By T Murrali:
Life of any product begins the moment it reaches the customer. It is also the beginning of its aftersales service term. For the vehicles also the beginning is the same. But the aftermarket follows them to the point they are dismantled and certain parts are remanufactured, recycled and reused. A healthy aftermarket keeps the vehicle in good condition, helps prevent accidents, and creates jobs for the skilled and unskilled.
Globally, aftermarket is a USD 740 billion business. The US accounts for more than half of this at $ 368 billion, followed by Europe $117 billion, China $ 52.7 billion and Mexico at $13 billion. For India it is just $ 7 billion. If the new vehicle market continues to grow at seven to eight percent as at present, the aftermarket in India would grow 10-12 percent to $16.5 billion by 2021.
Across the world the demand on consumers’ time has driven changes in the aftersales service sector. Irrespective of the vehicles, the customers want to get in and get out quickly and accomplish as much as they can at every stop. These emerging trends will consolidate specialised shops into larger, general repair centres serving the time-constrained customers.
The aftermarket, driven globally by the need for vehicle up-keep, has many new challenges and opportunities. AutoParts Asia is taking a close look at them.
The aftermarket is the part of the automotive industry sector comprising the automotive services and parts businesses. It is estimated that there are about 1.2 billion vehicles on the road now. The numbers are growing. In the saturated developed country markets new vehicle purchase is primarily to replace the old ones and therefore, their sales growth is very marginal. In the major emerging markets like China and India the number of vehicles has been growing in double digits since a few years, barring some blips.
With every new model and variant, technical sophistication has been on the rise and the industry has been growing exponentially in the last two decades. The sophistication has been mainly in electronics and software, connected technologies and telematics. Improved quality and durability of the parts, which enhance both the life of the vehicle and parts, affect the aftermarket. The new additions create new markets.
However, the automotive aftermarket industry is impacted by several major disruptions like digitisation, shifting competitive dynamics, and changing consumer preferences. The borderlines are constantly moving.
The survival and success of the aftermarket industry is in getting the big data for vehicle service. It is not yet unequivocally defined who, the manufacturers or the owners, own the data generated by the new vehicles. The vehicles, however, upload the data directly to their respective manufacturers. The aftermarket players are kept out of the game and lose the vehicle service business.
According to a McKinsey report, supported by the European Association of Automotive Suppliers (CLEPA), on the changing aftermarket scenario, the growth for European aftermarket will come from diagnostics and services as new offerings emerge, many of which are linked to digitisation and car data.
Also, digital-driven products and services will account for a growing share of overall value. It is expected that their share of aftermarket revenue will increase by a factor of three, from the current six percent, to almost 20 percent within the next 10 years.
“Growth in these digital offerings will come from hardware (such as telematics devices, sensors, or displays), software (vehicle tracking, total cost of ownership, or driver monitoring software), and services (fleet management, theft protection, or over-the-air update services). In many cases it will be new players who use digital to offer these new solutions,” the report stated.
The US aftermarket is almost similar. Many industry associations there have been working on new approaches to support the aftermarket. Auto Care Association, for instance, has been meeting with OEMs on sharing the data with the aftermarket players. While the association is still promoting the vehicle owner’s choice as to where their data goes, the OEMs do not agree. Auto Care is trying to strike a common ground, but with little progress. Meanwhile, Americans drove a record 3.2 trillion miles in 2016. Vehicle miles-travelled on the US roads increased 2.8 percent or 87.5 billion more miles than in the previous year.
China continues to be the largest vehicle market in the world with sales of over 28 million units in 2016, a year-on-year growth of nine percent from 2015. The Chinese Government expects that its automotive production will reach 30 million units by 2020 and 35 million by 2025.
India, the fifth largest vehicle (all types of vehicles) manufacturer in the world, is the largest manufacturer of three-wheelers and tractors and the second largest two-wheeler maker in the world. The country is expected to be number three in passenger vehicle production by 2020 from the fifth place now, triggering significant aftermarket growth. The vehicle manufacturers are weighing options for multi-brand service centres, and digitisation to bring in more business.
The North American Free Trade Agreement (NAFTA) has helped the Mexican market grow in the number of vehicles on the road and in the miles driven. It is the seventh largest vehicle manufacturer in the world, producing more than three million cars annually. It is also the fifth largest auto parts producer worldwide with USD 85 billion annual revenue.
In Australia after market is the principal automotive manufacturing sector as the two remaining car companies also closed their local factories in October 2017. Australia’s automotive aftermarket industry has been working hard to place itself in a strong manufacturing and marketing position both in the local and export markets. The industry has brought design ingenuity and manufacturing excellence to the fore to serve the global marketplace.
