Thursday, December 16, 2010

Looking Forward to 2011: OE Aftersales in Review and Preview - David Carlisle

We shut down next week, so this is our final blog for 2010. It has been an interesting year, where I can say that we made it in much better shape than we ever expected. Whole goods sales rebounded, and were matched by parts sales increases. In some cases, more than matched. I ask myself, what did I learn in 2010 and what do I expect to learn in 2011? These are two critical questions of introspection. I skimmed all of the 2010 blogs as if they were EKGs of what I was thinking about for the past 12 months.

The heartbreaks of 2010 included the closing of Saturn, for all the right reasons. But, I can’t help but feel a twinge of regret. Saturn was a re-think of the customer experience, and set the standards by which we judge much of our customer handling efforts. The lesson here is that good ideas really are not all that good unless they pencil.

My aspirational roller coaster thrills in 2010 came from Volkswagen. I love change. I thrive on change. I love unambiguous wins. VW’s approach to supply chain improvement has been breathtaking. They are taking the same winning headset into dominating parts sales and marketing. I’m not an underdog kind of guy – I like to see winners win. Luck is just fine, but it is uninteresting to me. I like to see a plan come together, and winners bring home the bacon. I love watching the Red Sox, Patriots, and VW. Two lessons here: you can’t manage what you don’t measure, and you can’t measure if you debate forever about what the best metrics really are.

A lot of relief in 2010 came in the form of rebounding parts sales in the US market. Canada is up, but not much over last year and this is mostly due to less of a dip in 2009. The basics of autos and heavy trucks remain the same; higher miles driven mean higher parts consumption. Next year should be even better with increasing car and truck sales. Construction and Ag rebounded too, but operating hours have a long way to go. Helping out in 2010 was seeing the “beer game” played out with these rebounding parts sales. Many of us have been through “beer game” training exercises, so we knew about the Bullwhip effect. Well, it happened to our industry this past year. I credit Cat’s Steve Wunning and Jim Owens for bringing this to my attention. It was quite obvious to Steve and Jim what was about to happen. But, it wasn’t all that obvious to everybody else. 2010 sales forecasts were hyper-conservative and assumed that recessionary market conditions would persist and depleted inventories would remain depleted. The lesson here is that some of the stuff we learned and never used is a lot better than the stuff we learned and is no longer valid. The fundamentals have not changed. We sell more parts when UIOs grow, hours of usage increase, and depleted inventories are replenished.

In 2010 we focused on wholesale. As we learned in our 2010 Recessionary Survey, nearly half of dealers focused on wholesale to drive growth. In the face of declining new vehicle sales and an aging vehicle population, OEMs looked to wholesale mechanical initiatives to increase sales to independent repair facilities. OEMs also shored up collision with price matching and certified body shop programs. These efforts paid dividends in the form of increased dealer satisfaction with wholesale support. The first lesson here is that market share and retention is a lot more than customer pay. The second lesson here is that tackling something that is difficult mostly needs more commitment, passion, and endurance for those who believe. If you want to run (and win at) sprints in high school, move to the middle of Wyoming and just run like the dickens. If you want to win the Boston marathon, well, you need to train and be committed. It is just that simple.

In 2010 we started to see the seeds of digital devastation sprouting. Our service customers are evolving to become “Digital Service Customers” (DSCs) – they represent about a third of our customer base. They use the internet for shopping and research. They feel most comfortable with peer review and input. They act on what they research and have remarkably high switching rates. They are less dealer-centric. They are young and more highly educated. They will displace our older more dealer-loyal service customers. They are the sort of folks who use Edmunds to research their vehicle choices. They are familiar. I remember 1985 when we were working with Hyundai on their US market launch. We were slipping under the radar of the domestics and the Japanese OEMs – no threat at all. GM was still focused only on Ford, and a distant Chrysler. Toyota, Honda, and Nissan were feeling pretty cozy with intergalactic JD Power CSI scores and Consumer Reports ratings. Nobody was terribly fearful of share shifts. That sort of stuff did not impact current year tactics, hopes, and aspirations. Today, in aftersales, it’s sort of like those good old days that the vehicle-side folks were enjoying. My, look what’s happened since 1985.

