Cover Story/Eye on the Industry: Aftermarket report

It’s a great time to be in the heavy-duty aftermarket, at least according to industry suppliers. Terms like alive and well, robust, strong and very healthy were used to describe the condition of the aftermarket today.

According to Todd Shelton, product marketing manager, Volvo Trucks North America and Mack Trucks Inc., “The aftermarket is very healthy in terms of demand.

“On the supply side, with the increased truck production over the last three years, there have been some product shortages to contend with, but in general suppliers have reacted well.”

Brian Bowerman, director of aftermarket sales, Haldex, said, “As the OEMs continue to have strong build rates, the aftermarket can expect to enjoy reasonably good sales in three- to four-year spans.”

According to Bill Rayball, eastern regional sales manager, Federal-Mogul Corp., even though the industry continues to be strong, there are a few challenges including high fuel prices that affected the industry. “Still the pace of business has been very positive for manufacturers and distributors thanks to a strong economy, more miles driven and more tonnage.”

Peter Horn, director of special market sales, Federal-Mogul Corp., added, “Another great indicator of the health of the heavy-duty aftermarket has been the influx of capital from investment groups. They’re interested in this industry because they believe there is money to be made here-and they’re right.”

Truck Parts & Service asked the experts what factors were contributing to the strength of the aftermarket.

Lori Thompson, general manager, parts, Cummins, cited the economy. “Clearly if goods are being transported, if earth is being moved and if construction and agriculture are running well, that is good news for the heavy-duty aftermarket.”

Shelton added, “As more trucks run more miles, there are increased opportunities for parts and service sales. Productivity gains continue and overall construction spending has been healthy, which all results in the need for more trucks on the road.”

Another big factor with an impact on the aftermarket is the engine emissions regulations. “They are causing a lot of buyers not to purchase new trucks and to keep their older vehicles longer,” said Pat Biermann, president, HD America.

“Obviously that is going to help the aftermarket as is the fact that the economy still is pretty good.”

Shelton talked about several other factors that are having a positive effect on the aftermarket. “The overall truck population continues to grow. Obviously more trucks in operation yield more opportunities for parts and service sales.”

Quality components are another factor he cited. “The quality improvements to truck components over the last 20 years at first were perceived as a threat to parts and service providers,” he said.

“This eventually proved to be untrue as the resulting quality improvements enhanced the profitability of fleets, which allowed for increased capacity. Now customers are able to keep their trucks in operation longer, which lengthens the opportunity for parts and service sales,” Shelton explained.

Rayball concurred adding, “The aftermarket will continue to reap the benefits of second-, third- and fourth-generation owners of commercial vehicles that still are out on the road. As the productive life of a truck continues to increase, the aftermarket is one of the primary beneficiaries.”

While there are many positive influences impacting the heavy-duty aftermarket, there also are some things having a negative impact.

Biermann sees the lack of technicians and the industry’s inability to train the ones it does have as a cause for serious concern when looking to the future.

Rayball too sees the people issue as a big one for the aftermarket. “This is a business that requires a great deal of talent and a willingness to go all out to serve the customer. One of the more serious challenges we face is attracting the next generation of business owners, fleet maintenance executives and technicians.

“This challenge impacts the manufacturers as well. Too many talented young sales professionals would rather pursue a career in pharmaceuticals or electronics, for example, rather than truck parts.”

Horn added, “This problem is particularly severe at the technician level. The industry has a huge shortage of skilled technicians and it will only get worse unless we come together and find a way to make this industry more appealing to today’s young people.”

But finding people is only part of the issue. “It is hard to get properly-trained people who are able to both sell products and service them,” Thompson said. “We need to improve our ability to make them capable quickly in this very technologically-advanced industry. We must get our employees up to speed so they can sell the value we offer.”

Biermann also sees longer product warranties keeping vehicles out of the independent aftermarket because most warranty work goes through the original equipment channel (dealer). “If distributors don’t want to shrink, they are going to have to find some other things to get into-other categories, other products to sell-in order to continue to grow their businesses.”

Shelton believes that suppliers will be “increasing their focus on the aftermarket for sustained growth during the predicted decreased truck production, and there certainly will be pressure on parts pricing as a result.”