The Game Changers
The current GDP of the US should total $19 trillion in 2017 complementing a 2.9 percent compounded annual growth rate from 2013 –17, and real growth in 2016. Since the economic recovery began in 2009, the country’s economy has realised favourable changes in key economic data. Some of the most notable changes in the four-year compounded growth rates occurred in motor vehicle parts manufacturing – to the tune of nine percent, retail sales of about three percent and disposable income that rose by more than five percent.
Long-term economic growth will improve going forward, but will remain moderate on an annual basis. According to the study carried out by Auto Care Association the full year nominal GDP growth will peak in 2018 at five percent before falling back slightly in 2019 and 2020. Although domestic demand will be slightly stronger than that, international trade will be a drag on growth through 2018. Increasing consumer spending and disposable income may support aftermarket while the anticipated increase in fuel price may drive de-growth.
Europe generated about USD117 billion turnover in the aftermarket. According to CLEPA, the service business (maintenance and repair of vehicles) generates about 45 percent of total aftermarket revenues in Europe, while retail and wholesale of vehicle parts make up the remaining 55 percent. More than 120 suppliers for car parts, systems and modules across the world and 23 national trade associations and European sector associations are members of CLEPA, representing more than 3,000 companies, employing more than five million people and covering all products and services within the automotive supply chain.
According to the McKinsey report, the automotive aftermarket is undergoing dramatic changes with evolving customer expectations, acceleration of technological innovation, and shifts in competitive power. These changes will reshape the way customers, automotive suppliers, and other aftermarket companies think of cars and driving and how business in the automotive aftermarket is conducted and value created.
Moreover, the emerging markets will create new needs and pressure to act for the aftermarket industry. At the same time, its players will face challenges from the increasing pace of industry consolidation, especially in North America and Europe.In the past five years, the overall automotive aftermarket has shown healthy growth and profitability. CLEPA and McKinsey expect the trend to continue and the aftermarket to increase to USD 1,200 billion by 2030 at an annual global growth rate of three percent.
Growth will not be evenly distributed among regions with significant differences between the consolidated and the emerging markets. Largely fuelled by China, Asia will be the key driver of growth in the coming years. With the country’s booming economy behind the climbing rate of car ownership, it is expected that China will be close to the number of light vehicles in Europe by 2020, and account for a fifth of the expected turnover of USD 1,200 billion global automotive aftermarket in 2030. The service market will grow in China, mainly owing to the increasing average age of vehicles from the present 4.5 years.
In the consolidated markets of Europe and North America, vehicle growth rates over the last 10 years have been below two percent a year. At the same time, the average car age increased from 10.5 years to 11.5 in the US, and from 8.4 years to 9.7 in Europe. These trends highlight the increasing need to deal with older vehicles, the report stated.
According to the study, the top six disruptive trends and what they mean for automotive suppliers are: consolidation among parts distributors; expansion of aftermarket activities by OEMs; digitisation of channels and interfaces; access to car-generated data; Increasing influence of (digital) intermediaries; and higher price transparency /greater diversity of supply for customers.
Recent investments by established automakers and new OEMs have increased business opportunities throughout Mexico and have attracted several suppliers. According to the International Trade Administration (ITA) of the US Department of Commerce, vehicle production, with the new players and expanded manufacturing capabilities, is estimated to reach five million units by 2020.
Automakers in Mexico have increased from seven to eleven, producing 40 brands and 500 models. The industry is spread out geographically with higher concentration of assembly plants in northern and western Mexico, stretching down through the centre of the country. General Motors, Ford, FCA, Volkswagen, Nissan, Honda, and Toyota have implemented big projects in the country to take advantage of the many Free Trade Agreements Mexico has with Latin American and European countries. The recent market entrants with manufacturing plants include Mazda, Audi, BMW and China Giant.
There are approximately 31 million vehicles registered in Mexico. Mexicans keep their cars on an average for 17 years and they need parts to repair their vehicles after the warranty period.
Mexico is the fifth largest manufacturer and exporter of construction and agriculture machinery, equipment, and spare parts. Major markets include the US, South Africa, Thailand, Switzerland, Australia, Uruguay, Venezuela, Chile, Paraguay, and Guatemala among others.
The country has also a long legacy of bus manufacturing. World leaders like Volvo Autobuses, Dina Camiones, Mercedes-Benz Autobuses, Scania Autobuses, MAN Latin America, GrupoAutofin, Isuzu Motors Mexico, Hino Motors Sales, American Coach de Mexico, Irizar Mexico, Beccar, Autopartes y Componentes AYCO, and RECO, have production plants across the country. Major export markets for buses manufactured in Mexico include Guatemala, Argentina, Chile, Paraguay, and South Africa.
