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Aftermarket Megatrends & Realities
Market Trends and Megatrends in the Aftermarket
September 2017
Philip Atkins Director, Strategic Research & PlanningPatkins@aasa.mema.org919-406-8856
Aftermarket Megatrends & Realities 2
Automotive Aftermarket Suppliers Association
Heavy Duty Manufacturers Association
Original EquipmentSuppliers Association
Motor & Equipment Manufacturers Association
Motor & EquipmentRemanufacturers
Association
ADVANCING THE INDUSTRY’S INTERESTSSINCE 1904
Aftermarket Megatrends & Realities
MOTOR VEHICLE PARTS SUPPLIERS MATTER
The largest sector of manufacturing jobs in the U.S.
871,000 direct jobs
Total employment impact of 4.26 million jobs
Contributes 2.4% on U.S.GDP
And…
77%
Aftermarket Megatrends & Realities
Strong Market Fundamentals
AGENDA—LIGHT VEHICLES
1
Decelerating Growth?
2
Future Looks Bright (Very)
3
E-tailing4
Changing ValuesConnected, Automated, Shared, Electrified
5
Telematics & Freedom of Choice
6
Market Trends Mega Trends
Aftermarket Megatrends & Realities
E-tailingStrong Market Fundamentals
AGENDA—LIGHT VEHICLES
1
Decelerating Growth?
2
Future Looks Bright (Very)
3
4
Changing ValuesConnected, Automated, Shared, Electrified
5
Telematics & Freedom of Choice
6
Market Trends Mega Trends
Aftermarket Megatrends & Realities
© AASA, the Automotive Aftermarket Suppliers Association, 2017
VERY STRONG MARKET FUNDAMENTALS
Fundamentals Status U.S. Statistic
VIO Big and Growing 279 million1
Avg. Vehicle Age High; Increasing 11.7 years2
Miles Driven Record Levels 3.22 Trillion3
Fuel Prices Low $2.38/gallon4
Unemployment 16-year Low 4.3%6
Economy Growing 2.2%5
1 2017 light vehicles, source: IHS Markit; 2 2017 light vehicles, source: IHS Markit; 3 2016, source: Federal Highway Administration; 4 regular gasoline, 8/07/17, U.S. Energy Information Agency; 5 2017 Real GDP growth forecast, U.S. Federal Reserve, June 14 FOMC release; 6 8/17, source: U.S Bureau of Labor Statistics
Aftermarket Megatrends & Realities
WHICH HAS LED TO A STRONG, STABLE, AND ATTRACTIVE $277 BILLION AFTERMARKET
© AASA, the Automotive Aftermarket Suppliers Association, 2017
8
$139
$277
-
50
100
150
200
250
300
Aftermarket Size in Billions of Dollars
Source: AASA / ACA Joint Channel Forecast by IHS Markit; 1997 – 2012 are historical actuals; 2013 – 2016 are IHS modeling based on economic actuals; 2017 – 2020 are forecasts.
U.S. aftermarket hasdoubled in size in the last 20 years
Aftermarket Megatrends & Realities
Strong Market Fundamentals
AGENDA
1
Decelerating Growth?
2
Future Looks Bright (Very)
3
E-tailing4
Changing ValuesConnected, Automated, Shared, Electrified
5
Telematics & Freedom of Choice
6
Market Trends Mega Trends
Aftermarket Megatrends & Realities
AASA MEMBERS REPORT SALES ARE STILL STRONG, ALTHOUGH SLOWING
-12% -11%
-3%
54% 58%
15% 5%
-40%
-20%
0%
20%
40%
60%
80%
2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2
How strong are your company's aftermarket sales?
Small declines Large declines Moderate growth Substantial growth
Source: 2Q 2017 AASA Barometer Report
Aftermarket Megatrends & Realities
RECENT CONCERNS / HEADLINES …ABOUT SLOWING GROWTH
-4%
-2%
0%
2%
4%
6%
8%
10%
5-Yr Sales 1-Yr Sales Latest SSS
Big 4 Sales Trend
Advance AutoZone GPC O'Reilly
Source: Jeffries, and company quarterly reports; SSS = same store sales
Aftermarket Megatrends & Realities
PICTURE MORE POSITIVE, THOUGH GROWTH MIGHT BE RETURNING TO TREND
• Market has been outperforming trend in recent years, as we have enjoyed large, unusually positive ‘deltas’ in key market drivers
• This may have led to ‘unrealistic expectations’• Recent market numbers likely depressed by unusually mild weather, delayed tax
refunds• Big 4 numbers may exaggerate recent market trend?