A general lack of emphasis on cost-per-mile by fleets when making vehicle maintenance and repair decisions was cited as another aftermarket weakness.

“Many fleets select components for their trucks with a long-view understanding that a higher up-front cost for a premium brake lining, wheel seal or engine part will deliver a significantly higher return on investment than a cheaper part will,” Rayball said.

“But there are still many fleets and owner/operators who don’t have the resources to measure this value. Manufacturers and distributors need to work on providing the necessary information to help them make the smartest possible business decision.”

We asked our industry experts to talk about how today’s aftermarket differs from that of five years ago. According to Shelton, “Changes are driven by several factors including regulatory issues. Plus, there are the continuing concerns about the availability of drivers and technicians that affect product offerings such as creature comforts and tools and training.”

He explained that creature comforts for drivers were not a big issue seven to 10 years ago. “That certainly has changed and the last five years have been a time of innovation in this area.”

Thompson sees the role of electronics and technology as something that differentiates today’s aftermarket from the past and an issue that will continue to be important in the future. “If you think about the number of electronic control modules and sensors on the engine today and the capabilities they have, we did not have that five years ago.”

She also said that customers have become more proactive and are looking at their operations more predicatively as opposed to waiting until things break.

“The whole idea around preventive maintenance is more advanced now than it was in the past, and I see that continuing into the future.”

Shelton believes that regulatory changes and the resulting research and development costs have resulted in the consolidation of trucks and have made products more complicated than before.

“Consolidation and complication make it more difficult for some parts and service providers to stay current on equipment. So there will be even greater pressure to adapt to newer products for survival as a parts or service provider,” he said.

Rayball too sees consolidation as something that has been a factor over the past five years. “Supply chain consolidation really has transformed the competitive landscape for many smaller distributors and service providers,” he said. “We’ve also seen the continued growth of national distributors and regional giants who operate in four or five states.”

Thompson commented on the consolidation that has taken place at the dealer and customer levels. “We have mega-dealers who have 20 or more stores in a certain region and then there are customers who are continuing to do more consolidating.”

She continued, “These customers have more buying power and are demanding things to make their lives easier. These large customers want more than plain vanilla in terms of support, but they also want consistent treatment everywhere they go.”

Globalization also has had a big impact on the aftermarket and has provided some cost benefits to truck operators. “The benefit of globalization is realized when a reputable manufacturer offers product savings as a result of lower costs of manufacturing. However, the customer must be aware of the fact that in some cases, reputable manufacturers’ designs and brands are being copied with no regard to intellectual property rights or safety,” Shelton said.

Another change that has taken place in the last five years is the volatility of raw materials, which has impacted the relative price stability of parts as the cost of steel, lead, copper, rubber, etc. have fluctuated.

Today, as compared to the past, the cost of repair includes not only the actual cost of the part and labor, but also the lost cost from the vehicle being out of service.

According to Ron Sauer, manager, aftermarket programs, Allison Transmission, “Customers continue to look for ways to minimizing their downtime. There is a higher percentage of repairs that are being made by replacing the entire transmission vs. overhauling it or performing major repairs while the customer waits.

“The idea is that the vehicle needs to be out generating revenue, so it is important to get it up and running.”

He went on to say that many components and vehicles in general are living longer. “The quality is much higher than it was a few years ago and as these vehicles age, there also seems to be an increased demand for the use of remanufactured parts.”

We also asked our experts to look forward at issues that are looming on the horizon for the aftermarket in the short term and evaluate the consequences.

The increasing complexity of heavy-duty vehicles was one big factor that was cited. “Technological changes in the pipeline will result from the 2007 and 2010 Environmental Protection Agency requirements as well as added features on vehicles to increase safe operation such as collision avoidance equipment,” Shelton said. In addition, stopping distance requirements could change the face of braking products.

Shelton believes that technology will continue to be a competitive advantage for truck manufacturers. “Parts that cross all makes and yield large volumes on few part numbers will diminish over time,” he added.

Rayball believes consolidation will continue to be a major factor in the future along with governmental regulations. “One of the more interesting challenges will be how the industry in general deals with upcoming braking regulation changes,” he said.

“It appears we’ll be looking at up to a mandatory 20% to 30% reduction in braking distance, which will have a major impact not only on the design of the braking system, but also on the number of specific replacement parts our customers will have to stock and install.”

