Even in today's sometimes rocky industry, business for hard parts makers remains as solid as the products they sell.
Seeking an understanding of today's tumultuous economy is the equivalent of communicating with a rock. But that's just what hard parts makers are proving themselves to be: stalwart, even in the toughest of economic times, showing unquestionable growth amid a questionable economy.
There has been some predictable fallout with accessory manufacturers, but those who make hard parts are in good shape, posits Dan Smith, president and CEO of Capstone Financial Group. "Hard parts will be stable for quite a few years because of many factors, including the increased age of vehicles on the road, the increased number of drivers and the increased number of vehicles on the road."
The distribution of hard parts also is growing.
"A lot of the distributors are growing in concentric circles around their warehouses, particularly in areas of high demographic concentration," Smith says. He adds that Asian influence has kept a cap on what could be even more merger and acquisition transactions.
Mergers and acquisitions are up this year, and private equity money continues to flow into the aftermarket, albeit more cautiously than before.
There have been more hard parts manufacturer acquisitions than Smith has seen in awhile. He points out that mergers and acquisitions in this segment for the first half of the year number 55, up from 43 last year. However, some of the companies purchased are not those with overly popular brands, Smith adds."It's been an active year in private equity deals," he continues. "They were up from 18 to 21." Private equity firms are still looking for deals all throughout the aftermarket.
For next year, the U.S. economy should be relatively stable, says David Solomon, co-CEO of Goldsmith-Agio-Helms/Lazard Middle Market. "There will be fewer cars sold, and sales in the aftermarket will be down because people are spending less."
A host of challenges
All of this isn't to say that aftermarket suppliers aren't facing challenges. If you were to write down every economic challenge and place them into a hat, each one you pick out most likely would apply to the aftermarket, from bankruptcy and low-cost country competition to labor and health care increases and plant closings.
Emerging from bankruptcy still is obviously on the minds of Federal-Mogul Corp. execs. Earlier this year, the company got the green light to enter into a $3.5 billion finance package from Citigroup Inc. and JP Morgan Chase & Co. to help move it from Chapter 11 bankruptcy.
Although day-to-day business takes place seamlessly within some of the market's technically bankrupt companies, the "B" word still hangs over their heads and can be a difficult stigma to shake.
Delphi looks toward emerging from Chapter 11 at the end of the year. The company has settled its relationship with former parent General Motors Corp. and has reached agreements with U.S. unions.
Frank Ordoñez, president of Delphi Product & Service Solutions and vice president of Delphi Corporation, says simple brand recognition can also be an obstacle. He says some technicians still are not accustomed to the Delphi name. In its defense, the company has existed for just over five years and continues to experience double-digit annual growth.
"We spent three to four years earning our badge," he says, as the industry at large wondered if Delphi would stick around.
In response to brand recognition and penetration into the marketplace, Steve Harman, president of the Americas for Shell Lubricants, says communication with distributors is key. "We have a distributor advisory council we meet with every three months."
The company has a very strong tie to its distributors, some of whom are third-generation business owners, says Harman.
ACDelco also has a strong distribution focus, with plans to grow its presence through the company's U.S. Dedicated Distribution Group and by increasing WD customers' footprints along the way, says Marketing Director Nancy McLean.
"We're also focused on expanding our distribution footprints and better leveraging our existing operations to source the highest-quality products at the best prices to mutually benefit us and our customers."
Just dealing with the customers is a challenge, Jay Burkhart, senior vice president, global aftermarket for Federal-Mogul Corp., offered when interviewed by Aftermarket Business at this year's Global Symposium.
"I think customer requirements are so much more complex now," he says. "They think on multiple levels." In order for Federal-Mogul to accommodate its customers, the company has created a more integrated sales and logistics function. Rather than a customer relationship involving one salesperson, "the whole enterprise is going to call on a customer."
Others worry over the independent technician's access to repair information as pivotal to any success.
"Government regulation is the one thing that scares me the most," Mike Fitzgerald, vice president of marketing for Standard Motor Products, said in an earlier interview. Pending Right to Repair legislation is necessary for companies like his to succeed. "If the hood gets sealed, our company would not fare very well, and it would impact the entire industry." Standard Motor Products makes high-tech engine management components.
McLean says that lead prices concern ACDelco, especially considering there's been a 200 percent increase over the past year.
OEM warranties and their extensions are other points of concern with Ordoñez. "In Europe, you can do warranty business in the aftermarket": not so in the United States, he adds.
India: a supplier hotspot
We all know the importance of China to the aftermarket, but — as we pointed out in our October issue — India continues to be a dominating factor among suppliers.
China specializes in labor volume, but India is looked upon for its engineering prowess. "India is light years ahead of (China) in technological and development issues," says Capstone's Smith.
Actually, India, Vietnam and the Philippines all are experts in generating business with mind share and engineering expertise, Smith adds.
Bosch now is producing common-rail injectors for diesel engines in India and hopes to make 3.5 million annually by 2010. The company wants to invest more than $400 million in India before the end of next year.
While some are adding an Indian presence, Visteon recently completed the sale of Visteon Powertrain Control Systems India (VPCSI) in Chennai to Adyar River Ltd. But the company's Indian footprint remains significant, employing more than 2,000 people in four manufacturing plants and two technical centers, according to "CNN Money."
At press time, Federal-Mogul and its subsidiaries were looking for approvals to set up a wholly owned subsidiary to make and distribute sealing products and gaskets in India. "The Economic Times" of India reports that Federal-Mogul has six joint ventures in India, with different auto component companies for different products, like Goetze India, which makes pistons and piston rings, as well as Gabriel India and Anand Engine Components.
