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Responding to Automotive Imports: What to Do?

Rebuilding, like many other industries, is feeling the pressure of offshore competition. This is a good time to consider the implications and develop alternatives. In simple terms, how should you respond? Is this a direct threat or an emerging opportunity that you should seize?

Most rebuilders already feel the pressure from imports; it has become a fact-of-life. Rebuilders are also experiencing other challenges that are just as fundamental. The OE dealer channel becoming stronger and is taking share. OE and replacement parts are lasting significantly longer, reinforced by warranties. Price and service pressure is everywhere.

CURRENT SENTIMENTS

In preparing for an industry seminar, Hadley Associates called 150 rebuilders. This was not a scientific survey, but rather informal interviews. The calls were made to owners and managers of both large and small operations. These companies rebuilt a variety of products.

Four very simple questions were asked, namely:

  • What is the health of the industry?
  • What significant changes occurred in the past 5 years?
  • What do you expect to occur in the next 5 years?
  • What are you doing to do to respond?

Interview highlights help to put issues into perspective. As you read the statements, ask yourself what do they mean and what are the implications?

Auto Electric:

  • Longer OE product life is a major issue
  • New units are coming from Mexico, China and Taiwan
  • New units cost lest than re-man


  • On-the-vehicle service segment doing well
  • Non-automotive segment has become a staple
  • Lean manufacturing reducing costs

Brake/Suspension:

  • Stop-and-go driving increasing the wear factor
  • OE products simply lasting longer
  • New product is favored over re-man units


  • More repair outlets appearing
  • Transfer cases have a bright future
  • Shift to electronic control from hydraulics

Power Train:

  • OE product lasting longer, backed by extended warranties
  • Seeing first buying cycle staying with new car dealers
  • New aftermarket units cost less than re-man


  • Non "A" item doing well, as well as service work
  • Non-automotive is less crowded
  • Parts proliferation and hard-to-rebuild system are issues

Engines:

  • Older vehicle registrations supporting growth
  • OE product lasting longer, backed by warranties
  • Parts proliferation continues to be a problem


  • Electronic components is a strong segment
  • OE dealers channel becoming a factor
  • Do not see significant import activity yet

MARKET REALITIES

The reality is that we have multiple business pressures; foreign component parts and products is just another one. This is benefiting consumers, but creating short-term problems for rebuilders. After initially being emotional, most rebuilders see this as an opportunity.

Before delving further, rebuilders need to ask several strategic questions:

  • What value-added activity do I bring to my customers?
  • What is the "real" cost of providing these products?
  • What "other needs" do my customers have that I do not provide?
  • Does my current business model need to be changed?

Suppliers in Mexico, Taiwan, India and China initially have one major advantage, "price". With time, they address quality, product features and even brand recognition. This formula has worked with automobiles, apparel, and electronics. The pattern will never stop; it is progress. What does have to change is how we respond to it.

The success of foreign auto parts did not just happen; it the result of leveraging a strength (labor and component costs) to satisfy the market. Remember, a successful program requires someone saying, "This is exactly what I need; I will buy it!"

The success of foreign parts has many factors, but it settles down to "customer segmentation". It is a cost/value relationship. You do not need the best quality to succeed; there are trade-offs. A 15-year-old vehicle owner has different expectations than a 3-year-old vehicle owner. Someone in Philadelphia has different wants than an individual from Fairfield, IA. As a result, they patronize different outlets and use different buying criteria. This needs to be understood.

UNDERSTANDING ADVANTAGES

The auto electric segment can serve as a good example.

In interviewing profitable rebuilders, most that it is more profitable to buy-and-sell "A" items than it is to spend the time rebuilding them. It is a cost/value relationship. Many have simple rules-of-thumb like $XX profit/unit or time-to-rebuild that triggers the decision. Their most important concern is maintaining the customer relationship profitably.

If the auto electric rebuilder can buy a unit, mark it up 30% and still satisfy the customer without expending any labor, it is a rational decision. With the time saved, the rebuilder can repairs a "C" item at a much higher unit price. By doing so, the rebuilder has satisfied two customers and produced two revenue streams. This is smart thinking.

The strategic advantage of the small rebuilder is their customer relationship. They understand their customers, products and end-use applications, thus adding value to the relationship. Answering technical questions, providing immediate solutions and responding to time-sensitive needs are their "real" products. This is more than just selling an alternator or starter. Reinforcing the cost/value relationship requires constant attention in the shop and with the customer.

The same principles apply to production rebuilders, but from a different perspective. A production shop with 100 employees serves different segments than a three-man shop, perhaps supplying wholesalers, multi-location jobbers and/or parts stores. They focus on one product category, like mid-priced domestic units.

Production operations use volume, product depth, lower prices or a program as their advantage. They are, however, susceptible to importers who focus on even lower prices. What is the value-added that the production rebuilder brings? Is it blending product lines, handling cores, satisfying special orders or being a low-cost supplier? The customer relationship will tell them.

Auto electric rebuilders are already benefiting from import parts, either buying components direct or through distributors. They may even buy complete units this way, focusing their operations on what foreign suppliers cannot do well. Whatever their strategy, it has to address improvements to the cost/value curve. "Lean manufacturing" is one method; rationalizing "make/buy" decisions is another. The key is how you link strategies together.

SO WHAT IS THE ANSWER?

Imported products are not going away; the nation may change, but "low cost" sources will stay. This is classic economic theory, traced back to 19th century European economists. The question is: Do you see this as an opportunity to modify your business model or do you see it as a threat and plan on fighting it in some way?

Imports can easily become an emotional issue. It is easier to project one's anger and frustration to something else. This does not solve the problem. The solution is to look at the opportunities in light of your operations. Consider these solutions:

  • Adapt "activity based" accounting
  • Understand costs "after-the-sale"
  • Institute "value-added" resale pricing

  • Add services and higher margin products
  • Balance parts, WIP and finished inventories with demand
  • Use suppliers that match your quality standards

  • Remove non-revenue producing activities
  • Measure the total "cost-of-quality"
  • Measure "customer service levels"

For many products, "new" has become more cost competitive than "remanufactured" items. In other situations, the gap between "new" and "re-man" is still enough to lead the buyer to remanufactured. The pattern is not universal; analyzing each situation is crucial. Most important, your customer expects you to supply them with the appropriate product for the situation. There is a high degree of trust and responsibility here.

CONCLUSION

When approached correctly, the perceived threat of imported products is really an opportunity. In some limited cases, it can be a direct threat requiring bold actions. In both situations, the solution is to understand your customers' wants, know your costs and develop a delivery system that is beneficial for both of you. This may require some adjustments in your operation and thinking; it may not. The solution is to logically understand the situation by using data and critical thinking.

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Hadley Associates is a consulting firm focused on industrial market research and facilitating strategic change. Drew Hill, principal consultant, is a certified focus group leader and management consultant.


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