Using innovation and technology, salvagers prove they have what it takes to be viable parts providers.
In the auto parts world, salvagers are the consummate role players. They fill a number of service gaps to aid both manufacturers and customers. And some are doing it with the sophistication and business savvy of some of the most profitable companies around.
Among their role-playing duties, salvagers give new life to manufactured goods, offer low-price alternatives to new products and make impossible-to-find-parts available.
The tight grasp salvagers have on these roles could be loosening as richly financed, international manufacturers — particularly the ever-growing number of aftermarket companies — eye salvagers' market share as they battle one another for every available parts dollar. Should salvagers be worried?
No. At least not yet, according to some industry analysts. They expect salvagers to hold firm in the near future and even grow a bit. More good news could be on the way: A number of business trends are converging that could help significantly expand salvagers' market share.
Building a path to market
At first glance, the size of the salvage parts market may seem too small to be of much significance. According to Mary-Beth Kellenberger, an analyst for Frost & Sullivan, salvage auto parts (collision and mechanical parts combined) account for just 4.3 percent of the entire replacement parts market. That share also represents the smallest market segment. Projected growth is equally modest. Kellenberger says sales of salvage parts increase on average 1 to 2 percent each year. Growth over the next year should continue at a similar pace.
Behind those figures are market trends that salvagers are leveraging to power their growth. Foremost among these, says Kellenberger, is a continuing strong demand for OEM parts based on buyer perception that they usually provide better quality — better fit and finish — than aftermarket offerings. Salvagers have responded to this demand by investing in new technologies to make their products more accessible to greater numbers of consumers.
"They've made significant progress by upgrading their distribution systems," says Kellenberger. Salvagers have invested in online technology that allows consumers to instantly search their inventories for parts. They've also joined forces with other salvage companies to form recycling networks where they essentially combine and share their inventories to attract more business. The networks offer consumers an increased opportunity to locate the parts they want, which increases the likelihood they'll return to make future purchases.Kellenberger says many salvagers have taken this technology a step further by including photos of their products along with ratings systems so that consumers can feel more comfortable when buying. "Some, like LKQ Inc., also offer warranties, and they're taking better care in shipping and handling," says Kellenberger.
These changes reveal the marked evolution of the salvage industry. No longer neighborhood junkyards or scrapping lots, salvage businesses are technologically proficient parts suppliers who market their wares globally. Using websites, even small salvage companies can build worldwide customer bases. To help bring even more customer attention to their products, some salvagers have even started selling their wares on sites such as eBay.
Technology also has helped transform salvage companies internally, allowing them to run more efficiently. "They've gotten much better at acquiring vehicles containing parts that are in high demand," says Kellenberger. New technology now permits salvagers to process vehicles more quickly, allowing them to bring more parts to market sooner. Kellenberger says in 2005, salvage companies processed $5 to $8 billion dollars worth of vehicles.
Further helping salvagers, a greater number of salvage vehicles are late-model cars. This benefits their business in two ways. First, having more late-model parts on hand lets salvagers appeal to owners of newer model vehicles, a consumer segment that traditionally has been difficult to target. Second, newer vehicles contain more components. Kellenberger says as auto manufacturers continue adding options and features, salvagers will benefit from the opportunity to harvest and sell more parts.
Kellenberger notes one final trend that she believes will benefit salvagers for years: rising fuel prices. "Higher fuel costs are driving up costs on new manufactured parts. These costs have no impact on salvagers since they've already been absorbed by new car buyers. This gives salvage companies a real price advantage," says Kellenberger.
Salvage strategy
The ability to sell low-cost parts undoubtedly gives salvagers a greater competitive edge over OEMs than aftermarket businesses, which typically offer lower-priced products.
Salvagers face serious challenges in remaining competitive with the aftermarket, in particular with the array of even more cheaply priced parts being imported from Asia. Salvagers have responded to the aftermarket by acting shrewdly — specifically, by playing to their strengths, their appeal to buyers wanting original parts and by avoiding direct competition with the aftermarket.
Many salvagers occupy niche markets that aftermarket companies have yet to address or are simply ignoring because the rewards offered by them don't justify the business investment. Case in point: parts for some older American-made vehicles.
Tony McFarren, a sales manager for Cadillac Auto Recycling in Rancho Cordova, Calif., says his company sees little aftermarket competition because it caters to older model Cadillacs. "This is all OEM stuff," says McFarren. "No one else makes most of it."
Far from seeing its business at risk from the aftermarket, Cadillac Auto Recycling actually embraces some aftermarket parts. The company keeps on hand a small inventory of aftermarket products to better serve its customers. "Mainly we stock usable, limited-life items like headlight assemblies," says McFarren. "We just make sure what we carry fits right. We'll spend a lot of time testing and looking at these parts to determine if it's something we'll sell. What matters in this business most is quality.