In 2010 we saw enhanced evolution of vehicle systems and Telematics. GM’s OnStar and Ford’s Sync are changing the way that consumers interact with their vehicles. With the proliferation of smartphones and other sophisticated mobile systems, I expect that more companies will make their onboard systems “talkative” with smartphones. This can be a major advantage in a variety of areas, including service retention – if your car can tell you it needs service, schedule a non-conflicting appointment based on your stored calendar information and set your reminders appropriately, why would you bother picking up the phone and calling an IRF? Telematics is big and becoming more plug-compatible. The lesson here is to pay attention to those Crystal Balls and get better prepared for the future. Ford, GM, BMW, Mercedes, and Komatsu all have a pretty good head start on this.

In 2010 we saw, thankfully, some reductions in junk car part sales from 2009. Evidence of this came from an OEM that conducted a market sizing and share exercise for their collision parts. They saw a clear reduction in the market share of junk car parts in 2010 compared to 2009. Several factors could have contributed to this; reductions in totaled vehicles to pull parts from … or the more optimistic belief that customers are using the rebounding economy to better repair their vehicles. Either way, our fear of an increase in the use of junk car parts long term looks to be dispelled for now. We still need to be careful here.

In 2010 some of those emerging markets exploded – you can’t really call them emerging markets when they’re now some of the world’s largest. It remains to be seen what level of growth is sustainable, but considering the unique challenges of ‘emerging’ markets and their customer tastes is more important than ever before. It’s not enough to design for Europe/Japan/North America and assume that the models (vehicles, networks, dealer relationships, etc.) will apply to emerging markets. There are unique challenges that must be addressed in each market; for rapidly growing markets, challenges are magnified and may be completely different from the issues that the industry typically handles. The Chinese are starting to move into developed markets… we need to watch for “interesting” service concepts like skipping a dealer network altogether and making agreements with national fast-fit chains for service.

In 2011 the HE segment got religion and continued on a “fat busters” program to increase sales and profits. Several heavy truck brands made very serious efforts to reevaluate every program and department … looking for ways to cut costs and not just do things because they always have. This wasn’t driven by financial hardship either – they’re having strong years for both whole goods and parts. A major focus is finding ways to use IT automation to free up headcount for repurposing. This segment is taking a course correction to follow the car-guys in many initiatives – taking advantage of the learning and investment the Auto sector has made along many different initiatives; for example, POS data. Several HT brands are ahead in using collision market intelligence. HT OEMs are continuing to push their focus on service retention and purchase loyalty. POS data gives this fight a new angle. The commoditization from all-makes parts makes this an enormous area of opportunity for OEMs to gain share from the aftermarket – and from each other. Second line and all-makes parts are gaining visibility at a bunch of HT brands. It would not surprise me to see OE Connection make some inroads in this segment. Lessons here? It’s all about listening with an ear to learn, not to defend. We still have some segments that are somewhat tone-deaf.

In 2010 we didn’t do enough in some areas. Most disappointing was the lack of effort in stressing the advantages of genuine parts, and dispelling the general public misconceptions that dealers are the high-cost spread. OEs have a lock on the distribution of parts that went into the building of the original vehicle, and, outside collision, they do pretty much nothing in merchandising this to their end customers. OK, mostly the car-guys are at fault here. CAT has historically been brilliant in merchandising the advantages of genuine. Our North American benchmark group has been seeing this for the past 15 years or so. Maybe we need to spend more time here.

What will 2011 bring? There are some things that I think will happen, and some things I hope will happen.
  • 2011 parts sales will show serious increases over 2010 for all segments. Most of the car-guys will see double-digit increases. Ag, CE, HT will see gains as well, but probably not at the same level as the auto segment. Motorcycle will get a breath of fresh air as consumer spending for delayed dreams increases, and the environment for accessory sales becomes more fertile. Harley will figure out how to reach into other segments – golf carts? Water sports? ATVs?

  • In 2011 Right to Repair legislation will continue to be an issue and will strive towards some conclusion. These bills (pending in NJ and MA) will force OEMs to provide their own proprietary tools and information to independent mechanics and other competitors, thus removing some of their advantage in the service bay. If the bills pass, it will make it even harder for dealers to retain service customers, and will accelerate the infection of low quality repairs performed in the independent aftermarket. It will be kind of like going to Mexico for your prescriptions … where, because of a lack of regulation, you don’t really need a doctor to write one out. Right to Repair smells like anarchy … hey, why not first roll it out to the airline industry? I’d like not to fly on a 737 that Joe’s Sunoco Repair works on.

  • In 2011 the OEMs are going to get even more serious about enforcing vehicle warranty terms that stipulate junk car parts from LKQ/Keystone not be considered as “genuine” and their use will void all warranties. This is just pure common sense – why should a vehicle owner who buys insurance want junk parts on a vehicle that is still in warranty? How can we be certain in this age of integrated engineering and safety systems that a junk car part from a car wreck still has all the quality of Genuine? Just who is responsible for checking all this out? It is time to get hyper-serious about this.

