How to make money with cars without selling them.
While auto makers are flirting with bankruptcy, parts dealers do well. By Bertel Schmitt, CEO Sinamotive Group (HK) Limited.
Since decades, this is the worst year for auto sales, especially in the saturated markets of U.S. and Europe. US new car sales plummeted to a record low in September 2008. For the first time in more than 15 years, monthly U.S. sales fell below 1 million. Traffic in showrooms has come to a virtual standstill. Industry sales crashed by 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.
J.D. Power & Associates cautioned that U.S. industry sales could “collapse” in 2009. Standard & Poor’s put GM and Ford on death watch “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 talking with Chrysler about a merger, after merger discussions with Ford went sour.
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.
This is great news for those who service older cars. 58% of Germany’s cars older than 8 years are no longer serviced at new car dealerships, a study says. New car dealerships are rapidly losing their profitable after sales business. As older cars are subject to more wear and tear, expenditures for service and repair are much higher than for new cars (where the big bills are covered by warranty anyway.) Nobody spends more for service and repair than owners of older cars. According to a recent DAT-Veedol Report, German owners of cars that are less than two years old spend EUR 109 a year for maintenance and repairs. Owners of cars older than 6 years spend close to EUR 500 per year. The Wall Street Journal agrees: “As more consumers hold off on buying new cars, they’re making more repairs.”
Owners of older cars may spend more, but they don’t throw their money away. Owners of older cars are value conscious. The price of the repair bill should be commensurate with the value of the car. The key to this profitable 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 experienced a mad run-up in the first half of 2008, have been coming down since July. In October 2008, Aluminum fell to a 31-month low on the deteriorating health of the car industry.
- Steel prices are also in decline. There are reports of panic selling as speculative positions are being unwound. 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 also coming down dramatically. “Barely 12 months ago carriers were making record profits in the Asia-Europe trade but from summer 2008, freight rates have plummeted and appear to still be in decline,” 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.
For these reasons, many repair chains and wholesalers in Europe and the U.S. have plans to launch their own private label parts lines, sourced in China. The profits can be huge. Many parts can be sourced in China at fractions of their European and U.S. retail prices.
An interruption of new car sales is good for after sales. Aging cars need more parts.
Leave a Comment