Wednesday, June 29, 2011

Maybe It’s Time To Move On And Embrace Right To Repair (RTR)? What da ya think?

I received two particularly interesting emails regarding last week's ‘right to repair’ blog.

The first was from Jessica Shea who shared an email from AAA asking her to contact her lawmakers and urge them to pass the RTR legislation pending in Massachusetts. This one was pretty predictable.

The second one was more interesting. This one was from an OEM supplier giving me advice in packaging my right to repair messages. He intimated that he wanted to remain anonymous, so I will quote from his mail without indicating the author or company.

“David, I agree with your position on Right-to-Repair (as described in recent blogs) but I think you are fighting a losing battle. As a result, I am responding by email (rather than posting a comment) because I prefer not to get sucked into this argument. … My message to you is that you need a new angle on RTR. You’re words are coming across as strident and potentially the words of either a fear monger or an OEM shill. (Most consumers have used generic parts on their car, including non-OEM tires, oil filters, etc.)”
Timeout: I think that this advice is all about taking the high road vs. the strident words of the fear mongers working the turf for the RTR lobbyists. It’s like a halftime coach of a losing team counseling his players to take the high road. Not so sure that’s a winning strategy.
“Reading your recent blog posts through the eyes of a consumer, it appears that you are trying to protect the OEM’s parts business and the dealer’s service business rather than ensuring customers get the best performance and lowest cost from their cars. (The consumer-concern noises in the blogs are long-term and seem to ring hollow.) The RTR team has the moral high-ground, they have a better message about caring for the consumer so they’ll win the battle for public sentiment.”
Timeout: The OEMs have no messages that counter the basic postulated right to choose. Also, not so sure that low cost has been portrayed in the correct safety, quality, and value light.
“It’s time for the OEMs and dealers to accept that RTR is coming because it “sounds” both right and proper. The OEMs need to figure out how to prosper in this environment and advocate for RTR changes that make it even “fairer”—ensuring cars are repaired in a way that preserves knowledge transfer to the OEM and DOT (for safety and performance analysis) and ensures consumer safety (latest parts and procedures).”
Timeout: As my father-in-law would say, “Oy veh!!” So, we just capitulate because something “sounds” right. No one debates the need to be sure that consumers have choice and can get their vehicles repaired correctly. But the current version of RTR is not the only way to do this.
“Most IRFs won’t be able to afford expensive diagnostics and other specialty tools therefore, rather than IRFs, RTR is really going to benefit the AutoZone’s of this world that can afford to buy that stuff. AutoZone (and others) will acquire the technical content and tools and make it available to IRFs via the web or local retail outlets for a per-use or monthly subscription fee. (Just like the current DMS and EPC technology.) Here’s the scenario: the IRF plugs a computer into the OBDII port and connects to AutoZone where the problem is diagnosed along with the recommended procedure, parts and tools. If I were an OEM, I would look for a way to offer the same service to the IRFs and tie in the local dealerships to provide parts distribution and (perhaps) local on-site service support (consulting). Using the airline industry as a comparison, here’s how it works: OEMs must provide current info to aircraft owners (for a price); owners can choose to use an MRO shop (e.g. an IRF) for maintenance and repairs; owners may only share those portions of the manuals that are relevant to the required maintenance. (This probably wouldn’t be viable in automotive because of the volume of cars on the road.) As a result, the OEM’s intellectual property is protected but they also protect parts revenue because MROs are using the OEM’s parts catalog. At the same time the OEM is preserving the aircraft owner’s right to have the aircraft serviced wherever they want.”
Timeout: As my mother-in-law would say, “Oy veh!!” This only makes any sense at all if you are 100% certain that we can’t change the direction of RTR (see the above “Timeout”). But even then, this involves significant and costly changes to the OE business model, relationships with dealers, etc. Personally I am not willing to fold the tent and take on that level of change without a fight.
“David, I believe RTR is going to happen (and I bet you do too). Lawmakers almost always favor openness/choice over restrictions, because it plays well to the populace. OEMs need to engage the RTR movement not to block it but to improve it. OEMs can find ways to make RTR profitable (or at least less costly) and therefore regain the moral high ground with consumers. However, no matter how eloquent your blogs may be it currently sounds like the OEMs are trying to deny consumer choice and harm the “small” IRFs and car owners. I like to believe that within the heart of every problem are the seeds of opportunity. We need to help our customers (the OEMs) to leverage the opportunities that will exist when RTR becomes a reality.“

