Cognizant 20-20 Insights

Automotive Parts:
The Industrys New Sweet Spot
As the automotive service industry accelerates, it faces stiff headwinds
spawned by a highly-congested marketplace, increasing regulatory
scrutiny and extended car ownership lifecycles. As a result, OEMs,
dealers and other players in the automotive value chain must find ways
to extract greater revenue and profit from the aftermarket services area.

Executive Summary Looking Through the Aftermarket Lens

Automotive companies have traditionally focused
on building their brand in order to increase sales of
new vehicles. In fact, they have worked relentless-
ly to enhance the way such vehicles are marketed
and sold. However, with the average age of auto-
mobiles rising, the auto value chain is shifting
towards the aftermarket. Key indicators of this
shift include the increasing spare parts market,
the expansion of the secondary car market, the
changing nature of auto financing, and collabora-
tive usage and pay per use..
However, the spare parts market is not without
challenges, both external and internal. This white
paper highlights the external obstacles and offers
advice on how industry players can solve them
through a mixed strategy that bundles parts
with service. The paper elaborates on consumer
purchase intent in the automotive aftermarket
and suggests a framework based on willingness
to pay (or reservation prices) to help OEMs reap
the rewards of a fast-growing market.
The market for services and parts has experi-
enced robust growth since the 2008 economic
recession. In fact, services and parts now
contribute about 30% of an average dealers
profits, while accounting for 11.3% of revenues.1
Figure 1 illustrates the profit comparison between
new vehicle sales profits vis--vis service and
spares for an average U.S. auto dealership.
Though these two businesses have been tradi-
tionally treated as separate market segments, a
few auto companies now view them as a unified
whole and look at the auto lifecycle in terms
of customer lifetime value (CLTV) rather than
from a total sales standpoint. Thus, for many
auto companies, aftermarket sales is now a
strategic business, because of its impact on the
bottom line, customer satisfaction, loyalty and
repeat sales.

cognizant 20-20 insights | october 2016

Net Profit Comparison: New Vehicle vs. Service and Parts
New-vehicle department net profit Service and parts department net profit
Average dealership, in thousands of dollars, including F&I Average dealership, in thousands of dollars
$100 $400

300
0
200
-100
100

-200 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Figure 1 Source: NADA Industry Analysis Division data, 2015

Key Business Challenges The Inhibition of Customer Choice

The spare parts business is typically immune to
economic and environmental factors and offers
much-needed relief from the economic vagaries
that new-car sales inevitably experience. As
Figure 1 illustrates, new vehicle profits closely
mirror the general economy while parts profits
have remained broadly consistent over the last
few years, highlighting the importance of parts as
a fixed operations business. Figure 2 categoriz-
es the major challenges faced by an OEMs spare
parts business.
Challenges in Automotive
Spare Parts Market
The auto industry establishment is facing compe-
tition from various entities: smaller players, third-
party suppliers, the gray market, etc.
Moreover, from an OEM perspective, outsiders
are deterred from entering the market when their
cars are sold with service bundled in. However, this
approach could invite an antitrust complaint. For
the past several years, regulatory watchdogs in the
U.S., Europe and Asia have uncovered multiple car-
tels, handing out record fines in some cases.2
Case in point #1: The U.S. charged seven
Japanese executives with price-fixing in a long-
running probe into illegal practices in the auto
parts industry. Over the past several years, U.S.
justice authorities have fined 28 companies
more than $2.4 billion.3

INTERNAL EXTERNAL Case in point #2: The Competition Commission

of India (CCI) imposed a penalty of INR25 billion
on 14 car manufacturers for violating com-
Complex Parts, Shorter Product petition law. CCI demands that OEMs reveal
Supply Chain & Lifecycle all facts in the public domain regarding price,
Reverse Logistics processes, alternatives, etc. of spare parts to
facilitate fair competition.
Increasing No. Branding However, the larger picture here is that the entire
of SKUs Requirements debate revolves around inhibition of customer
choice. Most warranty regulations advocate that
Complex Vehicle Gen-X simply using an aftermarket or recycled part does
& Parts Perceptions not void a vehicles warranty (see sidebar, next
Configuration on Spare Parts page). With such a clause, OEMs are often pressed
for customer win-back, which is made even more
difficult by a one-size-fits-all spare parts strategy.
Inefficient Data Gray Market Like any other product, automotive goods are also
& Price subject to the product lifecycle. Every stage in the
Management Regulatory lifecycle has a specific marketing objective and a
Compliance specific strategy as well. In automotive parlance,
Lack of Efficient Third-Party spare parts should not be any exception to this.
IT Application Supplier Penetration Different vehicles and models are at various places
in the automotive lifecycle; due to this, as well as
Figure
Figure 22 : Challenges in Automove Spare Parts Market changing consumer behavior, it is imperative that
the industry reexamine its operating approach.

