Avi Pelc, Sr. Product Manager, Hollander, a Solera company
Eric Schulz, CFO, AAA Auto Salvage, Full Service
Jeff Buchanan, Vice President, Auto Dismantlers, Inc., Full Service – Specialized Facility – German Cars
Pat Huesers, CFO, PAM’s Auto, Inc., Full Service
Paul E. Davis, President, A-Plus Parts & Salvage, Inc., Full Service
Rick Anderson, Partner, Reno Auto Wrecking
When discussing winning sales, one must consider the larger issues that drive auto parts sales. As technology rapidly changes, vehicle designs become more complex, competition for stock increases, and governments impose more restrictions on the industry, one wonders what is in store in the future for automotive recyclers and how they can stay profitable.
We polled members of the Automotive Recyclers Association to get their thoughts on the following questions. Here are responses from several of the progressive recyclers in the ARA and how they are thinking about the future of their business. We hope it inspires you to start thinking outside the box for yours. Send your ideas to ARAEditor@comcast.net to be published in a future issue.
Automotive Recycling magazine: How do you feel that recycling hybrids will impact the automotive recycling business model. Is it doable, viable, profitable, and/or expensive to do?
Avi Pelc: It is doable, but it will require a whole new way of thinking about some of the parts and the care needed to remove and test them. The degree to which it will impact business will depend on the degree of acceptance of hybrids and the speed of integration into society. Today, hybrids represent a very small portion of the vehicles on the road. Past history dictates that the acceptance of products like hybrids is likely to be slow (based on what happened with the slow acceptance of fuel-efficient vehicles the last couple of times that gas prices were high). The cost of hybrids will also limit their acceptance with the vast majority of the population embracing them only when prices become competitive with regular vehicles. I think the impact to recyclers will be slow, and other than the very large recyclers, care should be taken in the investment needed to recycle them properly.
Eric Schulz: There is certainly a training issue involved in the recycling of hybrid vehicles, but I don’t see it being a huge obstacle to effectively recycling them. While they may be intimidating or seem difficult to handle for some recyclers, it is no different than any other emerging technology in vehicles today. There is more sophisticated technology in new vehicles, such as crash avoidance systems, safety restraints, computerization, etc., which we need to be aware of and hopefully build a market for. The biggest battles we fight, when it comes to these new technologies, are the OEs who continue to issue statements that say reusing the parts that they manufactured is not acceptable.
Jeff Buchanan: I believe the industry will adapt and see no impact – hybrids are still vehicles.
Pat Huesers: Once you establish proper safety procedures, provide training, and acquire the necessary equipment, the recycling of hybrids does not differ much from conventional salvage.
Paul E. Davis: Of course it’s doable. Anything manufactured can be de-manufactured. It will require additional training like every new design or technology. As components become more electronics-intensive, I believe that warranty claim rates will escalate as repairer’s skills continue to fall behind the pace of new product introduction into the market. So, yes, it will end up being more expensive.
Like everything else, as the marketplace for used and recycled parts becomes more diluted by unregulated buyers and sellers, profitability will continue to be negatively impacted. Hybrids will not be exempt from this and may perhaps even be more challenging as a niche or specialty market where you are either all-in or marginalized.
Rick Anderson: We’ll be fine. We thought the world was coming to an end in the early 80s when Citation (FWD) cars started.
AR: What other recycling opportunities do you see that will be or could be incorporated into an auto recycling facilities’ business model?
Avi Pelc: Recyclers need to embrace online sales more and faster. EBay and other similar sellers and auction sites have taken the reins in retail sales if you judge by the tremendous increase in their Christmas business in 2010 when compared to previous years. To excuse poor acceptance of online sales by using the part condition as a leading factor is bad business if you gauge it by the tremendous sales for used items and antiques. These have taken off to the point that many antique dealers don’t even have regular stores any more. If condition were a factor, the sale of antiques would show it. Recyclers need to do more to offer their parts on the Web, either on their own sites or auction sites, and the industry should do more to promote these sales to the general public and to professional repairers.
Eric Schulz: Aftermarket and other alternative parts are obvious. In the collision repair process today, recyclers tend to be the first contact before OE and other alternative parts providers. The more we can source for the repair from that first call, the more valuable our service becomes. As recyclers we need to stay ahead of the curve on new technologies so that we can be a resource in the repair process. Being knowledgeable with regard to vehicle construction and technology and adapting your business to it keeps your credibility high.
Jeff Buchanan: I am under the optimistic impression, and hopeful, that modern recyclers will eventually be seen as a responsible means to end-of-life vehicles. I am also very hopeful that this will be recognized and will continue to level the playing field from illegal operators.
Paul E. Davis: Nothing stands out for me at this time. My biggest fear is that if there is a “next level,” it will require the resources of the very large operations to take advantage of whatever that opportunity may be, which would have the likely effect of shutting the smaller operators out.
AR: What will an independent auto recycler have to do to maintain a competitive edge in the next ten years?
