For players in the automobile market, aftermarket parts and services is a valuable adjunct to car sales, but this sector is changing rapidly due to market conditions. We offer a schema based on willingness to pay for parts and for service to guide OEMs and other players in their spare parts and secondary market strategies.

1. Automotive Parts:
The Industry’s New Sweet Spot
As the automotive service industry accelerates, it faces stiff headwinds
spawned by a highly-congested marketplace, increasing regulatory
scrutiny and extended car ownership lifecycles. As a result, OEMs,
dealers and other players in the automotive value chain must find ways
to extract greater revenue and profit from the aftermarket services area.
Executive Summary
Automotive companies have traditionally focused
on building their brand in order to increase sales of
new vehicles. In fact, they have worked relentless-
ly to enhance the way such vehicles are marketed
and sold. However, with the average age of auto-
mobiles rising, the auto value chain is shifting
towards the aftermarket. Key indicators of this
shift include the increasing spare parts market,
the expansion of the secondary car market, the
changing nature of auto financing, and collabora-
tive usage and pay per use..
However, the spare parts market is not without
challenges, both external and internal. This white
paper highlights the external obstacles and offers
advice on how industry players can solve them
through a “mixed strategy” that bundles parts
with service. The paper elaborates on consumer
purchase intent in the automotive aftermarket
and suggests a framework based on “willingness
to pay” (or reservation prices) to help OEMs reap
the rewards of a fast-growing market.
Looking Through the Aftermarket Lens
The market for services and parts has experi-
enced robust growth since the 2008 economic
recession. In fact, services and parts now
contribute about 30% of an average dealer’s
profits, while accounting for 11.3% of revenues.1
Figure 1 illustrates the profit comparison between
new vehicle sales profits vis-à-vis service and
spares for an average U.S. auto dealership.
Though these two businesses have been tradi-
tionally treated as separate market segments, a
few auto companies now view them as a unified
whole and look at the auto lifecycle in terms
of customer lifetime value (CLTV) rather than
from a “total sales” standpoint. Thus, for many
auto companies, aftermarket sales is now a
strategic business, because of its impact on the
bottom line, customer satisfaction, loyalty and
repeat sales.
cognizant 20-20 insights | october 2016
• Cognizant 20-20 Insights

2. cognizant 20-20 insights 2
Key Business Challenges
The spare parts business is typically immune to
economic and environmental factors and offers
much-needed relief from the economic vagaries
that new-car sales inevitably experience. As
Figure 1 illustrates, new vehicle profits closely
mirror the general economy while parts profits
have remained broadly consistent over the last
few years, highlighting the importance of parts as
a “fixed operations” business. Figure 2 categoriz-
es the major challenges faced by an OEM’s spare
parts business.
Net Profit Comparison: New Vehicle vs. Service and Parts
Challenges in Automotive
Spare Parts Market
Source: NADA Industry Analysis Division data, 2015
New-vehicle department net profit
Average dealership, in thousands of dollars, including F&I Average dealership, in thousands of dollars
Service and parts department net profit
$100 $400
300
200
100
0
0
-100
-200
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Complex Parts,
Supply Chain &
Reverse Logistics
Complex Vehicle
& Parts
Configuration
Increasing No.
of SKUs
INTERNAL
Shorter Product
Lifecycle
Gen-X
Perceptions
on Spare Parts
Branding
Requirements
EXTERNAL
Figure 2 : Challenges in AutomoƟve Spare Parts Market
Inefficient Data
& Price
Management
Lack of Efficient
IT Application
Gray Market
Regulatory
Compliance
Third-Party
Supplier Penetration
Figure 2
Figure 1
The Inhibition of Customer Choice
The auto industry establishment is facing compe-
tition from various entities: smaller players, third-
party suppliers, the gray market, etc.
Moreover, from an OEM perspective, outsiders
are deterred from entering the market when their
cars are sold with service bundled in. However, this
approach could invite an antitrust complaint. For
the past several years, regulatory watchdogs in the
U.S., Europe and Asia have uncovered multiple car-
tels, handing out record fines in some cases.2
• Case in point #1: The U.S. charged seven
Japanese executives with price-fixing in a long-
running probe into illegal practices in the auto
parts industry. Over the past several years, U.S.
justice authorities have fined 28 companies
more than $2.4 billion.3
• Case in point #2: The Competition Commission
of India (CCI) imposed a penalty of INR25 billion
on 14 car manufacturers for violating com-
petition law. CCI demands that OEMs reveal
all facts in the public domain regarding price,
processes, alternatives, etc. of spare parts to
facilitate fair competition.
