A kilt-ful of concerns

In HD Aftermarket Forum, MacKay says explosive growth is a thing of the past — the market we see now is what we'll see in 2020

AFTER Stu MacKay was introduced to start the Heavy Duty Aftermarket Forum, he strolled out onto the stage wearing a green-plaid Scottish kilt and a sheepish grin.

“This has been such a bad recession that it scared the pants off of me,” he deadpanned.

The question is, when will he be able to put his pants back on?

MacKay, president of MacKay & Company, a specialized market research and consulting firm, said his company has some real concerns:

  • Flat market outlook. “Product improvements have changed the structure of the aftermarket. We're no longer overhauling engines after 250,000 miles. It's a million.”

  • Continued competitive in-roads.

  • Over-distribution. “We may be in a situation where there's simply too much distribution for a relatively flat market that we see over the next four or five years.”

  • What's happening in parallel industries. “With all the product improvements and no real growth or operating universe, we are not going to have the kind of growth we had in the last 10 or 20 years. So you're going to be dealing with pretty much the market you see today.”

Forecasting to 2020, he sees: little growth in the Class 8 and trailer universe; 100% diesel and 70% proprietary power; medium-duty hybrids and heavy-duty alternative fuels; onboard electronics across the board; a minimum 20% increase in repair/replacement mileages; continuing operator desire to outsource service; a 50% to 75% increase in Class 8 truck prices and longer trade cycles; shifts in both OEM and aftermarket brand control; and physical distribution simplification.

He gave two examples of markets he feels are plagued by over-distribution:

  • Salt Lake City, Utah: It has 7000 medium-duty and 13,500 Class 8 trucks, along with 19,400 trailers. Twenty-one companies — nine truck dealers, six major independents, three engine distributors, and three major auto parts outlets — are competing for a $71-million market.

  • Birmingham, Alabama: It has 3900 medium-duty and 11,700 Class 8 trucks, along with 14,400 trailers. Twenty-two companies — nine truck dealers, seven major independents, three engine distributors, and three major auto parts outlets — are competing for a $63-million market.

What needs to happen? He gave the example of Buffalo, New York, where he says 15 Ford dealers got together and, through buyouts, reduced the market to nine stores that are “healthy, profitable, and growing.”

“In select markets, this would make sense,” he said. “The customer base has changed. We will see fewer larger regional or national customers. Truck manufacturers have changed, going from 18 to four. The supplier base has changed. Look at the consolidation — mergers, acquisitions, and divestitures. That will continue. Competitive distribution has changed. Are you going to change?”

MacKay broke down the operating universe and how it has changed in the past 20 years: Class 6 is down 37%, Class 7 up 28%, Class 8 up 84% and trailers/containers up 53%. The heavy-duty aftermarket has increased from $9.7 billion to $14.6 billion, with significant increases in power generation (44%), power transmission (50%), undercarriage (41%), electrical (44%), and cab, chassis, glass, etc (50%).

Truck dealers' share of the aftermarket has gone from 35% to 42%, while independents' share has gone from 34% to 27%.

He said the most important reasons why customers purchase parts from independents are price, availability, and convenience of location — and service provides a similar picture.

“Customers pick dealers for warranty and availability,” he said. “Independents see dealers having an advantage with warranty and knowledge. Customers pick independents for price and location. Independents agree with customers that price is #1.

“Independents are 3-to-1 on price over dealers. Dealer availability matches independents. Dealers seriously outscore independents on warranty, OEM ‘umbrella’ and knowledge. Independents really only lead on price. This is a point, from our perspective, of major concern.

“How does the independent distribution channel build its share of the heavy-duty aftermarket? By adding or expanding service, building the parts business customer by customer, and niche positioning.”

Next Page: Survey offers insights on parts, service trends

He brought out Bill Ryan, CEO/owner of Point Spring and Driveshaft Co, and Terry Dotson, CEO/owner/president of Worldwide Equipment Inc. He asked each one this question: When you have taken business away from a competitor, who is it?

Ryan: “Generally, it's a distributor that isn't ahead of the curve, isn't providing service, or hasn't kept up with the times. This recession, as tough as it is, we're weathering it fine. You view this as an opportunity. But we look more at other distributors. I think dealers have a real advantage. We do try to model ourselves after the things they do. It's important we do rely on service. Our thing is, service what we sell. We have good technicians, capable people who know how to sell the system.”

McKay: “Kind of like a truck dealer without trucks?”

Ryan: “That's what we do.”

Dotson: “We take the approach to business that our share is all of it. If we go to US Express and we're getting their engine and transmission business, we want to know where their battery business is going: ‘What will it take to get your battery business?’ I have a caustic question that I ask to every customer: ‘What have you always wanted a truck dealer to do for you that he's never done that you're willing to pay a fair price for?’ We try to get all the business. It's like winning a baseball game. All you have to do is hit ‘em where they're not. We work real hard on improving ourselves.”

Survey offers insights on parts, service trends

Truck and trailer usage is increasing, leading to improved prospects for distributors and manufacturers alike.

In their segment of the Aftermarket Forum, Mark Linton and John Blodgett of MacKay & Company reported some of the results of a survey of distributors and fleets that the company conducted throughout 2009. Linton said they surveyed over 400 fleets and 250 distributors and dealers throughout 2009. Here are some of the things they found:

  • Parked trucks went from 8% in May to 4.3% in July to 7.1% in October to 8.6% in December.

