The price we pay for parts

An old political adage tells statesmen to keep their friends close and their enemies even closer. A similar notion applies in business, where operators must keep a sharp eye on suppliers and customers and an even sharper one on the competition. In the 21st century world of globalization, this task has become far more difficult. Operators now must work and vie for business with people across the globe. That means keeping a grasp on thousands of varying economic forces: wildly disparate material costs, labor rates, taxes, tariffs and more. It’s little wonder that performing at a high level in business is proving more daunting than ever.

Parts distributors find themselves facing an additional challenge. They must weigh their desire to see domestic manufacturers succeed against the reality of an aftermarket where cheaper imported products are gobbling up market share and displacing American workers. Aftermarket Business questioned distributors on issues surrounding the new world market, most notably pricing and tariffs. Their responses paint a picture of a market in flux, one in which the players must still account for their own successes and one where the federal government ultimately might need to provide some help.

Perhaps most significant, distributors remain confident about their future and the future of their industry. The prospect of facing challenges posed by an imposing, ever-changing new world market is often just business as usual.

Is current pricing fair?
Opening the subject of parts pricing is much like opening a can of worms — a very complex, sophisticated can of worms. First, there’s the matter of which prices are being addressed: manufacturer, distributor, jobber or retail. They’re all different. Raising one doesn’t necessarily mean that others also will be raised at a corresponding rate. Second, and perhaps more importantly, there’s the matter of who actually sets price increases. According to the folks we spoke with, there is no who. Instead, there are hundreds, perhaps even thousands, of different forces impacting pricing.

“In the energy industry, you’re looking at a few people who run a lot of things. In the parts industry, we’re dealing with thousands of forces,” says Bart Riebe, president of Bart Industries in Yuba City, Calif. “We all wish we could sell more products and boost prices. That’s just common sense. But prices are actually set by economic forces outside our control.”

While he would like to see a bump in prices to help domestic companies, Riebe echoes a sentiment shared by other industry members. In a free market, companies have to survive on their own merits. “We have to learn to make money with the economics we’re given. That’s our situation,” he says.

Respondents disagreed on the necessity of price hikes to increase their own revenues. Some, like Joe Lieske, vice president of H&H Wheel Service in Detroit, don’t believe prices need to be raised.

“I don’t think they need to be changed,” he says. “We sell to the jobber market. From my perspective, prices are pretty much where they should be.”

However, Sandy Burnett, vice president of sales for Knoxville, Tenn.-based General Parts Corporation, says a boost is necessary to help distributors cover losses. “This is an inventory-driven business,” he explains. “Some product lines have longer lives and remain popular. They maintain their value. Others don’t. So it would help us out to get some increases to make up for the losses we sustain here.

“We need some kind of boost to deal with inflation,” he continues. “Competition helps keep prices down. We recognize that’s just how it is. That’s the market. But we would like to see this area addressed somehow.”

Ray Kline, CEO of R&L Warehouse in Sullivan, Mo., says stiff competition from large retailers precludes his company from raising prices. “The big companies simply won’t allow us to do it. We’d love to see prices go up a bit, and they should, but competitors like AutoZone and other companies have almost unlimited amounts of money to spend. They’re holding prices down,” he says.

Related to the topic of pricing are pricing sheets, and whether or not the current system should be revised. Many distributors we spoke with were virtually unanimous in their wishes to drop pricing sheets. Riebe says his company has started moving away from them. “We’d like to see them go completely away,” he says.

Harry Feitelson, program manager for Big City in Corona, N.Y., says his company continues to use them, but he, too, looks forward to the day when they stop. He says the market needs to set prices.

Other distributors have suggested that the Internet will make pricing sheets moot.

Competing with LCCs
Distributors report that manufacturers cannot compete with lower price imports, at least with products manufactured in the United States. Jim Hardesty, vice president and general manager of Pacific Supply Company in Buena Vista, Calif., calls it a matter of simple economics.

“When we first started seeing a lot of these import products about five years ago, the quality wasn’t there. That was the important difference between American-built products and imports,” he says, adding that now the quality is there. With the quality of many imports reaching a point where they’re on par with domestic products, they’re a better buy. 

That doesn’t mean, however, that distributors believe it’s time for U.S. manufacturers to close up shop. Domestic companies have several options. One, they can introduce imported products into their own lines under popular brand names.

“Ultimately, if you’re going to survive, you’re going to have to integrate these products. You also need to form good, strong relationships with a reliable broker who can get you parts you can trust,” says Riebe.

Several distributors note that a number of major branded labels are already adding these products to their own, especially as part of small-volume lines.

The second option manufacturers have involves moving their production facilities overseas. General Parts Corporation’s Burnett says the cheaper overhead will make the Asian market too attractive to pass up. “Eventually, you will see these companies move to places like China,” he says. “They have to compete. That’s the name of the game. That’s reality.”