Bottom line: Nearly all of what RTR lobbyist want is already given. My biggest fear from RTR is the language that nearly encourages IRFs to band together in class action lawsuits of unfair methods of competition and unfair or deceptive acts or practices. As I gaze my jaundiced eye on the pile of evidence supporting right to repair, I see more benefit to tort lawyers than to car and truck owners who are seemingly deprived of rights they already enjoy. All this makes me angry. Maybe taking the high road is all about low-risk and middle-of-the road corporate executive positioning … that got Motown in dire trouble a few years back. High roaders certainly didn’t come up with “imported from Detroit.” There might be a lot more to learn from that Superbowl.

Friday, June 24, 2011

Fixing it Right and Right to Repair Are in Fundamental Conflict - David Carlisle

The issues beneath Right to Repair are quite complex and completely unappreciated by car owners. Brackertz took a look at one argument of the Right to Repair coalition, which postured that the “US lags behind Europe in protecting small business and competition.”

Brackertz concluded “Europe is different from the US. You can’t conclude from Europe’s experience that the US will be OK with Right to Repair legislation. In the end, the end-customer suffers… because higher cost structures are passed on to consumers and because lower workshop profitability means fewer workshops from which to choose.”

To say that the U.S. is behind on this fundamental consumer “right” is without merit. But, the allegation remains and customer perceptions have been distorted.

Let’s get back to basics on this one. The fundamental question is “How do service technicians know what to do when it comes to motor vehicle repair?” I’ve been studying this question for about 27 years. The chart “Simplified Six Part Story of Why We Have Great Cars & Trucks in the United States” summarizes the answer to this question and is important to understand before voting in sweeping Right-to-Repair legislation.

OEMs do not design cars and trucks with perfect knowledge of how they will break. Their repair knowledge and expertise is developed by examining data to figure out what went wrong and how to make it right. The OEMs get a lot of data on warranty repairs that occur during the first 3-4 years of a vehicle’s life. They get more data from parts sales (assuming that they only sell replacement parts when something does not work), Telematics (e.g. OnStar), and technical hotlines. In addition, many OEMs collect data on customer pay repairs. All of this data sits inside a quality management system. Hundreds if not thousands of engineers and technical staff comb through this data for answers to key questions:
  • Are there any failure patterns that are outside “normal” wear and tear?
  • Do any of these patterns involve critical safety systems, such as airbags, steering, brakes, and acceleration?
  • What parts and components are at fault?
  • Do certain parts need to be redesigned and superseded?
  • Do certain vehicles need to be recalled?
  • Do we need to send out a technical serviced bulletin that allows service technicians to check out possible problem vehicles in the shop?
  • Do we need to develop special training programs for some of these troublesome repairs?
  • Do we need to develop new or revised procedures for the technical hotline and customer relations staffs?
  • Do we need to develop new tools for some repairs in order to reduce repair times and costs?
  • Do we need to update PROM chips and diagnostics systems to better catch these now more predictable failures?
  • Can the next generation product engineers learn anything from all this data so they can make better cars and trucks in the future?
When we buy our cars and trucks and drive them down the road, most people have no concept that all this is happening behind the scenes. The more robust the data is inside those OEM quality management systems, the better our cars and trucks are built and serviced. Today, we have great cars and trucks as a consequence of this.

