An influx of overseas parts arriving in an already-saturated American marketplace continues to place added pricing pressure on aftermarket retailers, distributors, jobbers and domestic manufacturers struggling to compete against cheaper imports.
Aftermarket business managers frequently find themselves ordering broader inventories of given product lines to better fulfill the needs of their customers, especially when price is one of the key drivers of a category’s management.
Offshore facilities, whether they be owned by manufacturers based in the United States or business operators residing in the country of origin, increasingly produce higher quality components than in the past — and they do it at a lower cost than what traditionally domestic firms can provide.
American-based aftermarket manufacturers wishing to remain competitive in the United States are increasingly being compelled to go global with their operations — either through strategic partnering with overseas outsourcing firms or building offshore factories themselves.
Certainly carmakers are going this route, as any given vehicle is likely to contain numerous original equipment-manufactured components solely supplied by foreign facilities.
Domestic-only parts producers can find themselves priced out of the aftermarket by competitors taking advantage of lower offshore overhead garnered through reduced pay rates, fewer taxes, less-restrictive environmental regulations and a host of other benefits found outside U.S. borders.
In the not-too-distant past, American companies often felt they were cushioned somewhat from overseas competitive pressure by quality issues and the difficulties that came with setting up an offshore manufacturing and supply stream. Despotic dictators, corruption and political instability were among the obstacles protecting the U.S. from inroads by imports. Weaker overseas infrastructure concerns are being pushed aside as numerous nations actively court automotive suppliers by presenting favorable trading terms and other benefits.
“It’s surprising many of our clients who thought a few years ago that that would be a sufficient barrier,” says industry investment banker Andrew Stumpf, vice president of Stout Risius Ross Advisors, LLC.
Certain foreign countries “have really come up the curve quickly” to straighten out previous kinks that discouraged the parts-making sector.
Not only is there an industry-wide desire for the lower price points that come with these overseas goods, some parts are simply not available with a “Made in USA” moniker as OEMs boost the level of international sourcing for new vehicle models.
A number of aftermarket executives tell us that pricing differences are often dependent solely on the label affixed to the box: An identical part in name-brand packaging costs more than its white-box version.
While some in the aftermarket remain reluctant to embrace foreign-made products, the sheer volume of merchandise coming ashore at American wharfs tends to mandate increased acceptance. In addition to private label lines, offshore-based name brands are steadily gaining in market share in the American aftermarket. “A lot of this has begun to reach deeper levels of distribution,” Dan Smith, president of Capstone Financial, reports.
About 10 percent of the nation’s auto parts arrive from overseas, says Paul Foley, who is vice president of the Automotive Aftermarket Suppliers Association (AASA), a division of MEMA, the Motor & Equipment Manufacturers Association. In 2003, this amounted to $74.5 billion, a 7.8-percent increase over the ’02 figure.
“It’s big and it’s been growing,” Foley notes, pointing to an American aftermarket that is already over-served.
“There’s 20-percent excess inventory sitting around,” he says.
Going global
“It’s a world market,” explains Gary Epstein, vice president of Reliance Automotive, Inc. The St. Louis-based WD, jobber and retailer serves a multi-state selling region, and Reliance supplies private label goods from a global array of manufacturers.
“If we cut out a lot of the things we buy based on where they came from we’d be out of business,” Epstein points out. He observes that the industry as a whole is often unaware of, or unconcerned about, the actual nation where a part is produced.
“The global market has hit and global manufacturing has hit,” concurs William Ussler Jr., president of McCabe Auto Supply Stores, a five-store chain based in Pottstown, Pa. “It’s a nonevent at this point,” he notes.
“Generally speaking, they’re the same quality as what you have in this country,” Ussler says. “It didn’t used to be that way.”
Occasionally Ussler will sample like products with varying packaging and pricing, only to discover that they are identical. “We’ll take a look at them, and often they have the same mold marks.”
Knowing your supplier is a critical factor cited by many in the aftermarket, as an established business will stand behind engineering, performance and warranty issues. If you buy direct from a relatively unknown overseas entity, “It’s a long road to talk to the guy who’s going to straighten it out,” Ussler advises.
According to Tomm Johnson, CEO of Red Rooster Auto Stores, a six-location jobber/retailer based in Minnesota, technician customers are increasingly unworried over where a part is produced. “They say, ‘We don’t care as long as you’re standing behind it and we don’t have any trouble with it.’”
He adds, however, that “some people don’t want to take a chance, so they’ll go back to the dealer” and purchase the official OEM version. Ironically, though, carmakers are frequently building their vehicles with offshore sourced components.
But overseas imports are throwing a wrench into pricing and product mix issues, says Johnson. He must now order multiple choices within a given line, where previously just a few would do. “You only have so many dollars that you can put into inventory,” he says.
It used to be that a good-better-best selection from a select manufacturer or two was sufficient; nowadays — because of price pressure from competitors — a considerably wider stretch of merchandise that includes bargain parts has to be made available.
“You have to be smarter and inside that computer looking at numbers” to ensure that a proper stock is in hand, says Johnson. “It’s a lot of work to have the right numbers and widths” within a category.
Balancing act
As big box discounters and other large operations buy cheaper overseas parts, they put the squeeze on smaller merchants trying to keep up, according to Johnson. “We’re being forced into value lines,” he says, using his preferred term for bargain parts. “We don’t want to call them ‘white boxes,’” he explains.
