To call 2009 a challenging year would be an understatement. Business was almost universally down, with distributors on average reporting year-over-year revenue declines of 12 to 20 percent.
Trucks simply weren’t moving, negating the need for maintenance and repairs.
Distributors reacted by going into survival mode. Operations were tightened and costs were cut. For some, when the belt was tightened as far as it could reasonably be, it had to be tightened more, resulting in layoffs, shortened workweeks or curtailing expenses normally considered essential.
While the recession may be statistically over, the general economic slump continues. Tonnage remains well below last year’s levels, which were already depressed. Less freight means fewer trucks are needed to carry goods.
Truck utilization worsened throughout last year. Fleets parked many trucks because there was not enough business to justify their operation. When a truck broke down, it got parked rather than repaired, and an idle truck was pulled back into operation. Some fleets are extending maintenance cycles or putting off repairs, doing what is only absolutely necessary in an effort to curtail expenses. In some instances, parked trucks were cannibalized for replacement parts to keep other trucks in operation.
All of these actions by end users were detrimental to aftermarket sales and resulted in an estimated $1.3 billion drop in 2009 parts sales versus 2008, according to MacKay & Company.
Replacement demand for some parts was off by more than 20 percent.
“The key dynamics that affected the aftermarket in 2009 were lower vehicle utilization rates which resulted in fewer miles being driven, fewer parts being consumed and less maintenance being performed on most commercial vehicles,” says Steve Crowley, president and CEO of VIPAR Heavy Duty, Inc. “The aftermarket experienced more than a modest decline in 2009.”
These dynamics affected the entire aftermarket supply chain.
“We saw a dramatic rise in idle vehicles and much lower overall utilization of equipment, evidence of parts cannibalization from parked trucks and dramatically lower inventories throughout the supply chain,” says John Beering, vice president and general manager-Clutch and Aftermarket Business, Eaton Vehicle Group. “The offsetting upside for the aftermarket is that the average age of the truck population is up. As utilization improves, inventory replenishment coupled with increased demand should lead to aftermarket growth.”
SO, IS IT OVER?
“That would be the $64,000 dollar question, wouldn’t it?” says Joe McAleese, president and CEO of Bendix Commercial Vehicle Systems LLC. “The economy has definitely turned, which is the starting point for everything.
“When you look at the aftermarket from a distributor standpoint, things are going to be marginally better and I think freight is going to come back as the recovery comes back and that’s going to drive maintenance. I think there are a lot of trucks that are parked that need repair work done. I think the aftermarket is going to come back gradually as a result of that but I don’t think it’s going to be a very robust recovery next year.”
Most agree it will not be a V-shaped recovery, and the reasons for that are varied and many.
“I believe the economic recovery will be a slow, drawn-out process,” says David Willis, president and CEO of Baltimore-based CRW Parts Inc. “The current administration is not helping with health care reform, higher taxes and a general lack of understanding of how the government can assist businesses. Uncertainty kills business and there is nothing certain about our business climate now or in the immediate future.”
Adds Crowley: “The recovery in the aftermarket will be somewhat slower than in past recessions. This recovery, which I believe has started in some industries, should get underway in mid-year or possibly could have some impact in the first quarter of 2010. Again, I think it will be gradual; there will be nothing normal. The fast increase in parts demand that we have experienced in some recovery periods in past recessions will not occur unless there is a big turnaround in new housing starts, domestic auto production and road construction all at the same time, which no one believes will happen in the near future and is very unlikely.”
Since housing construction and auto manufacturing were two of the hardest hit industries during the recession, suppliers in markets that relied heavily on those segments suffered financially to a greater degree. In fact, some of these markets may not have even hit bottom yet.
“I believe that the worst is over in some marketplaces, but that the bottom has just been reached in the last couple of months,” says Crowley. “Some areas of the U.S. continue to show signs of further deterioration. If you’re in one of those marketplaces that are still depressed, I think there’s a bottom yet to be reached. Any meaningful recovery in those markets could take many more months to materialize.”
But there are some bright spots. HDA President Pat Biermann says they have seen a slight increase in October and November. “Most businesses have bottomed out and are staying steady or picking up.”
