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Automotive Aftermarket Will Grow with Higher Prices, Analysts Say


Source: Kathy McCarron, Rubber & Plastics News

LAS VEGAS—The North American automotive aftermarket will enjoy increased revenue growth over the next several years as higher parts pricing offsets lower miles driven, according to industry analysts.

While sales are expected to dip in 2017, the aftermarket is forecast to grow at a rate of 3.4 percent per year for the next three or four years.

“Increased costs of technology (are) driving a lot of that growth. It’s not simply from more and more repairs,” Mark Seng, IHS Markit’s global aftermarket practice leader, automotive, said during a presentation at the recent Automotive Aftermarket Products Expo (AAPEX) in Las Vegas.

Many vehicle parts, he said, are becoming premium items with higher price tags:

  • The traditional wiper blade is now available in more expensive low profile and OE styling;
  • Fuel pumps, which used to be replaced as an individual item, are now part of an entire module, increasing the cost to $225 from $45; and
  • Wheel bearings and replacement seals, which used to be replaced individually, now are part of an entire wheel-hub assembly with electronics and sensors attached, thus increasing the price exponentially.

Meanwhile NPD Group Inc., which earlier had predicted that automotive aftermarket sales would slip 1.9 percent in 2017 based on a drop in miles driven and stable pricing, reversed itself with an upbeat year-end forecast.

During the year retail prices rose 3 percent—”so instead the forecast is trending positive this year (2017) and the whole story is based on price. If prices hadn’t increased 3 percent, the forecast would have been spot on,” said Nathan Shipley, NPD director, automotive industry analyst, during an AAPEX presentation.

He noted that consumers have been trading up on motor oil, either because they are required by vehicle specifications or because they see a great deal on full synthetic oil.

“Trading up is driving higher average prices, as well, in the market,” he said, adding that other categories, such as transmission fluid, experienced straight price inflation.

“It’s a mixed bag of reasons for why prices are up,” Shipley said.

“The usual story that we see is that, in the markets that we track, dollars are up, units are down. It’s all a price story that is keeping the aftermarket positive. It’s a very challenging market to play in…. We’re expecting the year (2017) to end (up) around 1.6 percent.”

He also noted that the private-label parts sector is trending up over 10 percent, growing at five times the rate of the overall market. Distribution of private-label products has doubled in the last three years.

“There are a lot of things happening behind the scenes that is driving some of that growth, which I would argue that it’s even more important to be aware of the trends and what is happening at the repair bay in order to successfully go forward and take advantage of some of this growth,” IHS’ Seng said.

Among those trends are a leveling off of new light vehicle sales, a change in the vehicle mix and the aging of vehicles on the road.

Both IHS and NPD predict slower growth in vehicle miles traveled, which increased 2.8 percent in 2016 over 2015 but which slowed in 2017 to about 1.7-percent growth.

Miles traveled per vehicle fell 3.5 percent, or about 400 miles per vehicle, between 2002 and 2016, according to IHS.

Consumers are still driving more every year but the growth rate has slowed dramatically, NPD’s Shipley said, “and this is having a major impact on our industry. It’s just not growing as fast as it once was.”

Fluctuating gas prices are impacting the number of miles driven. While gasoline prices are still relatively low, compared with past years, they are higher at year-end 2017 than they were a year ago.

Consumer spending increased 10 percent on gasoline in 2017 vs. 2016, according to NPD, noting that every 1-cent increase in the gas price equates to $4 million in additional U.S. consumer spending.

“So gasoline prices are a big deal for us,” Shipley said.

Trends

IHS offered five trends the aftermarket should watch in the next few years:

1. U.S. light vehicle sales are leveling off after hitting record levels the last couple of years.

After sales hit records of 17.6 million units in 2016 and 17.5 million in 2015, light vehicle sales were expected to end 2017 down 3 percent to about 17 million units.

Hurricanes Harvey and Irma, which hit the Gulf Coast and Florida, respectively, in September, created a brief surge in vehicle replacement sales, Seng noted.

“We think anywhere from 950,000 to 1.2 million vehicles will need to be replaced in those areas. That’s about 3 percent of the total (vehicles in operation) for that population,” he said, noting that not all those vehicles will be replaced, as some will be sold or repaired. The overall impact is not yet known, he said.

IHS does forecast a slight increase in vehicle sales in 2018 before hitting a plateau.

High new vehicle sales should not be considered a bad thing for the aftermarket, he said.

“I really don’t think that way,” Seng said. “I think it’s a great thing for us. I look at it as our new business pipeline, if you will.… These are the vehicles that will be coming into our bays three to five years out.”

Domestic vehicle model sales are expected to fall 4 percent while import brands will drop only 1.5 percent, still outpacing domestic sales. In 2016 domestic sales fell 2 percent while imports edged up 1 percent.

For the first time, sedan-style cars accounted for less than 40 percent of light vehicle sales, offset by light trucks and SUV/CUVs.

According to government records, there are about 271 million vehicles in operation (VIO) in the U.S. as of last January. IHS expects to see this number grow by 10 percent to about 300 million units by 2022 due to vehicles lasting longer and the growth in new vehicle sales.

2. Aftermarket repair opportunities are being driven by rapid changes in the vehicle mix toward SUV/CUVs and imports.

Four segments represented nearly 57 percent of all new light vehicle sales in the U.S. in 2016 — compact CUVs (19 percent), traditional compacts (13 percent), traditional midsize (12 percent) and full-size pickups (12.6 percent).

Seng said there has been a big shift toward the compact CUV, which accounted for 20 percent of sales in 2017 vs. 14 percent in 2014.

Between 2009 and 2017 there was a 7-million-unit increase in sales, with the CUV body style accounting for about half of the rise, he said.

