By T Murrali:
Automotive aftermarket plays a vital role in the upkeep of on-road vehicles. According to published data, globally about 1.3 million people die in road accidents every year, an average of 3,287 fatalities daily, with about 20-50 million injured or disabled. Most of the victims are young adults aged 15-44, and this affects several economies. Aftermarket plays a crucial role in containing accidents as the road-worthiness of a vehicle depends on its regular after-sales service, with the spare parts and other consumables that go into it.
The defined role of the aftermarket industry has been changing under the impact of several new trends that can be classified as ABCD: Alternative drive concepts, Big Data, Connected vehicles and autonomous driving and Digitalisation. They change customer expectations, and bring about a paradigm shift in the approach to the servicing of vehicles.
The global aftermarket business was USD 740 billion in 2017. The US accounted for more than half of this at USD 381 billion, followed by Europe close to USD 120 billion, China USD 54 billion and Mexico USD 13billion. For India it was just USD 7.5 billion.
Today’s consumers are keeping their vehicles longer and are more aware of the importance of preventive maintenance and scheduled servicing to maximise the life of their vehicles. According to V12 Data, this increases the demand for aftermarket parts and services which spurs new growth and revenue opportunities for a wide range of businesses operating in the automotive aftermarket industry.
A Global Market Insights (GMI) report says that the changes in the aftermarket are owing to the tilt in consumer preference towards vehicle comfort, enhanced efficiency and customisation for aesthetically elegant vehicles. Increasing vehicle wear and tear due to poor road infrastructure, particularly in developing countries, has led to more replacement parts consumption that would support product penetration. Rise in average distance driven per vehicle has increased the need for maintenance, and parts replacement.
According to the research agency, professional sales outlets, the major revenue generating segment for automotive aftermarket, were valued at USD 300 billion in 2015. The additional services provided by these outlets for customer delight, including free periodic servicing, insurance to damaged parts and delivery facilities, will fuel the automotive aftermarket industry growth.
Asia Pacific, led by China, India and Thailand, is estimated to witness a CAGR of six percent up to 2024. Growing consumer spending on automobiles, rapid urbanisation and increasing population are the key factors fuelling regional demand. High economic resource availability, workforce and land availability in this region will propel the aftermarket growth.
In general some of the factors that drive aftermarket growth are:
· Stringent regulations on emission control and safe transport which require regular maintenance of the vehicle.
· Preference for vehicle customisation, which includes lighting systems, vehicle graphics, and spoilers to achieve optimum performance.
· Rising demand for vehicle durability which increases frequency of scheduled maintenance and replacement of original parts.
· Increasing on-road vehicle usage and the rise in average age of the vehicle.
· Large presence of original equipment manufacturers along with regional players.
Tyres, electrical parts, lubricants and brakes are among the highest revenue generating parts accounting for over 50 percent of total revenue generated from the replacement parts segment. Europe, led by Germany, the UK and France, is expected to witness more than 4.5 percent of this growth.
Global e-commerce automotive aftermarket is expected to generate demand of over one billion units till 2025. Increasing age of vehicles across the world, specifically in developed countries, coupled with shifting consumer preference towards online purchase of auto components, will primarily drive the industry growth over the forecast timeframe, according to GMI. Changing style preferences of consumers and increasing customisation of vehicles will further strengthen the industry penetration.
Online platforms have gained prominence among the automotive aftermarket industry players to launch their auto-parts portfolio. The manufacturers are increasingly launching their products on online platforms through third party retailers such as Amazon, and eBay or via their own online portals, positively impacting industry growth. However, lack of efficient standardisation for the e-commerce businesses may lead to easy counterfeiting of products, posing a threat to industry growth, the report noted.
Rising production of electric and hybrid vehicles across the globe has resulted in increased complexity of the intricate parts. This has led to increased production of automotive aftermarket parts owing to proliferating Do-It-For-Me (DIFM) customers. The e-commerce automotive aftermarket players are forced to expand their portfolio, to cater to the rising demand, inducing immense potential to the industry size till 2025.
Third party retailers are likely to account for the highest revenue share crossing USD 29 billion by 2025. Rising popularity of these retailers such as eBay, Amazon, etc. will primarily drive the industry growth. High revenue generation can also be attributed to the distinct services. Moreover, provision of benefits such as same day delivery will further strengthen the e-commerce automotive aftermarket penetration.
