will oe gain cause aftermarket pain?
TRANSCRIPT
Will OE Gain Cause Aftermarket Pain?
The Downstream Impact of the Car Allowance
Rebate System
Matthew Scruggs, Research Analyst
Automotive & Transportation
Tuesday, October 6th, 2009
2
Introduction
• The CARS, or Car Allowance Rebate System, provides rebates for new vehicles to consumers via dealerships.
• Designed to improve average fuel efficiency and stimulate auto sales.
Source: US Dept. of Transportation, Washington D.C.; Frost & Sullivan
• The vehicles may not be re-titled or re-sold except as components. The vehicle must be shredded no later than 180 days after trade-in.
• The program was modeled after successful versions initiated across Europe.
3
Comparable Global Vehicle Sale Stimulus Programs
718,614
400,000
2 million
220,000
150,000+
Funded Vehicles
30.3 million
7.36 million
13.4 million
10.2 million
4.9 million
Eligible VIU
£400 million($488.12 million US$)
£2,000 ($3,234 USD)
UK
No fund limit; program deadline March 31,
2011
$300 ($274.42 USD)/transit voucher/car share program voucher
Canada
$3 billion$3,500-$4,500US
€4.88 billion(7.1 billion US$)
€2,500 ($3,556.50 USD)
Germany
€220 million($315.6 million US$)
€1,000 ($1,422.60 USD)
France
Available FundsIncentive AmountCountry
Source: Frost & Sullivan
4
History of the Program (United States), 2009
July August September
7/1/09- Program is signed into law
7/24/09- Department of Transportation begins processing
claims
7/30/09- Original $1b allocation exhausted
7/24/09-7/30/09- 250,000 vehicles sold, generating a SAAR of 19
million
8/7/09- $2b fund extension signed into law
8/26/09- Program is officially closed; 690,114 vehicle sales
generated, representing $2.88b
Source: Frost & Sullivan
5
Passenger
Cars
16%Light Trucks
84%
Analysis of Vehicles Traded In Under CARS
Requirements for new vehicles:
• Functional condition
• Insured for the past year
• EPA rating < 18 miles per gallon.
• Manufactured after 1984.
• Vehicles had resale under $4,500k.
Top Ten Vehicles Traded in under CARS
Ford Windstar 10
Ford F-150 4WD9
Chevrolet C1500 8
Chevrolet Blazer 4WD7
Jeep Cherokee 4WD6
Dodge Caravan/Grand Caravan 5
Ford Explorer 4
Jeep Grand Cherokee 4WD3
Ford F-150 2
Ford Explorer 4WD1
Source: US Dept. of Transportation, Washington D.C.; Frost & Sullivan
Trade-In Volume by Vehicle Type
6
Foreign
61%
Domestic
39%
Light Trucks41%
Passenger Cars59%
Consumers Choose to Downsize Vehicles
Sales Volume by Vehicle TypeTop Ten Vehicles Purchased under CARS
Ford Escape 10
Honda Fit9
Honda Accord8
Toyota Prius 7
Nissan Versa6
Hyundai Elantra5
Ford Focus4
Toyota Camry3
Honda Civic2
Toyota Corolla1
Source: US Dept. of Transportation, Washington D.C.; Frost & Sullivan
• Success of foreign manufacturers follows market trends
Sales Volume by Manufacturer Type
7
4 M
PG
10 M
PG
CARS Fuel Efficiency Requirements Prove No Obstacle to Consumers
18 MPG
$4,500
$3,500
2 M
PG
5 M
PG
$4,500
$3,500
Fuel Efficiency Requirements and
Incentive Levels for cars
Fuel Efficiency Requirements and Incentive Levels for Light
Trucks
18 MPG
Actual Fuel Efficiency Improvement Between Traded and New Vehicles under CARS
15.8 MPG
9.2
MP
G
$4,173.22*
*Average Rebate Value Awarded to Customers
Source: US Dept. of Transportation, Washington D.C.; Frost & Sullivan
8
Impact on the Vehicle Population
• Strong sales and growing average age prevents VIU decline
• CARS scraps vehicles in prime repair years.