• Some struggling to see the growth to meet plan or expectations
12
Market Fundamentals at a high, strong level – but may not be accelerating at the same pace that drove above-trend growth in
recent years. Sales aren’t declining; growth may be
Aftermarket Megatrends & Realities
WE HAVE RECENTLY ENJOYED ABOVE TREND GROWTH
© Automotive Aftermarket Suppliers Association 2017 Source: IHS Markit; AASA Analysis; Trendline based on 2003-2016
13
2008-9: Great
Recession
2010-12:Recovery
2014-16:Gas prices ↓,
miles driven ↑, employment ↑
IHS MarkitForecast
Aftermarket Megatrends & Realities
VIO WILL CONTINUE TO GROW, BUT GROWTH RATE DECELERATING FROM HIGH LEVEL
14
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2013 2014 2015 2016 F2017 F2018 F2019 F2020
Motor Vehicle Stock, % Change YOY
The increase in VIO that drove high market
growth in recent years……will continue but slow, which might dampen the
growth rate in aftermarket parts volume
© Automotive Aftermarket Suppliers Association 2017 Source: IHS Markit; AASA Analysis
Aftermarket Megatrends & Realities
CARS AT RECORD AGE, BUT SLOWING RATE OF INCREASE
9.8 9.8 9.9 10.010.3
10.610.9
11.111.3 11.4 11.5 11.6 11.7 11.7 11.8
0
0.1
0.2
0.3
9
10
11
12
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 F2017 F2018 F2019
Age of Vehicles In UseAverage Age • Change in Age YOY
Change in Age YOY Average Age of Vehicles
Average Age in Years
Change in Age YOY (Years)
© Automotive Aftermarket Suppliers Association 2017 Source: IHS Markit; AASA Analysis
Aftermarket Megatrends & Realities
9.3%8.9%
8.1%
7.4%
6.2% 6.3%
4.9%4.4% 4.5%
4.8% 5.0%
2.3%
3.3%
4.3%
5.3%
6.3%
7.3%
8.3%
9.3%
10.3%
2010 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F
U.S. Unemployment Rate
LOW UNEMPLOYMENT, BUT LIKELY NO BIG ‘DELTA’ LIKE 2010-16 TO DRIVE DEMAND
16
© Automotive Aftermarket Suppliers Association 2017 Source: IHS Markit
Aftermarket Megatrends & Realities
GAS PRICES LOW. BUT UNLIKELY TO SEE ANOTHER BIG DIP THAT WOULD SUPERCHARGE GROWTH
3.523.62
3.51
3.3
2.43
2.15
2.33 2.33
$2.00
$2.20
$2.40
$2.60
$2.80
$3.00
$3.20
$3.40
$3.60
$3.80
2011 2012 2013 2014 2015 2016 2017F 2018F
$/Gallon Regular
© Automotive Aftermarket Suppliers Association 2017 Source: Energy Information Agency: Short-Term Energy Outlook, 8 8 2017
Aftermarket Megatrends & Realities
MILES DRIVEN WILL BE POSITIVE, BUT NOT AS STRONG A CONTRIBUTOR TO VOLUME INCREASE
Forecast2017-2020
IHS
Forecast 2017-2020
EIA
~+2.0%
~+0.95%
Source: IHS Markit
2017 - 2020
-2%
-1%
0%
1%
2%
3%
4%
Miles Driven
*
*Annualized YTD as of May 2017
% Change in Miles Driven YOY
© Automotive Aftermarket Suppliers Association 2017 Source: Department of Transportation; IHS Markit; Energy Information Agency, AASA Analysis
Aftermarket Megatrends & Realities
Strong Market Fundamentals
AGENDA
1
Decelerating Growth?
