AUTOMOTIVE SPARE PARTS INDUSTRY REPORT (EXCERPT)

Spare parts sales are a significant contributor to profit throughout the automotive value chain even though they comprise a relatively small proportion of automotive manufacturers revenues. Henry Ford was once supposedly quoted as saying that he would gladly give his new cars away for free if he could have a monopoly on the sale of replacement parts and service. While the spare parts opportunity is evident, the marketplace is one of the most fragmented and complex. In the 1970s, when things took a downward turn, car manufacturers began to outsource their parts replacement business and today OEMs continue to outsource many of the components used in their cars. This means there are increasing amounts of genuine spare parts being produced by third parties, yet the OEMs do not have the same, if any, control over these suppliers as they do over in-house suppliers. As a result, manufacturers are facing growing competition from the development of a sophisticated parallel spare parts industry, particularly in the emerging low cost countries, as well as ironically - the increased competition from their own suppliers. OEMs face many challenges in protecting and extending their profits. High production costs, an emerging liquidity crisis, and a rapidly shifting competitive landscape are all conspiring to drive down revenues and erode margins. These profit margins, which are dependent on the aftersales business, are being further undermined, due to the improvement in the quality of new vehicles over the last decade or so. Fewer visits to the dealers and less demand for spares! For the first time, OEMs have had to take steps to secure their own parts distribution channel direct to the dealer or repair shop to ensure continuity of market share, fending off competition from elements fighting for the higher margin share of the automotive industry. And with the margins for new cars tightening, the pressure is on the automotive manufacturer to retain the aftermarket parts business more than ever before. In addition to marketplace complexity, there has been an explosion in the number of parts to be managed due to the growth of product models and variants, and the increasingly complex software embedded within vehicle electronics. As a result of the increasing computerization of car control systems, the small repair shops sometimes find themselves being locked out of technical information they need. So when a car does need fixing, the increased complexity of the vehicles require more components and technology to be available and dealers or repairers need innovative ways to make larger amounts of parts available, at a moments notice. Therein lies the rub: The dealer or workshop needs to hold a higher number of inventory references which reflects the increased number of components in a car and thus requires more complex inventory management, while having to hold on to the inventory for longer tying up more capital. It is recognised that it is no-ones interest for independent body shops to have to turn back custom because they do not have the software or parts readily available to diagnose

and repair. By being proprietorial over access to replacement parts and diagnostic software - customer repair options are limited: Fewer choices mean higher costs, lower productivity, longer waiting times and instability for the small independent repairer. The challenge facing the industry today is to provide, wholesalers retailer and independent repair shops, with the correct parts in the shortest space of time, and this requires investment planning and innovation. As a result the onus is on both the automakers and the aftermarket industry to form partnerships - to ensure that the service industry has the information and tools it needs which are vital to the viability of the independent repair industry and most importantly the interests of the auto user. To meet these challenges, auto manufacturing companies are looking beyond spot fixes that offer only incremental change and are seeking, innovative solutions that provide a true breakthrough in the way they do business. In response, many aftermarket parts suppliers view the actions of the auto manufacturers, who are investing in efficient parts supply and delivery systems - as encroaching on their profits - and battle lines are being drawn. Many auto-makers are already investing heavily to improve their aftermarket performance. Some manufacturers have taken steps to reduce costs and improve service levels by outsourcing varying levels of parts management and fulfillment. Others have developed portals to help dealers and independent repair shops consolidate and manage their orders. Still others have developed separate brands for their authentic spare parts and are marketing these to build customer preference. Notable amongst the car manufactures working to deliver long term sustainable profitability for themselves and their dealer network are companies such as Renault, Volvo, and Fiat. Each company has embraced the challenge and invested in web-based and JIT solutions for their official trade partners to deliver high-quality and reliable parts to the aftermarket industry quickly and efficiently. This has led manufacturers to manage and maintain their own complex replacement parts distribution channel. DHL in conjunction with some OEMs, has developed the LDC (local distribution centre) solution which solves the need having more warehouse space and capital tied up in parts. Through the LDC concept, the dealer receives two to three deliveries per day thus providing a near 100% same day spare parts availability cutting out dealer administration and planning time as well as inventory. Dealer can save costs and gain advantage over competitors by having the parts available all the time. Volkswagen has gone one step further with its newly created TPS Centre network, designed to make its own parts available to both to dealers and independent repairers throughout the country. The newly created Volkswagen Group TPS Centre network consists of 57 high quality, trade-only specialists and currently serves approximately 20,000 IMR customers. The TPS Centres are in very deliberately selected locations, in order to provide the optimum service to trade customers in their operating area. Every aspect of every one of these operators is trade-orientated the staff and their training, the premises, the stock, the infrastructure, the systems and procedures, and the pricing. Moreover, each Centres stockholding is set up to cater to the specific needs of the local trade, with supply

precisely matched to demand via automatic, overnight deliveries from the Dordon central parts warehouse. Volkswagen Group (UK) Ltd has taken over some of the burden from the dealer/repairer and set up a UK-wide network of 57 TPS (Trade Parts Specialists) Centres, with each site solely dedicated to serving the needs of local independent motor repairers. With these TPS in place at a local level they can provide a complete one-stop, five-brand OE parts solution for repairers of Audi, SEAT, koda and Volkswagen Passenger Cars and Commercial Vehicles. As a result the dealer/repairer no longer has to face the challenge of sourcing the juston-time delivery of high quality and reasonable priced parts alone. In turn, manufacturers, such as Volkswagen, are not only succeeding in reclaiming control over their trade parts business, they are, achieving long term sustainable profitability for themselves and their dealer network.