• Only about 0.8% of vehicles in the target population being replaced
• This target population is expected to grow, as average vehicle age increases
• Potential damaging upper limit of CARS replacements would be impossible to put into practice
Total VIU and Average Age (United States), 2007-2012
236
238
240
242
244
246
248
250
252
2007 2008 2009 2010 2011 2012
Vehic
les in U
se (
Mill
ions)
8.6
8.8
9
9.2
9.4
9.6
9.8
10
10.2
Avera
ge V
ehic
le A
ge
VIU
Age
+1.86 million
-690,114
Net Gain: 1.17 million
CARS Market Dynamics
CAGR: 0.8%
CAGR: 1.7%
Source: Frost & Sullivan
9
Top Aftermarket Replacement Services by Replacement Rate and Cost (United States), 2007*
(3.56)
(3.8)
(3.33)
6.59
11.41
19.05
(34.78)
13.22
Difference in Replacement Rate between Old and New
Vehicles
15.98
16.92
15.04
8.86
13.56
13.73
216.03
10.06
Average Replacement
Rates (Vehicle Age 0-3
Years)
20.0012.42Tires Rotated
43.0013.12Tires Balanced
75.0011.71Wheels Aligned
109.6715.45Transmission
Service
121.3324.97Fuel Filters
96.3332.78Cooling System
32.17181.25Oil Change
280.0023.28Brake Jobs
Average Cost for Service ($US)
Average Replacement
Rates (Vehicle Age 8+
Years)
Source: Automotive Aftermarket Industry Association, Bethesda, Md.; Frost & Sullivan
*Note: This is the latest data available through the Automotive Aftermarket Industry Association
10
Expected Service Revenue Loss for the Aftermarket (United States), 2009
Tires Rotated, $(0.38)
Tires Balanced, $(0.88)
Wheels Aligned ,
$(1.35)
Transmission Service,
$3.90
Fuel Filters, $7.46
Cooling System, $9.89
Oil Change, $(6.03)
Brake Jobs, $19.95
(10) 0 10 20 30
$ Millions
Expected Aftermarket Retail Service Impact (United States), 2009
Expected revenue losses, considering the difference in replacement rates per service by vehicle age, service cost, the number of vehicles taken off the road, and typical consumer vehicle maintenance behaviors as determined by
Frost & Sullivan’s consumer behavior study N5ED-18.
(Note: Negative numbers on the graph translate to positive revenue growth.) Source: Frost & Sullivan
11
Expected Aftermarket Retail Service Impact (United States), 2009 (cont’d)
Expected Revenue Loss = $32,556,257
•Growth in new vehicle maintenance will not be evenly distributed enough to compensate for the loss
•Dealership in best position to capitalize on maintenance and repairs because of warranty status
•Vast majority of financial loss will be taken by local or regional IRFs, specialty service centers, or tire company chains
•Almost all gains will be directed into the OES channel
Source: Frost & Sullivan
12
Downsizing Vehicles Reduces Average Part and Service Cost
Higher percentage of manual transmissions in new vehiclesTransmission Service
Long-life coolant extends service intervals in newer vehicles
Cooling System
Replacement cost higher in new vehiclesFuel Filters
Services
Source: Frost & Sullivan
• Service cost generally comparable between trade-in vehicles and new vehicles.• Driven by OE trend towards life-of-the-vehicle parts• This increases average service cost • Lower frequently of repair has the net effect of decreasing service revenues.
13
Top Aftermarket Replacement Parts by Replacement Rate and Cost (United States), 2007
5.49
14.05
11.41
3.1
(10.08)
(29.27)
10.72
23.61
14.57
Difference in Replacement Rate between Old and New
Vehicles
5.3
5.2
13.56
21.86
66.53
171.61
7.86
8.24
33.77
Average Replacement
Rates (Vehicle Age 0-3 Years)
30.7510.79Transmission Filters
25.5019.25Spark Plugs
25.3024.97Fuel Filters
30.5024.96Wiper Blades
13.7556.45Air Filters
6.95142.34Oil Filters
110.0018.58Brake Pads and Shoes
90.0031.85Batteries
474.7548.335Tires
Average Cost for Total Replacement
of Parts ($, Retail Level)
Average Replacement
Rates (Vehicle Age 8+ Years)
Note: This is the latest data available through the Automotive Aftermarket Industry Association
Source: Automotive Aftermarket Industry Association, Bethesda, Md.; Frost & Sullivan
14
Expected Parts Revenue Loss for the Aftermarket (United States), 2009
Tires, $37.28
Batteries, $11.45
Brake Pads and Shoes,
$6.36
Oil Filters, $(1.10)
Air Filters, $(0.75)
Wiper Blades, $0.51
Fuel Filters, $1.56
Spark Plugs, $1.93
Transmission Filters,
$0.91
(10) 0 10 20 30 40
$ Millions
Expected Aftermarket Retail Part Sales Impact (United States), 2009
Expected revenue losses, considering the difference in replacement rates per part by vehicle age, part cost, the number of vehicles taken off the road, and typical consumer vehicle maintenance behaviors as determined by Frost & Sullivan’s
consumer behavior study N5ED-18.
