The Heavy Duty Aftermarket

The market for medium- and heavy-duty truck replacement parts is estimated to be $14.4 billion in 2005, about $1.3 billion more than 2004, according to MacKay & Company. That's not surprising; there are more trucks on the road, and most have been running at near capacity.

But despite booming new truck sales and general optimism regarding the economy, MacKay researchers expect a slight drop in replacement parts sales next year. Why? The simple answer to that question is, "it's very complex" company representatives say. And so, it seems, is the heavy-duty aftermarket.

This segment of the trucking industry involves a broad range of businesses, from those that manufacture trucks and replacement parts to those who sell and install those parts.

The parts are sold through a variety of channels, but sellers are typically divided into two major groups:

• The original equipment or "OE channel," consisting mainly of truck dealers (about 42 percent of total sales) and engine distributors (about 9 percent)

• "Independents," which account for some 49 percent of final sales to end users, and includes heavy-duty parts distributors, garages, auto parts stores and specialists.

Price is important when truck users shop for parts, but surprisingly, it's seldom the deciding factor. "The first question is, 'do you have the part?' " explains MacKay Vice President Dave Fulghum. "If you don't have it or you can't get it right away, price doesn't matter."

Quality is a consideration, but in today's market, parts buyers generally believe that if they're dealing with a reputable supplier, quality is going to be good, Fulghum says. Truck owners are also well aware that parts and component manufacturers often sell replacements through more than one channel. In other words, "where you buy the part doesn't necessarily determine whether or not you will receive a genuine name-brand part."

"Brand loyalty also plays a role in parts purchasing," says Molly MacKay Zacker, operations manager. "The bigger fleets specify certain manufacturers mainly to simplify their own parts stocking. It also makes life easier when it comes to training mechanics and servicing the trucks."

Knowledge is also important. "Fleets definitely want to deal with someone who knows trucks, who knows what parts are needed," Zacker says. "Maybe they're asking for something that isn't available, but the educated person behind the counter can give them a viable alternative that fits the bill."

Where truck owners buy replacement parts often comes down to who they know and trust. "Relationships count," Fulghum says. "Truck operators like to deal with shops and parts suppliers that take care of them – that have the parts needed, when and where they want them; and accept returns without hassles."

A long-standing relationship can occasionally trump a higher price as long as prices are generally competitive. By the same token, fleet managers who buy solely on price may have a harder time finding replacement parts sources willing to cater to their non-price needs. "Loyalty goes both ways," Fulghum says.

WHO'S DOING THE REPAIRS?

MacKay estimates that in 2005, approximately 58 percent of the service and repair work on Class 8 trucks (based on dollar value of the parts purchased) was performed by fleet shops, owner-operators and leasing companies. Approximately 24 percent of the work was completed by the OE channel – truck dealers account for about 18 percent and engine distributors about 6 percent. Some 14 percent of repair work was done by independent shops.

The most notable change in those numbers was the outsourcing of service and repairs. In 1999 an estimated 65 percent of the work was done by fleet shops, owner-operators and leasing companies. Dealers had approximately 16 percent of the business, engine distributors about 7 percent, and independent repair shops 9 percent.

Technology has been one of the drivers of outsourcing. As truck technology advances, so does the need for special training and equipment. Good mechanics are hard to find. Those who know how to work on today's high-tech equipment are even more scarce.

Many fleet shops don't have the budgets to buy the necessary equipment and train their technicians to do the work, says Fulghum. "When we talk to small fleets – those running 10-15 trucks – they tell us that they're doing the work on their older trucks but outsourcing service and repairs on their newer trucks."

Because of warranties, dealers tend to receive a large share of the new truck service and repair business. But owners of older trucks who don't do the work themselves are turning to independent shops.

"What we hear from dealers today is that they don't have the capabilities to do more service work," Fulghum says. Many have full schedules with prepping new trucks for delivery, warranty work, and maintenance and repairs for their regular customers. The technician shortage is an ongoing issue. In some cases, wait times for regular maintenance can be as long as two weeks.

THE YEAR AHEAD

The need for heavy-duty replacement parts depends on the interplay of several factors, most significantly vehicle population, vehicle age, vehicle utilization and component durability.

• Population. MacKay estimates that the U.S. population of Class 8 trucks increased by about 60,000 units in 2004 and another 90,000 in 2005, bringing the total to just over 2.56 million. They project another 4.7 percent increase in 2006.

• Vehicle age. The older the truck, the more replacement parts it will need. But the continued increase in population will decrease the average vehicle age by approximately 2 percent. Logically, the effect of a "younger" vehicle population will be felt most in demand for power generation and power transmission segments, which are dominated by high-value, long-lived components.

• Vehicle utilization. MacKay's quarterly surveys of truck users in all vocations have shown utilization at record highs in 2004 and most of 2005. That will likely decrease if the economy and freight demand soften next year. It now seems inevitable that some truck buyers will pull some of their 2007 purchases to 2006 to avoid potential cost and performance penalties associated with new emissions standards for 2007 engines. Thus, fleet expansion may outpace economic growth and freight demand.

"You don't buy a brand-new truck and park it," noted Fulghum. Instead, truck operators will likely use their newer vehicle for high-mileage services and relegate the older trucks to peak demand and/or lower-mileage operations.

• Durability. A decade ago, a heavy-duty truck engine was overhauled or replaced about every 300,000-400,000 miles. Today, Fulghum says, the average is 600,000-700,000 miles, and the new ones can go close to a million miles if properly maintained.

As vehicle age decreases, durability will play an increasingly important role. "You've still got some trucks around that were built in the late 1980s and early 1990s," he explains. "But over time, the percentage of trucks with the more durable components will increase every year, so the durability factor keeps getting higher and the percentage of the population left with older components is dwindling."

At the same time, it appears that the rate of improvement has slowed. This year, longer-lived components reduced Class 8 replacement parts demand by an estimated $170 million. MacKay estimates that next year it will equate to a $149 million drop in sales.

In 2006, MacKay & Company will launch a major research project to determine how the heavy-duty parts and service distribution channels might change over the next 10 years.

The past decade has seen major consolidation throughout the heavy-duty industry – creating mega-dealers, mega-fleets and, albeit to a lesser degree, mega-distributors. More trucks. Increased durability. Offshore sourcing and sales. Computerized management systems. Giant steps forward in communications technology.

As MacKay notes, these changes will have a profound effect on the next decade. But there have been major changes in other distribution channels that also need to be considered.

Examples: Wal-Mart, a fledgling company just over a decade ago, is now challenging the market leadership of some of the country's largest grocery chains – and is doing so largely on its strength in distribution and information technology.

Home Depot and Lowe's have altered the distribution channels for hardware and home improvement products. And Starbucks has developed an entirely new approach to a previously fragmented channel – the coffee shop.

"It may be a long way from coffee to clutches, but the lesson seems to be a clear one," notes MacKay & Company. "Distribution systems to which we have become accustomed and the means by which they interface with their suppliers don't exist in a vacuum – or in perpetuity."