However, the larger picture here is that the entire
debate revolves around “inhibition of customer
choice.” Most warranty regulations advocate that
simply using an aftermarket or recycled part does
not void a vehicle’s warranty (see sidebar, next
page). With such a clause, OEMs are often pressed
for customer win-back, which is made even more
difficult by a “one-size-fits-all” spare parts strategy.
Like any other product, automotive goods are also
subject to the product lifecycle. Every stage in the
lifecycle has a specific marketing objective – and a
specific strategy as well. In automotive parlance,
spare parts should not be any exception to this.
Different vehicles and models are at various places
in the automotive lifecycle; due to this, as well as
changing consumer behavior, it is imperative that
the industry reexamine its operating approach.

3. DIY Category
Service
Aggregate Parts,
Safety items
Complex Design
and jobs
Accidental,
Proprietary Items
CATEGORY EXAMPLE LIKELY CUSTOMER
BEHAVIOR
1
2
3
4
Small scratches on car.
Engine oil refill required.
Parts are easily available. Customer can get the
correct grade of oil/part no. at any shop and get it
fixed anywhere or do it himself.
The car has a mishap; part
replacement required.
Customer seeks original parts and seeks cheaper labor
alternatives. However, defects, if not arrested, are
progressive and consequential over time.
Customer fitted an
electrical accessory; requires
a change in wiring harness.
Customer prefers the OEM . Though it can be reworked on a
case-to-case basis, waiting time is generally high for customer.
Here again, customer seeks cheaper alternatives.
Customer lost his 2nd car key;
wants to install a new set.
Customer puts safety above everything else. Due to
security reasons and version complexity, job also some-
times mandates service at authorized facilities.
Figure 4
Shifting Gears
Willingness to Pay
Taking a cue from the aforementioned cases,
companies should embark on initiatives that offer
a greater choice to customers in the aftermar-
ket and simultaneously innovate strategies to
safeguard their bottom lines.
We suggest an approach based on the simple
concept: “Price is the measure of willingness to
pay (WTP).” Figure 3 illustrates our take on a
WTP-driven example — an off-road enthusiast
would be willing to pay more for a “tire care
regime” than would a business executive who
drives a sedan on a corporate lease plan.
If different customers – or the same customer
under different situations – have a different WTP
7 8$
'"
Drives Car “A,”
a luxury sedan
on corporate
lease plan.
John,
“The
Executive”
Owns Car
“B,” an
SUV, loves
off-roading.
John,
“The
Adventurer”
Figure 3
for different maintenance regimes, repairs and
spare parts, why should the pricing approach, and
hence marketing and selling, be identical for all?
Splitting the “Pocket”
An invoice bill has two components – the part price
and labor charge (or job rate). Needless to say, tax
is another obligatory expense. In other words, after
a visit to a service station the customer incurs two
categories of expense. Hence, it is very likely that
the customer will have differential preferences
toward the two categories and hence varying WTP.
So, does the customer spend more on parts or on
labor?
An analysis of real life instances that broadly
categorize a vehicle’s visits to service stations is
quite revealing (see Figure 4).
cognizant 20-20 insights 3
Why Go To A Service Station: Four Broad Categories
Splitting the Pocket
Quick Take
The Magnuson-Moss Warranty Act makes it
illegal for companies to void your warranty
or deny coverage under the warranty simply
because you used an aftermarket or recycled
part. Still, if it turns out that the aftermarket
or recycled part was itself defective or was
not installed correctly, and it causes damage
to another part that is covered under the
warranty, the manufacturer or dealer has
the right to deny coverage for that part and
charge you for any repairs.
Why Inhibit “Customer Choice”?

4. REPLENISH
CROSS-SELL,
FASTER REPLENISHMENT:
3-D printing, dealer Incentives,
bundled offers.
1. Complex chassis items, high
number of variants (e.g., wiring
harness).
INCREASE LIFECYCLE, LONGER
OWNERSHIP: Refurbished parts,
dealer incentives, AMCs.
1. Aggregate parts (engine, gearbox).
2. Safety, security items: ECU
programming, key change,
airbags.
EXTEND
MULTICHANNEL SALES:
E-commerce, brand promotion.
1. Lubricants, tires, batteries, gels, fuses.
2. Low-value trim items (carpets,
accessories, decals, seat covers, etc.).
3. Body parts: other (e.g. paint jobs,
bumpers, hoods, fenders, grilles,
wheels).
PENETRATE
CROSS-SELL, PROMOTION:
Bundled offers, AMCs.