Knowing if it’s time to re-invest, stay put or prepare for further declines depends on your market and how well you know it.
“If a distributor, for example, has a chunk of business that’s driven by residential housing construction, that’s not going to come flying back,” says Stu MacKay, president of MacKay & Company. “But I think in general the overall economy is showing some meaningful signs of life.”
From the supplier perspective, the inventory reductions among distributors, dealers and end users made 2009 an even greater challenge, but should mean 2010 is a better year, at least in comparison.
“I think if you’re a supplier, the answer to that [is it over?] is a little bit different,” says McAleese. “The reason being there’s been a massive inventory reduction this year in the channel, so therefore you’re not going to take inventory down again next year…you’re not going to rebuild inventory, but even if it remains flat, year-over-year it will feel better for the suppliers just because of the massive inventory reduction that happened this year.”
DISTRIBUTOR ACTIONS
Businesses survive by how well they manage economic cycles. Those that make prudent decisions during the high and the low times weather the economic storms better than those who take a more reactionary approach.
Needless to say, some aftermarket companies did better than others during 2009.
“In my mind, how well WDs fared in 2009 is very dependent on how well they entered the recession,” says Paul Raymond, co-owner of Parts for Trucks, headquartered in Dartmouth, Nova Scotia. “Those with a solid balance sheet, efficient organizations, diversified products and customer bases coped far better.
“Making cost saving adjustments early and quickly without disrupting customer service was a key strategy to survival. WDs may not have had a profitable year in 2009, but I have not heard of many closing, so I conclude that most can be described as above. That resiliency is a positive. The negative is that investment in new facilities, training and IT have been stopped, delaying future improvement in efficiency.”
Most distributors found cost savings by reducing inventory levels.
“They’re not hanging on to their inventory,” says Molly MacKay Zacker, operational manager for MacKay & Company. “They’re using their money in other ways. Their inventories are low, they’re not stocking anything in excess. And given that the OE business is down as well, they don’t have to wait for those parts when they need them, the turnaround time is much less.”
But cutting inventories too much can result in not having parts in stock when customers need them. And in this highly competitive climate, that can be a deal breaker. “I think service and the availability of parts are essential during these tough times,” says Willis. “Some businesses cut inventory too much to save money and preserve cash flow. This can be disastrous for sales in the short and long run.”
But the inventory reductions will likely be a part of the new normal going forward. Distributors will likely keep inventory levels much leaner than they did pre-recession, and this will require improving efficiencies and communication throughout the channel.
“One of the key points going forward that the industry is going to have to adapt to is the inventory levels,” McAleese says. “I think all throughout the channel everybody in the heavy-truck business – everybody – has taken inventories down. I don’t see that reversing itself. I don’t think everybody is going to take inventory levels back up, or at least not to the extent that they’ve taken them down.
“I see this as a permanent change, and we as an industry have to effectively work together to adapt to that, and I think that’s going to be a challenge for the industry.”
Does that mean longer waits for end users to get needed parts or that they shop around until they find a distributor who has what they need on the shelf?
“The ability to meet customer demand is largely still in place, we all just have to adapt to do that with leaner inventory levels throughout the channel,” says McAleese. “That means we need to be able to communicate with each other better and share information better and improve the way we work together so that we’re all more nimble.”
One of the ways to accomplish that is through technologies like vendor managed inventory (VMI). Bob Johnson, vice president of aftermarket sales and marketing, Bendix Commercial Vehicle Systems, says adoption of VMI was increasing steadily in the years leading up to the recession, but this trend has been put on hold.
“Really, the industry in general – dealers and distributors – really cut back on everything that was non-essential,” says Johnson. “And we’re basically down to bare bones. Sure, there’s been a continued push over the last several years to move toward electronic ordering, VMI, etc., and that’s going to continue, but they basically cut back to the bare bones.”
Those companies that made investments in technology and better business systems prior to the downturn, now are enjoying the returns on those investments.