2
Future Looks Bright (Very)
3
E-tailing4
Changing ValuesConnected, Automated, Shared, Electrified
5
Telematics & Freedom of Choice
6
Market Trends Mega Trends
Aftermarket Megatrends & Realities
FUTURE LOOKS BRIGHT
Market large, stable, attractive – a market that rest of the auto or retail industries would love to have
• Despite return to trend, this is one of most attractive auto or retail sectors• U.S. OE volume softening, increasing incentives; aftermarket still growing• Consumer price inelasticity – when needs repaired, it needs repaired
Turned corner on “sweet spot”Parts complexity increasing cost per part; mega-trends of fuel economy regulations and sensorization accelerating opportunityGlobal trends are positive, as OE unit sales increase dramatically
20
Aftermarket Megatrends & Realities
REPLACEMENT ‘SWEET SPOT’ IS GROWING AGAIN
21
Source: IHS Markit, AASA Analysis
Post-recession new vehicle sales increases are starting to move into the aftermarket sweet spot, joining the increasing number of cars older than 12 years
66
68
70
72
74
76
78
80
2015 2016 2017 2018 2019 2020
Number of Vehicles in ‘Sweet Spot’6 - 11 Years Old (Millions)
At the same time, cars 12+ years in age will grow by 10% 2016-21
Aftermarket Megatrends & Realities
PARTS ARE GETTING MORE COMPLEX – AND COSTLY
22
Wiper Blade$5 $19
Fuel Pump$45 $225
Wheel End$15 $185
Source: AASA Analysis
Examples
Increasing technology – lightweighting, friction reduction, ADAS, electrification, sensorization, etc. – will increase parts value
Aftermarket Megatrends & Realities
AFTERMARKET FORECASTED TO GROW TO A HEALTHY $316 BILLION BY 2020
Recessions
© AASA, the Automotive Aftermarket Suppliers Association, 2017
23
139 157
223
277
316
-
50
100
150
200
250
300
350Aftermarket Size in Billions of Dollars
The market in 2020 will be more than twice the size it was in 2000.
Source: AASA / ACA Joint Channel Forecast by IHS Markit; 1997 – 2012 are historical actuals; 2013 – 2016 are IHS modeling based on economic actuals; 2017 – 2020 are forecasts.
Part of growth is shift from
DIY to DIFM, including
growing labor component and pricing
Aftermarket Megatrends & Realities
Source: AASA / ACA Joint Channel Forecast by IHS Markit; AASA Analysis
1.8% 1.6% 1.7% 1.8% 1.7% 2.2%2.9% 3.2% 3.1%
4.9%
1.6% 2.0%2.5% 2.6% 1.3% 0.4%
0.2% 0.2%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F
Growth Rate ContributionsPrice versus Volume
Price Volume
ALBEIT GROWTH INCREASINGLY DRIVEN BY PRICE
Aftermarket Megatrends & Realities
WHAT COULD BE NEW DRIVERS OF POSITIVE “DELTAS” FOR U.S. AFTERMARKET?
Inflation• General economy• Industry-specific
Increased consumer spending powerIncreased economic growth rateIncreased failure rate of new technology—large technology deltas historically lead to temporary increases—among, for example:
• More fuel-efficient, light-weighted, lower-friction technologies• Infotainment and electronics / software / sensor content
25
Aftermarket Megatrends & Realities
Strong Market Fundamentals
AGENDA
1
Decelerating Growth?
2
Future Looks Bright (Very)
3
E-tailing4
Changing ValuesConnected, Automated, Shared, Electrified
5
Telematics & Freedom of Choice
6
Market Trends Mega Trends
Aftermarket Megatrends & Realities
E-TAILING —SMALL PART OF MARKET; LARGER SHARE OF GROWTH
28
2012 2013 2014 2015 2016 2017 2018 2019 2020
Pure Play E-tail Contribution to Total Aftermarket Sales
E-tailing Sales
$7.1B
E-tailing Sales
$14.9B
Sales do not include etailing sales of traditional brick and mortar retailers such as Walmart or AutoZone.
