Gordon Cautiously Optimistic About Post-State Farm U.S. Collision Market

On Aug. 18, the Illinois Supreme Court reversed a $1 billion judgment against State Farm Insurance Co. stemming from a national class-action lawsuit. In rendering its decision, the high court held that the trial court erred in giving the suit class-action status.

The plaintiffs consisted of State Farm policyholders who took issue with the insurance company's uniform practice of mandating the use of non-original equipment manufacturer (OEM) parts to repair policyholders' vehicles in every case where such moderately priced parts were available. They contended that such a policy breached the defendant's standard contract because it was not designed to restore policyholders' cars to their pre-loss condition by using parts of like kind and quality. They claimed that the non-OEM parts were categorically inferior to their OEM counterparts.

The plaintiffs also argued that such a practice violated Illinois consumer law, which prohibits misrepresentations as to the quality of the goods and services provided by the defendant's policies.

The State Farm case, started in 1999, seriously affected the sales of Taiwanese-made aftermarket (AM) body parts in the two to three years after the case entered litigation, as most major auto-insurance firms in the U.S., including State Farm, immediately stopped using AM parts to repair insured cars. The impact of the decreased purchases, however, has been gradually reduced in the past few years, as auto-insurance firms have begun adopting AM collision parts again, though with a relatively more conservative attitude than before.

The real effects of the recent ruling in the State Farm case are not expected to come quickly and obviously, industry sources say, as State Farm has to wait and avoid action for three months, under the requirements of the legal system. After the three-month period, however, all major Taiwan AM collision parts suppliers report that they are very optimistic about incremental sales gains in the American collision-parts market. State Farm, which accounted for about 20% to 25% of the auto-insurance repair market before 1999, and which totally stopped using AM products that year, is expected to gradually begin adopting AM parts again to repair insured vehicles. Other auto-insurance companies are expected to also slowly adopt more AM parts under a clearer policy that underscores the legitimacy of AM collision parts, according to Taiwan's major collision-parts makers.

In the U.S. collision-parts market, Taiwan suppliers together account for about a 90% or higher share.

After learning of the result of the Illinois Supreme Court's ruling, Gordon Auto Body Parts Co., Ltd., a leading AM sheet-metal body parts supplier in Taiwan that holds about a 30% share of the American market, said that Gordon is "cautiously optimistic."

Cynthia Lee, an assistant to Gordon's president, points out that State Farm is expected to gradually increase its use of AM parts in the future, after the insurance company signs agreements with different body shops. As a leading supplier of sheet-metal body parts to the auto-insurance market in the U.S., Gordon is expected to be one of the greatest beneficiaries of the final ruling.

When the State Farm case started in 1999, Lee points out, Gordon suddenly lost about 40% of its annual revenues, as the Taiwan company concentrated too much on the auto-insurance market. "In 1999, about 90% of Gordon's products were Certified Automotive Parts Association (CAPA) items," Lee says, "but now, after a few years of policy adjustment, the ratio is about 50%, and our sales has recovered to an even higher level than before 1999."

That means, according to Lee, a big demand exists in the American collision-parts market, which has effectively balanced Gordon's lost revenue. "A big group of car owners in the U.S. might want to pay for restoring their own vehicles after collisions at lower costs, even if their vehicles are insured," Lee continues. Citing statistics, Lee says that customers choosing their own repair parts account for about 13% of the overall auto-insurance repair market.

"For parts in both the CAPA-certified or non-CAPA market segments," Lee continues, "the demands have been expanding. The former represents a profit margin of about 35%, but has declined in the past few years; while the latter has about a 10% margin, but has continued expanding. Both of the two segments are expected to generate more sales for Taiwan suppliers."

"We are carefully watching the follow-up developments of the State Farm case after the ruling," points out Sonny Pan, vice president and spokesman for Gordon. "Basically, we are cautiously optimistic about the future collision market in the U.S."

"The AM parts market should have a constant 4% to 5% annual growth because of the increasing volume of car ownership," Pan explains, "but we also see some factors that might offset the increasing demand, such as the high oil and steel prices."

The high oil prices might decrease the transportation demands of the general public, and the result will be a decreased frequency of car accidents, Pan explains. The soaring oil prices might also lead to lower expenditures for car repair and maintenance.

Another possible negative impact on sales, according to Pan, is the serious damages caused by the Hurricane Katrina in southern American states. The devastating storm might affect insurance companies' financial structures, and a possible result could be that the insurance firms might ask AM collision-parts suppliers to cut prices. "We are carefully watching those possible factors, and nothing can be clearly stated about the market at all," Pan says.

Gordon shipped more than 1.8 million sheet-metal parts last year, about 99% of which were delivered to customers in the U.S. According to Pan, both his company's shipment volumes and revenues are expected to grow by 10% to 15% this year.

Gordon is also aggressively eyeing the European market, which currently accounts for only about 1% of the company's sales. But that situation is expected to gradually change in the coming years, as the number of the company's Thatcham-certified products is expected to reach 40 by the end of the year. According to Pan, sales to Europe are expected to account for 5% to 10% of Gordon's revenue next year, if the company's capacity can meet demand.

At a previous interview with this publication, Pan said "The new Automotive Block Exemption Regulation (BER) 1400/2002/EC opens up new opportunities for AM parts makers that want to tap the growing European market. More importantly, the new directive offers a fair competition mechanism for the region. The biggest AM parts buyers will be auto-insurance companies, which want to use more AM parts to repair insured vehicles to cut costs and strengthen competitiveness. First, though, the parts they use have to be certified for safety and quality."

"With the new BER, the core competitiveness of AM parts suppliers is the number of their products that are certified by mainstream European standards organizations. So the mainstream quality-accreditation systems, such as the Thatcham in the U.K., are the new competition thresholds, and they constitute a fair starting line for interested suppliers."

U.S. Auto-insurance Market Data Update

CCC Information Services Inc. 1997-2004 Statistics
Calendar Year	Total Repair Cost	OEM	AM	Recycled	RO
1997	US$7,760,412,806	73.4%	11.5%	12.4%	2.8%
1998	US$10,062,867,518	71.9%	13.3%	12.7%	2.0%
1999	US$11,592,002,679	73.5%	12.7%	12.6%	1.2%
2000	US$12,996,667,474	77.2%	9.2%	12.8%	0.8%
2001	US$12,862,469,574	76.3%	9.2%	12.1%	2.3%
2002	US$13,561,249,279	75.2%	9.1%	12.1%	3.5%
2003	US$13,323,375,125	73.7%	9.8%	12.3%	4.1%
2004	US$13,033,910,370	71.7%	107%	12.6%	5.0%

The CCC data approximately represents about 70% of overall insurance data.