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The Aftermarket Analyst

Why Silicon Valley?

Quick: What’s the first thing that comes to mind when somebody says “automotive aftermarket”? Is it struts and shocks and brakes? Lift kits and roll bars and “go-faster” parts? Or do you wring your hands and wonder what things like ride-sharing and autonomous vehicles will mean for the future? It’s a big, fast-moving world, so a proper perspective about what’s in store for all of us is in order.

First things first

Let’s get one thing out of the way: Americans still love their cars and trucks. The Federal Highway Administration estimated we drove our vehicles 3.148 trillion miles in 2015, besting the previous high of 3.003 trillion in 2007. The estimates for 2016 aren’t showing any slowdown. Combine that with data showing people are keeping vehicles longer than ever, and you have a recipe for strong aftermarket automotive growth. So if your focus is on the parts that break and need replacing, or even the performance parts business, you’re golden. Right? Well, yes…for now. But that’s no excuse for ignoring the trends or refusing to think about the future of automobile transportation.

Why should I care about Uber or Lyft or Zipcar or Didi Chuxing or …?

Car-sharing and autonomous vehicles represent two of the biggest challenges facing the auto industry today because deep down, they represent a dramatic shift in consumers’ attitudes towards car use and ownership.

The automobile has always been an aspirational object, yet today’s Millennials are waiting longer to get their licenses, and car ownership isn’t attractive to the under-employed or long-term unemployed. Companies like Zipcar and Uber see an opportunity in this and are spending billions to fill the need people still have to move around.

The car ownership paradigm shift is subtle right now, but the cumulative effect of small changes over a long period of time will be profound. The fact that car-sharing and ride-sharing are gaining in popularity is a clear signal that people’s attitudes about transportation are changing.

Why should I care about autonomous vehicles?

If ride-sharing and car-sharing are baby steps along a trajectory, autonomous vehicles are a giant leap, better known as a “disruption,” to use the techie phrase. Disruptions occur when new skill sets are applied to age-old problems, and, just like in so many other aspects of our lives today, the people and companies in Silicon Valley are leading the way.

Autonomy is coming in 5 different levels. Level 1 encompasses simple driver aids like adaptive cruise control or lane-keeping assistance. Levels progress up to 5, which is where you may or may not have a steering wheel or gas and brake pedals. There are innumerable challenges to overcome in the race from level 1 to 5, and the winners in this race won’t win by going it alone. Automotive companies have come around to the realization that they need Silicon Valley’s technical skill, and Silicon Valley needs the automaker’s auto-making skill, especially to win over a public that’s skeptical of level 5 autonomy.

To accelerate this symbiosis, you’re seeing more automakers and suppliers set up shop in Silicon Valley. Nine of the world’s largest automakers have facilities in Silicon Valley, along with Tesla, as well as four of the largest suppliers. It also doesn’t hurt that that’s where the money is. Alphabet’s market cap is $545 billion. Apple is $612 billion. GM is $51 billion. Ford is $50 billion. FCA is $8.44 billion. It’s easy to see where this is going.

Why should the aftermarket care?

The aftermarket will have to adapt as people’s attitudes towards transportation change, as government regulations impact safety standards and fuel economy, as repair laws are hashed out, and as cars become ever more technologically advanced.

You might see a revenue stream dry up like it did for the car stereo business, which has been battered and beaten on many fronts, not the least of which is automakers taking away the rectangular hole on the center console and integrating other controls and functions into that space.

Or the materials used in your field may change. Government regulations are making many companies look at aluminum. The investment needed to upgrade a shop to repair aluminum body panels can be upwards of $70,000. Or you may want to get into additive manufacturing.

There will be a window of time when people with older cars will want to bolt on the latest driving assistance tools like rear-view cameras or lane departure systems. Then someday we’ll reach a tipping point where that business will decrease, and the newer cars will start to need replacement systems. Or maybe owners will want to upgrade to a better system. There will be legislative and regulatory battles over who can make those repairs, and the aftermarket company positioned to handle the new systems we see on the road will find itself in good stead.

The changes aren’t just to parts and accessories. The data generated by a connected car can be used to distribute parts quicker and more efficiently so that no consumer ever need hear their vehicle will be out of service for “about a week” because the part isn’t available. Your relationship with your vendors and customers will have to change as well. Increasing customer satisfaction might be the most beneficial change that can happen. This is as much a B2B and B2C revolution as anything.

How about a little competition?

It wasn’t long ago that Detroit viewed Silicon Valley as an adversary. Now it’s the Europeans. VW’s new CEO, Matthias Muller believes that Europe, not Silicon Valley, should be setting the course in developing automotive technology and that a “true breakthrough for electric mobility will only be achieved if politics, society, and authorities work together more closely.” And there’s the Daimler and Plug and Play STARTUP AUTOBAHN initiative which bills itself as a contrast to Silicon Valley in that the focus is on both software and hardware. Or the Johnson Matthey/BMW/Dana-backed Project INSPIRE fuel cell initiative. Of course, a lot of those companies have set up shop in Silicon Valley alongside all of the other American and Japanese companies that recognize the value of the existing infrastructure. The competition is a sign of a vibrant and lucrative market. Volkswagen market cap is $64 billion EUR. Daimler is $69 billion EUR. BMW is $50 billion EUR.

Besides death and taxes, one other thing is certain.

It goes without saying the changes going on in the automotive world at large will change the aftermarket. Aftermarket companies need to embrace new technologies and materials, watch how their consumers are consuming, and take advantage of the new data available to them; some may need to seek out partnerships or acquisitions.

So basically it’s business as usual.

 

Recently Announced Aftermarket Automotive Transactions

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Selected Public Company Capitalization and Operating Figures

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