Meanwhile, import brand sales are expected to continue to outpace domestic sales through 2022, by which time 44 percent of the VIO will be domestic and 56 percent will be import makes, he predicted.

“There is great growth opportunities with import cars for repair going forward,” Seng said.

“We need to track what OEMs are doing and what consumers are buying because that is driving the future repair opportunities that you all will be relying on three, four, five or 10 years from now.”

3. The aftermarket “sweet spot” is shifting to older vehicles.

The traditional sweet spot—model years of vehicles that are driving most repairs—has been vehicles 6 to 11 years old, Seng said, but several factors are shifting that sweet spot to older vehicles.

During the 2008-09 Great Recession, new light vehicle sales dropped 40 percent, a decline that contributed to the average vehicle age rising at a faster rate to 11.7 years. Compounding the trend is that average vehicle ownership has extended to 73 months.

People are hanging on to their vehicles longer, Seng said, for a couple of reasons: automotive finance term length has increased to 67 months on average with the fastest-growing loan types lasting six to eight years as consumers seek lower monthly payments on increasingly expensive vehicles; and the quality and technology built into newer vehicles has increased their lifespan.

The changing makeup of the U.S. vehicle parc from 2017 to 2022 is predicted to include: a 10-percent increase in the number of new to 5-year-old vehicles; an 18-percent rise in the number of 6- to 11-year-old vehicles; a 23-percent drop in the number of 12- to 15-year-old vehicles; and a 28-percent jump in the oldest vehicle category, those 16 years old and older.

He noted the drop in the 12- to 15-year-old category reflects the low number of new vehicles sold during the 2008-09 recession.

“I don’t think, necessarily, that the aftermarket sweet spot is shrinking,” he said. “I think it’s really just changing. More of our repairs have to be coming from these older vehicles.”

He noted that in 2002 about 35 million vehicles on the road were 16 years old or older; today there are 66 million of these units and by 2022 there will be 85 million units, about the same as the number of newer vehicles on the road.

“So again, we’ve got to be getting more of our repairs from these older vehicles. What’s cool is for the independent aftermarket, we get most of these repairs. So I think this is a good trend any way you look at it,” Seng said.

“I think the aging vehicle population is a great thing for the aftermarket. I think we need to be looking at that sweet spot a little bit differently. Is it really still the 6- to 11-year-old vehicle or should it really be extended because these vehicles are lasting much longer?”

He also noted that repair shops will need to change how they deal with owners of these old vehicles.

“Rather than dealing with the second or third owner of that vehicle, with the average age of a vehicle almost 12 years old, you could be dealing with the fourth, fifth or sixth owner….

“You need to be translating what’s happening on the road with average age into how we deal with consumers as car driver needs begin to change,” he continued. “Things that have to do with a good/better/best-type marketing strategy because somebody who has a vehicle that old, they want to repair it and keep it on the road.

“But how much are they going to be willing to pay for the parts to make those repairs? These are the things the aftermarket needs to be made aware of, not just that the numbers are changing, but how do you market (those parts).”

He noted there is the potential for increased scheduled maintenance with the aging vehicles and while the DIY market may increase in the short term, that category eventually will decrease as new technology becomes more common, and more complicated, on older vehicles.

4. OEMs are adopting new technology rapidly to meet current fuel-economy requirements.

Federal requirements for fuel efficiency and higher miles per gallon have prompted OEMs to dabble in electric vehicles (EVs), but these alternatives to gasoline- or diesel-engined vehicles aren’t being accepted by consumers fast enough, Seng said. Therefore, the OEMs are developing technologies to improve gas-powered engines. The traditional internal combustion engine (ICE) isn’t going away anytime soon, he predicted.

By 2028, IHS predicts 27 percent of new vehicles sold in the U.S. will be some type of battery/electric-powered vehicle (90 percent of which will be hybrids), while 73 percent will be ICE vehicles.

“In our view it’s going to be a long time before the internal combustion engine goes anywhere,” he said.

However, the technology is changing for ICE vehicles over the coming years.

The powertrain is shrinking to four or even three cylinders. By 2025 IHS predicts 70 percent of engines will be less than 3 liters in capacity in North American production.

Transmissions will increase beyond five speeds. Today about 86 percent of vehicles sold are five-speed or higher transmissions; by 2025, 94 percent of vehicles will have five speeds or more and half of those will be eight speeds or more, he said.

The industry will be seeing more vehicles with turbocharged engines, stop-start technology (over 60 percent of engines will have this by 2025) and gasoline direct injection, Seng noted.

5. Autonomous vehicles (AVs) are coming, but the technology is already found in today’s vehicles.

“They are on the horizon, and the technology is actually here, but it’s going to be a while before they are a lion’s share of the vehicles we have to repair,” Seng said, adding, “The technology that supports autonomous vehicles (is) entering our repair bays today.”

AVs today that are considered level 1 or 2 feature adaptive cruise control and lane-assist technology. Level 4 AVs still have a steering wheel, allowing the driver to take over control, while level 5 vehicles are fully autonomous with no steering wheel.

Seng said “a lot of things have to happen” before level 4 and 5 AVs become commonplace, including development of a communication infrastructure to enable AVs to handle various traffic situations.

IHS predicts there will be 21 million level 4 and 5 AVs globally by 2035.

“The technology that is going to be in place, it’s got to be perfected. It’s got to be connected. But the technology that is going to be required is on the vehicles today and the aftermarket needs to be aware of it and be ready to repair them,” Seng said.

“All the lane-departure assists, collision warning, adaptive cruise control, all the different sensors, the cameras — all those are coming and in place and are things we in the aftermarket need to be ready for.

“So even if it’s going to be awhile for autonomous vehicles to be a big piece of the VIO, the technology and the repairs are coming into our service bays now and will be rapidly accelerating going forward.”

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