By Jeff Sanford
Toronto, Ontario -- June 9, 2016 -- This week features news about the ongoing steel vs. aluminum debate, a new flood of more sophisticated counterfeit parts from China and the “now occurring” deflation of the sub-prime auto loan bubble.
- The Ontario Liberal Party made a major announcement this week. Premier Wynne rolled out a climate change action plan that observers say is likely to be the issue that will be at the heart of the next election, still two years out. According to the plan, the Liberals will raise the gas tax by at least two cents and add surcharges to home energy bills. Critics note that part of the plan involves a higher use of ethanol in gasoline. Many environmentalists point out that adding fuel made from corn to gas tanks is a bad, bad idea. Linking food and energy markets results in large increase in the price of food, which hurts the world's poor. In the 2000s, as the price of oil was rising, thousands of ethanol refineries popped up in the US. As almost half the American corn crop got diverted to ethanol refineries by 2008, the price of corn and other grains exploded. It's also worth noting that breaking down corn into fuel actually uses more energy than is ultimately produced.
- Chevy is going after the Ford F-150 with a new round of ads that focus on the “Steel vs. Aluminum” debate. You can check out the latest commercial in the player below.
- This past week news broke of a major investment in online parts provider OEConnect. A large private equity firm, Providence Equity, has taken a majority stake in OEConnect. Collision Repair magazine reached out to Long Beach California-based consultant Bradley Mewes, principal of the firm Supplement. Mewes had an interesting take on the deal. According to him, “Providence's investment into OEConnect may be a sign of a more aggressive period in electronic parts procurement.” He notes that Providence has a large information technology portfolio of businesses. That is, this deal is “likely more a technology play, than an automotive or collision play.”
Mewes also notes that “Providence is comfortable in the automotive space through their successful minority investment in the Auto Trader Group.” That investment has been a fantastic one for Providence. Mewes suggests the investment had provided over $1.2 billion in proceeds across a three and a half year holding period, resulting in a 38 percent internal rate of return. That is far better than any market performance of late. Mewes goes on, “There is still a lot of inefficiency in parts distribution globally. But as dynamic pricing and other electronic marketplaces continue to alter the marketplace, there will be a continued need to invest in technology to scale this type of enterprise. That may come in the form of investment in technology platforms, but may also come in the form of acquisitions.”
Auto Trader completed a number of acquisitions while it was held by Providence. “Based on publicly available numbers, I estimate that Providence invested an additional $100 million into Auto Trader for acquisitions during the holding period,” says Mewes. We might consider a similar situation for OEConnect, a company now set up to experience rapid growth in the months and years to come.
- There's been a huge bust of a parts counterfeiting ring in China. The products uncovered in the bust were manufactured in major facilities, were branded as genuine OEM parts and came complete with barcodes and serial numbers. Chinese counterfeit auto parts are becoming a big concern today. The FBI has recently warned about a big flood of counterfeit parts coming into North America, and attendees at the most recent Ontario Automotive Recyclers Association conference heard that Chinese parts manufacturers have recently achieved new "North American" levels of quality.
- According to a recent report from researchers at the University of Sussex in the UK, hands-free devices are no quick fix for texting at the wheel. The research seems to show that hands-free devices are nearly as distracting as their hands-on counterparts.
- US consolidator ABRA Collision & Glass is offering $2,500 cash rewards for new hire referrals, paying apprentices during a five-week training program, and guaranteeing them tools, industry certification and jobs after completing the program. It's an interesting idea to counter the labour shortage. Let's keep an eye on how this plays out.
- Does the US auto Industry have a subprime problem? Arguably so. Several articles popped up in the financial press this week warning about a bubble in sub-prime car loans in the United States. Sales of autos in the United States hit a record high this past winter. In February the industry recorded a record number of sales. Analysts were surprised however by a large plunge in US auto sales in May. Results for the month were released last week (and noted in this space). Overall US auto sales were down 6 percent in May 2016. General Motors reported a massive May sales decline of 18 percent, while Ford reported a sales decline of 6 percent. These are huge swings in the sales data. What might explain the anomalous movement?
Lenders have been offering loans with huge interest rates attached to people with bad to no credit (sub-prime borrowers). According to reports the number of new cars being sold today to sub-prime borrowers is at an all-time high of about 20 percent of outstanding car loans, or, one-fifth of the loans driving the current boom in auto sales. It seems many are now worried the sub-prime lending bubble that has pumped up in the auto industry over the last several years is about to give way.
- Give the kid credit ... the scam worked for a while. Police in the UK report that a young kid began selling fake insurance policies online under the Allianz brand name. He offered up cheap policies on a classified website. The plan unravelled when police began pulling over drivers in his area and found the insurance policies were bogus.
- The collision repair industry is the same around the world. An article from the Netherlands notes insurance premiums have risen in the Netherlands by 20 percent in the last year. The cause? Rising repair costs, of course. According to the report, “A car used to have a simple bumper but now it is full of equipment, sensors and cameras. And that makes repairs cost more.” In 2010, the average repair bill in the country was €1,360 but that has now risen to €1,900.
- Some months ago Collision Repair magazine report on a new business from major Fiat Chrysler shareholder, Lapo Elkannn. Lapo is the great, great, grandson of the founder of Fiat, Giovanni Agnelli. Lapo returned to the auto industry this year with a new type of auto industry company: A super high-end car customization firm that offers things like fur interiors and super expensive fabrics. According to Lapo, the current upheavals in the industry around the coming of AVs will see “many auto brands disappear.” No word on whether he considered Fiat to be one of those on the way out.
- The International Standards Organization is working on a new project for 2020: Setting new standards for automotive image quality. The number of cameras on cars has exploded. The organization will begin to weight and sort out what exactly standards should be in terms of images produced by cameras on cars.
- A news station in Michigan thought it appropriate to film a segment about how to handle a roundabout. These traffic features are common in Europe, but are relatively rare in North America. It seems Americans just across the border in Michigan are not loving the new feature. The few roundabouts in the state are proving to be areas that are statistically higher in terms of the number of local car accidents.