehicles continuing to favor older vehicles, thus creating a sweet spot for service and repair. Average age of vehicles on the road is expected to rise to 11.7 years by 2018. Census Region Market Share of Sweet Spot Vehicles Northeast 37.5% South 35.7% Midwest 35.2% West 33.5%
  8. 8. • The chart below shows the quantity in millions of vehicles in circulation by age. • Vehicles in the “sweet spot” years 2004 to 2010 account for nearly 35% of all light- duty vehicles in circulation.
  9. 9. • When looking at the various vehicle on the road, full-size pickup trucks are still the most prevalent segment at 15%, followed by mid-range cars at 11.5% and small economy cars at 9%. • The Ford F-150 remains the most driven vehicle on the road, with nearly 9 million vehicles in operation as of mid-2015. It is followed by the Chevrolet Silverado 1500, which has nearly 9 million vehicles on the road.The remainder of the top 10 models driven include the HondaAccord,Toyota Camry, Honda Civic,Toyota Corolla, Dodge/Ram 1500, Nissan Altima, Ford Explorer and Honda CR-V. • Domestic vehicles still dominate the market with 56.1% of share.
  10. 10. 2. Growth in OverallVehicle Population • The overall vehicle population in the US continues to grow. It is estimated to grow by 5% over the next five years, hitting 261 million light-duty vehicles in circulation by the year 2018. • Vehicles are also lasting longer. Over the next five years, vehicles 12 years and older in circulation will increase nearly 12%.
  11. 11. • In addition to more vehicles on the road and growing vehicle age, the automotive aftermarket industry is also driving revenue from the growing complexity of automotive parts. • Parts complexity is partly fueled by the growth in popularity of Hybrid and Electric vehicles, which currently account for over 3% of vehicle population and growing. • More complex parts not only mean more expensive parts, but also a smaller number of capable DIYers who increasingly turn to automotive professionals to service their cars. • Thus, growing parts complexity drives revenue upwards in these two ways. 3. Growing Parts Complexity
  12. 12. • Miles driven continue their upwards trend year over year and will do so for the foreseeable future. • This is partly due to continually improving vehicle fuel economy. • It is also due to recent decreases in gas prices. • Additionally, an improving economy allows Americans more discretionary income to spend on gas and travel. • The additional miles driven contribute to vehicle wear and tear and more demand for aftermarket products. 4. Increase in Miles Driven
  13. 13. 2b. Global Opportunities Exist • The number of vehicles in circulation expected to increase by 30- 50% globally from 1 billion units in 2010 to between 1.3 to 1.5 billion by the year 2020. • Additionally, trends in OEM production will lead to the use of similar components and the ability to market the same aftermarket product similarly in various regions around the world, thus creating greater opportunities for scale. • Mexico, in particular, is growing substantially, but so is China and Eastern Europe.
  14. 14. • The global automotive aftermarket stands at over half a trillion dollars. • The chart below shows market size in Billions of Euros and the market growth potential and competitive intensity within each global market.
  15. 15. 2c. Industry Consolidation • The industry is becoming increasingly consolidated through mergers and acquisitions. • Value in the automotive supply chain has been shifting from manufacturers to retailers who now command significant bargaining power. Retail profit for the top 3 players has been increasing, while that of manufacturers is on a decline. • The graphic shows 2009 revenues for players in the value chain.
  16. 16. Auto Plus Example • Auto Plus's acquisition by IEP is just one example of ongoing industry consolidation. • The acquisition was finalized in June 2015 for $340 million and it included 38 distribution centers and satellite locations, 240 corporate stores, and over 3,500 employees. • With BrentWindom as president and CEO,Auto Plus is embarking on a growth strategy, purchasingCentral City Auto Parts inTennessee, XpressAuto Parts in Florida, United Auto Parts inWisconsin, and most notably, the Pep Boys Company. • “Auto Plus has been aggressively positioning itself to become a top tier automotive aftermarket company.These recent acquisitions help push us toward this goal,” said CEO Windom. “Our plan is accelerated one and these recent successes are a reflection of our commitment to growth.These newly acquired stores build toward our new hub-and- spoke distribution model.We expect strategic growth through acquisition to continue into 2016 and beyond.” • United Auto Parts CEO welcomed the acquisition by Auto Plus saying that it was best to be at the beginning of this process in industry consolidation than at the end. “Auto Plus has the horse power to take us to the next level.” Moving quickly, Auto Plus is increasing UnitedAuto Parts inventory by 30% and implementing a new computer system.They’re also adding more deliveries to augment the routing schedules.