Right to Repair lobbyists want a lot of what they already get (I will talk about this next week), but most critically, they want to shift service business away from certified dealers to independent repair facilities, and want to shift parts sales from genuine OEM parts organizations to the independent aftermarket manufacturers. They want OEMs to provide independents with everything involved in product support at the same cost and terms that they charge their authorized dealers. These lobbyists posture that this is an inalienable right much like all those other rights that we fought for from 1775 – 1783. This is certainly passionate, but is it reasonable and in the best interests of car owners? No.
  • Since there is no data flow between independent repair facilities and OEMs’ quality management systems, there is no opportunity to learn from the repairs and failures that they treat.
  • Because independent repair facilities generally use non-genuine and/or counterfeit parts, there is no opportunity to even understand parts breakage patterns.
  • Since there are no franchise requirements guiding technician training and certification, customer service standards, quality standards, and diagnostic technology, there are no fool-proof processes in place to ensure customers get the right repair at the right time with the right parts.
As dealer service market share erodes over time, the flow of repair data to the OEMs will also erode. Service and repair quality will erode in turn – this is logical and inevitable. Finally, motor vehicle quality will erode – again, this is logical and inevitable.

Bottom Line: Who cares? Our cars and trucks are fine today. My concern lies with our necessarily evolving motor vehicle technology. For example, our powertrain systems will migrate from gas to hybrid to pure electric in order to reach ever higher levels of fuel economy. Our braking systems will evolve to be more regenerative. Our steering systems will utilize more drive-by-wire technology. Our body parts will be engineered for lower drag coefficients. And, our safety systems will be infinitely more complex due to lower vehicle weights and more powerful technology. Failure rates with this evolving technology will be very small during the warranty periods – simply because electric motors and lithium batteries have less wear and tear than do internal combustion engines. “Right to repair” chokes the data flow with these technologies, and OEMs won’t even know what’s going wrong anymore. Without robust data, OEMs’ ability to identify failures, take corrective action, and incorporate improvements is severely curtailed.

To protect this feedback loop – and by extension, vehicle quality, reliability, and safety – Right to Repair legislation could, if its backers truly had car owners’ best interests in mind, propose a certified repairer model. Independent facilities who meet certain criteria, such as use of genuine parts and provision of repair information to OEMs, would be certified to use OEM repair information and technology. It’s highly unlikely, however, that this model would appeal to the driving force behind the current legislation – namely, aftermarket parts companies such as Autozone, NAPA, and LKQ – who are out to sell more parts. Ultimately, it’s the consumer who suffers.

Right to Repair legislation is a Trojan Horse, with a belly full of non-genuine parts, pushed on unsuspecting consumers by hired-gun lobbyists.

Tuesday, June 14, 2011

Right to Repair in Europe? It Is Called “BER” and Consumers There Are Not the Winners - Stephan Brackertz

The “Right-to-Repair Coalition of 2011” is backed by the AAIA and says that the US lags behind Europe in protecting small businesses and competition. A claim to be lagging behind is generally a prick in the side worth investigating. So let’s take a look…

Let’s look at what the coalition arguments are in Massachusetts. The intent of the bill is to allow “independent auto mechanics access to the same repair information available to dealership mechanics.” ( 7/6/2010 Mass. Senate approves Right to Repair Act).

The statements by the coalition to support the bill are sweeping:
  • Manufacturers should provide the same repair and diagnostic information to independent workshops that they do to franchised dealers.
  • Ensure consumer’s choice of where to get their car fixed.
  • Provide savings to consumers, upwards of $300 to $500 per family annually.
  • Protect Massachusetts drivers and their families by requiring safety bulletins and recall information is distributed to all repairers, not just dealer franchises.
  • Protect 32,000 jobs in Massachusetts related to the automotive industry.