Increasing life of cars needs support from service providers and spare parts. For the construction and farm machineries the aftermarket support is seasonal. Use of construction equipment largely depends on weather. Therefore, the stock-keeping units play a key role in construction and farm machinery aftermarket as they have to ensure the availability of spare parts when the demand picks up. The coach building industry’s needs for spare parts for maintenance is always moderate.
The Chinese Government’s policy, Made in China 2025, is an initiative to upgrade the country’s industry from low-cost mass production to value-added advanced manufacturing. According to ITA, the country has prioritised 10 sectors, including the automotive.For the automotive sector the objectives are to sell one million units of locally produced pure electric and plug-in hybrid cars in China by 2020, which would account for a minimum of 70 percent of the country’s market share, and to sell three million domestic brand vehicles by 2025, accounting for a minimum of 80 percent market share.These targets will also create huge new opportunities for the aftermarket.
The passenger vehicle parc in India is expected to reach about 36 million units by 2021 from the current 26.3 million, growing at a CAGR of about eight percent. Infrastructure improvements, the rising affordability and the aspirations of the people are the growth triggers of the automotive industry. The present motorisation is at 20 plus per 1,000 people. It was only 11 in the beginning of this millennium. Even if it doubles, new car sales will increase significantly and fuel the aftermarket.
If the new vehicle market in India continues to grow at seven to eight percent, the aftermarket would reach $16.5 billion by 2021. This would largely depend on the policy support of the government for the market. Better quality and technology that give extended life to the parts and consumables are impacting the aftermarket business. According to a report by Frost & Sullivan, the factors that are likely to impact aftermarket in India include: OEMs exploring to enter multi-brand service business; online e-retailing, which is also one of the emerging trends globally, and the recently- introduced goods and service tax.
A Confederation of Indian Industry (CII) report, ‘New Business Models Driving Automotive Aftermarket in India – IT Integration Leading the Way’, highlights the various growth opportunities of the automotive aftermarket, the latest trends and its challenges. Several factors like consumer attitudes, economic and technological trends influence the growth of the aftermarket.
The multinational companies operating in India have been leveraging the competitive cost advantage the country offers for small cars. These automakers are looking to source more parts locally. This gives a tremendous growth opportunity for the auto component manufacturers, and parts suppliers for the aftermarket.
With the cost of ownership becoming the key determinant for the purchase of new vehicles, most of the vehicle manufacturers are focussing on aftersales to attract and retain clients. They are keen to open modern service stations to offer a comfortable experience to the customers. With adequate support, even the unorganised sector can evolve into full-fledged service centres.
However, there are several factors that impact the evolution of aftermarket. The ever-improving life of the components pose a threat to the aftermarket business. For instance, engines used to be overhauled after they have run for 1-1.5 lakh km earlier. Now it is done after 2.5 lakh km. Improving road conditions in India also enhance the life of vehicles along with their parts. A decade ago, the clutch assembly of a truck had to be replaced after running for about 45,000 km. Now it is being done after 60,000 km.
Technologies to meet evolving emission and safety norms propel component manufacturers to ramp up faster to meet the demand of their customers. This is also opening up opportunities for financially strong service chains and organised players who install diagnostic equipment in their garages, eventually making several stand alone garages obsolete. The high-tech equipment is costly and needs highly-skilled manpower to operate them, which may not be possible for many stand-alone garages.
In India prevention of accidents is cardinal, as on an average over 400 fatalities occur daily on the roads. While driver negligence is touted to be the major reason for accidents in commercial vehicles, the sale of counterfeit spare parts in the aftermarket is also considered a major reason. The spare parts market in almost all the cities and towns have spurious parts for such safety-critical parts as brake linings, clutch, steering system parts, axles and suspension parts.
If the automotive aftermarket gets a little more active support from the government and other stakeholders, it can save lives and create wealth for the country. One manufacturing job creates nearly four in the aftermarket, a boon for a highly populated country. Aftermarket is vital for any product and any form of vehicle – from two-wheelers to off-road. However, the importance of aftermarket is not well appreciated by the policy-makers in India and even the beneficiaries, perhaps for lack of awareness.
Australia has a very vibrant automotive aftermarket industry that design and manufacture products both for the national and international markets. It is an Australian $5.2 billion (USD 3.95 billion, as per current trading) business annually, with strong year on year growth.
About 260 companies are members of the Australian Automotive Aftermarket Association (AAAA). Over 65 percent are active in exports to the global markets. The Australian automotive aftermarket manufacturing sector alone employs about 21,000 people directly and generates export income of around Australian $1 billion (USD 0.76 billion) a year, purely from locally manufactured products. The export markets continue to grow as the international customers prefer the quality engineering and precision manufacturing of automotive components and accessories from Australia.