Direct-to-customer will exhibit approximately 21 percent CAGR from 2018 to 2025. This can be attributed to high brand loyalty of the customers and provision of appropriate service facilities. Some of the automotive aftermarket players are expanding their online platforms to enhance their visibility among the customers. Business to consumers will account for maximum revenue share crossing USD 13 billion by 2025. Shifting preference of customers towards online purchase of these auto-parts will primarily support industry dominance. This can be attributed to the cost effectiveness of the online portals as compared to conventional stores. Fast query solving and provision of technologically advanced products will further escalate revenue generation. B to big B will exhibit over 19 percent CAGR owing to provision of benefits such as fast delivery services.
The North American e-commerce automotive aftermarket size is anticipated to exhibit a CAGR of approximately 17 percent by 2025. Well-established internet infrastructure will pave the way for the region’s stable growth. Presence of prominent e-commerce leaders such as Amazon will strengthen the industry’s growth over the coming years. Asia Pacific is likely to exhibit considerable share of over USD nine billion over the coming years. This substantial revenue generation can be attributed to growth in the automobile industry along with rising internet penetration across the region.
Napa Auto Parts, Denso Corporation, Amazon, E-bay, Auto Zone, and Advance Auto Parts are among the prominent participants in the e-commerce automotive aftermarket. Partnerships and collaborations with online aftermarket players are among the strategies adopted by the industry players to enhance their visibility. For instance, in 2016, Hella Group collaborated with online auto-parts supplier iParts.pl in order to expand its product line.
Frost & Sullivan’s recently released study on the ‘Global Automotive Aftermarket Outlook, 2018’ has some ominous news for market participants: a continued slowdown of growth in the most mature and biggest aftermarkets globally, including the US and Western Europe. Promisingly, however, the annual study which covers aftermarkets in North America, Europe, Latin America, China and India found that tapering growth in developed regional markets would be offset by burgeoning opportunities in emerging markets, including in China, India and Eastern Europe. The research firm has also identified three trending themes—data monetisation, eRetailing and autonomous vehicles—that will create upheaval in 2018, compelling market participants to quickly realign their strategies or lose out on revenue prospects of over USD 400 billion.
Frost & Sullivan reiterated that market participants should develop repair and maintenance solutions customised to the specific needs of the emerging markets. Shrinking replacement demand across key US and West European markets will impact the overall growth of the automotive aftermarket. The increasing average age of vehicles in operation (VIO) will make it particularly challenging for OEMs to derive any benefit from this trend as old vehicle owners have typically exhibited high levels of price sensitivity.
At the same time, despite declining new vehicle sales in some developed markets, the global VIO count of passenger cars and light commercial vehicles is expected to increase by 3.9 percent during 2018. This growth will be driven primarily by brisk sales of new vehicles in markets like China and India. China, in particular, is set to emerge as a hotspot for the automotive aftermarket; over the next couple of years, the majority of VIO in the country will be four to five years old, considered the sweet spot for the aftermarket. In Europe, the focus of the automotive aftermarket will shift eastward to Poland and the Czech Republic for both manufacturing and consumption.
Data is the new gold, both for automotive manufacturers and the aftermarket. Currently, cars provide 200 data points with a potential value of approximately USD 100 per car, according to the company. Over the next decade, OEMs are set to accelerate the development of customer data applications and connectivity technologies in a bid to monetise such data. Aftermarket suppliers have an unprecedented chance to leverage on such data by improving their product and service portfolios, designing innovative predictive maintenance solutions and developing new business models. Access to such data will also be critical in helping automotive aftermarket participants devise focused marketing strategies for the fast growing electric/ hybrid vehicles segment.
Traditional retailers will need to look sharp as eRetailing channels are estimated to generate close to USD 30 billion by the end of 2018, backed by aggressive year-over-year growth. New business models, especially around offline to online(O2O), together with comprehensive offerings, price transparency, rapid delivery times and services ranging from do-it-yourself DIY to DFIM, are underlining the growing appeal of eRetailing channels.
During 2018, in particular, the research firm expects to see investments from both OEM and OES participants. eCommerce giant Amazon created a buzz last year by announcing its entry into the space with its single platform integrating automotive retail and after-sales. OEMs and other industry stakeholders are also likely to adopt this route and bring all their after-sales services into a single, digital platform, thereby prodding the growth of online sales.
