Aftermarket Update 2012
The aftermarket is seeing some growth, but it is happening at a slow pace and economic and political uncertainty are keeping things from really taking off.
By Denise L. Rondini, Executive Editor
While everyone in the aftermarket will take today’s market conditions over those of just a few years ago, no one is jumping for joy over the current situation. Conditions in the U.S. economy, the economic situation in Europe and the upcoming elections are all casting a pall over the industry.
The year started out on a high note for many in the aftermarket, with distributors, dealers and repair garages seeing strong sales in the first quarter. However, many business owners saw sales fall off in the second quarter.
“It’s been spotty,” says Tom Stewart, president of Carolina Rim & Wheel. “We had good runs in certain things and then it would fall off. There just does not seem to be a lot of rhyme or reason for it.”
Many cite the unseasonably mild winter as one of the causes for the drop-off in sales.
“Those breakdowns that don’t happen, don’t repeat,” says Don Reimondo, CEO of HDA Truck Pride. “Cold temperatures, freezing roads, ice, sleet, they ruin our surfaces and they cause wrecks. Cold weather breaks things, and when you don’t have it, things don’t break. They are not repeatable so it has a profound impact on consumption.”
Walt Sherbourne, director, field sales, Meritor, Aftermarket, says, “The lack of a winter season not only impacted winter product sales, but it eliminated the spurt in spring brake season (shoes, hardware, slacks). Fleets were able to perform regular maintenance, which would normally have been held off in the winter.”
Overall, the market has seen growth, although not at the rate experienced in 2011, according to Terry Livingston, general manager, Aftermarket U.S and Canada for Meritor.
“We have noticed that growth is not spread evenly over all markets and vocations. We see some markets performing well — refuse and construction — and others that are sluggish — linehaul and pickup and delivery,” he says.
Stu MacKay, president of MacKay & Co., says, “The brightest geographic spots are where they are drilling for natural gas whether it is in North Dakota, Ohio, Pennsylvania or wherever. I think that probably is the strongest area of performance at this point simply because there is so much brand new economic activity and brand new truck activity.”
Additionally, since most aftermarket businesses cut costs during the recession, they have been able to see higher operating margins even if their sales have not gone up, according to Kumar Saha, industry analyst, automotive and transportation for Frost & Sullivan.
Balancing inventory in uncertain times is a challenge as well. “It is very difficult because you get runs on stuff and you are scrambling to get product,” Stewart says. “Then you get product in and sales fall off and you are sitting with product on your shelf. We crystal ball gaze as best we can and sometimes we are good and sometimes we are not so good so we run out of product or we look around and say ‘Who do I have so many of that?’”
The amount of product carried is not the only important factor when it comes to inventory management. Distributors also need to review the product mix they offer.
Looking To Year’s End
No one knows for sure how the aftermarket will perform in the second half, but most aftermarket participants expect it to be better than the first half.
Tim Bauer, director, Undercarriage Products, Meritor, Aftermarket, says the company remains “optimistic based on the indexes for the fourth quarter, but many dealers and distributors are pulling back on inventory and conserving cash as the expectation is the market will not perform as forecast.
“Based on conversations and input from distributors and dealers, the aftermarket will be slightly softer for the remainder of 2012,” Bauer says.
One of the factors that may be tempering optimism for the balance of 2012 is the upcoming elections and the uncertainty they brings. “I think one of our biggest risks is political right now,” Dave Clark, manager of business consulting for Karmak says. “The direction Washington takes, the cooperation level out of Washington can certainly impact our industry as well as the market in general.”
Reimondo does not expect things to change dramatically in the second half of the year. “I think it is going to be flat. We don’t see anything gangbusters and it being an election year I think there is a lot of anticipation of what is going to happen. I don’t think things are going to change dramatically.”
MacKay says his firm’s forecast for 2012 is for the aftermarket to be up between 5 and 6 percent. “What we are seeing through the first three or four months parallels what we forecast, and I don’t think we are going to be above that through the balance of the year.”
He adds, “My perspective is there is an awful lot of uncertainty out there driven by things as far away as Greece and as close as what is going on in Washington. The fact that the economy is not really rebounding significantly, that unemployment is still high, I don’t think the basic characteristics are going to change that much over the next seven or eight months.”
But Tom Tecklenburg, director of global aftermarket for Timken Co., says his company remains bullish about the remainder of the year.
“There are a few economic indicators of housing starts being up year over year although still not back to the high trends of the mid-2000s. In addition, if unemployment goes down modestly and we can hold on to some manufacturing output, then we see this being a positive send half of 2012.”
