An Above-Par Dollar May Impact Parts Use.

By Bruce Carrick

The rise in the Canadian dollar is a welcome sign to snowbirds as well as those crossing the border for some Sunday shopping. But for those of us in the collision industry, it may have implications for how vehicles are repaired, or more specifi cally, which kinds of parts are placed on the vehicle. Given that parts represent over 40 percent of the dollar value of the repair, it is important to understand this trend and where it may be headed.

Over the past few years, there has been a gradual decline in the use of OEM parts in the collision repair industry. Since mid- 2008, OEM crash parts usage has declined three percent, down to about 72 percent of all parts dollars spent as of Q4 2010. Th is is measured by what is written on the estimate and based on the strong correlation between the types of parts specifi ed by estimators and the parts actually used during the course of repairs.

Major Benefactor

Th e major benefactor of alternative parts usage (APU) has, of course, been aftermarket parts suppliers. Aft ermarket crash parts usage has jumped from 11 percent to over 13 percent in the last two years. Remanufactured parts, such as alternators, engines and wheels, which are also usually provided by aft ermarket suppliers, stayed constant at four percent. Recycled parts increased a modest one percent to about 11 percent of all parts dollars.

Note that a three percent increase in the dollar amount of APU represents more than this percentage in the actual number of parts that have shifted away from OEMs, since these parts cost less than the equivalent OEM parts. Additionally, assemblies distort the part count which is another reason we report on the parts dollars spent, rather than the number of parts utilized.

The OEM Decline

There are a number of factors that have impacted the decline of OEM parts utilization in the Canadian collision industry, including:

Decreases in the cost of recycled parts:

Over the last few years, Mitchell has been tracking a basket of the 20 most commonly replaced collision parts in North America. While the prices of OEM, aftermarket and remanufactured parts has risen over 25 percent since 2003, the price of salvage (recycled) parts has actually dropped over 5 percent during this same time period.

Ease of ordering and comparing features:

In the past, a collision repair facility might call around to find out about the top three items on a sheet. They might check for that door shell or hood. But they would not think about searching for alternatives for the tail light. Now that estimators can compare all parts for OE, aftermarket and LKQ pricing and availability while writing the estimate, it becomes a no-brainer. Combine this with the ability to automate the parts order from within the shop management systems using email, fax or online connections, and repair facilities have no reason not to source the most cost-effective part.

Alternative part supply chain technology infrastructure:

Advanced inventory and logistics systems enable suppliers to ensure part availability and timely delivery. The merger of various alternative part providers has resulted in fewer, but stronger companies that have now entrenched marketing and sales channels.

Insurance rules and the ability to oversee compliance:

Repair facilities can now use automated self-audit tools to ensure that they are following the insurers’ best practices for part-type selection (e.g. older vehicles require alternative parts in certain situations). Insurers also have the ability to review sheets online to ensure compliance.

Based on the above list, one might question why APU has only increased a few percentage points, and OEM suppliers still command the lion’s share of parts replacement. Some of the reasons include:

OEM suppliers fighting back on price and quality.

For years, they have questioned aftermarket part quality, despite the great strides in quality improvement of the aftermarket industry. There are many examples of OEMs modifying their pricing structure. For example, Chrysler’s retail price for grilles is extremely low compared to the actual cost of production. This makes it tougher for the aftermarket providers to compete.

Many parts are not offered by aftermarkets:

Due to the initial cost of production (e.g. headlamp technology), or the specialization associated with that part (e.g. adhesive trim that’s colour coded to a specific model) it just may not be worth it for the manufacturer. Additionally, the cost of the materials themselves may shrink margins. For example, the margins on boron infused steel are very low due to the high cost of materials. At some point the aftermarket providers are unwilling to invest in the expense of adding these items to their production lines.

Reluctance of recyclers to sell non-sectioned parts:

The recycler makes the most profit when they can sell the entire section or assembly. Would an aluminum hood on a front section be separated and sold? Not always. This can reduce the competitiveness of the pricing.

Better OEM vendor margins:

Higher margins on OEM parts provide a huge incentive to the body shops that are experiencing tight margins on their overall business.

Supply issues with some recycled parts:

Depending on the time of year and location across the country, some recycled parts simply are not available for less common vehicles. So which direction will crash part utilization take?

Look to the loonie

The answer may lie with the loonie. At the time of this writing, the Canadian dollar is worth over $1.03 USD, which is the highest it’s been in four years. And other than that brief flirt with parity in 2007, the dollar has not been on par with the greenback since the late 1970s.

Many OEM parts are manufactured in North America, with a big chunk of them being produced in the U.S. Historically, OEM parts have been priced higher in Canada than in the U.S., even factoring in exchange rate differences.

Compare this to aftermarket parts, which are typically produced overseas in low-cost manufacturing environments in countries such as Taiwan. The Taiwanese dollar as well as the Chinese yuan has been appreciating against the loonie, which could cause aftermarket parts to be more expensive in Canadian currency. Salvage parts, since they are sourced locally, really aren’t impacted by exchange rate fluctuations.

But don’t expect OEM prices to drop significantly even if the loonie shoots through the roof. As anyone who has been watching gas prices knows, prices are quick to jump up, but slow to come back down.

More than likely OEM parts prices will continue to increase, but at a slower pace than their aft ermarket counterparts. Th is may make OEM parts more competitive vis-à-vis aftermarket, and slow the decline of OEM parts utilization.