1. Lubricants, tires, batteries,
gels, fuses.
2. Low-value trim items (carpets,
accessories, decals, seat covers,
etc.).
3. Body parts: other (e.g. paint jobs,
bumpers, hoods, fenders, grilles,
wheels).
CROSS-SELL
LOW
LOW
HIGH
HIGH
4
Figure 5
The Strategy Quadrant
Based on an examination of consumer behavior,
customers visit service stations with different
expectations under various circumstances.
The jobs carried out differ in nature, and under
different circumstances customers have varied
WTPs (or reservation prices) for parts and labor.
Figure 5 plots the major jobs in automotive service
context into four quadrants. Our breakdown of
the individual quadrants reflects our suggested
action plan in line with the consumer behavior and
provides a mixed approach to spare parts strategy.
Bundling as a Pricing Strategy
Forbothtraditionalandnewerbusinesses,marketers
have used bundling methods to effectively increase
profits (for complementary goods), to reduce selling
costs and to deter market entry. History shows that
a bundling approach can yield great results when the
concerned products/services exhibit inverse WTP
among customers. Our “cross-sell” group (showing
high WTP for parts and low WTP for labor charges)
classifies products and services that exhibit such
behavior. Rolling out calculated bundled prices
of parts and labor can yield fruitful results here.
The same argument can also be extended to the
“replenish” quadrant, as well.
The customer who buys a discounted bundle (i.e.,
service plus parts) doesn’t care if either is discount-
ed, as long as the total cost is lower. Furthermore,
bundling does not require knowledge of an indi-
vidual consumer’s WTP, but only the distribution
of consumer choices on prices. (See sidebar for an
example from an entirely different industry sector.)
WTP FOR OEM SPARE PARTS
WTP Quadrant
WTPFOROEMSERVICE(LABORCHARGES)
Refurbished Parts as an Extended Market
For all practical purposes, refurbishing automotive
parts is very much like assembling new parts - except
that many of the components are taken from used
parts (cores). In reconditioning, the part is disassem-
bled, cleaned and examined for damage. Worn out,
missing or nonfunctioning components are replaced
with new or rebuilt components. After all the work
is completed, the part is reassembled and tested
for compliance with performance specifications.
This means a separate supply chain mechanism is
required (e.g., reverse SCM) for the collection and
redistribution of used parts through a channel.
OEMs need to consider playing in this segment for
the following reasons:
• Waning margins: Changes in the legal envi-
ronment will lead to a growing deregulation
of the after sales business. While the warranty
regulations will ensure more rights for inde-
pendent repairers, Insurance companies may
establish their own repair network and exert
pressure on the prices charged by authorized
repair shops.
• Lengthening lifecycle: In most developed
markets, the increasing cost of car ownership
and declining population means potential
private new car buyers will postpone buying a
new car or won’t buy one at all. Furthermore,
given the industry’s improved service quality,
car life has been prolonged.
Quick Take
Retailers frequently bundle the prices of
several products and services together for
their new customers. They offer the phone
itself with a package that also includes the
two-year phone plan, Internet access and
phone charger. This bundle benefits the
customers because it provides them with all
the tools they need for their phone all at once
and it benefits the mobile phone retailers
because they are selling the customer sup-
plementary products and services other
than just a phone.
Bundling in Mobile
Phone Retail
cognizant 20-20 insights

5. 5
Hence, “discounting” spare parts or service
offerings is more effective for OEMs as it expands
demand and, under most circumstances, delivers
scale benefits. Smaller competitors – those that
sell parts or service individually - do not have the
same luxury. Even if these smaller competitors
hold similar technical competencies, OEM market
clout typically wins out. For example, OEMs will
always have an edge by offering service bundles
that provide an economic advantage to car buyers.
E-tailing as a Channel
OEMs understand the impact of digitization and
its ability to increase market share and improve
customer satisfaction. OEMs need to become
independent of the demand for parts from
authorized workshops, which necessarily means
entering the online market and expanding their
Why Should OEMs Play this Game?
Figure 6
Did you know?
1. Rebuilt ENGINES
require only 50% of the
energy and 67% of the
labor that is required to
produce new engines
2. About 50% of an
originial Starter is
recivered in the
refurbishing process
IMAGINE the scale effects!