“Technology enabled the independent distributor to manage this downturn with solid data on which they could make informed decisions on the management of their business,” says Crowley. “Distributors were able to make needed inventory adjustments quickly, respond to demand changes in the local marketplaces faster and manage the changes in receivables that a recession of this type produces.”
Investments require money and with credit tight, companies that do not already have capital will be hard pressed to find resources. As MacKay points out, low interest rates make borrowing money more affordable than ever in recent history, but access to that money is extremely limited. “It’s not an issue of price,” he says. “It’s simply an issue of availability.”
Those who are in a position to spend this year and are looking for expansion opportunities may find themselves in an enviable position.
“I think even the big guys have pulled back strategically and are paying more attention to improving performance in the existing locations,” says MacKay. “On the other hand, it would not surprise me if you saw more activity in 2010. There are probably some distressed businesses out there that are going to be more attractive targets than they were a couple of years ago.”
CUSTOMER CHOICES
Money of course was tight at the customer level as well, and cost cutting was the foundation of many of their business decisions.
Underutilization kept a steady reserve of “spare” trucks to replace vehicles that broke down. The parked trucks also served as parts warehouses for some fleets as they cannibalized units for replacement components rather than purchasing new parts.
According to Johnson, Bendix conducted a “quick hit study” that found about 10 to 15 percent of vehicles were being cannibalized, but usually for specific components such as tires and alternators, and not braking components due to the lower replacement costs and inherent safety concerns.
For end users who did take trucks in for repairs, it usually was to do the
bare minimum.
“The trend was to fix only what needed fixing, and also taking a look at using less expensive parts,” says Biermann.
The shift in parts preferences, while saving money initially, could have undesirable consequences in the long run.
“Many fleets and end users were forced to use price as their primary criteria for purchasing parts and repair,” Crowley says. “Many changed their focus from the best part available to a good part at a lower price. Unfortunately, some made the decision to buy the cheapest parts available. This action will cause a spike in parts demand at a reduced interval for those fleets, adding to increased costs for parts and labor later in the life cycle of the vehicles.”
Todd Kindem, ArvinMeritor’s director of sales and marketing, Commercial Vehicle Aftermarket, sees this short-term thinking as short lived.
“A current trend we are seeing in the market is fleets seeking pricing solutions that provide short-term cost reduction but increase the long-term cost of operations and potentially pose a safety risk,” says Kindem. “As the market recovers, we anticipate a rebuke to this pattern of component consumption as fleets and dealers/distributors understand the high cost of a cheap solution.”
There also was a greater trend toward installing remanufactured or rebuilt components, rather than buying new.
“When fleets are making repairs, they’re looking to save money, and a way to save money is to go for that reman or rebuild part,” says MacKay Zacker. “That trend would not surprise me at all.”
Kindem says this trend is ideal for some fleets.
“Customers and fleets continued to demand fast, reliable, quality parts sourcing, with many considering remanufactured components more and more due to quality demands and budget restrictions,” says Kindem.
While extending maintenance intervals was widespread, it was not universal. Kindem notes that ArvinMeritor has not seen end users abandoning their maintenance routines. “Fleets did age, some gracefully, and service work on existing tractors was a major activity,” he says. “Private and for-hire motor carriers have maintained their preventive and incident-necessary maintenance; the swing continues between dealers performing maintenance and independent garages increasing their participation in keeping vehicles up to par and on the road.”
Many fleets also have modified their equipment buying cycles, running existing equipment longer. Credit availability can make new truck purchases unrealistic.
Those who can afford new equipment placed orders late last year and will continue to do so into the first quarter of this year to avoid the more expensive truck models equipped with 2010 emissions-compliant technologies.
According to ACT Research Co., net orders for Class 8 trucks spiked to 21,500 units in October, the highest level since January 2008. Medium-duty Class 5-7 net orders also were at their highest level of the year, up 50 percent from the prior year.
“The sharp spike in orders and the near-term placement of a majority of the orders is a clear indication of pre-buy activity in the United States and Canada,” says Kenny Vieth, partner and senior analyst with ACT.
An aging vehicle population will add yet another twist to aftermarket dynamics in the years to come.