"We just don't see the aftermarket affecting us," he continues, adding that his business is impacted much more by other economic factors. "Right now things have been a bit slow because of gas prices. Some Cadillac owners are dumping their cars in favor of vehicles with better mileage."
Salvage companies have found that occupying a niche can be beneficial because it allows them to keep a smaller, more specific inventory they can more effectively track and leverage. For example, occupying a niche can help a salvager more effectively target and service a specific, revenue-rich customer base. If successful there, the salvager can begin gauging consumer interest in other niches. These niches can be anything from a particular vehicle make (or several makes) to specific model year vehicles or types of parts.
One parts niche growing in importance features expensive parts and systems for newer vehicles designed for a long service life (for example 10 years or more). These parts often are so new that no aftermarket alternatives yet exist. Or, if they do, their costs may be so high they make repairs prohibitive for many consumers.
Mike Starovich, president of C&M Auto Service Inc., with locations in Vernon Hills, Ill. and Glenview, Ill., turns to salvage operators in just such cases. "There are three basic occasions when we'll use salvage parts," he explains:
"One, when a part doesn't have a certain life expectancy of wear cycle. For example, an electronic control module (ECM) could last for 25 years, and a steel bracket could be as good 10 years later as it was from day one.
"Two, when we need late-model, high-tech components, such as an engine, transmission, ECM or other electronic components. This week, we've ordered a salvage transmission and a face component for around the dash gauges.
"Three, on more rare occasions, subframes and crash parts. These are parts that are not normally wear items, such as a control arm, but they certainly need to be replaced if you crash into a curb.
Dark clouds on the horizon?
Starovich is confident enough in these parts to make them part of his operation's 36-month/36,000-mile warranty. Still, for as much as he supports the use of some salvage parts, Starovich has strong reservations about salvage products. On other occasions when C&M could turn to salvage goods, Starovich prefers to go with a similar option — rebuilt parts. "We'd use salvage parts if the quality exceeded the quality of available rebuilt parts," he explains.
Cost also is a factor here. "If you can buy a rebuilt part for the same price as a salvage part, your better option is the rebuilt part," says Starovich.
Other shops also bring quality into question when considering salvaged parts. Some, like Dean's Automotive Inc. in Mountain View, Calif., adopt policies that preclude the use of any parts that aren't new.
"We offer a 24-month/24,000-mile warranty on all our work," says Greg Bartol, a service writer at Dean's Automotive. "Being able to provide new parts is an important part of that. We only sell high-quality new parts, OEM or better."
Bartol adds, "We work on cars built from 1985 and later. There's no part I can get from salvage that I can't order new."
Shops like Dean's aren't the only businesses avoiding salvage products. Some jobbers insist on sticking to new parts. Greg Wallin, a sales clerk for B&L Auto Parts in Everett, Wash., says his company orders no salvage parts. "All of our orders are for new pieces," he says.
Mark Scheurer, owner of Genuine Auto Parts in Colton, Calif., reports that he orders salvage parts only when no other alternative exists. He says those occasions are becoming less frequent.
"We don't order as many salvage parts as we used to," he says. "We found that if you used the right distributors you have a better chance of finding a new part to do the job."
Scheurer expects overall demand for salvage parts to decrease. He bases that contention on the quick turnover of new vehicle models. "Vehicles are leaving the market sooner than ever. They just don't last. People aren't going to pay to restore a 2000 Chrysler Cirrus," he says.
Final word: Planning for the long haul
Salvagers may not be too concerned about being locked out of certain markets, at least for now. Revenues are strong and growing. Salvagers continue holding profitable, long-standing relationships with do-it-yourselfers and restorers. They also stand to make significant gains from one more market trend: the increasing cost of new vehicles. With the price of a new car closing in on $30,000, Americans are holding onto their vehicles longer. That means more repairs as vehicles age, which translates into more repair opportunities.
Also, as repair prices escalate, insurance companies are feeling increased pressure to salvage total out rather than repair them. These vehicles help grow a resource pool to bolster salvage inventories.
(Notable here is that many high-end vehicles are beginning to fall into the "too expensive to repair" category, creating a potentially high-profit new market for salvagers.)
Salvagers have one more reason to be optimistic. They've built a solid track record of adapting and thriving in an evolving market. They continue finding roles to fill and better ways to carry out those roles. Arguably, those are the most important tasks for any role player.
Tim Sramcik has covered the automotive service industry for more than five years and has received national and regional awards from the American Society of Business Publication Editors (ASBPE).