“We’ve always sold the premium product because we’re a premium house,” Johnson continues. “We’re old-fashioned and high service, but it’s a balancing act.” Thus, he’s compelled to carefully select other lower-priced parts to carry based on customers who desire lower price points. “I probably have five lines of filters but only two full lines.”
Obtaining this expanded price-based inventory and selling it at a profit is challenging. “The big guys in this industry are looking at the Wal-Mart road map” and insisting on reduced pricing schedules from suppliers, Johnson laments.
“What happens to the Red Roosters in the world when the big boys can buy a part for a dollar and sell it for $10? I’m not big enough as a six-store system to go out and get this done.”
An affiliation with the now-larger Uni-Select/MAWDI merger has Johnson crowing over the possibilities. “It will allow us to put pressure on the manufacturers. With purchasing power, you get what you want.”
In the meantime, Johnson contends that larger distributors are aggressively buying increasingly lower-cost parts to sell, then shifting the offerings to gradually higher price points if and when quality issues come to bear. And with private labeling, “We have no idea what’s in that box.”
Another vexing issue is that competitors in Red Rooster’s trading area are quoting better prices to technicians, then saying it will take a week to get the part. The tech moves on to another supplier with a quicker turnaround, yet that bargain price is now in play. A part is offered at a lowball $10: “Then they call us and we say $20, and then we look bad,” Johnson says. “Their delivered price is lower than the stocking price. They just want the delivered price to look good.”
Technicians are increasingly shopping price, often purchasing from big box retailers with commercial divisions. Johnson anticipated the do-it-yourself trade would be affected, but “I didn’t think they’d be so successful at wholesale. I expected too much in allegiance from our wholesale customers.”
While Red Rooster has had long-term relationships with the company’s established customers, younger purchasing managers frequently go with the best price — period.
“I’m a fairly small jobber,” explains Gene Dean at Dean Distributors of Rainbow City, Ala., “and I’m basically at the mercy of the distributors I buy from, and most of your bigger distributors buy from overseas — which was not the case several years ago — and put their own labels on them.”
Declares Dean: “I have more problems with the private label merchandise” than with name-brand parts.When selecting private label products, “I basically choose the things that are price sensitive in my area,” and “with most of the stuff that’s price sensitive I’ll buy both” types of product to ensure that the company gets the sale.
Core values
“Some of my competitors are white-boxers to the core, and it’s hurt us — the competition can be tough, ” reports Mike Emley, who, with his brother Don, owns All Parts Auto Stores, Inc., a four-location Parts Plus (and now Automotive Distribution Network) member headquartered in Morgan Hill, Calif.
“You have to explain more to the customer why the prices are higher,” he points out. “I’m not a white-box seller; quality is extremely important to me.”
Covering the high-end Silicon Valley, the shops in the All Parts targeted wholesale marketplace tend to be more concerned with product performance than with low-end pricing or the country of origin. “We sell tons of stuff that comes in from offshore,” says Emley. “How does anyone in this country not sell anything from offshore?”
He adds, “I’m a firm believer in selling American parts to the best of my ability — I want to keep jobs in this country — but there are so many brands (with only overseas facilities) that I have no choice.”
The issue is softened by the company’s insistence on buying only from mainline distributors that stand behind the products.
Brian Keith, president of Walter S. Wright Automotive Parts, a fourth-generation two-step warehouse distributor with four locations throughout the Birmingham, Ala. area, advises against changing product lines every year or two in search of an elusive better deal that may or may not be so good.
Country of origin and quality will be questioned less when there is “a relationship and trust,” says Keith. “People will always be dealing with people.” If you have misgivings about a particular offshore product line, factor in your potential quality control costs with the price you’re prepared to pay, he suggests.
Seeking ‘OE-ness’
“In my market they want premium brand-name products,” says Frank Kohlweiss, president of Kohlweiss Auto Parts Inc., a Pronto program group member with four warehouses throughout the San Jose, Calif. region. “It’s the ‘OE-ness’ that I’m looking for on behalf of my customers. You put it in a white box and nobody will touch it in my area,” he contends, adding that a recognizable label assures that an item will perform as expected, even if it happens to be from overseas.
“The shops don’t want to use an offshore product (in no-name packaging) because they don’t want it coming back,” Kohlweiss says. “My friends tell me that I’m missing the boat” by not offering the lower-priced import lines. “That’s a market I don’t want to get into.”
Several aftermarket participants report that white box products are flying off the shelves in lower income neighborhoods, especially those with high immigrant populations.
Jobbers and WDs often discuss brake rotors made in China and oh-so-tight pricing pressures. “Chinese rotors are a comedy,” says a jobber with no hint of mirth in his voice. “Everyone wants to know who has the cheapest rotor.”
Chinese rotors no longer give pause to Aftermarket Auto Parts Alliance member Gary Hunt, CEO of Auto Craft Automotive Products, Inc., a 12-store retailer, WD and jobber based in King of Prussia, Pa. “The quality has been very good over the past several years,” he says. “About 10 years ago they had some problems, but those have been taken care of.”
The label affixed to the box is cited as a harbinger of how the product will perform, no matter where it comes from.
Pronto Group member Rock Valley Distributing of Loves Park, Ill. buys with confidence because only major companies are selected as suppliers, notes Jim Beasley, vice president and general manager. “They live with the quality issue,” he explains. “I depend on the manufacturer to provide that engineering and expertise to supply something worthwhile.”