The aftermarket will have to address the challenges thrown up by the galloping technological change in the automotive industry. In this context, the increasing penetration of advanced driver assistance systems (ADAS), autonomous cars and electric vehicles (EVs) needs to be confronted head on.
Frost & Sullivan estimates that in 2018 the penetration of ADAS / autonomous cars will reach 10 percent of the total VIO in North America. This will gradually start to have an impact on aftermarket demand, especially for repairs, since such vehicles are less likely to be involved in collisions than their conventional counterparts. In North America alone, revenues of the collision repair industry are likely to fall by almost 30 percent by 2030. At the same time, EVs will pose a challenge as multiple parts used in conventional vehicles will become obsolete.
Even as the automotive aftermarket looks forward to new opportunities provided by data monetisation, emerging regional markets and eRetailing, it is also a time for introspection to determine the best path forward in a highly disruptive automotive ecosystem, the research firm noted.
There are approximately 1.2 billion vehicles on the US roads. The typical car on the road in the country is a record-high 11.5 years old, according to a new IHS Automotive survey. However, while cars on the road may be aging, consumers are continuing to purchase new vehicles. According to a 2015 article by USA Today the number of vehicles on the road that are at least 25 years old is about 14 million. That’s up from about eight million in 2002. Those are vehicles made in 1990 or earlier. Meanwhile, the number of vehicles that are 16 to 24 years old is 44 million. That’s up from 26 million in 2002, according to IHS.
The US aftermarket industry grows at an average of 3.6 percent annually. By 2020, experts predict there will be more than 250 million connected vehicles that will generate USD 14.5 billion in revenue in automotive data assets. This will fuel growth for the motor vehicle parts suppliers in the country that are already the largest sector for manufacturing jobs in
The total volume of the European aftermarket is about Euro 128 billion. According to Wolk Aftersales Expert, Germany accounts for 17 percent. European car drivers spent an average of Euro 388 on automotive parts in 2015, three euros more than in 2014, while in Germany, drivers invested Euro 477, four euros less than in 2014.
There are 54 parts traders with a turnover of more than 100 million euros in Europe. Overall, the number of car parts distributors in the 35 countries surveyed continued to decrease compared with previous years. This applies primarily to the smaller local parts dealers, whose numbers are constantly declining. There is no end in sight to this development. Six parts traders exceed one billion euros in sales; two of them are from Germany, WM and Stahlgruber.
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 of 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.
CLEPA foresees that connectivity and new vehicle ownership models definitely have the potential of disrupting the traditional value chain and the industry will have to adapt in order to find new collaboration models and partners, and as such, create new opportunities. These among others were clear trends identified at the ninth edition of the Aftermarket conference, organised by the association in the recent past. Presentations and key notes from established and new players identified new technologies on vehicles and the production of parts, the change of vehicle ownership as well as upcoming new business models as main drivers for the transformation. New competencies, other success factors and a different mind-set will be needed to manage the future competitive challenges, with the consumer in the centre.
Roberto Vavassori, President, CLEPA, said, “New players are on the verge of entering the automotive aftermarket sector, creating new mobility concepts. Although the real impact via electrification and connectivity is not to be expected before 2025, time is crucial, and suppliers have to define their future positions as soon as possible. Although there is still a lot of uncertainty, both established players and start-ups should not fear this upcoming disruption but embrace it.”
According to Auto Care Association’s Mexico report, the Mexican market is increasingly becoming important to NAFTA. In addition to manufacturing, retail and wholesale is emerging as an important activity in Mexico as the vehicles on the road continue to increase and get older. Mexico is a country with a relatively young population at an average age of 26 years. According to 2016 year-end figures released by IHS Markit for over 100 VIO markets globally, Mexico continues to be the 11th largest VIO market in the world. Only three countries have a VIO larger than 50 million: US, China and Japan. Mexico with 30 million vehicles on the road is right between India and Spain and has now surpassed Canada. There is roughly one vehicle for every four people in Mexico. The 31 million vehicles in the Mexico VIO are mainly in the last two decades. The average age of a vehicle is 15.17 years.
