Detroit quake

Jan. 1, 2020
In December, President Bush announced he would provide General Motors and Chrysler with an emergency $13.4 billion in bridge loans to help keep the troubled automakers afloat into 2009. GM and Chrysler were given a Feb. 17 deadline to provide thei

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In December, President Bush announced he would provide General Motors and Chrysler with an emergency $13.4 billion in bridge loans to help keep the troubled automakers afloat into 2009. GM and Chrysler were given a Feb. 17 deadline to provide their restructuring plans while car sales continued to plunge. Sales were off more than 30 percent in December at GM and Ford, while Chrysler experienced a whopping 53 percent drop.

Slumping vehicle sales have only fed into the turmoil already affecting the overall economy, and the usually recession-proof collision repair industry also is feeling the affects. Auto industry insiders have been predicting nearly apocalyptic results if one or more of the Big Three wind up collapsing, but how have Detroit’s troubles affected body shops?

Although business is not exactly booming across the country, so far the industry has weathered the economic crisis fairly well. According to the Automotive Aftermarket Industry Association’s (AAIA) 2008 Collision Repair Trends report, total collision repair industry sales grew 5 percent from 2006 to 2007, and respondents to a recent ABRN survey said they expect revenues to rise in 2009. The recent plunge in new car sales is helping, as more people have decided to repair their older vehicles rather than trade up to newer models.

But a major restructuring (or bankruptcy) by the U.S. OEMs could impact the collision industry adversely if dealership closings or the elimination of some brands lead to parts shortages or a spike in prices. The dramatic decline in the resale value of used cars also has led to an increase in total losses.

And if the economy doesn’t improve in 2009, more collision repairers may start feeling the pinch.

Mike Quinn, owner of 911 Collision Centers, which operates multiple facilities in Arizona and Nevada, says his business has been in a growth mode for several years, but revenue was relatively flat in 2008. “We’ve had to tighten our belts a bit, and look at not always having surplus of people to fill slots, even though we’re growing,” Quinn says. “We’re running leaner.”

“We’ve always had pretty good expense management processes in place to keep our costs down, but we’ve gone deeper than ever before in trying to improve the bottom line,” says Mike Schoonover, owner of Schoonover Bodyworks in St. Paul, Minn., and a member of the Automotive Service Association’s (ASA) Collision Division Operations Committee. “We’ve also come to the conclusion that this year is going to probably be the make or break point for a number of our competitors here.”

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Business booming?

With fewer people buying new cars, conventional wisdom says that more people will turn to the aftermarket to repair their old ones. Anecdotal evidence seems to support this — so far. At the end of 2008, many shops were reporting an increase in business, in part because of customers trying to keep older vehicles on the road longer, and thanks to a nasty streak of winter weather in the Midwest.

But the ongoing recession could still be hard on collision shops. With unemployment climbing, and consumers spooked about their retirement savings, many customers are forgoing repairs and pocketing their insurance settlements.

“We’re seeing more people aggressively shopping around than they have in the past,” says Darrell Amberson, president of Lehman’s Garage in Bloomington, Minn. “They are spending the money to maintain the vehicles on the mechanical side, but it’s been a mixed bag.”

“Customers are taking a wait and see approach before they do any repairs,” says Schoonover.

Midwestern snowstorms also have been a mixed blessing for shops. While there are lot more vehicles coming through the door, the number of total losses is increasing because used car values have plummeted, even on vehicles that are just a few years old.

“Even on newer cars, or cars it looks like we will be able to fix, they are just getting totaled out much faster than we’ve experienced in the past,” says Schoonover. “We’ve had a busy winter here, but it isn’t necessarily helping our business.”

“All these cars being totaled out will hopefully encourage people to go out and buy new ones, but in the short term that trend has hurt us,” Amberson adds.

Dealership closings

The most visible impact of the OEM’s troubles in many communities has been a spate of dealership closings. According to the National Automobile Dealers Association (NADA), between 700 and 900 dealerships were expected to close in 2008, with even more to come in 2009. Many analysts have predicted that the industry may not return to peak sales figures of 16 million vehicles per year until after 2012 — if ever.