Avi Pelc: They need to be smart about how they do business and they are likely to beat consolidators. Independents are free of the pressures to keep stock prices high and can make decisions faster than large corporations. Everyone thought that family-run hardware stores would go away when Home Depot showed up and that prediction was wrong. True, that was not the case in other businesses. Independent drug stores are pretty much history since Walgreens and CVS expanded. Independent grocery stores went the same way unless they specialized.
Consolidators have shown a weakness in not being able to provide the service and customer care that independents are capable of. Recyclers who can tout those benefits are still around and growing. Granted, business may not be as easy as it was before consolidators, but the opportunities are there for those smart and energetic enough to exploit the consolidators’ weaknesses.
Eric Schulz: I saw a video recently that described what type of business survives. It all comes down to be “customer centric.” The culture of your company needs to be aimed toward the customer, giving them a solution to their current problem with options to choose from, bending over backwards to make sure they are satisfied after the transaction. I think that the independent recycler can more easily maintain a “customer centric” culture than a consolidator can. The consolidator is beholden to the shareholders first and customers fall somewhere else down the hierarchy.
Jeff Buchanan: Pricing, increased productivity, and increased public awareness to the benefits of responsible auto recycling.
Pat Huesers: Watch your market competition. You must provide the services they provide at a minimum if you plan to be in the market in a competitive fashion in the long haul.
Paul E. Davis: Until our governing bodies learn that with the revenue and regulation that come with licensing, there is a responsibility to the licensed to not grant equal access and opportunities to the unlicensed, the competitive edge will continue to shift to the unlicensed, unregulated, non-tax and non-fee paying participants in our arena.
Rick Anderson: Be Dynamic!! Constantly changing. Be more flexible. What worked last quarter may not this quarter!
AR: Is diversification (adding a u-pull-it, supplementing parts sales, etc.) a must for survival or can a traditional model (purely full-service or purely self-service) still work in the future?
Avi Pelc: I think there is room for all. Adding a self-service facility can help a full-service recycler diversify and not suffer when sales to professionals decline and vice versa. As cars get more complex, it limits the ability of non-professionals to fix them, but there will always be do-it-yourselfers willing to give it a try.
Eric Schulz: I think that more important than diversification is your ability to adapt to an ever-changing marketplace. A strictly full- or self-service facility can certainly survive and be very successful just like those who choose to take another path. It all comes down to filling a need in the market and being able to show that your business is the only solution that can best fill that need. There are all sorts of businesses that focus on a particular item or niche that are very successful.
Jeff Buchanan: With the changing marketplace, full-service recyclers will have to adapt many of the self-service processes, i.e., handling cores, ELV detox, and using profitable material management as a means to determine a full value for our product.
Pat Huesers: Traditional models should have no trouble succeeding in the future.
Paul E. Davis: Full-service should continue to work well at top of the market; self-service makes sense for lower value vehicles and parts. I don’t see a big revolution coming there.
Rick Anderson: We have four stores with four managers and four different ideas. You have to use supplemental parts sales, builders, etc. If someone asks for it, you should see if you can sell it to them, which makes money and makes for a larger customer base!
AR: What about co-ops, is it reasonable/unreasonable to say that those in coop networks could fare better than those not in network solutions?
Avi Pelc: Same as above. I think there is room for all. Co-ops are not for everyone. They offer marketing and purchasing benefits, but let’s face it, many if not most recyclers are highly independent thinkers who want things done their way and that doesn’t go along with the way co-ops operate.
Eric Schulz: Whether it is an official co-op or group you belong to, or if you have just surrounded yourself with other recyclers you can rely on, I think you will be better for it. Involvement in ARA, state associations, and your customer’s trade associations is invaluable. Having recycler partners that you can rely on to provide service and quality in the brokering relationship is also invaluable. Just belonging to a co-op or sending in your dues isn’t going to make you any better. You need to actively use your memberships and grow your relationships for it to make a difference.
Jeff Buchanan: I strongly support co-op networks and see them as a means to increase your trading network.
Pat Huesers: Depending on the state of your yard, the state of the co-op you are involved in, and the level of your participation, a co-op can be of great benefit to your yard, or it can severely hamper your ability to maneuver in the marketplace. Always assess your involvement annually; don’t be afraid to make changes.
Paul E. Davis: Yes, that is fair, but the products being handled must be able to support the shared costs involved.
Rick Anderson: Possibly. But I would rather go at it alone.
AR: If the issue of salvage shortage is solved, and 30% of the salvage stops leaving the United States, what impact will that have on auto recycling and to your bottom line?
Avi Pelc: The percentage is closer to 40% and nothing other than government regulation is likely to change that. Labor rates in other countries, combined with the higher value they place on our vehicles, will continue to contribute to vehicles leaving our market. It may change for one country or another but there will always be a country ready to fill the vacuum. Unless United States labor rates go down to match those in Eastern Europe or Central and South America, nothing will change. To compensate for that, recyclers need to find new sources of revenue that will make vehicles more affordable, but I suspect foreign buyers will always be willing to pay more until the used car market in their country is flooded, and that is not likely to happen soon.