Horn added, “How the OEMs react to the new braking standard also could impact steering and suspension components and other parts.”

Along with the technologically more complex products comes extended warranties. According to Bowerman, end users are demanding this as a result of the increased purchase price of new vehicles coupled with the cost of repair.

Sauer believes the continued, more stringent emissions requirements may cause customers to hold on to their vehicles longer and not to take chances with new vehicles until they are certain all the issues with the new technology have been worked out.

In addition, he sees that more integration of components requires service providers to have a greater understanding of products and how they work together. “It requires much more sophisticated troubleshooting capability. It is going to be important to get the problem fixed right the first time by going to an authorized outlet vs. taking it to the cheapest place because then it may have to go back multiple times to be fixed properly.”

Biermann cited several issues that will impact the aftermarket. “Government regulations, the Right To Repair Act, access to testing equipment, the cost of fuel and consolidation all can affect the aftermarket.”

According to Rayball, independent distributors and service providers need better access to data to increase their overall business efficiency.

And although the Right To Repair Act currently focuses on the automotive industry, there is some thought that it could also apply to the trucking industry.

Regardless of whether that happens, Rayball said, “Our customers-independent distributors and service providers-badly need the capability to immediately access parts information via a VIN look-up system.”

Biermann also pointed to NAPA’s recent announcement that it will be getting more involved in the heavy-duty market in the United States. “Whatever kind of success they may have could affect the aftermarket simply because they are so big.”

In addition, he sees more captive parts as a potential threat to the independent side of the aftermarket.

Along the same lines, Thompson believes there will be a higher degree of integration between the engine and other major vehicle subsystems.

To conclude our look at the current and future health of the aftermarket, Truck Parts & Service asked our experts for some final thoughts.

The Right to Repair Act, the softening vehicle market and counterfeit parts are just a few of the things affecting the aftermarket, according to Thompson.

“The important thing is to anticipate the changes and develop strategies to manage them while continuing to provide excellent support to the customer. In the end that is what is going to make the difference and it is going to be where we will count our success,” she said.

“Customers always have choices about where they do business, whether it is buying parts or buying service. Our job is to make sure that we make it easy for them to do that and treat them well so they will continue to do business with us.”

Thompson added, “Short term, the commercial vehicle aftermarket looks good as we continue to differentiate our products and services.”

Rayball too commented on the short-term future of the aftermarket. “We expect to see continued, increased competition from the OES channel resulting from the drop-off in new truck sales.

“Then as the next set of regulations is announced, we’ll see many of these dealers take their eyes off the ball in the aftermarket so they can concentrate on another huge vehicle pre-buy.”

And what about the aftermarket’s long-term future?

“We all need to invest and make decisions that support continued growth for our industry and promote the development of products and service solutions that will continue to meet and exceed our customers’ expectations,” Rayball said.

Bowerman believes the significant changes in the aftermarket will result in more sophisticated parts. “This will require more updating of people skills and training to assist in keeping vehicles running. But overall I think the future looks great.”

Biermann said he sees the industry remaining cyclical. “However long term and short term, as long as houses are being built and goods are being moved, this is going to be a great place to be.

“Somehow we will find the people we need. Somehow we will sort out all of the other issues we face. As long as we have to move things and the rail system does not dramatically change, it is going to be a good future.”

Sauer too is positive about the aftermarket’s future. “I think in the short term there are some technical issues, like the ’07 emissions, that may deter customers from purchasing new vehicles and therefore increase the demand for aftermarket parts and services.

“Long term, we need to continue to look for ways to increase the overall value we bring to the end user by reducing their total life cycle cost. This can be accomplished with improved products, which are good for the customer and good for us.”

He continued, “If you make the customer happy, then he probably is going to come back not only for his next vehicle purchase, but also to get his vehicles serviced.”

According to Shelton, the future is bright but not easy. “Trucks continue to be the most efficient mode of transportation in the U.S. and opportunities for trucking companies have expanded with NAFTA.

“Our end customers have survived by being innovative and adapting quickly to a changing business environment. They are making demands on equipment specifications, and I suspect more customers will outsource some aspects of their businesses that are non-core,” he said. “This will provide bright opportunities both short term and long term for aftermarket providers who are able to adapt.”

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