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Auto industry:

Drivers wanted—now


Is this a good time to be in the business of fixing cars? Well, that depends. How does that half-filled glass look?

For the glass-half-full crowd, there is this reason for optimism: People are driving older cars. Auto sales have fallen like a brick over the last several months, taking with them not just domestic automakers hurting from lower SUV sales but also the import companies, like Toyota, known more for gas-sipping models.

Aftermarket repairs

People are driving older cars, making repairs more common and helping the auto aftermarket industry. But people are also driving less and putting off more repairs.

Fewer new cars on the road means more older cars on the road, and more older cars means more business.

Yet the pessimists may have an even more notable number: The number of miles driven in the U.S. has fallen each of the past six months. That is hurting an industry generally considered recession-proof by keeping cars off the road. Cars that aren't driven as much don't wear out as quickly.

"The number of miles driven has been declining for the last six months," said Mike Rippey, CEO of 1-800 Radiator, a California-based wholesale radiator franchise. "That's never happened before. The effect is, across all auto parts, if a car is driven less, it takes longer for parts to wear out."

Which view is winning out? So far, it appears that the pessimists have it. While some companies have reported strong sales recently, many others have shown weakness and stock prices for several of them have fallen.

That makes sense. For years, the auto industry had been able to rely on a simple fact: people keep driving. Miles traveled had been increasing steadily since the early 1980s, when gas prices began falling after the previous price spike of the late-1970s.

The recent declines have followed the run-up in gas prices. Most recently, the number of miles driven in the U.S. fell 3.7 percent in May, according to the Federal Highway Administration. That continued a steady, significant decline that began in November. More people are using mass transit, which has increased significantly in many markets, and the popularity of gas-sipping vehicles like scooters has also increased.

The decreased driving does have a ripple effect on aftermarket companies that deal in both service issues and parts sales. For instance, if people are driving less, they may take four months to need an oil change instead of three. It may take them a year to need a maintenance checkup instead of nine months.

"There's a domino effect," said Cid Wilson, senior analyst with Kevin Dann & Partners who focuses on the auto aftermarket industry. "Now that six-month repair takes eight months. Something you needed every nine months takes 12 months. It has an adverse impact on the whole industry.

But the decline in driving has started reversing the major factor that led to it – gas prices. Once thought headed for the $5 mark, they've fallen back to Earth from the $4 level of this summer. Lower gas prices may get some people back on the road.

And decreased driving isn't the only factor behind any decline in the auto aftermarket business. Many people are delaying repairs on cars for economic concerns. "We do believe that gas prices are causing some drivers to simply defer major repairs and seek alternate transportation," said Todd Leff, chief executive of Aamco Transmission.

In the current environment, companies do well when they have high margins, which enable them to under-price their competitors, Wilson said. And service companies do well when they offer something of value – companies like Texas-based Christian Brothers Automotive, which lures customers with a clean, customer friendly environment that targets mostly women.

Companies also escape problems through geography. Wilson said aftermarket companies are more likely to struggle if they have a big presence in places like California and Florida, which have been hit hard by the housing crisis and are struggling economically.

Still, there are some positives for the industry over the long-term – namely the dip in new car sales.

Americans bought 13.6 million new cars in May, down 18 percent from the same period a year ago, according to industry research firm AutoData – the worst drop since October 2002, when the drop was due largely to an overwhelming number of vehicles that had been sold the previous year.

R.L. Polk & Co., the Michigan-based research firm, found that the median age of a passenger car was a record 9.2 years in 2007 and the percentage of cars on the road that were 11 years or older increased from 40.9 percent to 41.3 percent. In other words: the cars on the road are getting older.

While that means cars today are more reliable, that still means people are holding onto their cars longer. "As the average age of an auto gets older, they fail more often," Rippey said. And while people can put off car repairs, they can't put them off forever. "If a radiator starts to go, they can keep putting water in that thing for four or five months," he said. "But eventually they have to pay the piper."

The decline in new car sales isn't always a positive for auto aftermarket companies, especially those that deal more in parts rather than on service. Many companies, Wilson said, added accessories and other products to improve the look or function of a new car or truck. Those companies aren't doing as well now. "Those accessories are a lot more economically sensitive," Wilson said. "Those companies that don't have a lot of exposure are doing well."

Wilson also noted two other trends that could help auto aftermarket companies in the coming years: cars bought in late 2001 and again in 2005 will need repairs soon. Both years saw sales spikes because of various dealer incentives – in 2005, for instance, many automakers sold cars at a loss by giving customers employee prices. Assuming there are no sales spikes, many of those cars will need maintenance in the years ahead.

There is one more reason for optimism, at least for chains: the economy could force many independent companies to sell or get out of business. "The general consensus among our dealers and new prospects is that the weak economy will cause many independents and smaller chains to fold – and we are seeing that already," Leff said.


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