(Note: Negative numbers on the graph translate to positive revenue growth.) Source: Frost & Sullivan
15
Expected Aftermarket Retail Part Sales Impact (United States), 2009 (cont’d)
Expected Revenue Loss = $58,151,124
•Many suppliers will be balanced through OE/OES orders
•“Biggest Loser” retail parts are very dispersed
•Buy-back agreements can lead to trouble, especially with exclusive parts, though not in many cases
Source: Frost & Sullivan
16
Comparing Part Costs Between New and Traded Vehicles
Ford Explorer: $25Toyota Corolla: $0-35
Transmission Filters
Ford Explorer: $10Toyota Corolla: $6
Spark Plugs
Ford Explorer: $10Toyota Corolla: $40
Fuel Filters
Ford Explorer: $70Toyota Corolla: $40
Brake Pads and Shoes
Ford Explorer: $152Toyota Corolla: $82
Tires
Part Cost Comparison Between Typical New and Traded Vehicles*
• Manufacturers affected by lower average sale prices for parts, except for life-of-the-vehicle parts
• Participants will need to adjust to vehicle downsizing anywaySource: Frost & Sullivan
*Part cost is approximate average
17
Remanufactured Replacement Parts Vulnerable to CARS Effect
• Remanufactured
engines, transmissions,
starters, and alternators
are the dominant
replacement part choice.
• As such, the CARS act
will have the strongest
effect on this segment.94.2%
95.8%
94.9%
1.1%
2.0%
0.8%
0.8%
95.7%
5.0%
4.0%
2.2%
3.5%
0% 20% 40% 60% 80% 100%
Gasoline engine
Diesel engine
Automatic
Transmission
Manual Transmission
New Remanufactured Salvage
Source: Frost & Sullivan
Market Share by Volume for Replacement Parts by Source
(North America), 2009
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Impact on the Core Markets
• Key for re-man engine and transmission profitability is the steady price of cores
• CARS destabilizes equilibrium in core prices in several major product categories
Source: Frost & Sullivan
• CARS act could flood core market for starters and alternators
• The CARS act would ease traditional core transaction program, which remanufacturers prefer.
• Destabilization effect serious detriment to engine core market
• Transmissions will see a lack of demand as chief hurdle
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Are Sales Sustainable?
• Sustainable benefit required
• Sales in August/September traditionally higher
• Convincing consumers to “buy right now” instead of “buy at all”
• Increasing OEM production is expected to be beneficial
OEM
Dealership
Consumer
SupplierSupplier
Labor
LaborLabor
Vehicle
Vehicle
PartMaterial
Income
Source: Frost & Sullivan
20
Is There a Positive Environmental Impact?
Source: US Dept. of Transportation, Washington D.C.; Frost & Sullivan
• Environmental benefit must come with reduction in annual use
• Scale of the program restrains the benefits achieved
• Fuel economy gain limited to 0.28% of the total vehicle population.
• New vehicles have mileage ratings 19% higher than the average vehicle.
• Approximately 0.45% of the vehicle population consists of hybrid vehicles with mileage ratings
50% better than the average vehicle.
21
Is There a Positive Environmental Impact? (cont’d)
2.88 Tons (based on average fuel
economy improvement of
9.2 mpg)
3.0 Tons, 1 year break-even
12 Tons, 4 year break-even
Saved CO2
Production CO2 High Value
Production CO2 Low Value
Source: US Dept. of Transportation, Washington D.C.; Frost & Sullivan
• The average reduction in CO2 emissions is 2.88 tons/year.
• Average vehicle produces the equivalent of 3 to 12 tons of Co2
• Environmental benefit of CO2 reduction is not an immediate one.
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Conclusions
• Negative effects will be dispersed enough to avoid damage to any one company.
• Minimal loss of vehicles in operation among the target aftermarket age.
Source: Frost & Sullivan
• Act was passed without real concern for the impact it would have on the automotive
aftermarket.
• The aftermarket impact of the CARS act will be small, yet significant
• Remanufacturing will face real difficulty standardizing prices and recovering the equilibrium.
The Good
The Bad
The Ugly
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For Additional Information
Matthew Scruggs
Research Analyst
Automotive and Transportation
Tel: 210-477-8491
E-mail: [email protected]
Mary-Beth Kellenberger
Global Program Manager
Automotive Aftermarket
Tel: 416-490-1997
E-mail: [email protected]
Jake WengroffGlobal Director
Corporate Communications
Tel: 210-247-3806
E-mail: [email protected]