Fewer dealerships could be both good and bad for collision shops. If dealership body shops close down, that could mean more business for independent repairers. However, shops that rely on referrals from local dealers could see a slump in their business, particularly if they do contract work for those dealers.

“There’s a lot of work being displaced from the dealerships, and not just body work, but mechanical,” Quinn says. “But shops that have a strong dealership base had better look to diversify. If they’re dependent on a dealer sending them work, they have to make sure that dealer is going to be there in the next 12 months.”

Schoonover, for example, receives a lot of work from the local Saturn dealership. “We’re keeping an eye on them, because they’re a very good customer and we just don’t know what the future holds for them right now,” he says. “That’s one of my biggest concerns is if GM decides to shut down Saturn, what are the parts ramifications going to be?”

It could also be harder to get parts at a good price. If there are three Chrysler dealerships in town, shops have more leverage on pricing because they can always take their business elsewhere. If that competition evaporates, prices could go up when shops lose their bargaining power.

“We’ve already had problems with dealers starting to charge delivery fees, or having chargebacks on returns,” Quinn says.

Dealers may also take a closer look at how financially healthy their body shop customers are. “Maybe they will look at putting some of those shops on cash on delivery if they think they might not make it, and then going after business form shops that look like they’ll be able to continue to pay the bills,” Quinn says.

And if some brands go away altogether (Hummer and Saturn are possible candidates), shops could find themselves scrambling to find OEM parts, or see total losses increase even further. At the same time, stronger dealerships are reinvesting in their parts and service operations, which could lead to increased competition for customers in some markets.

It’s been a long time since the industry faced any significant parts shortages for a major brand. When American Motors Corp. was absorbed into Chrysler in 1987, the new parent company continued to support the parts channel for AMC’s admittedly limited vehicle line.

“Some of us remember when the 1986 Hyundai Excels first came out, and you couldn’t get parts for them,” Quinn says. “They were literally totaling everything. We had the same problem with the Yugos. We have enough problems in this industry as it is, we don’t need those problems.”

Quinn thinks that the manufacturers may cut some lines, but that those lines would be serviced through other dealerships. However, if one of the Big Three were to shut down or significantly reduce operations, several parts suppliers could be taken down in the process.

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Cash for clunkers

One of the measures being considered to help struggling OEMs could also have a negative impact on the collision industry. Although not part of the bridge loan package proposed by the Bush Administration, an incentive program known as “cash for clunkers” could be part of an economic stimulus package now working its way through Congress. Under this program, consumers would turn in older model cars for crushing, and receive reimbursement that would be used to purchase a new car, thus stimulating new car sales and taking older model vehicles with higher emissions off the road.

The Specialty and Equipment Market Association (SEMA) is urging members to write to their Congressional representatives to oppose the program because of the threat is poses to aftermarket repairers and the salvage market. The Automotive Service Association (ASA) has indicated support for some kind of fleet modernization program, but thinks the program should include a vehicle repair option (with allowances sufficient to address emissions repairs) and should be administered by the states (there are already programs in Texas and California).

“We want the owner to have the option of repairing the vehicle,” says Bob Redding, ASA’s Washington, D.C., representative. “The Texas program could be a good model to look at, provided the states get the money in the stimulus package.”

Regardless of what happens to the OEMs, repair shops should be prepared for what could be a challenging 2009 if consumer confidence remains low and dealership closings accelerate.

What the industry really needs is some clear direction as to what will happen with specific brands, Quinn says. “GM says it needs to close 1,200 dealerships, but which ones?” Quinn says. “Will that be Chevy or Pontiac? Is Saturn going away, or will one of the European companies buy it? We need some clarity early in 2009 so we can figure out what direction to take our business.”

“The worst case scenario would be for one of the domestic manufacturers to close up shop,” Amberson says. “That would be a dramatic change, but I would like to think it won’t come to that.”

“You can’t even have that conversation about GM just going away,” Quinn adds. “That’s an impossibility. It would be mayhem. It would turn the industry upside down. If we can’t get parts to fix cars, we’re out of business.”

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