+$0.7B
+$0.8B+$0.9B
+$1.0B+$1.0B
+$1.1B
+$1.1B
Pure-play e-tailers are adding ~$1B a
year in sales
© Automotive Aftermarket Suppliers Association 2017 Source: AASA / ACA Joint Channel Forecast by IHS Markit; AASA Analysis
Aftermarket Megatrends & Realities
12%23% 29%
13% 22%
25%26% 19%
13%17%
50% 29%
1%
16%4%
Price Ease of Purchase/Convenience
Home Delivery Unavailability inLocal Store
Other
Reasons for Buying Online - Consumers Who Have Bought Online
Reason 1 Reason 2 Reason 3
WHY U.S. CONSUMERS CHOOSE THE E-TAILING CHANNEL
29
SOURCE: AASA and Booz & Company; E-tailing Success Strategies for the Fastest Growing Segment of the Aftermarket. March 2013
87%77%
49%42% 43%
Aftermarket Megatrends & Realities
$213
$249
E-TAILERS HAVE TAKEN ADVANTAGE OF THIS DISRUPTION
30
FAST DELIVERYSame-day delivery of parts
in 40 U.S. cities
AMAZON WORLDWIDE$4 Billion aftermarket sales
EXPANDING SERVICESOffering cars online in
Italy
ESTIMATE“They’ll grow 50% this year”
EASY SHOPPINGCustomized, individual shopping
LOWER PRICES
Aftermarket Megatrends & Realities
COST SAVINGS COULD HELP E-TAILING EXPAND INTO DIFM
31
SOURCE: Directional findings from AASA proprietary study; 2017
Shops are interested in cost saving, if significant….
DIFM consumers are interested in cost savings, even with delayed delivery.
SOURCE: AASA/Strategy& DIFM Outlook 2025
Price savings required to convince shops to relax delivery expectation
(% Acceptors)
Aftermarket Megatrends & Realities
TO DATE, ROADBLOCKS HAVE OFFERED PROTECTION FROM E-TAILING
“Relationships …have also been a sticking point for B2B distribution moving online. Industrial buyers
often value reliability, quality guarantees and immediate availability of products highly relative
to costs…”
32
Goldman Sachs, Fortnightly Thoughts
Issue 119 April 12, 2017
Aftermarket Megatrends & Realities
SOME AFTERMARKET PRODUCTS WILL LOSE THAT PROTECTION SOONER THAN OTHERS
33
Drivers of Online Penetration
Easily digitizedHighly standardizedLow weight/volume
Low touchDiscretionary purchase
Physical productsRelatively standardized
Physical productsIndividualized, not standardized
Perishable/short shelf lifeComplex product/ installationHigh weight/volume relative to price
Physical handling and saleDiscretionary purchase
Assisted saleSame-day delivery
Assisted saleImmediate fulfillmentRelationship-based sale
PRODUCT CHARACTERISTICS
MARKET CHARACTERISTICS
Easier to Sell Online Harder to Sell Online
Source: Booz & Company e-tailing report for AASA, 2013
Aftermarket Megatrends & Realities
E-TAILING WILL IMPACT ALL PARTS OF THE VALUE CHAIN
34
Service Professionals
Channel Partners
Suppliers/Manufacturers
• More educated consumers• Impact of price transparency—need to make
profit on labor since parts moving to market prices
• Learn customers’ “path to purchase” on and off-line
• Competitive threat: possible market share shifts• Potential threat: too much brick and mortar
• Understand consumers, build brands, grow with e-tailing
• Suppliers behind the curve in creating value for channel partners through insight
Source: Booz & Co.: “E-tailing: Supplier Success Strategies” 2013
Aftermarket Megatrends & Realities
Strong Market Fundamentals
AGENDA
1
Decelerating Growth?
2
Future Looks Bright (Very)
3
E-tailing4
Changing ValuesConnected, Automated, Shared, Electrified
5
Telematics & Freedom of Choice
6
Market Trends Mega Trends
Aftermarket Megatrends & Realities
CHANGES IN WHAT IS VALUED IN A VEHICLE
36
Past
Mechanical device
Current
Mechanical device with electronic enablers
Future
Software device with electronic & mechanical enablers
What a vehicle is has changed over time
Aftermarket Megatrends & Realities
VALUE PROPOSITION MIGHT FUNDAMENTALLY CHANGE
37
Changing Product AttributesWhat consumers want / pay forWhat is ‘performance’ / appealWho are the buyers / owners
Who and how vehicles are maintained
Changes for SuppliersSources of competitive advantage
Investment needsPace of change / level of certainty
People and culture needs
Aftermarket Megatrends & Realities
INDUSTRY TRANSFORMATION—A CASE IN POINT
38
• Becoming a technology industry: mechanical → software/ electronics• Internet of Things (IoT), cybersecurity, V2X, infotainment, big
data/data analytics
• Driving automation / ADAS / increased safety• Cybersecurity / V2X
• “Car-as-a-Product” “Car-as-a-Service”
• Changing business models and value propositions• Changing customers, competitors, partners
• Fuel economy, CO2, emissions reduction / harmonization• Electrification / decarbonization• Sustainability
Connected
Electrified
Shared
Automated
Aftermarket Megatrends & Realities
CONNECTED & AUTONOMOUS
39
“November or December of this year, we should be able to go from a parking lot in California to a parking lot in New York, no controls touched at any point during the entire journey.” Elon Musk
CEO Tesla, Inc.4/29/2017
Aftermarket Megatrends & Realities
CONNECTED & AUTONOMOUS…WILL INCREASE MILES DRIVEN
40
KPMG:“Miles driven will soar by one trillion more miles per year by 2050 …”
- Older can still be driven- Freedom of mobility for youth
- Fewer occupants per vehicle
- The top of their 3 scenarios has miles driven increasing 3-4 trillion miles/yr!