Not only are these bold statements – but, another justification on top could be that Europe already has this kind of stuff. Superficial comparisons to Europe might make for disastrous precedents in the States. Unlike in the US, the European rules originally set out to squeeze OEMs, not to slaughter them. There are some significant differences:
  • The EU regulation does not require OEMs to share training with independent workshops. Training is, of course, a key differentiator for providing repair quality. In the US, I suspect that there are some differences between authorized dealers, Pep Boys training and AutoZone’s training …. and this could be a key differentiator for them. Even bureaucrats understand this.
  • The EU does not require OEMs to provide specialized tools to independent workshops. The expectation is simply that repairers will have access to tools somehow through third parties. Hey, if low class restaurants want those fancy tweezer tools for eating escargots they will have to buy them, not get them for free from five star temples.
In terms of the market structure: change comes slowly in Europe. The US market is hypercompetitive for the end-customer; Europe is not yet so hypercompetitive. End-customer service retention in Europe generally hovers around 50%, depending on the country (vs. 25-30% in the US). Blame it on wine, cheese, Oktoberfest and all the things that distract you from worrying about where to repair your car.
  • By and large, end-customers still believe they have to go, exclusively, to the dealer during the warranty period. While this isn’t true, many customers are still blissfully unaware.
  • What we Europeans don’t like to admit is that Internet adoption in Europe is behind the US. We have been slower to adopt the power of the Internet and, as such, our societies are a few years behind the US in Internet literacy and usage.
  • Lastly, some markets still have regulation in place that protects certain exterior body parts from aftermarket competition, creating purely captive body parts. While this legislation is about to expire, it has been one of the reasons why dealers have held a good grip on the collision repair business (and its associated profits).

Unlike in the US, where the OEM aftersales organizations passively wait to see what will happen, the automotive industry in Europe is strongly organized and lobbies hard with Brussels bureaucrats. At least as hard as the independent aftermarket; some would say even harder. This means that a lot of legislation is fairer for OEMs. In particular, during the last two recession years lawmakers have seen the need to support carmakers and to ease off from overly strangulating regulation.

Most importantly, Europe has a different legal model than the US; one without lawyers that sue at every corner, one without enormous punitive damages. All this means that, while a complaint about unfair competition or slow provision of technical information will be taken seriously, it goes through the intricate mills of the Competition Commission. That may mean years go by before resolution and no incentive for frivolous lawsuits.

In the last few years, Europe’s automakers have discovered what pharmaceutical companies would call a “blockbuster” drug… the service contract. European customers have been eager to sign up for service contracts (no hassle, one price product including service and maintenance for the first say 3-4 years of ownership). Service contracts, of course, have the side effect of binding customers more closely to dealers. Nothing wrong with this, as long as OEMs aren’t forcing these contracts onto customers (and they do not).

And, what has happened in the marketplace as a consequence of “right to repair” being introduced in Europe?
  • Since the introduction of BER, a number of independent third parties have sprung up that offer diagnostic tools, repair information databases, and tool support for all makes. Independents mostly get their information from these aftermarket third parties, rather than from OEMs.
  • Manufacturers have begun to charge workshops for technical information. This means dealers now have to pay for what was previously free or close to free (reducing their profitability). The impact has been acceleration in the decline in the number of dealers (as well as independent workshops). This is bad for network coverage and consumer choice.
  • Repair quality at independent workshops has not necessarily increased. The information that third parties provide to independent workshops is still error prone and sometimes sloppy. This information has to be purchased and not all repairers will buy all of it (some will skip some months / quarters of updates to cut costs).
  • Repairs at independent workshops are still not cheaper than at dealers. There is no sign of those substantial annual savings per family from right-to-repair. The reason is that independents sell spare parts more expensively than dealers do. In addition, while their labor rates are much lower, they often bill you more hours.
  • There is no substantiated evidence of job creation. Really, how would you even come up with an estimate like 32,000 jobs protected? And, how do you protect against lower labor costs and harder schooling in China?

Bottom Line: So, what can we learn from the European experience? Europe is different from the US. You can’t conclude from Europe’s experience that the US will be OK with Right to Repair legislation. Lobbying is extremely important for OEMs. Europe is an example of how OEMs successfully bundle their strength vis-à-vis aftermarket lobbyists. Service contracts and other “service products” can help to defend parts and labor sales – with or without right to repair legislation. Third party information aggregators in the aftermarket may grow stronger, with all the adverse side effects market concentration may have for OEMs. Information is a high quality product. Quality and speed can make all the difference. Treat it like a physical product and fight for your right to bring this product to market your way. Increased repair quality at independent workshops is a weak argument, as are arguments associated with lower repair cost and job creation. In the end, the end-customer suffers… because higher cost structures are passed on to consumers and because lower workshop profitability means fewer workshops from which to choose.

