One of the more liquid economic aspects in the collision repair process is parts. It used to be a somewhat small and self-contained industry, with original equipment (OE) parts dominating in the market place. The addition of aftermarket and recycled parts has turned it into a highly competitive, technical marketplace that presents multiple options that are important to both the repair facility and insurance carrier. As you read the other articles in this edition of CCC UpFront, you will notice that parts is one of the key data points at which both sides of the industry are looking.

CCC UpFront had the opportunity to sit down and get answers to some important parts questions with Frost & Sullivan analyst Mary-Beth Kellenberger. With more than 10 years experience as both an industry participant and analyst, Kellenberger has authored several studies on the North American components market, and is Frost & Sullivan’s foremost expert on the topics of vehicle customization and collision.

Q: The automotive industry as a whole seems to be watching the cost of raw materials very closely, which appears on a continued climb. What impact does that have on the use of different materials (aluminum, plastic)?

MBK: Raw materials cost is something that is closely watched, since—as you said—it has been on the rise. Steel technology has shifted, and is now being produced to be a much lighter product than before. The use of advanced steel is projected to increase in the next four years, accounting for as much as 50 percent of the overall body structure in 2010. And while more unique, converse metals are going to be used with the advent of new technologies like hybrids, there will be more aluminum in hybrids, but it won’t be for the core, integral collision repair parts. The other thing about hybrids is that it takes a significant level of commitment and expense to shift the manufacturing process to new metals and materials. You would be manufacturing and producing parts for newer vehicles, but all of the other vehicles out on the road are still composed of steel. Another aspect is the way replacement parts are being handled. A large component of part replacement cost is having access to parts from multiple channels. This is something that the collision repair and insurance markets closely watch. There’s a noticeable price differential between OE, aftermarket and recycled parts.

Q: Looking down the road—what impact will the emerging OE recovered parts program have on pricing?

MBK: It provides an interesting opportunity. But the challenge is—will it be successful? Will there be more demand than supply? When the OEs begin selling recovered parts, what’s going to happen if the demand exceeds the supply? The market is curious to see how many OEs are going to enter this space. There is an obvious benefit in the fit and finish, but the overall impact to the industry remains to be seen.

Q: There’s been an increase in the number of counterfeit parts over the course of the last few years. Do you see that as a continuing trend, and is there a way to rein that in?

MBK: There’s always a concern regarding counterfeit parts. When it comes to tracking products entering the United States, parts don’t even rank in the top ten counterfeited products coming in to the country, but it does have a significant economic impact on the industry. An estimated $3.3 billion in counterfeited parts landed in North America in 2004. In that same year, there were an estimated 7,000 counterfeit seizures at a value of more than $125 million. In 2000, there were roughly 3,500 seizures worth $40 million.

Q: Let’s talk about another important part category. What is the status of the recycled part industry today, as it relates to quality and delivery?

MBK: There are two major factors that have helped recycled parts distributors improve. First, due to the increased number of vehicles hitting total loss thresholds, the part quality has improved. And second, recycled parts distributors have done an excellent job of utilizing technology. Physical pictures of the parts are now available, allowing you to inspect the part and choose the one you want. In addition, there are ratings systems regarding the condition of the part—so you are getting a description of quality as well. As for distribution, again they’ve been very efficient. Users had been circumspect in the past, but a majority of the salvors utilize a “Hub and Spoke” system, so the delivery dates are remarkably accurate. This goes back to the impact of cycle time when using recycled parts. Their distribution methods address concerns that may have been there in the past.

Q: Speaking of distribution: how much does it factor into parts decisions during the repair process?

MBK: Distribution does rank as an important factor of part choice. One of the studies Frost & Sullivan recently completed with repair facilities focused on just this topic. As we’ve mentioned before, we’re trying to study and understand cycle time. We have found that “one-stop shops,” such as Keystone Automotive have grown due to their convenient distribution model.

Because there are several parts being ordered for one vehicle, let alone any others in the repair facility, it’s efficient to get everything from a distributor in a single shipment. Keystone was the one example cited. It’s really another level of consolidating. In some cases it became a first choice for repair facilities: the Keystone person is there every day, the level of quality is known.

Q: What factors into the decision process when a parts distributor—regardless of it being an aftermarket, OE or recycled company—decides on their “Hub and Spoke” locations?

MBK: That’s a very interesting and interrelated situation. Think about the repair process—insurance carriers are receiving claims and are reaching out to the repair facilities in regard to repair. On the repair side, if you’re a multi-store operator (MSO) or a consolidator, you talk to the insurance carriers with which you have an established relationship, and you ask them where their higher volume areas seem to be. Those repair facilities will be looking for quick access to the most parts in the most efficient manner. So, really it’s kind of a cause and effect situation. Parts vendors locate where the repair facilities are located, which in turn are located in areas that see higher volume.