HDAW '08 Report - Aftermarket: Where it's been, where it's going
January 2010, TruckingInfo.com - Feature
Heavy duty distributors and product specialists have lost market share over the last 15 years, especially to independent garages, but there are opportunities for growth in several areas.
That was the message during the Heavy Duty Aftermarket Forum that kicked off HDAW '08.
Dave Fulghum, vice president of MacKay and Co., spoke on the state of the aftermarket parts and service market, based on tens of thousands of surveys done by the firm with fleets, distributors and others in the medium and heavy duty truck marketplace.
The U.S. commercial vehicle aftermarket is $53.1 billion - 29 percent of that is medium and heavy duty truck parts, while 28 percent is Class 2c-Class 5 parts, 23 percent construction equipment and 10 percent agriculture. There may be opportunities, he noted, to sell to fleets that also have lighter-class vehicles, or also have construction vehicles.
When you look at the medium- and heavy duty truck market, he said, total maintenance is $54.3 billion. Of that, 29 percent is parts, 12 percent tires, 42 percent in-house service, and 15 percent purchased service. "More than half of what it takes to maintain the fleets is service," he noted.
Fulghum compared trends between 1989 and 2006, and showed that heavy duty distributors and product specialists have a smaller piece of the pie today than they did in 1989. In 1989, the heavy duty distributor/
product specialist had 34 percent of the market share at point of final share. That was down to 26 percent in 2006. Truck dealers are getting a bigger piece of the pie, up 5 percentage points from 28 percent to 43 percent. However, he said, over the past 10 years that has been pretty stagnant.
The interesting story, he said, is that of independent garages, who saw their market share grow from 5 percent in 1989 to 13 percent in 2006.
"Here's a group that has more than doubled their business in 15 years," Fulghum said. "That's all driven by service. There's no parts over the front counter; they're turning the wrench, they're doing the job for the fleet, and they're growing the business. These guys have grown the business in virtually every product area, because they're doing the service on the truck, especially in transmissions, engine overhaul, and alternator/starter business."
However, he said, MacKay's data indicated that the heavy duty distributors have not seen that kind of increase. Market share has fallen in areas such as brakes, alternators/starters and transmission/differential work. "No matter what business you're in, our data shows fleets are buying less products from you at retail than they were 15 years ago.
"If you run the numbers, your sales to independent garages should be three times what they were 10 years ago," Fulghum said. "If you're not, you lost ground with your independent garage." MacKay's data says in most cases, the heavy duty distributors have not participated in this growth.
Reading the Numbers
Some of Fulghum's other observations:
Outsourcing: If you take out warranty work, 75 percent of service is done by the fleet or owner-operator, mostly preventive maintenance work. But paint and body work they tend to outsource, as well as engine overhauls.
"Remember the independent garage? Engine overhauls, they're picking up that business."
Independent garages do 9 percent of the work, independent paint and body shops 7 percent, truck dealers 7 percent (of customer-paid work). "Independent garages do more service work on an hourly basis than OE truck dealers do today," Fulghum said. In addition, fleets expressed a desire to do more outsourcing. For instance, when it comes to engine overhauls, 64 percent said they'd like to outsource more engine overhaul work; 57 percent already do. The same trend holds true for every other product area - fleets would like to outsource more work in the future of they could find the right someone to do it.
Weekend opportunities: If you're going to take away maintenance work from a truck owner, when will you need to do that work?
Sixty percent of the fleets surveyed had shops that run Monday through Friday. Only about a third open their shops on Saturdays, and 8 percent on Sundays. (But those fleets that are running their shops on Sunday are running an average of nearly two full shifts.)
"So if you want to pick up fleet service business, Saturdays and Sundays are the time to do it," he said. Similarly, "if you want to sell parts to an owner-operator, you probably need to make them available on weekends," when owner-operators are more likely to be working on their trucks. Owner-operators do 39 percent of their work on the weekends.
Opportunities & Challenges
After Fulghum's look at the aftermarket, Stu MacKay offered a summary of opportunities and challenges.
There are opportunities for aftermarket business in the future, he said, particularly in the Class 8 market - and especially among second and third owners.
"I think the first point, the base of the business has grown significantly and remains a very significant and solid base - the Class 8 market." In 2007, the heavy duty aftermarket was $15.6 billion, MacKay reported. The truck dealer had 43 percent of the market at the point of last sale, while heavy duty distributors had 26 percent and independents 13 percent.
MacKay sees "lots of opportunity" in these numbers, "coming not from the first owner, but from the second owner." When we look at that second owner, he explained, the used truck guy generates an aftermarket of about $6.9 billion. The new truck market generates an aftermarket of $8.7 billion. But what's more significant is that the dealer loses about 10 share points in the used truck aftermarket compared to the new-truck business. The independent garage is generally picking up that business, he said.
Because of those numbers, "one of the things that's happening which we think is good news for you is the average age of the Class 8 universe is increasing," MacKay said. "From our perspective, this is good news for the independent heavy duty aftermarket, an opportunity to cash in on a fleet that will be older. And we think as these new, more expensive trucks come into the universe, in order to justify the investment [in new emissions technology], they're going to be kept longer to justify that expense."
In fact, by 2016, MacKay's firm anticipates the market value will be nearly as great for the used truck aftermarket as the new or first owner aftermarket. "We think that's a very significant and meaningful opportunity," he said. And by 2016, MacKay predicts the heavy duty aftermarket will be worth about $20 billion in today's dollars.
Beyond the Current Downturn
Looking ahead toward challenges beyond the current economic situation, MacKay looked at the increasing use of proprietary technology by OEMs, "white box" products continuing to make inroads against brand names, and an increasing trend toward consolidation.
"I think we're all aware that all the truck manufacturers are moving to increase their proprietary technology," he said. For instance, he said, Freightliner and Sterling are 67 percent proprietary power with their Detroit Diesel and Mercedes Benz brands; Volvo is 63 percent proprietary power, Navistar is 22 percent and will up that with the introduction of their proprietary MaxxForce engines, and Paccar is moving toward proprietary power with private-branded engines from Cummins as well as their upcoming new engines based on European subsidiary DAF's models.
"It's going to give the dealers, from our perspective, a bigger edge than they have today," MacKay said. "We think by 2016, the dealer market share could be close to 50 percent. There are things going on with each of the OEMs to lead us to believe there are things that will drive parts and service business to the dealer." MacKay predicts by 2016, heavy duty distributors/specialists will have 19 pe