Tony DiFiore, chief executive officer for Brook Park, Ohio-based Car Parts Warehouse Inc., argues that domestic companies can compete against imports with effective marketing and promotions. This is one place where distributors can help, especially when it comes to selling to technicians. “You need to keep your name in people’s minds. With the right promotions and attention to customers, they’ll continue buying a product,” he says.

To tariff or not to tariff
One question floating in the aftermarket universe is whether the United States should impose tariffs on foreign auto parts to keep stateside companies “in the game.” For many distributors, staying in the game lies more in finding ways to remain competitive rather than turning to the federal government for help. Even though foreign manufacturers often benefit from what some may call “unfair advantages” such as lax labor, health and environmental regulations, distributors remain wary of tariffs.

“When you start closing your borders to products and labor, you lose,” says Burnett. “It’s anti-competitive. Once you start doing that, you head down a path where you’re turning your back on the business. You’re no longer aware of what’s going on and how things can be done.”

Burnett notes that, in some cases, regulations meant to protect certain industries ultimately lead to their undoing. As an example, he cites the freight industry, which he says operated for years with little competition due to strict government regulation. “When the government deregulated it, suddenly companies that had been profitable for years couldn’t make a go of it. They simply fell apart,” he says. “They didn’t know how to compete on their own.” 

Riebe says free trade has helped create a comfortable level of living for most Americans. While he concedes American workers and companies are paying a price because they have no way to compete with the low labor rates available in developing countries, he notes that the United States also benefits from trade relations that permit it to export billions of dollars in products. Interfering with trade could jeopardize the economy, says Riebe.

While they may distrust government action, distributors also say leaving trade unregulated is dangerous. Some have blamed the open market created by the North American Free Trade Agreement (NAFTA) for job losses in the United States.

Distributors say the best solution lies in making and enforcing trade agreements that give U.S. companies more equal footing. These agreements would require other nations to abide by the same or similar environmental and labor regulations that American companies must follow.

Hardesty suggests tariffs be leveraged to help “control quality.” He says many consumers don’t realize that a number of imported products still don’t meet OEM specifications. Tariffs could call attention to this factor. 

Regardless of which kind of tariffs or trade agreements will help establish an “even playing field,” some distributors think action must be taken soon. “We need some regulations made before this situation gets so far out of hand that companies can’t catch up,” says Lieske.

For some industry members, it may already be too late. Many manufacturers have moved overseas, says DiFiore, adding that “there are very few that still make 100 percent of their products here. You can probably bet that some of those remaining ones eventually will move as well.”

A United States without a manufacturing base?
According to the Automotive Aftermarket Industry Association (AAIA) total imports of aftermarket parts from China increased from $1.8 billion in 2001 to $5.2 billion in 2005. That represents 2.6 percent of industry sales.

That figure is both telling and a bit deceptive as well. It points to a small part of the overall aftermarket, but that small part is exploding in growth. Also, China is just one leg in the overseas aftermarket. Other countries also play a part, such as in India where U.S. consultant McKinsey & Co. predicts sales of exported auto components will jump from $1.8 billion currently to $25 billion in 2015. Surely this growth, driven by the lost cost advantages of manufacturing in Asia, eventually will have an effect on U.S. parts manufacturing.

The changing market that distributors are seeing may run its course much sooner than many expect. The reason? The low manufacturing costs available in China and other countries are due to a labor pool that is largely uneducated and untrained. Such a pool is fine for manufacturing relatively simple parts lacking in complexity.

Kathleen Schmatz, president and CEO of AAIA, has noted that the next stage of parts that China (and others) can address requires a trained, highly educated workforce. That translates into higher costs — the kind that could put imported versions on an even cost scale with American varieties. 

Indeed, the movement of “second stage” to Asia might only occur if a company believes the investment in education and training is worthwhile. Many U.S. companies have reported difficulty in moving highly technical operations overseas. Even if an educated, capable workforce is available, a lack of expertise working with sophisticated products can inhibit production.

Also, China and India face significant challenges in modernizing their work forces. Doing so will cost billions of dollars, which translates into higher manufacturing costs and the creation of an expensive bureaucracy to manage such initiatives. 

Industry experts like Jim John, chairman of the aftermarket management department at Northwood Universityin Midland, Mich., believe North American aftermarket manufacturers can respond to the challenges posed by their overseas competition. They still have sufficient time to find ways to compete. Some product lines, especially low-cost lines, might be manufactured overseas for some time. Other lines, including newer, more sophisticated ones, might be the exclusive domains of domestic manufacturers.

These economic forces obviously will each have their own impact on pricing and the aftermarket. Distributors will react as they have in the past to remain competitive on their own terms.