Thursday, June 9, 2011

RepairPal’s Musical Chairs: Where Have You Gone, David Sturtz? - David Carlisle

RepairPal’s David Sturtz has vanished from the leadership circle. When I first heard this, the tune and lyrics from Mrs. Robinson crept into my head.

"Where have you gone, Joe DiMaggio?
Our nation turns its lonely eyes to you.
What's that you say, Mrs. Robinson?
Joltin' Joe has left and gone away."
Hey, hey, hey.

David knows that I have always been suspicious of where RepairPal was headed. Based on some email exchanges and conversations I had with others, I was pretty sure that David was a stand-up sort of guy. He really wanted RepairPal to become the “trusted consumer and industry resource for auto repair and diagnostic information”. Beyond this, I suspect he really wanted to add “fair and” before “trusted”.

I could not imagine him pulling this off. If RepairPal was ever going deliver zillions of dollars to its investors, it had to follow the money. And, the money was not associated with giving dealers a fair shake. Here’s a simple hypothetical example. Jiffy Lube has 1966 stores in the United States. It does not take a rocket scientist to understand their model, the keystone of which is an oil change every 3,000 miles with aggressive up-selling of stuff that customers don’t really need. A few weeks back we showed a simple example of how you will hand over $201.75 to Jiffy Lube for something that should only cost $39.95 at a Ford Dealer. All those RepairPal geniuses should be able to figure this out. Now, if they wanted to be “fair”, they’d go after Jiffy Lube like a mongoose on a cobra. But, that would not be following the money. If they did this, no Jiffy Lube franchisee in their right mind would pay RepairPal for a featured listing – and that would cut off a pretty big hypothetical source of revenue. Furthermore, it would scare off many of the independents that RepairPal depends on for revenue growth. So, there would be a pretty big negative cost associated with being fair. What’s the offset? Hmmm. Getting a large bunch of car dealers to buy featured listings, because of a stand on why Jiffy Lube costs more? No. To follow the money you’d not go after Jiffy Lube.

The new guy, who replaced David Sturtz, is “Dave” Whorton. “Dave”, yeah, sounds kind of friendly-like. Hmm, lets see what he’s all about:
  • He comes from Tugboat Ventures where they work with tenacious entrepreneurs who want to make a difference in the world … so, just where did you go David Sturtz?
  • There lots more on Dave – basically he’s a vulture capitalist.
Looking at the board of directors (David Sturtz is no longer sitting on the Board), I don’t see anybody with a “compelling vision for the future with a deep passion for his/her business”. Unless that business is making a pile of money, driving Ferraris, and breaking bread with other VCs.

Bottom Line: “Trust” is an elusive concept. You only know it’s not there when it fails. Many times, that’s too late. In the absence of undeniable failure, you need to use your judgment to assess trust. We do that as parents. If you have a gorgeous 14 year old who hangs out with kids with facial tattoos who smoke from bongs, well, you might get a funny feeling about “trust”. Hey, you just might be wrong about those tattooed bongers – they might turn out to be the next Bill/Melinda Gates. But, probably not. So, do I “trust” RepairPal to be a fair and trusted consumer and industry resource for auto repair and diagnostic information”? Absolutely not. But, that’s just my opinion.

Thursday, June 2, 2011

Update from the 2011 Global Automotive Aftermarket Symposium – GAAS (Chicago; May 18-19, 2011)

Carlisle attended the 2011 GAAS, held in Chicago a couple of weeks ago. The focus of this blog is the highlights from this event. We are considering attending more of these types of conferences to provide you with updates and insights. Please let me know your thoughts.