According to AAAA Executive Director, Stuart Charity, the Australian automotive aftermarket industry is set for an exciting future. “Our industry is ready to become the automotive manufacturing sector in this country and our manufacturers have prepared extremely well for the end of Australian vehicle manufacturing. While some Australian aftermarket manufacturers were suppliers to the local car manufacturers, the vast majority of our products are sold to customers outside of the car companies and their franchised dealer networks. These companies are designing and manufacturing premium quality aftermarket products that are world class. It is proven by the local and international sales success that these businesses are generating.”
With automotive aftermarket product export markets throughout Asia, Europe, and the US, the Australian manufacturers are exploring potential new markets. They are keen to cater to the increase in global demand for specialised automotive aftermarket components for the highly customisable vehicles such as Sports Utility Vehicles and Four-Wheel Drives.
Another factor working in the favour of the Australian and international automotive aftermarket manufacturers is the rise of global vehicle platform- based car manufacturing. This cost saving move has opened the floodgates of new opportunities in the development of accessories and safety enhancing or performance- based modification products. In most cases, these products are initially developed for the local aftermarket and then made available to the international markets.
The innovative product development and manufacturing capabilities developed by the Australian automotive aftermarket manufacturing companies have encouraged some of them to diversify into other sectors, including rail, defence, mining, marine and general industry.
These market developments are in spite of the closure of the Australia- based, foreign car manufacturing companies of Ford, Toyota and GM-Holden, and large-scale import of aftermarket products.
“The Australian automotive aftermarket manufacturing industry has been able to grow despite the challenges that it faces in moving up the value chain. That is, to progress from service parts to high value, speciality aftermarket products that provide distinct technological and performance advantages,” Charity said.
For this scale-up and to comply with the rigorous Australian and global road safety and performance, the Australian companies have made big investments in research and development, plant and equipment, and in the highly expensive international testing procedures.
Following the shutdown of local car manufacturing, AAAA has been advocating with the Australian Government to fund infrastructure to support the automotive aftermarket manufacturing sector. Australia is a country of just over 24 million people. Still it has a thriving automotive industry that has transitioned from the loss-making car manufacturing to the design and production of innovative components that improve vehicle safety, fuel efficiency, performance, comfort and aesthetics. They are sold profitably in the local and global markets. Therefore, as has been clearly proven in recent years, automotive aftermarket product innovation and development is the key to continue the success drive of Australia’s automotive aftermarket industry in the local and international markets.
The Australian Government in the Federal Budget in May 2017 has established an ‘Advanced Manufacturing Fund’ for the development of specific industry, ‘Innovation Labs’ to assist businesses in developing new products for local and global markets. This was based on an AAAA proposal to the Government. A study tour to the USA played a major role, Charity said.
“This will be the key to the future growth of the Australian automotive aftermarket manufacturing industry. The Innovation Lab concept is a realistic and highly practical industry-led solution that is backed by detailed case studies, the counsel of our own successful AAAA manufacturer members, and global automotive aftermarket component product demand research.”
Therefore, if anyone hears that automotive manufacturing in Australia no longer exists, this is far from the truth, claims Charity. While cars are now no longer assembled in Australia, the automotive aftermarket product manufacturers in the land down under are constantly developing, perfecting and exporting world leading products to a constantly growing global market. Armed with the support required to be able to develop new and innovative automotive aftermarket products, the future for the Australian automotive industry is looking bright, he said.
The Way Forward
Players such as automotive suppliers that have long conducted business in a relatively stable environment will face a new type of competitive pressure from others at different stages of the aftermarket value chain as well as new players with, for example, digital-driven business models, states the McKinsey report. New technologies and major shifts in the aftermarket industry will be the game-changing factors that all players have to react to now in order to maintain strong positions in the future.
As many industry experts agree that significant changes are ahead, McKinsey has undertaken the effort of creating a big picture of the most relevant trends disrupting the European aftermarket from a suppliers’ perspective and ideas for how to face them.
While every other market can be grouped into one, the major markets in Asia-China and India – are different. The numbers will make China huge while the technology and its readiness to cater to aged vehicles coupled with their high-tech counterparts, will create opportunities for India. Applying successful models from the developed markets will not help the players in India since the market is fragmented and the vintage of vehicles very large. India has the opportunity to create a unique model.
NB: Photos are representational; Courtesy: Bosch, Continental, Denso, Honeywell, Liqui Moly, The Automobile Association, Valeo and ZF