“I think there’s a lot of dynamics right now that will be very interesting to watch as they play out in the future,” says McAleese. “There have been so many trucks parked this year because tonnage dropped off so much, so the trucks don’t have as many miles on them as they would historically. The relationship between age and mileage is not the same as what it used to be. I think the original owners now are extending trade cycles because No. 1 they don’t have miles on them and No. 2 they’re going to try to avoid the early part of the 2010 emissions standards. So you’re going to see first owners hanging onto the vehicles a lot longer than they used to and that, by definition, is going to push them out of their normal warranty cycles. That’s going to put some business up for grabs – whether fleets are going to do it inside or if they’re going to remain with the OE dealer network or if they’re going to move some of that to distributors.
“I think that’s going to cause some very interesting dynamics over the next two to three years in the aftermarket.”
Or, as Biermann puts it, “Vehicles will run longer, but eventually this all will catch up and the good times will roll again.”
READY FOR THE REBOUND?
There is some concern that when a rebound does occur, will the aftermarket be ready for it? Some fear there could be disruptions in the supply chain since, like most businesses, manufacturers have trimmed their operations during the downturn. Layoffs and ramped-down operations could result in parts shortages, particularly if demand were to rapidly increase.
“Many suppliers have reduced their manufacturing capacity to meet only the current demand,” Crowley says. “We feel that anything but a gradual upturn in demand may cause spot shortages and disruptions in the supply chain. We currently are taking measures to ensure the supply of some critical maintenance components to avoid disruptions to our customer base.”
Since most suppliers provide products to truck manufacturers as well as the aftermarket channel, if new truck production were to rebound at the same time as the aftermarket, the potential for shortages becomes much more likely. But that possibility is slim, at best. New truck production volume is expected to stay about the same this year as last year.
“Build rates went up significantly in September, October, November and December,” says McAleese. “January and February both look good, and then we’re going to see a very, very significant drop off. There’s not really a normalized period even to compare against, to say it’s up 10 percent or 30 percent. It’s up significantly – not in a historical sense, but in a current year sense. I think we’re going to see a drop in the 30 to 50 percent range in the March through June timeframe as soon as the 2010 engines have to start being put into vehicles and the inventory [of 2007 engines] is exhausted. I think we’re going to see a very significant reduction in OE build.”
And even if a surge in new truck manufacturing did happen, Beering says it likely still wouldn’t be a problem, at least not for long.
“I don’t think so,” says Beering. “However, if the demand increases take the form of a significant spike, then I suspect that the supply chain would be challenged – at least initially – in keeping up. Staying close to the customer is key.”
Adds MacKay, “Even if it did [rebound], we have plenty of capacity. Look at what we did in 2006 both in terms of supporting the aftermarket and building 300,000 Class 8s. Most of that capacity is still out there. Not all of it, but most of it.”
The consensus is that things will get better, slowly but surely. No one is predicting a spike in new truck sales, aftermarket demand or vehicle utilization.
“The aftermarket is poised for a gradual growth with some significant pockets of major growth, such as remanufactured components usage,” says Kindem. “The
aftermarket and its supply channels – allegiant to its quality standards – are ready when the market rebounds.”
Raymond says some companies are better prepared than others for when a rebound occurs, depending on the actions they took during the downturn. He says inventory and staff will be key determining factors. “Those who made bigger cuts will struggle to fill those holes particularly with skilled and experienced people. Those who let training lapse will struggle more than those who did not. I suspect that recovery will be more gradual and smart WDs will react accordingly and quickly, just as they have done when the recession started.”
And even if the duration or severity of this downturn took your company by surprise, there’s no reason the next one should. With light at the end of the tunnel, now is the time for distributors to be evaluating their own capacity and resources for an economic recovery.
Outside salespersons should be working closely with key accounts, predicatively selling what the parts demand will be throughout the year. This will help manage inventory more efficiently, let customers know you are ready for their aftermarket needs and put you ahead of the upswing.
“Once you get down, it’s easy to stay down,” says MacKay. And I don’t think this is a time to stay down. There’s enough positive at this point in time that distributors and dealers really need to be looking objectively at the positive pieces of the business they’ve got.”
