June 2018 – The automotive industry has reached a turning point – and so has the European automotive aftermarket. There are major changes happening in the workshop and service business. Competitors boasting new, digital business models are declaring war on established providers. A new series of studies by Roland Berger and HSH Nordbank (available in German) reveals how the industry is changing, and which companies will eventually emerge as winners from the massive wave of consolidation. The first report is available now. Three more detailed studies will follow in the next few months.
As any good roofer and forward-thinking home owner knows, the best time to repair a roof is when the sun is still shining. Once it starts to rain, it’s usually too late to keep your feet dry. Europe’s automotive aftermarket finds itself in a similar situation right now. In a nutshell, the aftermarket covers all services and products relating to cars where the manufacturer delivers the car to the customer – primarily workshops, tire dealers, and their intermediaries and wholesalers.
Around 480 million passenger cars and nearly 80 million commercial vehicles are currently on the road in Europe. The manufacture and distribution of spare parts alongside car maintenance and repairs currently accounts for a market volume of around EUR 248 billion in Europe.
An initial quick glance at the market data seems to suggest that everything’s fine, and the industry is thriving. Around 480 million passenger cars and nearly 80 million commercial vehicles are currently on the road in Europe. By 2022, it is expected that 604 million vehicles will be registered in the EU states, Russia, and Turkey. Two out of three vehicles are more than four years old – making them good customers for spare parts manufacturers and workshops. The manufacture and distribution of spare parts alongside car maintenance and repairs currently accounts for a market volume of around EUR 248 billion in Europe. Even in the medium term, stable growth rates of around one percent per year are expected through 2025.
Drivers of the automotive aftermarket remain at a high level
Source: Roland Berger/HSH Nordbank
So is everything really OK? Absolutely not, says the first Roland Berger and HSH Nordbank study, “Consolidation in Europe’s Automotive Aftermarket.” In this study, the authors illustrate the changes that the industry is currently undergoing, as well as how acquisitions and digitization are fundamentally transforming the competitive landscape. Three other studies will be published in the next few months covering detailed aspects such as mergers and acquisitions, success factors from the customer perspective, and the tire trade.
Behind this seemingly reassuring facade of general market growth in Europe’s automotive aftermarket since 2012 “a wave of consolidation has been building and has nowhere near reached its peak”.
“In the next ten to 15 years I expect to see disruption in the industry,” says Jens Thiele, Head of Trade at HSH Nordbank and co-author of the studies.
The four megatrends of mobility, autonomous driving, digitization, and electrification – “MADE” for short – are not just revolutionizing the automotive industry, they are also affecting the automotive aftermarket, although with a slight delay. When it comes to mobility, the authors of the study actually take a relatively optimistic view: “Car sharing and other shared mobility concepts suggest that the total number of vehicles will dwindle in the long term. That said, the intensity with which each individual vehicle is used and the spend per car will rise – which will have a positive impact on the automotive aftermarket.” However, the trend toward autonomous driving will be less popular with workshops in particular: “We can expect to see the number of accidents decrease thanks to autonomous driving. And though repairs might be more expensive, the net effect on the future aftermarket is more likely to be negative.” The study’s authors believe that the growing number of “connectivity solutions and other solutions” will provide positive impetus, though mainly for car manufacturers. Many other aftermarket players find themselves torn regarding the fourth letter in “MADE,” the “E” for electrification. On that point, the study reports: “The consequences of electrification will be equivocal. On the one hand, vehicle electrification will reduce the demand for maintenance and repairs; on the other, battery repairs will open up new potential revenue streams.”
Anyone watching the automotive aftermarket closely cannot fail to have noticed shifts in the balance of power. Big fish swallows medium fish, medium fish swallows small fish. “Large numbers of acquisitions are altering the competitive landscape and have triggered deep structural change,” says Thiele. Roland Berger Partner Alexander Brenner is also convinced: “The rules of the aftermarket game are being rewritten.”
Yet Thiele speculates that the actual market revolution is still to come; the European market is as heavily fragmented as ever. Thiele predicts similarities with the US in the distant future: “The three leading players in Europe hold around 15 percent of the market share. In the US, the top three players already dominate the field with around 50 percent of the market.”
The many independent workshops and parts dealerships that exist will come under more pressure than anyone else. In particular because, in recent years, new players have inserted themselves between workshops and parts dealerships as well as between workshops and their end customers: these “intermediaries” in the automotive aftermarket include insurance companies, automobile clubs, and online platforms. Thiele: “These companies are working to occupy the customer interface between workshops and end customers.” For example, a customer reporting a claim to certain insurance companies – such as HUK Coburg, Allianz, or R+V – under their third-party or fully comprehensive cover is usually only permitted to have the damage repaired at specific, affiliated partner workshops. In return the customer is granted a corresponding discount on their insurance premium. Independent workshops are increasingly going away empty-handed from these repair jobs.
Online retail will also further intensify the consolidation process. This means the market will become more transparent, but at the same time market power will decline, and so will the established players’ margins. At this time only around ten to twelve percent of all parts in the independent aftermarket (IAM) are ordered via online channels. So far, private customers have typically only purchased small parts online, such as wiper blades, batteries, and bulbs – but that can change. Existing inefficiencies in the market represent a solid invitation to new, digital competitors. During their research, the market analysts at Roland Berger and HSH Nordbank repeatedly came across price differences of between 30 and 50 percent for the exact same spare part. E-commerce providers, such as Fairgarage or the workshop network Caroobi, exploit this for their own benefit and attract customers in the B2C and B2B segment with price transparency and lower costs. “That makes it possible to skip over certain interim steps,” says Thiele.
As a result of the seismic shifts in the automotive aftermarket, the M&A business is really stepping on the gas: more than 20 significant acquisitions or mergers have taken place in Europe in the past five years. These included an acquisition by US parts wholesaler LKQ at the end of 2017, subject to approval from the antitrust authorities, of Stahlgruber GmbH near Munich for almost EUR 1.5 billion. Another US giant made a grand entrance into the European market shortly afterward: Genuine Parts Company, a provider of spare parts for cars, bought shares in Alliance Automotive Group from financial investor Blackstone. According to its own information, the Group is Europe’s second-largest provider of car parts, tools, and workshop equipment. “There are a lot of dynamic forces at play right now. The acquisition carousel is just getting going and is starting to turn faster,” says Thiele.
“Lone fighters below a critical size will find it difficult to get through the consolidation wave in the automotive aftermarket unscathed,” says Alexander Brenner at Roland Berger. “If they don’t merge with a larger player, many small parts wholesalers will simply not survive. Between 2013 and 2017 there were more than 200 insolvencies in Germany alone. That sends a clear signal.”
Average vehicle age in years
Source: Roland Berger/HSH Nordbank
But according to Jens Thiele from HSH Nordbank, size is just the necessary precondition for future market success. In addition, it is also necessary that buyouts and takeovers make strategic sense and are well-managed. 1 plus 1 does not necessarily make 2, or even more than 2, in business practice. Many companies struggle with integration following acquisitions, as Thiele has observed in recent years, as well as with the accompanying dips in earnings and revenues. As such, he offers the following advice: “To be among the winners, companies need to start intensively exploring and addressing their strengths and weaknesses.” This includes aspects such as having a good understanding of customers and competitors, as well as challenging their own position on the market, which will become fully transparent thanks to the arrival of new competitors and new digital business models.