The ageing of the car population.
Making money with while auto makers are fighting for survival. By Bertel Schmitt, CEO Sinamotive Group (HK) Limited.
Since decades, this is the worst year for auto sales, especially in the saturated markets of U.S. and Europe. US new car sales plummeted to a record low in September 2008. For the first time in more than 15 years, monthly U.S. sales fell below 1 million. Traffic in showrooms has come to a virtual standstill. Industry sales crashed by 27% to 964,873 vehicles. Likewise, the European new car market is on track to fall to its lowest level in more than a decade.
In Europe, the drop of new car sales is expected to be less dramatic than in the U.S. Analysts expect Western European volumes to decline 5% in 2008 and 3.5% in 2009. Analysts also expect Western Europe and the US to report approximately 14 million in new cars sold in 2008, with the outlook flat to lower in 2009. Some industry insiders, such as Katsuaki Watanabe, President of the world’s largest automaker, Toyota, expect even lower numbers. Watanabe recently said that U.S. new car sales will probably end the year below 14 million.
U.S. industry sales could “collapse” in 2009, J.D. Power & Associates cautioned. Standard & Poor’s warned of a possible insolvency of GM and Ford, “because of the rapidly weakening state of most global auto markets” and weak capital market conditions. Ford and GM promptly denied that they might file for bankruptcy. Instead, GM is in merger talks with Chrysler, after ending a flirt with Ford – as they did many times before, without ever consummating the marriage.
How can you make money with cars in such a dangerous world? Stay away from selling cars. Start selling car parts. While people can delay the purchase of a new vehicle until times get better, people still have to drive to work or to the mall. In bad time, people hold on much longer to their older cars. This is helped by cars having an increasingly longer usable life. Already, the average age of all cars on Germany’s streets is 8.4 years. 10% of Germany’s cars are over 16 years old. According to a recent study, the car park in Europe will rise from currently approximately 200 million to 275 million in 2025. The study also predicts that the average age of a car on Europe’s streets will rise to 10.2 years in 2025. In the new European countries, the average age of the car is expected to rise to 14 years by 2025.
If you are in the business of servicing older cars, you are sitting on a gold mine. Nobody spends more for service and repair than owners of older cars. According to a recent DAT-Veedol Report, the annual average spendings for maintenance and repairs by German owners of cars that are less than two years old are EUR 109. Owners of cars older than 6 years spend close to EUR 500 per year for maintenance and repairs. The Wall Street Journal agrees: “As more consumers hold off on buying new cars, they’re making more repairs.” As older cars are subjected to wear and tear, expenses for service and repair are much higher than for new cars (which are covered by warranty anyway.)
Owners of older cars may spend more, but they don’t throw their money away. Owners of older cars are value conscious. The price of the repair bill should be commensurate with the value of the car. The key to this profitable market are high quality, competitively priced parts.
Where to get these high quality, competitively priced parts? Mainly from China. For years, auto manufacturers worldwide have been buying their parts in China. Japanese, European, and US automakers successfully source parts used for production in their home markets in China. According to the report, GM buys 20 million parts a month from 190 Chinese suppliers, and had experienced no quality problems over the past year. Many brand-name parts are already manufactured in China.
Now more than ever, sourcing car parts in China makes dollars and cents:
- Metal prices had a mad run-up in the first half of 2008. Since July, they have been coming down. In October 2008, Aluminum fell to a 31-month low due to the anemic health of the car industry.
- Steel prices are also coming down hard. There are reports of panic selling as speculative positions are being liquidated. Forbes quoted an analyst who said that steel prices are “coming down hard and fast” as the economies of the United States and Europe deteriorate and growth slows in China.
- Rates for container shipping are also falling dramatically. “Barely 12 months ago carriers were making record profits in the Asia-Europe trade but from summer 2008, freight rates have plummeted and appear to still be in decline,” said Neil Dekker, editor of the Annual Container Market Review and Forecast 2008/2009 for London-based Drewry Shipping Consultants.
- According to just released figures by the China Association of Automobile Manufacturers, China’s domestic auto sales will most likely see 2008 growth rates of under 10%. In the previous years, China had double digit growth rates. The reduced domestic demand for OEM parts is expected to exert additional pricing pressure on parts manufacturers.
For these reasons, many repair chains and wholesalers in Europe and the U.S. have plans to launch their own private label parts lines, sourced in China. The profits can be huge. Many parts can be sourced in China at fractions of their European and U.S. retail prices.
New car sales may crater, manufacturers and dealers may go bankrupt, but people won’t stop driving. More wear and tear means more parts sold.
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