Judging from the talk at Industry Week, China seems to be on everyone’s mind.
The influx of products from China and other low-cost countries, and the subsequent ripple effects those products cause, is having a jarring effect on the North American aftermarket. Probably no issue in my 25 years in this industry has had a more far-reaching impact, especially when all its iterations and ramifications are considered.
Affinia President and CEO Terry McCormack eloquently defined the situation in a speech he made during Industry Week in November. He started that speech with three stories that set the stage for his commentary on the state of aftermarket manufacturing in light of the new geopolitical realities.
To summarize, McCormack admits that just like Napoleon at Waterloo and the domestic automakers’ non-response to imports, some aftermarket manufacturers really didn’t “see what was coming.” In these scenarios, the competitors have outwitted and outsmarted. His point: North American aftermarket suppliers didn’t see what was coming in terms of the impact China would have on their businesses.
McCormack’s point is well taken. I don’t think any of us have thought through the complete impact that the invasion of low-cost, high-quality products to the United States would have on this business. But upon reflection, I conclude that the impact will be profound and has the potential to change the way we do business forever.
Two countries are key
This invasion of foreign-made products is largely due to the remarkable achievements of two countries, but one in particular. China has gone far beyond previous low-cost countries like Taiwan and Mexico.
With one-fifth of the world’s workers, a culture that values, if not honors, laborers, an increasingly progressive government and a voracious appetite for growth, China is taking the concept of global manufacturing to the next level. Concurrently, India, with another 17 percent of the global labor pool, is right alongside. With nearly 40 percent of the Earth’s labor force, China and India are changing the rules of the manufacturing game all around the world.
As a backdrop to this rapidly changing world picture, one needs to consider what is happening here at home. There is a change that has taken place among our most critical consuming public that is creating a fertile market for products from low-cost countries.
For years, “Made in America” meant something to automotive repair technicians. In fact, it was so important that most wouldn’t accept foreign-made parts for American vehicles. No more. In the new economic reality, country of origin simply doesn’t matter anymore.
They have come to realize and accept that replacement parts have gone the same global route that car manufacturing has gone.
Most techs would prefer to buy parts that are domestically manufactured, but, as one said, “Sure, I’d rather buy parts made here, but the fact is this stuff is good, it works and it costs a whole lot less.”
Value line, not value added
The effect of this receptiveness to globally manufactured parts and the sudden onslaught of high-quality, low-cost parts from offshore countries has created a whole new class of products, euphemistically called “value lines.” They are cheap — often half the price of the traditional North American manufactured lines they target to replace. They perform adequately, although I’m sure there are some North American manufacturers that would take umbrage with that comment.
In just a few short years, they have come from nowhere to command more than half of the volume in some categories.
But the rub starts with what they don’t have. These lines are frequently offered without any kind of marketing, reference, technical, warranty or obsolescence support at all. And they are typically offered for only high-volume applications.
Traditional North American manufacturers are heavily invested in “value-added services.” They offer a full line of products for a broad range of applications. And, most invest heavily in doing the OE research to regularly introduce new part numbers for new vehicles.
They support their full lines with return privileges, warranties and obsolescence protection. They create both paper and electronic catalogs that include year, make and model, as well as supporting data like product attributes, photography and specifications. Many have technical support with toll-free service lines, tech bulletins and training programs to assist technicians. And, most have field sales personnel who spend the vast majority of their time working collaboratively with distribution partners calling mostly on their customers.
The low-cost country model is literally the “ying” to this “yang.” Typically, when you buy a product line from a low-cost provider, you get just that: the product line. Most low-cost countries only offer the 20 to 30 percent of the SKUs that represent 80 to 90 percent of the volume. They leave the slow movers that require heavy investment and return only modest volume to the traditional suppliers. They rarely offer service of any kind: no returns, marketing programs or help in the streets.
So that begs the question, “Who is going to add the value?” Or maybe there is a bigger question: “Are all of the value-added programs required?” Let’s address the latter first.
When you start to tally the expense associated with the “wrap-around” support services that traditional North American suppliers offer — like cataloging, tech support, electronic data, return privileges, dating terms, even field sales forces — you get something that amounts to more than chump change.
“Traditional” distributors might depend on more of them than their “retailer” counterparts, but most have been considered essential by resellers to some greater or lesser extent. But the message more and more resellers are sending is a good low price is all they need.
The availability of the slower moving numbers is one value-added element that there is no room for debate on, especially with traditional distribution. We are an industry that is built on the practice of making any part to repair any vehicle available to anyone who needs it, usually within a few hours. Most traditional distributors pride themselves on being able to provide outstanding service on parts that fall to the extremes on the bell curve.
Taking care of the slow movers
If resellers shift their purchases to low-cost providers for the fast-moving numbers, can they still expect to look to traditional domestic suppliers to provide the slower moving items? Is it their expectation to enjoy the same price and discount advantage as when they were buying the entire line?
I’m not sure either is a reasonable expectation, however, most resellers might expect both. My understanding is that some manufacturers are considering instituting policies where only customers who buy the full range of products have access to the slower moving numbers.
Others are talking about selling the slower moving numbers at a higher price to someone who isn’t purchasing their complete line. Whatever the case, traditional suppliers are reacting.
But as compelling as these issues are, there is something even more insidious happening. Most low-cost providers identify their product using the part numbers of an established North American supplier. While the practice is longstanding in the aftermarket, especially for use with “short lines,” when applied in this new context where the value line is supplanting, if not replacing, the traditional line, it is theft of intellectual property.
Using the same part numbering system means the low-cost provider doesn’t have to invest in product research and cataloging to support the sale of its line.
I know of at least one reseller who began purchasing a line directly from a low-cost country but continued to identify it with their North American supplier’s part numbers. Adding insult to injury, the reseller also continues to use the domestic supplier’s electronic catalog data, even though he no longer purchases their product line! This practice clearly crosses a line.
A day of reckoning is near
So how should affected North American manufacturers react? Should they ignore it? Charge royalties for those who wish to sell products using their intellectual property? Should they pursue legal remedies to protect themselves?
One thing is certain: A day of reckoning is coming.
As more product categories are affected and the shift toward using product from low-cost countries continues to grow, it will make investment in critical “forward looking” areas more difficult with each passing day.
It has the potential to slow down the introduction of new parts. It will curtail investment in R & D. It will even divert resources from initiatives, such as supply chain technology, that could save money for everyone.
Think of the irony: The chase for cheaper products to improve profitability is preventing us from investing in technology that would reduce cost.
In this environment, everyone loses. Aftermarket manufacturers with less money to invest will focus only on the top volume part numbers and postpone new part number introductions, pushing service techs to the OE dealers for those parts. Technicians will have less training and technical support available to them across the full range and likely will turn more to the OEM/OES to fill that void, and take with them their purchasing loyalty.
So what are we to do? Not buy the stuff from low-cost countries? Of course not. The question becomes who, then, will provide the wrap-around services that were previously provided by traditional suppliers?
Considering the undeniable reality that someone has to make the part and someone has to install it, it would appear that the answer has to be that someone in the midpoint of the distribution channel will have to step up and fill the void. Is it reasonable to expect that those services can either be withdrawn or assumed by resellers without the service we provide to technicians suffering?
North America’s aftermarket will be faced with challenges of significant proportions over the next few years with perhaps none as great as coping with the globalization of our manufacturing.
Next month, we can talk more about this global impact and how it has the potential to redefine the roles of the entire aftermarket supply chain.