Aftermarket Megatrends & Realities
MOBILITY AND AUTOMATED MEAN VEHICLE USE MIGHT EXPLODE
Mobility & automation will lead to significant increase in miles-driven:
41
U.S. forecast to grow from 3 to 5 trillion miles driven
Source: Morgan Stanley, 6/16
• Basic economic equation: good becomes more appealing (automation frees up time for work, entertainment, consumption) + cheaper per unit of use (increased safety, shared mobility models) = increased demand
• May happen a bit later than forecasts, which are over-optimistic on automated vehicle timing. But this is our future
Aftermarket Megatrends & Realities
MOBILITY TREND MAY LEAD, OVER TIME, TO‘GOLDEN AGE’ FOR AFTERMARKET
… and with it the size of the aftermarket:
42
Source: McKinsey, 1/16; note that AAPEX analysis indicates the global aftermarket was $740 billion in 2016
$30
$1,500 $720
$1,200
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
2015 2030
McKinsey & CompanySize of global aftermarket, high-disruption scenario,
$ billion
Traditional Aftermarket
New Services (shared mobility,data connectivity, apps,remote service and upgrades,etc.)
Aftermarket Megatrends & Realities
Strong Market Fundamentals
AGENDA
1
Decelerating Growth?
2
Future Looks Bright (Very)
3
E-tailing4
Changing ValuesConnected, Automated, Shared, Electrified
5
Telematics & Freedom of Choice
6
Market Trends Mega Trends
Aftermarket Megatrends & Realities
TELEMATICS COULD LEAD TO AN INCREASE IN KEY BUSINESS DRIVERS FOR THE AFTERMARKET
28
Increased awareness of: - failure, replacement rates, & location information for better demand forecasting
- prognostics that alert motorists, service providers, distributors, & suppliers of pending failure.
- more end-consumer awareness benefits suppliers from increased maintenance
Products or services used to a) collect and communicate data from vehicles in operation, and/or b) the process of communicating that data.
Aftermarket Megatrends & Realities
“We need to get the laws to be pro-choice and pro-consumer. We could all be denied this and the aftermarket goes away..”“Like Tesla, they could have a chip that says the part has to be OE”“We’re playing high-stakes poker with this topic…”
We consumers want freedom of
choice!
WHO HAS ACCESS TO THE DATA?CRITICAL ISSUE FOR THE AFTERMARKET
Senior executives in the aftermarket, 2016
Aftermarket Megatrends & Realities
4 STEPS TO ACHIEVE DESIRED OUTCOME (1/2)
1. Be clear about what we want –
• Access to the vehicle that offers motorists freedom-of-choice for vehicle repair and service parts
• Access and use of parts and equipment-enabling software necessary to allow motorists freedom-of-choice
AASA initiatives
Aftermarket Megatrends & Realities
2. Advance aftermarket industry’s technical solution:• Secure Vehicle Interface
o Required for v2V, V2I, V2X as well as aftermarket• Software-enabled copyrights• Aftermarket data privacy principles
3. Training & Certification• Telematics/Connected-vehicle Certification
• Consumer trust that aftermarket can repair• Protect data privacy
4. Awareness of Solutions
AASA initiatives
4 STEPS TO ACHIEVE DESIRED OUTCOME (1/2)
Aftermarket Megatrends & Realities 48
To grow, the aftermarket needs to:• Take advantage of the opportunities that increasing
vehicle technology and parts complexity bring• Ensure aftermarket can repair automated, connected,
software-intense vehicles / remain the provider of choice
• Now, more than ever, suppliers and channel-partners must collaborate for mutual growth and long-term success..
WHERE DO WE GO FROM HERE?
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