  17. 17. • Sales of parts are increasingly going online, with most sellers across different markets adopting an eCommerce platform to sell them. • eCommerce sales in the automotive aftermarket are estimated to now exceed $6 Billion annually and are forecasted to grow at double digit rates between 14% to 18% in the near future, reaching $16.6 Billion (10% of current total parts aftermarket) by the year 2020. • Currently at 5% of auto aftermarket sales, online part sales are still quite low as compared to other industries, but they are expected to catch up. • E-Tailing auto aftermarket penetration is expected to grow to 7.3% by 2018. 3. E-COMMERCE AND E-TAILING INTHE AUTOMOTIVE AFTERMARKET INDUSTRY
  18. 18. Online Channel • 60% of sales growth in the auto aftermarket Online channel has come within the past 4 years. • According to Booz & Co., currently over half of all online channel sales are captured by pure-play online auto resellers who are highly fragmented and specialized by part type, vehicle, or application. • Brick & Mortar retailers with online channels, such as Pep Boys, capture only about a quarter of all online sales. • Third-party vendors onAmazon & eBay motors account for 10-15%. • Amazon itself accounts for another 10%.
  19. 19. • The Online channel is used by customers for purchasing and predominantly also for price/product research. • Consulting firm Frost and Sullivan estimates that currently up to 70-80% of customers research online before making a vehicle parts purchase. • Most auto parts buyers visit 2 or more sites before making a purchase. The largest group of buyers, 44%, looked at 5 or more auto parts websites before buying, while only 24% visited only 1 site. Product Research and Price Comparison
  20. 20. • When it comes to auto parts shoppers, websites only get one or at most two chances to make a good impression, according to a Google shopping study. • 59% of auto parts buyers visit an online site just once or twice before buying. • That means sites must do everything possible to get visitors to convert immediately: eliminating roadblocks, improving navigation, having competitive pricing, and providing complete and accurate content which engages customers with pictures, product descriptions, details, attributes, and product ratings. First Impressions Count
  21. 21. • When Booz & Company asked DIYers why they purchased online, the top three reasons given in order of importance were: Price, Convenience, and Home Delivery. These reasons are consistent with other industries and are not surprising. • When the DIFM segment was posed the same question, their top 3 reasons were different. For them what was most important was Established Relationships with Store, Delivery Speed, and Unwillingness to Use a Different Source for Parts.This further emphasizes the importance that trust plays for DIFM customers. • These answers also shed light on important elements of the online shopping experience. Attributes such as price-transparency, ability to compare characteristics and product attributes quickly and conveniently, and complete and accurate product or service content, are key differentiators. • According to Booz, the sales difference between parts with basic information versus parts with product photos, details, features and benefits, image manipulations / mobile viewing, and informational videos, is 17 times greater for the latter. Why Auto Parts Customers Shop Online
  22. 22. How Auto Parts Customers Shop Online • In 2012 over 40% of traffic to websites was generated through search engines like Google. • A recent Google shopping study found that when people searched, they were using a combination of brand and category keywords. Brand terms included the manufacturer of a product or the websites of online retailers. • To illustrate common brand search terms, this next graphic shows the top 20 search terms relevant to this industry. Only two terms were for products: “tires” and “auto parts”. (Note, however, that the graphic below is from 2012.)
  23. 23. • When looking at the customers who shop for auto parts, Mosaic U.S.A divided them into 19 unique customer segments. • More than 30% of consumers who visit automotive aftermarket parts sites fell into one of four categories: • “Pastoral Pride” (mix of lower-middle-class widowed and divorced individuals who have settled in the country and small towns) • “Family Union” (Midscale, middle-aged and somewhat ethnically diverse families with blue-collar occupations) • “AutumnYears” (Established, ethnically diverse and mature couples) • “Blue Sky Boomers” (lower and middle- class baby boomer-aged households in small towns). Who Are Auto Parts Online Customers
  24. 24. Mobile • As mobile phones grow in screen size and processing power and as an increasing number of websites become optimized for mobile, customers are ditching their laptops and desktops. • Because of its better convenience and omnipresence, cellphones, in many cases, are fast becoming the preferred method to shop online. • During the 2015 Black Friday weekend, retailers -- such as Amazon, eBay,Walmart,Target, Best Buy, Home Depot, Lowes, and Macy’s -- all experienced over 50% of website traffic from mobile. • Within e-Commerce, mobile shopping is growing at the fastest rate and we can expect this to be the case for 2016 and beyond. • Currently, mobile shopping accounts for 12% of global e-commerce. • Nearly 50% of smartphone owners have made a purchase from their smartphones. • Many companies have taken advantage of this trend not only through creating highly optimized mobile websites, but also through deploying mobile apps. 85% of consumers have expressed a preference to shop through mobile apps than over mobile websites. • When it comes to mobile shopping, there is much to be gained for automotive aftermarket companies.
  25. 25. eCommerce Opportunity • Though the automotive aftermarket industry was late to the online game, with internet shopping becoming more accepted and more optimized, to not fully take advantage of this channel would translate into lost sales and customers. • The real impact of the online channel is not sales growth in the channel itself, but rather how online e-tailing engages customers and affects the “off-line” market to guide customers along the path to purchase – on and offline.
  26. 26. 4. FUTURE CHALLENGES & OPPORTUNITIES • In their industry report, consulting firm Frost & Sullivan ranked the transformations happening this decade within the automotive aftermarket based on degree of impact and degree of certainty.