  • Parts cannibalization went from 15% in May to 12% in July to 7.5% in October to 8% in December.

  • Fleets' parts inventories went from -11.5% in May to -9.7% in July to -7.4% in October to -4.9% in December.

  • Distributor parts inventories went from -10.1% in May to -8.3% in July to -7.8% in October to -8.3% in December.

Blodgett said the cannibalization is being done by smaller fleets, older fleets, and local/regional fleets.

“The good news is that they can only cannibalize a part once,” he said. “Eventually that part will need to be replaced to get that truck on the road.”

He said that different fleets reported that they are making stock orders and purchasing parts on an as-needed basis; not stocking anything that is readily available from more than one vendor; and keeping less in inventory — not less of each item, but fewer items.

Distributors and dealers reported that they reduced margins where they had too much inventory; scrapped dead parts for salvage values; did less bulk buying; didn't reorder slow sale items; and sought local inventory vendors with on-shelf needs.

Blodgett said there will be good news and bad news in 2010.

“There will be fewer parked trucks,” he said. “Cannibalization will be less frequent. We can't take any more parts off. Inventories will be up, but they won't go back to the levels where they were before.

“The operating population will be lower, because we just haven't added enough vehicles in the last three years to make up for those trucks that have been scrapped or died or have been exported. The average annual mileage will be up. Fleet utilization will be up — it couldn't get significantly lower, and we don't want it to.”

Components and vehicles are lasting longer, Blodgett said. “That has a very negative impact on the aftermarket.”

Linton said Class 8 will make the biggest improvement in reducing parked trucks, going from 7.6% in 2009 to an expected 3.3% this year. Trailers are expected to go from 5.6% in 2009 to 2.5% this year.

Next Page: How fleets choose vendors

He said the US vehicle population forecast (parked vehicles included) calls for a loss of over 600,000 trailers and chassis between 2008 and 2014, going from 3,662,500 in 2008 to 3,045,100 in 2014.

Class 8 vehicle utilization went from 87.4 in 2007 to 84.8 in 2008 to 81.3 in 2009, and is expected to go up to 83.1 this year.

The forecast is for increases in inventory restoration (1.5%), less cannibalization (1%), fewer parked trucks (1.5%), and the DataMac model (utilization, aging, mileage, durability) — for a total surge of 8.3%.

Blodgett gave the following forecast for demand for US Class 6-8 and trailer replacement parts: increases of 8.3% to $15.874 million this year and 2.2% to $16.221 million in 2011, then 1.9% declines for three straight years — to $15.976 million in 2012, $15.692 million in 2013, and $15.528 million in 2014.

“We're going to see some flatness across the markets,” he said. “We have to find our customers, know what they want, and bring them the inventory when they want it.”

How fleets choose vendors

He said availability is the top reason why fleets purchase parts from dealers and engine distributors, while price/cost is the top reason why fleets purchase parts from independents and auto parts outlets. He said in the last two cases, availability is second.

He said warranty is the top reason why fleets have service work done by dealers and engine distributors, while price/cost is the top reason why fleets purchase parts from independents with service and independent garages. He said in the last two cases, location is second.

“Proximity is very important when they're trying to service the fleet,” he said.

“There are opportunities. Have the parts, because everyone — fleets and distribution — is holding back on inventory, the economy is picking up, and parked vehicles and delayed repairs will provide a bump. Who will be there to meet the need? Service gives you control of the work. It allows you to sell that part. Fleets want to outsource more of their service work.”

Linton said fleets want to do that in every category: engine overhaul, paint and body, R&R axle/driveline/transmission, service AC system, fuel systems, troubleshooting electrical system, and troubleshooting ABS.

“So when parts trucks come out into the marketplace and utilization increases, there's going to be a need for this outsourcing,” he said. “Can the fleets support that with what they've done and what they want to do? They've pre-determined to work outside their own facilities. So take advantage of that. And these are opportunities for non-traditional work such as AC.”

The economic outlook

Bob Dieli, president of RDLB Inc, provided his thoughts on how the economy will perform in the coming months.

He said there is a misconception about what constitutes an economic recovery. He defines the recovery phase of the business cycle as “the interval between the end of the recession and the resumption of a full-scale expansion.”

The recovery phase has three main characteristics:

  • It's uneven. “It does not start everywhere at the same time.”

  • It's unsettled. “Not all the news is good news.”

  • It's unique. “Every recession creates its own set of problems.”

Dieli said the housing sector is “the poster child of this recession.” The seasonally adjusted annualized rate for single-family housing-unit starts began a precipitous plunge in 2006 and has only marginally recovered to 500,000 units.

“At about 500,000 units, we are running at the replacement level of construction,” he said. “Getting back to a 750,000 annualized pace in this construction season would suggest a recovery is in place.”

Job losses continue to bog down the economy.

“We are still trying to assess how much of the damage was cyclical and how much was structural,” he said.

And then there is the loan crisis.

“The ultimate determination of the viability of the recovery will be what happens to bank lending,” Dieli said. “The economy appears to have regained its footing and has started to expand again.

“You need to go back to your business and your statistics regarding what happened to you in this recession and in the last recovery, so that you can develop a perspective as to what your expectations should be in the coming months. Part of the problem is counteracting the spin we get on all matters economic. Find the points of focus that are most relevant to you.”

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