And while Bill Gryzenia, vice president and general manager, aftermarket for Dana Holding Corp., expects the second half to look much like the first half, he says “We are experiencing a couple of slight up ticks here and there.
“With the [nation’s] fleet being older than it’s ever been, this will create the need for continued service and parts,” he says.
An Action Plan
To remain profitable for the balance of the year and to position themselves for 2013, distributors, dealers and repair garages must continue to focus on business basics but also look at making some changes to the way they operate.
“They have to continue to be customer focused,” Clark says. “They have to continue to improve the customer experience. And then the basics like cash management, asset utilization, profit margin improvement are going to be critical. Areas like training, process improvement, system improvements and upgrades also are going to continue to be critical.”
One of those basics is inventory, Gryzenia says. “Product on the shelf continues to be extremely important. He who has the product available will win the business.”
Livingston agrees, “All three segments — independent service garages, distributors and dealers — have to focus on inventory utilization. There are many options today for a fleet to purchase parts so if the distributor, repair garage or dealer does not have the part on the shelf that day or moment, the fleet will try the next one on its list and usually it will find the part or service it needs.”
Reimondo also says there are things aftermarket companies can do that are more strategic. “We continue to stress product line diversification. [They need to] look at product lines they are not currently in, look at product categories they are not currently in, look at expanding the basket of goods they provide to the market.”
He adds, “In addition, we continue to talk to our guys about expanding into the service end of the business or expanding their service operations because we really do believe that down the road being someone who hangs parts on the vehicle is going to be a strategic advantage.”
MacKay too is a proponent of adding service to a distribution operation. “We think service drives everything. Those businesses that are really putting the emphasis on service probably are going to be the companies that should have what I would describe as above average performance over the balance of the year.”
Mastering technology is another key factor for success, according to Tecklenburg. “We have increased technology in the vehicles and the capabilities and personnel [of aftermarket businesses] need to be able to adapt.”
Ultimately Livingston says the three segments “should create the best differentiating value for the fleet to ‘win the business.’ The segments must be complete solution providers for end users, because [fleets of all sizes] want answers and solutions to their problems, not excuses.”
“One of the things we hear from fleets is they do not want to have 10 contracts in 10 different shops,” Saha says. “They want to go to one place. It makes their billing easier; it makes everything easier to go to one place and make sure that one place is taking care of all their needs.”
“If the three segments provide value-added services such as fast, easy access, speedy delivery and prove lowest cost of ownership (savings), they’ll ultimately win business over the price seller every time,” Livingston says.
Starting A New Year
A new year brings new hopes and new challenges, and 2013 will be no different. While no one can say with certainty what will happen next year, some were willing to hazard a guess.
“I am real hopeful that after the elections and after Congress decides what it is going to do with regard to the Bush-era tax cuts and capital gains taxes and stuff like that, [I hope] they keep everything in place,” Stewart says. “[If they do that], I think 2013 might start off pretty well and might really be a good year.”
MacKay explains that Bob Dieli, who does economic forecasting for MacKay & Co., does not see anything negative in terms of the economy for at least 12 months. “That puts us into the second quarter of 2013,” MacKay says. “So I don’t think there is any negative over the first part of 2013 that might be driven by a downshift in the economy.”
Saha says the economy presents a bit of a slippery slope for 2013. “I don’t think the U.S. economy is going to go through any kind of major downturn, but there will be certain impacts from Europe and India. However, it will not be anywhere near as bad as it was in 2008 or 2009.”
Tecklenburg is more upbeat and says, “The positive sign is there still is a prediction for modest growth in the economy in 2013. That is an upside,” he says. “If the economy grows, unemployment generally comes down. There continues to be more manufacturing increases going on versus the declines we had especially during the recession .”
For not only the first six months of 2013, but for the foreseeable future, Stewart says “you just have to keep business going and keep products on the shelves so the customers will be served. It certainly is not as much fun as it used to be. It is a lot more like work, but that is what you have got to do today.”
Reimondo says the aftermarket is light years from where it was in 2009 and the industry has recovered well. “If, in fact, the economy will stabilize and show some signs of real growth, our guys have made the adjustments necessary to not only survive but will jump on it and benefit from it as we move forward. We just need a break in the economy.”
However, MacKay is predicting what he calls a solid unspectacular recovery for the aftermarket and that might not be enough of a break.
“[The aftermarket] did not drop off anywhere near the way the truck and trailer business did. Utilization rates for the truck operators themselves are up,” MacKay says.
“It is simply not a spectacular recovery, but I don’t know that we’ve ever had a spectacular rebound in the aftermarket. But it is solid and it moving in the right direction.”