  27. 27. • Changes in store formats have the highest degree of impact and certainty. Frost & Sullivan predict retailer store sizes to be around 20% smaller than the current average store size. • High real-estate costs, expensive resources, and the need for innovation to stay afloat, will compel automotive dealerships and aftermarket retailers to shrink store space. • This will be facilitated by the use of technology to allow customers to interact digitally with retail products and services. • This express format for shops would “facilitate on-the-fly customers, instant mobile appointments, and cross-shopping non-repair products that attract more women.” • These “pop-up” stores would emerge and rotate quickly through different spaces with shorter leases. Future Store Format
  28. 28. • The next set of important transformational shifts would be in Omnichannel retailing where businesses become increasingly efficient in integrating their “brick experience” with their “click experience” in order to generate and close sales through multiple selling channels and platforms. • This would mean upgraded business models and greater integration of technology and analytics in the selling process. • The growth in Big Data in Retail would allow for Predictive Modeling, Demand Forecasting, Social Sentiment Analysis, Supply Chain optimization, and Prioritizing high-value customers in order to drive revenue. Integration
  29. 29. • New vehicle software implementations, such as telematics (which allow for interconnected communication between vehicles on the road to increase safety and awareness), new manufacturing methods and advancements, and new vehicle model introductions create some of the natural challenges for companies in the automotive aftermarket. • Additionally, better manufacturing allowsOEM’s to continue to increase the interval between recommended oil changes, thus making trips to aftermarket retailer less frequent. • They are using technology, the oil service indicator light, to replace standard recommended maintenance intervals.Today, only 52 million vehicles (21%), use the oil service indictor light, but this number is growing quickly. • Since most repair opportunities are discovered during routine maintenance, the need for less frequent oil changes -- the most common service opportunity for vehicles of all ages -- is concerning. • 3D printed parts are also starting to penetrate the market.This technology is still in the nascent phase, but has the potential to alter many facets of the industry. NewTechnologies & Parts Complexity
  30. 30. • Research from Carlisle & Co. found that dealerships struggled to find and retain good technicians. • Dealerships with “express lane” offerings have retained customers through providing value, convenience, low cost, and faster service. • Express service customers are the most satisfied and are the biggest promoters. They are also the most likely to return. • However, these express service offerings have eroded technician and service advisor satisfaction. • The turnover rate is 25% for technicians, 30% for service managers, and 42% for advisors. • This is because there is no clear line of career progression and better pay from the express lane to better paying jobs in the main shop. • Some locations have addressed the issue by adding a second tier express program for tires, brakes, and similar services. • Others have been more proactive about creating explicit progression plans for technicians and advisors. • Strained communication with service advisors, “who are not motivated by the same thing,” also contributes to high technician turnover. • A 2014Carlisle study found that 43% of repair orders require additional clarification from the service advisor, costing 30 minutes per day of follow-up time, resulting in both lost time and revenue. • Technicians estimate that a third of advisors provide customers with unrealistic wait times, thus putting pressure on technicians. • To address this issue, some service locations are instituting tablet computer systems that streamline communication between advisor and technician to improve communication and diagnostic accuracy. TechnicianTurnover
  31. 31. • Increasingly, the most important differentiating factors for automotive aftermarket companies aspiring to win is the speed with which an order is fulfilled. • At the end of a complex automotive aftermarket supply chain fulfillment cycle is a customer waiting for their correct repair part at the right place, at the right time, with the correct price. • To have a well-oiled supply chain, companies need to master the logistics of each step. • This means reducing overall costs (transportation costs, aggregating shipments, planning for production and labor). • It also means increasing efficiency by automating repetitive tasks through the use of an integrated transportation management system with reporting and analytics capabilities.This, in turn, helps with accurate inventory planning and reduction. • Companies in this space could invest in a third-party logistics provider (3PL) to provide transportation management solutions. • A 3PL delivers the tools, information, people, expertise, and process rigor to ensure accurate and timely execution. • Being able to deliver faster than competition makes all the difference. • The right 3PL provider can help companies identify service goals and decide how much inventory to hold, where to put it, and what the fill rates should be. Supply Chain Efficiency
  32. 32. • The future of the automotive aftermarket industry is bright. Industry trends and macro-economic trends will allow the automotive aftermarket industry to grow at a sustained rate of 3.4% in the near term. • These trends include: longer-lasting vehicles and growing age of vehicles on the road, increasing overall vehicle population, growing parts complexity, year over year increases in miles driven, lowering gas prices, and steadily improving US economy. • Industry consolidation is expected to continue as bargaining power and profits shift increasingly downstream to aftermarket retailers. • Currently at $6 Billion annually, eCommerce sales in the industry are expected to reach $16.6 Billion per year by the end of the decade. Unprepared companies will not share in the spoils. • There are noteworthy challenges and opportunities that face the industry in the short term: • Challenges include: modernizing and digitizing store formats to adapt to GenerationY preferences, dealing with implementation of software technologies in vehicles and the growing complexity of parts, coming up with answers to the technician turnover problem. • Opportunities exist in: integrating brick & mortar sales with online channels to engage and guide customers to a path of purchase, adopting technologies and big data analytics to gain insight into customers and make smarter decisions, and perhaps most importantly, improving supply chain efficiencies in order to fulfill customer orders as quickly and accurately as possible. 5. CONCLUSION
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