The average bumper to bumper warranty in Mexico is for three years and 37,500 miles. Some like Hyundai which is a newcomer to the market is offering five years. Chrysler and VW that have been in the country for several decades offer only two years. Some of the domestic retail chains are Rolcar and Refaccionarias California. Together they have approximately 250 stores. Rolcar has added 47 stores since 2010, while R. California has a modest 11 stores added. In the retail and wholesale space there are two American players – Autozone and GPC/NAPA. Besides, there are many other mostly regional players such as Calderon and Morsa. Similar to the US there are a few large chains and an endless list of smaller players.
Despite challenges, new technologies like online retailing and telematics continue to invade the Mexican automotive aftermarket giving the players opportunities to expand business.
In the more developed cities, China has evolved to the point where profit on car sales has thinned while aftermarket repair and parts sales profit is increasing. As a result, there is more emphasis at all levels of the market on cultivating opportunities in the aftermarket, states the Auto Care Association’s China Market report. An estimated 35 percent of profit comes from car sales, while 55 percent comes from aftermarket service, and 10 percent is from financial, insurance and used car sales. In developed countries, profit from aftermarket takes 65 to 70 percent of the auto industry.
Parts distribution remains highly unstructured and continues to present major challenges to all players in the value chain. Fake or counterfeit components are still persistent in the aftermarket. Parts suppliers, in conjunction with local authorities, are beginning to limit their sale. The historic pattern by government car owners buying fake parts and ‘expensing’ genuine is declining due to a higher proportion of privately-owned vehicles today. Significant price differences exist between counterfeit and other products. In extreme cases, the price difference could be seven to eight times. An effective remedy by parts suppliers has been to conduct raids on local fake producers, with the cooperation of local government, and better control of their channels of distribution.
The repair market in China is forecast to grow by about 14 percent annually in value to over USD 188 billion by 2020, with general repairs leading the market growth, according to the report. The growth of the repair market will continue to benefit from the increase in parc size, which will nearly double over the period. China’s vehicle parc is highly fragmented with all major global OEMs present and over 1,300 models, many of which have very low volumes, on the road. China’s parts suppliers comprise sophisticated and large global players, and small, local distributors.
China’s aftermarket distribution is poised for some significant changes in the coming five years. Despite the aftermarket’s rapid expansion over the last 10 years, its distribution structure and operational characteristics remain highly fragmented and relatively chaotic. Garages are mostly independent (a few chains) and have rudimentary sourcing methods. Parts supply covers the spectrum from leading international players to many lower-end local producers as well as counterfeiters.
The aftermarket is expected to continue expanding in China from Tier-1 and 2 cities to Tier-3 and even Tier-4 markets since it is becoming a strategic market for all players in the auto industry. Coupled with a high volume of new car sales and an expanding parc, the market structure for service providers is poised to evolve from a poorly organised developing market structure to a more modern and efficient model.
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 of two-wheelers. By 2026, Indian automotive industry is expected to be among the top three in the world. The Indian automotive industry has its own growth triggers. They include a rising working population and growing middle class, government’s initiatives for e-mobility and other regulatory reforms. They alter the Indian automotive market to a great extent.
The leaders of the automotive aftermarket industry think that through appropriate strategies they can effectively capture the aftermarket opportunities in India.
Like the Indian automotive industry, the aftermarket also faces sweeping changes. Digitalisation, regulatory pressure and eco-friendly products underscore the changes. Along with these intrinsic factors of change are the external and national developments like demonetisation and implementation of GST. India is becoming one of the largest manufacturers of vehicles in the world. Hence the number of new models being rolled out is also on the rise.
The aftermarket is striving to be up-to-date and relevant with revamped supply chain, product and service offerings.
According to Goldstein Research, automotive aftermarket revenue of India region was about USD 14.2 billion in 2017 or about eight percent of the total Asia Pacific automotive aftermarket industry revenues. Further, the automotive aftermarket industry is likely to expand at a CAGR of 7.6 percent during 2017-2025.
Based on the assessment of the Indian aftermarket products and services, wear-and-tear parts accounted for the largest revenue share of more than 61 percent. The services segment is the fastest growing and is likely to expand at a CAGR of nine percent till 2025, according to Goldstein Research.
In order to be successful in the new aftermarket game, automotive suppliers have to act now by gauging the impact of the new trends on their individual organisations and defining the future strategy along strategic and operational dimensions. Experts say that the growth outlook for the aftermarket is stable, although the structure of the market will change with digitalisation.
