Parts is Parts? Hardly. Observations from Heavy Duty Aftermarket Week.
Posted: January 26, 2018 by John G. Smith
Business was being conducted behind every display at Heavy Duty Aftermarket Week in Las Vegas,
LAS VEGAS, NV — Children of the 1980s might recall a Wendy’s commercial that mocked the quality of chicken sandwiches from competing fast food chains. “Parts is parts,” the cashier for a generic restaurant says with a shrug, suggesting different pieces can be fused together into some sort of processed Frankenchicken.
There are clearly differences in parts, though. It’s a harsh reality known to anyone who buys truck and trailer components — especially if something fails and strands a driver at roadside, comes with a price that carves a deep gash into a line of credit, or is late to arrive. They’re the issues that weigh on every buyer as they try to pick between the OE-level components found on a new truck, premium alternatives, reman versions, and low-budget options.
The one thing all these parts share in common is a rapidly changing business, and it’s affecting everything from pricing to how quickly parts arrive.
Responding to competition from low-pricing suppliers, companies behind premium brands are increasingly rolling out value-priced offerings of their own. Meritor, for example, recently introduced the Mach lineup that it describes as good choices among good, better, and best products. Wabco was the latest, unveiling its ProVia brand of budget parts during Heavy Duty Aftermarket Week to help bridge the gap between “parts of questionable origin” and premium lines.
“Everybody has a lower price in the market,” bemoaned Dayton Parts marketing vice president Walt Sherbourne, referring to salespeople who automatically default to price point rather than truly meeting customer needs. “We’re driving the price of the parts to a level that there’s no profit in the business.
“Our customers are not going to win. They’re going to be dissatisfied with the products.”
There is clearly plenty at stake in the race for a share of the business. The aftermarket serving Canada’s Class 6-8 trucks and trailers was worth $4.2 billion in 2017, and is projected to climb to $4.4 billion this year, according to analysts at MacKay and Company.
John Blodgett, MacKay and Company.
These are the parts that help to keep Canada’s 41,000 Class 6 trucks, 148,000 Class 7s, 344,000 Class 8s, and 543,000 trailers on the road. And the trucks ranging from seven to nine years old are in the “sweet spot” for aftermarket demand, typically requiring $8,000 a year in products outside of warranties, said John Blodgett, MacKay and Company’s vice president – sales and marketing.
“Everything looks fairly positive,” he added, referring to Canada’s growth in oil activity, the Gross Domestic Product, and international trade. “Obviously if the U.S. screws up NAFTA and provides some issues there … that could potentially have a negative impact. Hopefully level heads will figure that out and we won’t have too much impact from that.”
The nature of the parts that are required is changing in its own way. Look no further than the shift toward proprietary drivetrains in new trucks. Last year, proprietary engines were found in 80% of Daimler models, 97% of Macks, and 93% of Volvos. Shares of proprietary Paccar power in Kenworths and Peterbilts also continue to grow. Cummins is still the engine of choice for 80% of Internationals, but if that truck manufacturer’s emissions strategy had worked a decade ago, its share of proprietary power would be closer to 100%, said Stu MacKay, president emeritus for the company that bears his name.
“Supplier relationships, the competitive positions, virtually all of that has changed,” he added.
Stu MacKay, president emeritus for MacKay and Company.
Aerodynamic enhancements have led to a lower demand for fenders and flat brackets, said Ken Griswold, the analysts’ director – market strategy and sales. The impact of technology doesn’t stop there, either. The growing adoption of collision mitigation systems, if they perform as promised, will lead to fewer collisions and a corresponding drop in replacement parts. Telematics and the Internet of Things, meanwhile, promise to determine exactly when parts are wearing or about to fail, affecting purchasing strategies along the way.
Should electric vehicles become the norm, thousands of moving parts on a truck could eventually be replaced by fewer than 200. And emerging electric truck makers like Tesla, Thor, and Nikola are even exploring new distribution models, Griswold warned a crowd of aftermarket executives. “They may not follow our traditional channels.”
There has also been a shift in countries of origin.
“Eighty-five percent of our members are global or going global,” said Heavy Duty Manufacturing Association president Tim Kraus, offering his observations during a Heavy Duty Dialogue presentation. The association itself is forming new councils in India and China, and has rescheduled a 2018 briefing to align with the IAA show in Hanover, Germany.
A focus on global manufacturing is about more than the race to shed costs. It also presents a chance to develop products around regional expertise. Meritor’s recently released 13X medium-duty axle, for example, was developed in India, is sold in North America, and will soon be launched in Brazil. “We look to different regions to be centers of excellence for different product categories,” said Jay Craig, president and Chief Executive Officer of Meritor. This becomes increasingly important in an era when the lives of product lines continue to shorten.
There was a time when a high-volume axle would be on the market for 20 to 30 years, Craig explained. Now the period between redesigns is closer to five to seven years. Meritor is even including aftermarket engineers in its initial design work these days, looking to develop features that are tougher for competitors to reverse engineer after something is released to the market.
The heavy-duty aftermarket is in the midst of a digital revolution.
No matter what brand name is stamped on a box, the tools of e-commerce are reshaping the way transactions are conducted, and increasing the demand for quick parts deliveries.
As recently as 2007, a part made using $36 in labor and other direct costs translated to a final price of $230 for an end user, Stu MacKay observed. “It costs far too much to take that product from point of manufacture through the various distribution channels.”
The massive distributor WW Grainger, for example, used e-commerce to complete 30% of its sales in 2012. Last year about half of its business transactions were completed this way. The online shift has admittedly stripped away about four points of the company’s operating margin, MacKay said. But it’s allowed the business to shed 20% of its physical locations, trimming down to 300 sites.
When discussing e-commerce, it’s also impossible to ignore the long shadow cast by Amazon.
“Amazon has changed some of our business – not because they have the product, but they have provided a conduit for a variety of suppliers,” MacKay explained. About ¾ of the products that it sells don’t even sit in its warehouses. Volvo filters, for example, can be ordered through Amazon from five dealers and four independent distributors.
“What used to take weeks to get parts now comes in days,” said Griswold. Offshore competitors are not even constrained by the need for a bricks-and-mortar presence. Direct online sales can be a particular fit for parts that are viewed as commodities.
“Amazon is not going to be the last guy,” he said. “There’s going to be an impact on margins.”
He also believes e-commerce and longstanding Electronic Data Interchange (EDI) capabilities will come together in about eight years, making EDI obsolete.
“By 2020 I think our business models are going to be very much different than they are today,” said Scott Gates, senior director and general manager at Ryder. But the electronic sales still require closer links to buyers, if distributors hope to be successful.
“You can’t allow your organization to lose the relationship. You can’t just become an e-commerce company,” he warned, stressing the importance of reaching out to parts buyers to ensure they’re satisfied with the technology being used. And if they don’t want to shop on the website, give them other opportunities.
Bill Nolan, president of PBS Truck Parts, admits many of today’s independent distributors will close because they continue to work on 30-year-old models, but added there’s always a place for an innovative business. “E-commerce,” he said, “is the price of admission anymore.”
The good news for distributors is that e-commerce can free up personnel on a parts counter to work on difficult projects and support outside sales teams, said Matt Treadwell, general marketing manager for Paccar Parts.
“It used to be that information was scarce, and everybody marketed to the masses,” he said. “Now information is abundant.”
Said MacKay: “The rate of change is increasing, and certainly the last chapter has not been written.”