Beyond India, globalization can be the best, or worst, thing for a supplier. It all depends on the company's reach.
Or for ACDelco, globalization can likely be to blame for the company being a victim of the counterfeiting of intellectual property. And ACDelco certainly isn't alone.
"Earlier this year, we settled enforcement actions in two separate U.S. cases against individuals for infringement of our trademarks and diagnostic and repair software," says McLean.
Solomon says some automakers are sourcing from U.S. companies that are directly sourcing in China. "There's going to be branded OEM product made in China," he says, adding the U.S. brand will be stamped on the products so consumers and techs will not know the difference.
Burkhart says Federal-Mogul plans to set up a global sourcing division to directly source parts through all of the channels. "I don't think it's a negative phenomenon," he says, adding that globalization can pose a problem for the North American manufacturers that are rooted to this continent.
"I talk about global sourcing like grief counseling," jokes Fitzgerald of Standard Motor Products. "There's four stages before you get to the acceptance side of it."
But without globalization, he adds, companies cannot be competitive.
It's still all about technology
No matter which auto parts a company manufactures, there's no hiding from the proliferation of technology.
And it's part of a mantra Delphi's Ordoñez has stressed for some time. He calls it the "Electronics Revolution." And others, like Ordoñez, point to everything from in-vehicle entertainment systems and telematics to "by-wire" steering and braking systems as parties to this revolution.
Telematics, he adds, is a two-way form of communication, a way for someone to talk to the car and the car to talk back.
"There is opportunity for the aftermarket here — the technology exists," says Ordoñez. "Telematics is a great way to maintain consumer loyalty, and our industry should take full advantage of it."
ArvinMeritor is another example of a supplier embracing developing technology, infusing "smart systems" into the marketplace, which cuts the mechanical parts in systems by as much as 50 percent.
A latching system, which has a low energy release and is reputed to be smaller and quieter than traditional latches, was introduced at Germany's IAA Frankfurt Motor Show in September. ArvinMeritor has the potential to implement this system in everything from power locks, trunks and sliding doors to side-door latches.
Having a strong OEM connection plays to ACDelco's favor with technology, says McLean. "ACDelco leverages the expertise and resources of our parent company, General Motors," she says. "We incorporate these technology changes into our testing requirements to give our customers confidence — whether they're selling, buying or installing our products."
The relationship between OEMs and the aftermarket will become stronger and more active, says Jonathan Carey, vice president, investment banking group, for BB&T Capital Markets. However, "the aftermarket is demanding in very different ways than the OE market is, and we do not believe it will be an easy transition for many manufacturers," says Carey.
Bosch has a similar story in regards to close OEM alignment and its eventual benefit to aftermarket channels.
"Bosch is one of the biggest suppliers to domestic OEMs," says Chuck Ruth, director of automotive marketing for Bosch's North American Aftermarket Division.
In fact, Bosch's OEM labs and proving grounds are located in the heart of U.S. vehicle manufacturing: Farmington Hills, Mich., and nearby Flat Rock. "This proximity to our domestic customers makes it possible for the Bosch OE team to work very closely in partnership with GM, Ford and Chrysler to design systems and components customized to their needs," says Ruth.
Bosch's close alignment to technology dates back 100 years, and the company claims to hold more patents than any of its major competitors. "Since entering the U.S. market in 1906 with its revolutionary high-voltage spark plug and magneto ignition system for cars, Bosch has produced groundbreaking inventions in premium platinum spark plugs, oxygen sensors, windshield wiper blades and gasoline and diesel injection systems," Ruth continues.
The need to face technology even applies to unlikely corners of the aftermarket, like the high-performance glove market.
"We use the latest technologies in computer software and hardware to expedite the design, development, testing and manufacturing of our gloves," says Bari Waalk, "marketing guy" for glove maker Mechanix Wear Inc. "The high performance glove category is showing steady growth, and we discover new markets for our gloves each year. The only way to take advantage of these opportunities is to embrace technology."
An open system of communication between the design team and factories has helped Mechanix Wear to innovate its products "on a daily basis," Waalk attests. "We rely on computer-generated designs sent by e-mail and followed by a video teleconference with our glove factories."
Other supplier news
There's enough supplier news to fill every page of this magazine, but here are some recent news briefs:
- Visteon's Eastern Indiana employees got three months of reprieve when the planned September closing of the Connersville plant was extended. Almost 300 jobs were expected to be cut, according to the Associated Press. This was part of a plan to fix, close or sell about 30 plants, the report adds. Visteon has been haunted by debts from the initial Ford spin-off in 2000, but company officials are confident the parts maker will weather the U.S. automotive market slowdown.
- Timken extended its strategic alliance with North Coast Bearings. The two companies market and distribute differential and transmission kits and components under the DT Components name. The company also expanded its aerospace offerings with an agreement to buy The Purdy Corp., of Manchester, Conn., for $200 million, in a deal expected to close in the fourth quarter. Purdy makes and repairs transmissions for helicopters and airplanes.
- As part of a restructuring plan, ArvinMeritor is merging its three North American ride control facilities into one. The Toronto OE shock absorber facility will move to Queretaro, Mexico, while its Chickasha, Okla., location will hand over its packaging and distribution business to a third-party logistics firm.
The company is undergoing a restructuring plan that will affect 3,000 employees at 13 plants.
- Tenneco Inc. opened an exhaust systems plant in Leningrad, Russia, in September. The $2 million plant will make 75,000 exhaust systems a year for a Ford plant nearby, according to news reports.