According to 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 goods and service tax (GST). In India, more than 70 percent of car buyers abandon the authorised service station within three years of purchase. This will boost the market for multi-brand service stations. In the next five years the percentage of vehicles which are more than seven years old will be close to 40 percent, creating more demand for parts replacement.
The global automakers in India 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 focusing on after-sales 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.
The potential of the aftermarket in India has attracted several established players to venture into this vertical which is highly dominated by the unorganised players. For instance, Rico Auto Industries, a leading component manufacturer, has recently announced its foray into four-wheeler aftermarket, after a successful year in the two-wheeler aftermarket segment. The Managing Director of Rico, Arvind Kapoor, said that the company which had not ventured into the aftermarket in the 35 years of its manufacturing operations, decided to take the plunge after the implementation of GST in India. It also plans to expand its aftermarket base to other SAARC nations.
Gopal Maloo, General Manager of Madras Auto Service (MAS), a TVS group company, said that growth in the industry is not confined to the metro and Tier-1 cities as the company has seen exponential growth in the smaller towns and cities of the country, indicating the kind of volume that it can expect to see.
MAS, since 1936, has set the pace for the spare parts and components industry in many avenues. Today it represents more than 70 ancillary manufacturers. In addition to marketing spares for trucks and cars, tractors, earthmoving equipment, gensets and IC engines, MAS is one of the largest wholesalers of spare parts.
Until the implementation of GST the organised aftermarket players had a tough time. The April-June quarter has seen better growth than in the same period last year due to the pre-GST pent-up demand. “Since the automotive aftermarket is not a structured industry and has multiple players, some of them were not accounting properly. After GST we could see there is a vast improvement and a definite 60-70 percent drop in that kind of business,” Avijit Mukherjee, Executive Vice President (Parts,) Sundaram Motors, which has around 142 branches, said. The trading market (that part of the market which used to operate without bills) is not growing as it is difficult to sustain previous kinds of volumes. Companies which ventured into smaller Tier-2 cities and markets and expanded their networks are doing better.
The aftermarket is a segment where one cannot create demand. Customers will purchase a spare part only when the vehicle breaks down. “It is need-based. Wherever there is need, whatever available is used. So, network is very important,” he said. Those companies that invest in networks and deliver fast take the cake.
However, Mukherjee added that online retail has not made much of a dent in the spare parts space. “So far it has only negligible presence in the business. Maybe accessories, a little bit,” he said. Sometime in the future the trend might catch up because the online sales have been increasing. Taxis and fleets have altered the aftermarket tremendously, with the spread of cab aggregators like Ola and Uber. Almost 70 percent of the business for aftermarket comes from taxis.
India is developing as a global hub for auto component sourcing and as an export base to South East Asian countries, Middle East and Africa region. However, the large number of unorganised market players stagnate the automotive aftermarket growth. Industry experts say that due to disruptive trends in the industry, the automotive suppliers that have long conducted business in a relatively stable environment will face a new type of competition from players at different stages of the aftermarket value chain, as well as from new players with, for example, digital-driven businesses.
As vehicles on the road continue to age, there will be an ever-growing demand for parts and services. With the demands of the consumers and their profiles changing drastically, the automotive aftermarket has been presented with great opportunities. It is up to the industry to grab them. The first-movers will reap major benefits, industry players said.
While the global automotive industry is fiercely competitive, there are other factors that limit or distort the trade. According to the US Commercial Service, for decades, various governments around the world have used trade distorting policies to support the creation and expansion of domestic automotive industries that were not otherwise economically viable. This has been accomplished through combinations of subsidies, tariffs and non-tariff barriers.
In general, the economic outlook for the global aftermarket business is positive but the main growth will be in Eastern Europe and Asia. The market will see less but stronger players who will drive the digitalisation process and new platforms. These are expected to play a major role in the distribution of parts and assigning of repair jobs to workshops. The entire automotive industry must make efforts for leaner processes and nurture the ability to make use of in-vehicle data-based services around mobility. Thus technology and regulations will propel the aftermarket to new paradigms in the near future.
With inputs from ShamPrasad.
NB: Photos are representational. Courtesy: AA, Bosch, Continental, Dana, Delphi, Denso, Knorr Bremse, Schaeffler, WABCO and ZF.