by Bertel Schmitt
Making money with while auto makers are fighting for survival. By Bertel Schmitt, CEO Sinamotive Group (HK) Limited.
Auto sales, especially in the U.S. and Europe, are at their worst in decades. US new car sales dropped to a record low in September 2008. For the first time in more than 15 years, monthly U.S. sales fell below the 1 million mark. Overall industry sales tumbled 27% to 964,873 vehicles. Likewise, the European new car market is on track to fall to its lowest level in more than a decade.
In Europe, new car sales drop, but they drop less dramatically than in the U.S. Europe doesn’t rely as much on auto financing as the U.S. And as one observer put it, “before Germans stop driving, they will rather stop eating.” Analysts expect a decline of Western European volumes of 5% in 2008 and 3.5% in 2009. Western Europe and the US are expected to report approximately 14 million in new cars sold in 2008, with the outlook flat to lower in 2009. Industry insiders, such as Katsuaki Watanabe, President of the world’s largest automaker, Toyota, think the numbers might even be lower. Watanabe recently said that U.S. new car sales will probably end the year way below 14 million.
U.S. industry sales could “collapse” in 2009, J.D. Power & Associates cautioned. Standard & Poor’s warned of a possible insolvency of GM and Ford, “because of the rapidly weakening state of most global auto markets” and weak capital market conditions. Ford and GM promptly denied that they might file for bankruptcy. Instead, GM is in merger talks with Chrysler, after ending a flirt with Ford - as they did many times before, without ever consummating the marriage.
How can you make money with cars in such a catastrophic market? The answer is auto parts. People may stop buying new cars, yet, people don’t stop driving. People simply hold on much longer to their cars. This is aided by cars having an increasingly longer usable life. Already, the average age of all cars on Germany’s streets is more than 8 years. 10% of Germany’s cars are over 16 years old. Some observers already talk of a “Cuba-effect” on Germany’s autobahns, a tongue-in-cheek reference to the old cars on Castro’s island. According to a recent study, the car park in Europe will rise from currently approximately 200 million to 275 million in 2025. The study also predicts that the average age of a car on Europe’s streets will rise to 10.2 years in 2025. In the new European countries, the average age of the car is expected to rise to 14 years by 2025.
If you are in the business of servicing older cars, you are sitting on a gold mine. Nobody spends more for service and repair than owners of older cars. According to a recent DAT-Veedol Report, the annual average spendings for maintenance and repairs by German owners of cars that are less than two years old are EUR 109. Owners of cars older than 6 years spend close to EUR 500 per year for maintenance and repairs. The Wall Street Journal agrees: “As more consumers hold off on buying new cars, they’re making more repairs.” As older cars are subjected to wear and tear, expenses for service and repair are much higher than for new cars (which are covered by warranty anyway.)
Owners of older cars may spend more, but they spend it wisely. Owners of older cars are price sensitive. The price of the repair bill should be in line with the value of the car. The key to unlock this market are high quality, competitively priced parts.
Where to source these high quality, competitively priced parts? Mainly from China. China is the world’s biggest exporter of auto parts. Auto manufacturers worldwide have been buying their parts in China for years. Japanese, European, and US automakers source parts used for production in their home markets in China. According to the report, GM buys 20 million parts a month from 190 Chinese suppliers, and had experienced no quality problems over the past year. What’s more, most brand-name parts are already manufactured in China.
China is now more competitive than ever:
- Metal prices, which saw a wild run-up in the first half of 2008, have been coming down since July. In October 2008, Aluminum fell to a 31-month trough on the deteriorating health of the car industry.
- Steel prices are also falling. There were reports of panic selling . Forbes quoted an analyst who said that steel prices are “coming down hard and fast” as the economies of the United States and Europe deteriorate and growth slows in China.
- Rates for container shipping are falling precipitously. “Barely 12 months ago carriers were making record profits in the Asia-Europe trade. But from summer 2008, freight rates have plummeted ,” said Neil Dekker, editor of the Annual Container Market Review and Forecast 2008/2009 for London-based Drewry Shipping Consultants.
- Even formerly red-hot China is cooling slightly. Domestic auto sales will most likely see 2008 growth rates of under 10%, a recent report by the China Association of Automobile Manufacturers says. China experienced double digit growth rates in the years before. The reduced domestic demand for OEM parts is expected to apply additional pricing pressure on parts manufacturers.
In front of this backdrop, many repair chains and wholesalers in Europe and the U.S. are preparing their own private label parts lines, sourced in China. There is a potential for huge profits. Many parts can be sourced in China for a fraction of their European and U.S. retail prices.
New car sales may crater, manufacturers and dealers may go bankrupt, but people won’t stop driving. More wear and tear means more parts sold.
About the Author:
Author Bertel Schmitt spent more than 30 years as a marketing consultant to Volkswagen AG. He is now CEO of Hongkong, Beijing, and Hamburg based Sinamotive, a company dedicated to sourcing
low cost high quality auto parts in China. The company is financed by a private equity group.