The North American collision repair industry spends an estimated $16B annually on parts to repair vehicles. A rapidly increasing share of that — 33 percent and rising — is for alternative parts (recycled, aftermarket, and remanufactured), all of which are being consolidated in the hands of fewer and larger suppliers.
This trend is being driven by the insurance industry's need to contain repair costs and is perpetuated by the emergence of the technology that enables the automated identification, location, and soon the real-time procurement of these parts during the electronic repair estimating process. The potential for large capital gains has attracted private equity and public capital.
Fewer (But Larger) Suppliers
Consolidation of alternative parts supply nationally and locally by large, well-funded public companies such as LKQ Corp., which bundle and deliver alternative parts to collision and mechanical repair shops, is further facilitating the shift. LKQ has acquired and consolidated several hundred family-owned recyclers, aftermarket distributors, and remanufacturers in the past decade and now has an estimated 40-percent (and growing) share of those parts sources. Further acquisitions may be expected as private and family owned businesses liquidate ahead of the proposed reinstatement of long-term capital gains tax in 2011.
The auto repair supply chain includes OEMs; aftermarket parts distributors (Keystone, the largest, was recently acquired by LKQ Corp); remanufactured parts suppliers; and salvage auctions of which public companies Copart (CPRT), IAAI (KARS) and Manheim/Cox are the largest, in addition to more than 20,000 "professional" collision repair facilities. The salvage auctions sell total loss and used vehicles from insurance companies, banks and corporate fleets to rebuilders and recyclers, including LKQ, who then harvest, inventory, and sell the salvage parts (also known as used OEM) to collision and mechanical repair shops.
The successful implementation of "virtual" online bidding and buying by these large salvage auction companies has dramatically expanded the audience, demand, and therefore prices for salvage vehicles from local to global — in under a decade. This helps explain why the salvage parts industry is suddenly experiencing shortages and price increases, particularly in the most popular crash parts. Faced with this, the insurance industry in conjunction with large alternative parts suppliers such as LKQ may "dis-intermediate" the supply chain by selling total loss salvage direct to recyclers and buying the harvested parts directly from those same suppliers.
However, we are also seeing private equity and public capital flowing to salvage companies with the strongest leadership teams and dual physical and virtual online auction models. In addition the line between wholesale used car and salvage car auctions is blurring as virtual auctions enable the most efficient worldwide real-time sale by auction on a single platform from several distinctly different major supply sources to thousands of distinct buyer groups worldwide. Western Europe represents an opportunity equal to that of the United States.
Glass Repair Job "Harvesting"
The auto glass industry is also consolidating rapidly. This $3.4B industry (60-percent insurer pay) has been almost completely outsourced by carriers. As a result, the space is now dominated by vertically integrated wholesalers who own call centers along with retail glass shops. Safelite (owned by Belron Glass) dominates the market followed by Lynx (owned by PPG Glass). More innovative approaches utilizing networks of totally independent glass shop networks rated by customers on every installation are proving successful for other major national vendors such as HSG (formerly Harmon) and Gerber National Glass Services (owned by Boyd Group, Canada). The insurance industry is now trying to gain control over auto glass costs as new more aggressive multi-level marketers are driving up claim frequency by "harvesting" glass repair jobs and taking advantage of some state insurance regulations that require waiver of deductible on glass claims.
It seems that access to capital, quality of leadership, logistics expertise, marketing, and brand development may be the differentiators in this interesting worldwide rollup of used and wrecked autos and their parts.
From a North American Auto Insurance industry perspective, while this increased demand may be providing better gross salvage returns — as much as 28 percent compared to less than 20 percent only a few years ago — it also means increasing alternative parts prices and shortages as we compete with global markets on both the buy and sell side.
Insurers repair 82 percent of the autos involved in collisions and write off as total losses the remaining 18 percent. Alternative parts represent 12 percent of average repair severity of $2,880, or $346 in alternative parts cost per vehicle repaired. Total Loss ACV is currently averaging about $12,000, and net salvage recoveries are running around 22 percent, or $2,440 per vehicle.
At these levels, carriers are still coming out ahead from increased total loss salvage returns, which more than offset the resulting increases in salvage parts costs. However, continuing increases in demand for used and damaged vehicles and salvage parts, enabled by these global auction platforms coupled with the continued aging of the vehicle population, could begin to affect this balance very quickly.
This could open the door to "closed loop" supply chain arrangements between larger carriers and dismantlers in which a carrier's total loss salvage has its parts harvested, and redistributed back to direct repair program shops as (and when) needed.
In fact, this model has thrived in one western Canadian province for many years. We are already seeing disintermediation by large parts suppliers disrupting traditional carrier and salvor relationships. Consolidation between parts suppliers and salvage auctions may ultimately occur and would pave the way for the necessary storage and other logistics required to make the "closed loop" concept a reality.
This would certainly earn the collision repair and parts markets a big "green" badge, and a major image upgrade for the "junk yards" of only a decade ago.
The old "junk yard" is gone forever, swept up into a global and more efficient digital marketplace. However, used car parts still ultimately must find their way from the original vehicles to repair shops to be given a new life in a new body…..and in increasingly higher numbers and shorter delivery cycles than ever before.
The unanswered question is who will ultimately control the supply and distribution of these parts.
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