Aftermarket Auto Parts Sector to Do Well Amid Crashing Car Sales
2009/02/25 | By Michelle HsuWhile the gloomy global recession has slammed the brakes on automakers due to sputtering car sales, and hence damaging operations of their downstream parts suppliers, sales of aftermarket parts or AM parts have been relatively stable. Market observers say that AM auto parts sales hinge on the number of cars already plying the roads. That means the demand for AM auto parts varies according to the ownership of cars, with the former remaining relatively unfazed, despite battered demand for OE or original equipment auto parts, amid the currently declining global auto markets.
GM, formerly the world's largest automaker by sales, even cut its annual 2009 production by over 30%, a move copied by most counterparts in the U.S. and other countries in view of the uncertain duration of the recession.
Comparatively, aftermarket auto parts producers expect growth in sales as drivers would turn to buying used cars or put off car replacement plans due to tightened budgets and credits, consumer decisions that would likely increase various demand for automotive AM goods and services. However, the insiders are also aware that such demand for AM replacement parts may eventually drop in the long run if total car ownership keeps shrinking. This imminent event may have begun with the November plunge in global car sales, widely regarded as the beginning of worsening business cycles to come in 2009 or beyond.
No matter how the market scenario pans out in the short or longer terms, currently declining car sales may work for all makers of AM auto parts, but especially those supplying lower-priced products to appeal budget-conscious drivers, a reasonable view considering that tightened credit, rising unemployment and weakened consumer confidence are global phenomena. Such outlook would favor, for example, emerging AM auto parts makers from China, many of whom already command considerable shares of global markets over the past decades and are likely to capture more business opportunities as global car owners cinch belts.
Currently and unsurprisingly, the U.S. is the largest outlet for China-made AM auto parts: the American Automotive Aftermarket Industry Association (AAIA) says that the overall AM parts sales increased 4% in 2007 to US$285.5 billion, and another 5% in the first half of 2008, with sales to remain at similar levels in the following months despite depressing car sales.
By definition, the AM auto parts sector covers all products and services purchased for light and heavy duty vehicles after their original sales, including replacement parts, accessories, lubricants, cosmetic products, service repairs as well as tools and equipment necessary for such repairs. The American automotive AM sector is a significant component of the U.S. economy, employing approximately 4.5 million people.
One positive factor which may help the AM auto parts business is the plummeting prices of international crude, which dropped from its historic high of over US$140 per barrel in mid-2008 to the current US$40-plus per barrel, as lower gasoline prices would be less of an impediment for people to drive, and the more mileage logged the more has to be spent on car maintenance.
Another favorable sign for the AM auto parts business is the rising demand for used cars, which would naturally generate relatively more demand for AM auto parts. In fact, some used-car markets bucked the ubiquitous falls in sales of new cars in the latter months of 2008: In Taiwan, the prices of 7-to-8-year-old cars rose by 10-15% in December as drivers buckled down amid a recession to buy used cars, hence driving up the prices on such vehicles.
China Market
China, despite showing relative stability in its auto market, also suffered in terms of its growth in auto sales, which slipped to 8.52% for the first 11 months of 2008, according to the China Association of Automobile Manufacturers (CAAM). In November alone, China's auto production plunged nearly 20% and sales 15% from those of last year, to 689,000 units and 685,100 units, respectively. The sales of MPV (multi-purpose vehicles) dropped the most by 30% while that of sedans slumped 10%.
In line with the nation's relatively robust economic growth, China's auto market rolled along with much more power compared with most counterparts worldwide in 2008. With many observers predicting positive economic growth, unlike many major global economies, for China even in blustery 2009, the car market in the most populous nation is expected to continue to hum along, even looked upon as the engine to drive the global auto market. Such assumption is logical considering that China's per-capita car ownership still lags far behind those of more developed nations, meaning China still holds vast potential as a haven for carmakers.
The CAAM figures show that China had 50 million licensed cars in 2008, compared to over 200 million in the U.S. or Europe; while, CAAM estimates, eight to nine million new car licenses are issued yearly, but around two million cars are junked each year at the same time. In other words, the number of licensed cars increases by over six million every year, with such volume to exceed 100 million in maybe five to six years. Such steadily growing car ownership in China bodes well for the AM auto parts business for sure.
Emerging Trends
As in other industries, the automotive AM parts sector is also pushed ahead by the development of new devices that create new opportunities. One such relatively new realm is auto electronic device that enhance safety, comfort and convenience of driving.
"Automotive electronics are becoming increasingly popular because they add new functions to automobiles," said Ian Riches, director of global automotive practice for Strategy Analysis, during the International Automotive Electronics Congress (IAEC) held in France last November. The GPS (global positioning system), for example, is among the hottest-selling auto electronics. Night-vision devices, as well as parking and reverse assist systems, are also among the most popular items as they help make the often daunting task of driving easier for greenhorns.
"The market prospect of this sector would remain bright even though its growth may slow in light of the world economic recession in the next two years," Riches predicted.
Hybrid cars are another growing niche especially when gasoline prices skyrocket, and when global warming is among the most urgent issues with worldwide impacts. "There are more and more car owners who would like to retrofit their cars to burn propane to save fuel cost," observed Riches.
Besides, cars that claim to be eco-friendly also have mass consumer appeal. "In many countries, promoting the 'green car' concept has become major official policies in view of the global consensus for the need to enforce stricter environmental protection," said the French auto industrial analyst. Gas-guzzling SUVs (sport utility vehicle) will gradually fade from markets, replaced by small and fuel-saving vehicles. A trend that is already confirmed by fact: the sales of the once-fashionable Hummer in the USA have dived. Riche commented that the "green car" concept won't only prevail among automakers, but also makers of auto parts, which have to be green as they make up an eco-friendly car.
Car Production & Sales in China | ||||
Year | Auto production | Growth | Auto sales | Growth |
2006 | 7,279,700 | 27.32% | 7,216,000 | 25.13% |
2007 | 8,791,500 | 22.02% | 8,882,400 | 21.84% |
2008(Jan-Nov) | 8,704,000 | 7.98% | 8,629,800 | 8.52% |
Source: China Association of Automobile Manufacturers | ||||