Embracing Change: The Automotive Industry Faces Consolidation by Lynn Novelli Five auto recyclers in New Jersey get together and create an auto recycling franchise. A privately held corporation acquires 19 automotive auto recyclers scattered across the United States. A U.S. automaker quietly buys a recycling facility in Florida. This is the new automotive recycling industry, one in which consolidation brings new direction, new thinking and new focus to those in it. Consolidation should come as no surprise, say many auto recyclers with long experience in the business. Among them is Ginny Whelan, incoming ARA president and chief executive officer of ARA Certified Automotive Recycler (CAR) ProAuto Recycling, Inc. Based in New Jersey, ProAuto is the first successful U.S. automotive recycling franchise. The concept is based on ARA’s certification standard. “As the industry gets more complex, there needs to be standardization of quality, delivery and warranty. We need to have greater market penetration, operate more professionally,” said Whelan. “To do these things effectively is beyond what an independent, operating on his own, can accomplish.” The industry’s increasing complexity also means that auto recyclers are more likely to need expertise in specialized areas such as regulatory issues or environ- mental concerns. Few independent operators can afford to hire specialists in these areas, but when several operators can pool their cash, expertise becomes affordable. Companies that combine their resources in this way for common goals can accomplish more than any of them could on their own. For all of these reasons, Whelan, Joe Wittenwiler, Stephen Wiesner and Gary Wiesner, all with at least 25 years experience in the automotive recycling business, created the ProAuto franchise. Under this arrangement, each franchisee—ARA Certified Automotive Recyclers—owns his or her own business and operates it independently but enjoys the benefits of a larger business management organization, said Gary Wiesner, co-owner of ProAuto Recyclers of Williamstown (formerly Manuel’s Auto Parts) and chief operating officer of ProAuto. “Being in business together with other auto recyclers lets you develop a coordinated effort. As a group, you can hire people to do the legwork for all of you in areas such as environment, accounting and regulatory affairs,’ he said. All ProAuto locations are linked by a computer network and share a common inventory. A dedicated delivery and pick-up truck makes daily scheduled rounds among all the locations. As a result, the ProAuto group can offer customers 24-hour availability, an expansive inventory of quality parts and solid, uniform warranties. So far, the ProAuto franchisees believe they have the best of both worlds. “The numbers are going through the roof,” says Joe Wittenwiler, Jr., manager, ProAuto Recyclers of Egg Harbor and an ARA regional director. “The response has been incredible. Our combined advertising ability and the service and quality we can offer are unlike anything else in the industry.” Greater market penetration and increased sales tell only part of the story, said Whelan. “Since becoming part of ProAuto, I have gained a greater sense of personal security and career path,” she said. “I feel that we can go sure- footedly into the future.” Since starting with the original three franchisees, ProAuto has added several more. The founders hope to add another five or six franchises this year and keep growing slowly but surely after that to a total of about 100 franchises in key markets. Outside Investors Investors outside the automotive recycling industry have come to the same conclusions as the ProAuto group about the industry’s need to consolidate. Operating on the premise that there is serious money to be made in the industry, they have created private, well-capital- ized companies with aggressive business plans for growth through acquisition. Chicago-based LKQ Corporation was started about 18 months ago by a group of investors who eventually plan to acquire some 100 auto recyclers in the U.S. In the first year of operation, LKQ purchased 19 automotive recycling businesses. Founder Don Flynn knew a good opportunity when he saw one, said LKQ Chief Executive Officer Joe Holston. “The automotive recycling industry is one in which consolidation could signif- icantly increase the level of service and customer value,” he said. “The potential is there for money to be made, but overall the service level in the industry is mediocre at best.” When considering an acquisition, the company evaluates auto recyclers in selected markets based on how well the facility would fit into the organization overall. According to LKQ Senior Vice President and CFO Thomas Raterman, the company asks itself a series of ques- tions: Does the auto recycler’s manage- ment share the same vision and core values as LKQ? Does the auto recycler have a track record of profitability, revenue and growth? Is there additional ca