Friday, September 14, 2007

Business and Industry Intelligence: Auto and Truck Parts

Overview

In 2006, the US car and truck aftermarket was worth $280 billion, an increase of some 4% on 2005. Since 2000, annual growth has been between 3.4% and 5.5%. This contrasts with the less buoyant performance of the new car and truck markets in the same period.

The automotive aftermarket accounts for 74% of the total value, with the medium and heavy truck segment generating the remainder. The truck aftermarket has grown more strongly since 2004. Although mechanical components are likely to remain more lucrative going forward, electronic parts are becoming an increasingly valuable segment, as manufacturers continue to move to electronic control systems.

Manufacturers in the US industry continue to suffer from the current high prices of important commodities such as steel, aluminum, resins (plastics), and copper, which tend to drive up their costs. There is also a risk to revenue and brand value from counterfeit products, which are generally of inferior quality. However, the number of cars and trucks on the road, and their average mileages, are increasing. Both these factors should maintain demand for aftermarket products.

Johnson Controls, Delphi, Magna International, and Lear are the leading players, with many companies acting as both OEM and aftermarket suppliers. The industry saw intense M&A activity in 2005 and 2006, in both manufacturing and wholesale sectors. Innovation is important, not only to develop improved products, but also to ensure that they are delivered efficiently through the supply chain to end-users. US companies are exploiting export markets such as China, where rates of car ownership are rising strongly, and also benefiting from low-cost manufacturing locations in Eastern Europe and Asia.

Key Issues

New and Used Car Markets - The recovery of the US new car market in 2004, following some years of decline, was sustained in 2005 and 2006, although at a slightly slower pace. The used car market is worth more than double the new car market, and in 2005, unit sales of used cars grew more strongly than new car volume. Overall, the number of cars in use in the US, their average age, and the aggregate mileage, are increasing. These factors are expected to maintain demand for aftermarket parts.

Rising Demand in the Truck Aftermarket - In 2005, aftermarket sales for medium and heavy trucks grew more strongly than car aftermarket sales. Drivers of demand in this segment include rising Class 4 8 truck sales, and total truck registrations since 2000, together with increasing road transport mileage.

Increasing Costs - For aftermarket manufacturers, raw materials are significant costs. In 2006, prices of vital inputs such as carbon steel and stainless steel, aluminum, copper, and many plastics (resins) continued to rise. Although stabilization of some prices, particularly for resins, was detectable towards the end of the year, raw material costs will continue to impact manufacturers: directly by narrowing their margins, and indirectly, by affecting the performance of upstream component suppliers on which they rely.

Counterfeiting - Aftermarket manufacturers are impacted by the presence in the market of counterfeit products, such as brake components and batteries. This decreases revenue for the genuine manufacturers. Additionally, as the counterfeits are generally of inferior quality, and may even be hazardous, there is a risk that they will damage the brand image of the manufacturers.

Significant Trends

Consolidation - 2005 saw more intense aftermarket M&A activity than any year since 1999. Almost 60% of the deals were in the manufacturing sector, with the remainder in the wholesale sector. Preliminary information for 2006 indicates that this trend is persisting. The industry remains fragmented, and additional consolidation is likely going forward, as players aim to grow revenue inorganically, diversify product ranges, increase their purchasing power, and compete more effectively against cheaper commodity products from foreign manufacturers. In some cases, businesses spun off by the largest companies have been successfully acquired by smaller ones. Also, domestic and foreign private equity players are continuing to pursue aftermarket companies.

Innovation - Manufacturers are investing in R&D, in order to bring to market innovative, higher quality, and more durable products that can be sold at higher prices. There is increasing adoption of IT solutions such as the Internet Parts Ordering open standard, which can replace fax and phone communication between manufacturers, distributors, and end-users, thus increasing efficiencies throughout the industry.

Globalization - US-based manufacturers are exploiting growing markets, such as China, where vehicle ownership rates are rising strongly, in order to boost their total revenues. At the same time, Asia and Eastern Europe offer attractive low-cost manufacturing locations for US companies, which should alleviate cost pressures.

The auto & truck part market is valued here as total spending by consumers in the US on automotive aftermarket parts, tools, service, and equipment.

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