The conference consisted of a few presentations, as well as a number of panel discussions. There were three discussions of note outlined below, but two comments from the other discussions are also worth mentioning:

  1. One of the more interesting comments of the two days was made during a panel on women and the aftermarket, where the Tenneco representative stated that Tenneco cares very much about sending every customer to the independent aftermarket – I think they sell to OEMs too, don’t they?
  2. During the BB&T equity, investment discussion the presenter stated that their analysis shows that each dealership that closes is worth about $2 million in service and parts business to the aftermarket.
Macroeconomic Conditions
Bill Strauss of the Federal Reserve Bank of Chicago provided a macroeconomic overview, which I considered measured and probably a realistic assessment of the headwinds we are facing. Some of the important points he made were:

  1. Excess reserves are still growing, reflecting the combination of continued tight credit policies, as well as risk-averse borrowers. This “paradox of thrift,” as it was referred, while good for the long term will be a damper on the short-term recovery. On a related note, there is close to half a trillion dollars of un-invested private equity sitting on the sidelines. Bottom line: these credit and lending conditions are not sustainable over the long term.
  2. While gas prices are high, total expenditures on energy are at historical averages.
  3. However, (as we saw this in the last Case-Shiller home-price index) housing is still under significant downward pressure. While a ‘normal’ housing market is 1.5 million new units per year, we will see less than half that rate in 2011.
Bottom Line:   The US economy still faces significant head-winds, which will dampen the recovery.
Preparing for Increasing Complexity and Technology
This presentation, by a CARQUEST representative, was focused on the need for the aftermarket to ramp up training to deal with the new/emerging technology and the availability of scan tools and databases to work on current/future vehicles. They further promoted the idea of “open standardized diagnostics” and the fact that several OEMs, as well as CARQUEST, are supporting this (they didn’t reference which OEMs). They said that the OEMs should let the aftermarket provide the hardware to interface the technician (presumably IAM) to the vehicle. Great idea if you are an IRF!!! Transfer technology and how-to information to ‘the street’. When it comes to people, he highlighted the challenge as follows - it’s not quality and accessibility, it’s the quality of the technician and their ability to know what to do with that information. CARQUEST also highlighted the fact that they are implementing an OE-level tool program to allow their customers to purchase and support OE-level scan tools. Finally, he made the recommendation that during the Toyota unintended acceleration recall, shop owners should have looked into their database and reached out to all their Toyota owners, be proactive, drawn them into their facility, and found out if there was any way they could help. This one struck me as an odd recommendation, since drawing these owners into your shop for a problem you are not able to work on seems like a waste of the customers’ time.

Bottom Line: The aftermarket is thinking and talking about how to get ready for increased technology in vehicles and how to create open diagnostic and technical standards that will make them increasingly competitive with dealers.

David Sturz, of RepairPal, hosted a panel with two independent repair providers discussing transparency in the auto-repair space. This panel made the point that repair sticker shock reduces service retention. This is consistent with our consumer service sentiment survey, where an accurate up-front estimate was the #1 most important attribute. The panel focused more on how to use the internet to capture and connect with customers, with one IRF reporting approximately 50 internet leads in Q1, worth about $26,000 in initial business. The panel drifted into the topic of telematics and, interestingly, predicted the development of an open telematics architecture and ultimately sees telematics as an opportunity for their shops. I am not sure if they know something we don’t or if this is wishful thinking, but I don’t know that any open telematics architecture is in development…do you?

Bottom Line: Even small independents are increasingly getting internet savvy.

Impact of OEM Warranties
This presentation focused on the potential impact of longer OEM warranties and free maintenance programs on the aftermarket business. The aftermarket sees these programs as significant threats to their business, with potential lost business for the aftermarket ranging from $312 million, in the case of BMW, to $5.1 billion in the case of GM. The aftermarket clearly understands that these programs give the dealer the first shot at customer-pay business and that they need to react to this threat. Discussion ranged from offering free oil changes to “AfterStar” (Aftermarket sponsored On-Star) to a one-stop-shop for “coordinating” warranties for customers.

Bottom Line: OEM warranty and maintenance programs are having an effect on the aftermarket; they see the threat and are preparing responses.