Eric Schulz: I don’t think that there is a shortage of salvage. You hear the shops complaining all the time that they are “totaling everything.” Leveling the playing field through regulation to eliminate fraud and theft that is happening will help a little with the acquisition of salvage. There is a demand for recycled parts that we cannot meet as an industry right now. In order for us to acquire more parts vehicles we need to give ourselves the ability to sell more from each vehicle, which will in turn give us the ability to out-pay the competition for salvage vehicles. The same electronic inventory that promises us greater sales is also diminishing our ability to sell parts that may not have interchange. Without a phone call, we are getting less and less of a chance to sell parts.
Jeff Buchanan: If the issue were solved today, and the auctions discontinued selling to non-industry buyers, I believe it would take some time for our facilities to catch up with the flooding of vehicles available. However, I am optimistic that we as a whole would pick up the slack and would become a widely recognized justifiable means to end-of-life vehicles.
Pat Huesers: Short-term, the recycler will benefit. Long-term, the price of our parts will diminish due to greater availability, and the consumer will be able to purchase parts at reduced prices and will receive the long-term benefit.
Paul E. Davis: There is no shortage of salvage. There is an absolute shortage of salvage available at prices that allow for covering our overheads – which we all know are greatly different than the overheads of the money launderers and third-world countries – while being able to price our parts at a level that continues to be attractive to our customers relative to the cost of new OEM and new alternative of remanufactured and reconditioned options. We cannot sell used for more than new on a continuing basis, only in isolated cases of shortages or other availability issues.
Rick Anderson: We will make more money and service our customers better.
AR: If the issue of salvage shortage is NOT solved, and 30% of the salvage keeps leaving the United States, what impact will that have on automotive recycling? How has it affected your bottom line?
Avi Pelc: See the previous answer above.
Eric Schulz: See the answer above. We need to adapt to the marketplace and figure out a way to outbid the competition.
Jeff Buchanan: I don’t believe that “leaving the United States” is the whole of our issues. Illegal operators are just as big a problem if not bigger. If nothing is done, I believe it’s only a matter of time before the smaller facilities, without huge direct insurance contracts, will cease to exist.
Pat Huesers: See previous answer.
Paul E. Davis: We are currently dismantling fewer vehicles with the same number of people that we did 10 years ago. One part of the reason is more complicated vehicles; another part is that we are getting a lower grade of vehicle on average and trying to make up for it by inventorying and dismantling deeper because the next high content car is not waiting outside the bay door as it used to be.
We are spending more effort on cores and other ways to peel more off of each vehicle we are able to obtain. Cost of goods percentage continues to march steadily upward as do fixed costs. Sales are not following that trend. Having said that, two of our record gross profit vehicles were bought in the last 12 months but two exceptional vehicles do not make a sustainable trend. Sustainability seems to be the crisis we are currently facing.
Rick Anderson: Our sales could go down.
AR: Any other thoughts on the next ten years in the automotive recycling industry, and beyond?
Avi Pelc: Recyclers need to embrace more automation and accept new technologies faster then in the past. Replacing a computer system every 10 years is way too slow a pace when you consider the competitive advantages of better information provided faster leading to better decisions. The same applies to embracing other technologies, including the use of the Internet, social media, and so on. In addition, as margins for the OEMs decline because of the increase in sales of smaller and less profitable vehicles, they will place a greater emphasis on the revenue generated from parts. This will lower parts prices to squeeze out competitors like recyclers (as seen by the recent moves to deny warranties if vehicles are repaired with anything other than new parts). Recyclers need to stop viewing each other as competitors and focus more on new and aftermarket parts.
Eric Schulz: Technology as far as construction, recyclability, and automation is changing with each model year. We need to stay on top of those changes and adapt to them. I think over the next ten years our biggest battle is going to be with the OEs. The OEs are putting quite a bit of effort into diminishing our ability to sell their parts and we need to fight back.
The second battle we have before us is with ourselves. As an industry we are disjointed. Behind every stereotype there is some reality. ARA has gone to great lengths to develop standards and best practices but has had limited success in implementing those standards and practices throughout the industry. Some of it comes from lack of membership, but most of it comes from a lack of desire to change the stereotype. I think that if we all took the opportunity to become more “customer centric,” even with each other, it would do a lot to change the stigma we have created.
A great video blog that I subscribe to by Bob Parsons, CEO and Founder of GoDaddy.com, at www.bobparsons.me/index.php, is worth a look.
Jeff Buchanan: Again, with the changing climate in the United States, becoming known as “Recyclers” is the most important we, as a whole, can do.
Paul E. Davis: Frankly, at this point and at my age, I see no purpose in even suggesting I have any insights beyond the short term. My current goal is to be able to continue at an acceptable level of ROI that might attract a qualified buyer for our business.
I will mention that the trend toward VIN-specific, or reprogrammable electronic, or simply electrical components, such as door mirrors, can only be perceived as anti-competitive on the parts of the OEMs. They can re-cast it any of many other ways, but the bottom line is, “We cannot sell what our prospective customer cannot use” at a price above that of scrap or cores. It is also very frustrating that so many valuable parts anhd components are almost too fragile to remove for reuse.
Rick Anderson: It will be interesting. I welcome the challenge.
AR: Thank you to all the respondents.