Have You Hugged Your OEM Lately? By Rick Baker There are a number of fundamental changes affecting our industry. Any one of these factors in and of itself will have a negative impact on auto parts rebuilding, but combined they are caus- ing the worst down turn the industry has ever seen. The bad news is that there is not a thing that you can do to stop the change and the second bit of bad news is that these are permanent changes. In other words, we are not going through a “down turn” that is going to be followed by an “up turn.” We are going through a fundamental change in the way business is conducted, and a change in the major players in that business. Forewarned is forearmed. What changes? There are many, but the ones that are having the most dramatic affect on our business include: 1. Better quality products 2. Use of technology in managing the supply chain 3. Import of products from lesser developed nations 4. Increased involvement of OEs in the aftermarket Better Quality Products As a graduation gift in the early 1970s my sister got a brand new Chevy Vega. I doubt that any engineers won awards for that particular vehicle or its associated parts. Was there a single component on that car that could go more than 50,000 miles? Fast-forward 25 years. I own a Jeep Grand Cherokee. I have put 175,000 miles on that vehicle. The only thing that has ever been replaced is the battery. As consumers we don’t want to return to the quality of vehicles that we saw in the 70s and early 80s. Yes, the average age of vehicles on the road is increasing, and eventually stuff has to break— but we’d better accept increas- ing quality as the norm, not as a passing fad. Quality products are cheaper for the OEs to build and service, so they will not stop any time soon. Use of Technology in Managing the Supply Chain Every publicly traded company in the universe is driven to perform for its shareholders. Return on Assets is a very big deal, and there are lots of smart guys and gals figuring out how to squeeze every last penny out of the supply chain. These companies are really just beginning to realize how to effi- ciently use their Enterprise Resource Planning systems (ERP) that they implemented in the late 90s. They are going to pound every last nickel they can out of their inventory. There will be fewer warehouses. Cycle times will shrink; all compli- ments of some pretty sophisticated tech- nology and systems. Are shareholders going to let their respective manage- ment off the hook for getting better financial results year-over-year? Not likely. Count on this trend continuing for as long as capitalism does. Import of Products from Lesser Developed Nations No sense in picking on any particular country. The laptop on which I am writing this article was not assembled in the USA. It’s a sophisticated product that requires manual assembly as the last step. Why wouldn’t you go where the labor is cheaper? Likewise, if there is a large market (and last time I looked the automotive aftermarket was some $200+ billion) you can expect folks to look to manufacture products where they can do it most efficiently, for the smallest investment. So if it appears that a partic- ular product will be around for a long time in the aftermarket, plan on some smart person (from another country) creating a competing product to sell. We saw it happen to water pumps and clutches, and it’s happening to rotating electrical and axles now. Other countries want what America has— opportunity to thrive based on hard work and creativity. Unless we cap people’s desire to improve their circumstances, less expen- sive (not cheap) products are going to continue to flood into this country. Increased Involvement of OEs in the Aftermarket Once again the markets are at play. New vehicle sales is not where the prof- itability is. The profits are in the aftermarket. Dealerships have aggres- sively grown their service departments, OEs are buying scrap yards and auto service centers. The OEs are getting more heavily involved in reman- ufacturing. There is no doubt in my mind that these decisions are being driven by companies that are seeking to increase their profits. Once again, not a short term trend. As aresult of these changes, I believe that we will see three types of rebuilders in the future: ¢ Closely partnered with the OE. As products become more complex, having access to engineering informa- tion is going to be critical. There are currently many companies that exclu- sively work for OEs. I suggest that this is a very viable long term strategy. ¢ Large independents. By large, I am suggesting over $100 million per year in revenue, capable of affording the technol- ogy, engineering, and marketing expenses that will be required to compete. ¢ Small niche players. Ill define small as under $2.5 million in revenues, servicing a select customer base and pro- viding service that the larger companies cannot afford to provide. There are no easy answers, but to sit and wait “fo