Average of light vehicles
U.S. FiveEuropeanCountries
12years
10
8
6
4
2
2009 ‘10 ‘11 ‘12
0
Source: APRA.org Source:The Wall Street Journal
3-D Printing as a Fulfilment Option
With additive manufacturing – the descriptive
phrase for 3-D printing - considerably lower organi-
zational effort is required for developing suppliers
to maintain quality standards for complex and
critical parts. This is because designs shared
can be directly taken to mass production at any
location. From an aftermarket perspective, this
implies on-demand spare parts production at the
distribution leg, thus reducing service lead time.
parts retailing network and supplying indepen-
dent repair shops and service chains as well (see
an example in sidebar, below left).
While increasing product complexity will continue
to squeeze the do-it yourself market, customer sat-
isfaction will depend more and more on availability
and brand visibility. Automotive e-commerce will
emerge as a retail channel for parts and services,
enabling the sale of items. The “penetrate”
strategy quadrant represents such a scenario.
Since this customer has a weak WTP towards both
parts and labor charges, it is better for the OEM to
proliferate through every channel possible.
Final Thoughts
The spare parts business should not be looked
upon as a derivative of a product, but as a product
itself with its own 4P (price, product, promotion
and place) strategy and technology road map. The
average spare parts inventory for a U.S. dealership
is nearly $330,000 SKUs.4
With frequent product
launches and facelifts, organizations often end
up with stocks that have a very low potential to
be sold at normal price. As such, they incur a
huge amount of revenue leakage through such
distressed inventories.
OEMs and dealers are often led to believe that
new vehicles are bread winners and spare parts
are remainders in the top line. Hence, most after-
market initiatives are meted out and given stepson
treatment. As a result, the bottom line suffers. As
discussed throughout this white paper, the auto
services market is fragmented, subject to changing
customer needs and evolving technologies. As a
result, a “one-size-fits-all” approach simply won’t
suffice. By viewing the market through our strategy
quadrant prism, carmakers can take a different and
more profitably textured approach.
Quick Take
Indian auto major Tata Motors teamed up with
e-commerce player eBay India to sell branded
merchandise of its sports utility vehicle Tata
Safari Storme online after the grand success of
theirearlierNanoBrandStoreone-bay.Evenwith
e-bay’s early presence on the online platform in
spare parts, there is a wide scope ahead.
E-Bay and Tata Motors
Join Hands
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6. About Cognizant
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business
process services, dedicated to helping the world’s leading companies build stronger businesses. Headquar-
tered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology inno-
vation, deep industry and business process expertise, and a global, collaborative workforce that embodies
the future of work. With over 100 development and delivery centers worldwide and approximately 255,800
employees as of September 30, 2016, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes
Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies
in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.
World Headquarters
500 Frank W. Burr Blvd.
Teaneck, NJ 07666 USA
Phone: +1 201 801 0233
Fax: +1 201 801 0243
Toll Free: +1 888 937 3277
Email: inquiry@cognizant.com
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Phone: +44 (0) 20 7297 7600
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­­© Copyright 2015, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is
subject to change without notice. All other trademarks mentioned herein are the property of their respective owners.
Suresh Vickram is a Senior Manager of Consulting within Cognizant Business Consulting (CBC) and leads
the Automotive Consulting Practice. He has more than 12 years of experience in IT consulting, leading trans-
formational deals and driving strategic initiatives for automotive customers worldwide. Suresh has a strong
background in automotive demand planning and order management, working with leading OEMs across the
U.S. He specializes in dealer management, supply chain planning and execution. Suresh can be reached at
SureshVickram.Selvarajan@cognizant.com.
Somnath Chatterjee is a Senior Consultant within Cognizant Business Consulting (CBC), focused on the
automotive domain. He has more than eight years of combined experience in automotive and consulting
functions. Somnath’s experience includes aftermarket operations, spare parts, channel development, manu-
facturing planning and quality management. He currently leads the consulting function for one of Cognizant’s
marquee clients. Somnath can be reached at Somnath.Chatterjee3@cognizant.com.
Footnotes
1 “NADA data 2015 - Annual financial profile of America’s franchised new-car dealerships,” NADA, 2016,
https://www.nada.org/nadadata/.
2 “EU antitrust chief says more cartel fines on way for suppliers,” Automotive News Europe, September 2014,
http://europe.autonews.com/article/20140919/ANE/140919813/eu-antitrust-chief-says-more-cartel-fines-
on-way-for-suppliers
3 “US charges 7 Japanese auto executives with price-fixing,” The Economic Times, September 2014,
http://economictimes.indiatimes.com/us-charges-7-japanese-auto-executives-with-price-fixing/article-
show/42907851.cms
4 “NADA data 2015 - Annual financial profile of America’s franchised new-car dealerships,” NADA, 2016
https://www.nada.org/nadadata/
Codex 2234
About the Authors