  • In 2011 I expect to present a banner to GM’s Vancouver PDC for either: (1) breaking the 100,000 LHY barrier, or (2) giving it a gallant try. I might have to settle for “Congratulations Vancouver – You Are Almost There – 100,000 is in sight!” I take this barrier-breaking as having the highest sort of personal interest.

  • In 2011 we hope accessories will continue to be a focus at the OEMs. Customers will continue to hammer the OEMs more and more on vehicle “invoice prices” they find on Edmunds, but accessories have maintained much of their suggested margins. Personalization is becoming more and more important to customers as a means of self expression, which the aftermarket has a strong hold on. Some areas the OEMs have more trouble competing in, like wheels, because of the aftermarket's lower quality standards and costs. However, other areas, like electronics, are high value items, and growing rapidly, that OEMs should control. Hey, you guys designed the vehicle, you should be able to create a better value proposition here than the aftermarket.

  • In 2011 digital media will be a strong focus for the OEMs; shouldn’t it be a strong focus for your dealerships too? Dealerships, like their OEMs, are creating an online presence on Facebook, Twitter, FourSquare, etc. Used correctly – not to simply blast Service Specials 24/7 – the dealership digital presence can be a powerful tool to increase our service retention. Smart dealerships are already using social media to answer service-related questions online directly with customers, who in turn will come to the dealership for service. You need to step it up here and assign your best talent in this area of the business.

  • In 2011 OEs are going to START to come to grips with the servicing, distribution, and lower customer pay sales of electric and hybrid vehicles. The use of electric and hybrid technology will have an adverse impact on parts sales. Although the percentage of vehicles sold with alternative powertrain technology over the next ten years will be low, it is forecast to grow quickly. The challenge is that most OEMs are providing long vehicle warranty coverage on the powertrain. Thus, parts sales will be warranty, not customer pay. Also, to some degree the use of diesel engine technology will have an adverse impact on parts sales. Again, although the percentage of vehicles sold with diesels over the next ten years will be low, it is forecast to grow quickly. Not just pickup trucks. The challenge is that diesels are highly reliable and will consume fewer parts than gas engines. So, technology will start to have a depressing impact on customer pay sales … we need to better understand this.

  • The engine business is going to get interesting in 2011. With Caterpillar’s exit from on-highway, Cummins is now the major player beyond proprietary engines. OEMs are pushing their proprietary engines as a way to reduce the percentage of their trucks built with all-makes. This will be a battle fought not just in the front of the store, but in the back of the store as maintenance and repair concerns are much more important to fleets than your average soccer mom. How Caterpillar’s share gets divvied up between Cummins and proprietary engines will have significant long-term impacts on part sales for OEMs and Cummins. For all of us, we need to stay tuned here, watch this evolution, and learn from it.

  • In 2011 someone will remember that structure follows strategy … and that our strategies have matured. Our 21st century strategies are all about low cost, high quality supply chains that subsume purchasing, interconnected digital information networks, service and parts retention strategies, sales and service operations excellence, revenue management, and support from finance and IT. Our structures are mostly relics from the last century.

  • In 2011 I hope we will collaborate more. We’ve planted the seeds for collaboration and now it’s time to harvest. We need to form a unified front against the AAIA. We need to communicate the value of genuine. We need a robust web-presence that provides sticky content, quality information, and unbiased reviews. We need to work together on the toughest supply chain issues. The longer we wait, the more difficult it will be to make up ground. We need to transcend benchmarking.

  • In 2011 the New York Times will figure out that Mr. Ed Niedermeyer’s opinions are quite idiotic and they will not use him – they will devote more space to sports coverage of their crumbling Yankee and Giants franchises, where at least it’s hard to get the facts too wrong. Mr. Ed’s wisdom on December 16 was that it is pretty much a crying shame that GM and Chrysler followed the market, rebounded from their bankruptcy miseries by selling more trucks, SUVs, and minivans. They cheated. They were supposed to just sell high-mpg cars and let those truck intenders go over to Ford, Toyota, Nissan, and Honda. Hmm. I thought it was pretty cool launching the Volt and Cruze, paying off billions of dollars in debt, having the largest IPO in history, and having balance sheets that are the envy of the industry. Oh well, what do I know.

To all of you, have a wonderful holiday season. Share it with the ones you love. Keep safe and happy. Return in January and let’s knock the ball out of the park in 2011.

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