cognizant 20-20 insights 2

Quick Take
Why Inhibit Customer Choice?
The Magnuson-Moss Warranty Act makes it
illegal for companies to void your warranty
or deny coverage under the warranty simply
because you used an aftermarket or recycled
part. Still, if it turns out that the aftermarket
or recycled part was itself defective or was
not installed correctly, and it causes damage
to another part that is covered under the
warranty, the manufacturer or dealer has
the right to deny coverage for that part and
charge you for any repairs.
Shifting Gears
Willingness to Pay
Taking a cue from the aforementioned cases,
companies should embark on initiatives that offer
a greater choice to customers in the aftermar-
ket and simultaneously innovate strategies to
safeguard their bottom lines.
We suggest an approach based on the simple
concept: Price is the measure of willingness to
pay (WTP). Figure 3 illustrates our take on a
WTP-driven example an off-road enthusiast
would be willing to pay more for a tire care
regime than would a business executive who
drives a sedan on a corporate lease plan.
If different customers or the same customer
under different situations have a different WTP
Why Go To A Service Station: Four Broad Categories
CATEGORY
1
DIY Category
Service
2
Accidental,
Proprietary Items
3
Complex Design
and jobs
4
Aggregate Parts,
Safety items
Figure 4
cognizant 20-20 insights
for different maintenance regimes, repairs and
spare parts, why should the pricing approach, and
hence marketing and selling, be identical for all?
Splitting the Pocket
An invoice bill has two components the part price
and labor charge (or job rate). Needless to say, tax
is another obligatory expense. In other words, after
a visit to a service station the customer incurs two
categories of expense. Hence, it is very likely that
the customer will have differential preferences
toward the two categories and hence varying WTP.
So, does the customer spend more on parts or on
labor?
An analysis of real life instances that broadly
categorize a vehicles visits to service stations is
quite revealing (see Figure 4).
Splitting the Pocket
Drives Car A, Owns Car
a luxury sedan B, an
on corporate SUV, loves
lease plan. off-roading.
John, John,
The The
Executive Adventurer
7 8$
'"
Figure 3
EXAMPLE LIKELY CUSTOMER
BEHAVIOR
Small scratches on car. Parts are easily available. Customer can get the
Engine oil refill required. correct grade of oil/part no. at any shop and get it
fixed anywhere or do it himself.
Customer seeks original parts and seeks cheaper labor
The car has a mishap; part
alternatives. However, defects, if not arrested, are
replacement required.
progressive and consequential over time.
Customer fitted an Customer prefers the OEM . Though it can be reworked on a
case-to-case basis, waiting time is generally high for customer.
electrical accessory; requires
a change in wiring harness. Here again, customer seeks cheaper alternatives.
Customer puts safety above everything else. Due to
Customer lost his 2nd car key;
security reasons and version complexity, job also some-
wants to install a new set.
times mandates service at authorized facilities.
3
The Strategy Quadrant WTP Quadrant
Based on an examination of consumer behavior, WTP FOR OEM SPARE PARTS
customers visit service stations with different
expectations under various circumstances. LOW HIGH

WTP FOR OEM SERVICE (LABOR CHARGES)

The jobs carried out differ in nature, and under
different circumstances customers have varied PENETRATE CROSS-SELL
WTPs (or reservation prices) for parts and labor. MULTICHANNEL SALES: CROSS-SELL, PROMOTION:
E-commerce, brand promotion. Bundled offers, AMCs.
LOW 1. Lubricants, tires, batteries, gels, fuses. 1. Lubricants, tires, batteries,
gels, fuses.
Figure 5 plots the major jobs in automotive service 2. Low-value trim items (carpets,
accessories, decals, seat covers, etc.). 2. Low-value trim items (carpets,
3. Body parts: other (e.g. paint jobs, accessories, decals, seat covers,
context into four quadrants. Our breakdown of bumpers, hoods, fenders, grilles, etc.).
3. Body parts: other (e.g. paint jobs,
wheels).
the individual quadrants reflects our suggested bumpers, hoods, fenders, grilles,
wheels).

action plan in line with the consumer behavior and

provides a mixed approach to spare parts strategy.
REPLENISH EXTEND
Bundling as a Pricing Strategy
CROSS-SELL, INCREASE LIFECYCLE, LONGER
FASTER REPLENISHMENT:
For both traditional and newer businesses, marketers 3-D printing, dealer Incentives,
OWNERSHIP: Refurbished parts,
dealer incentives, AMCs.
bundled offers.
have used bundling methods to effectively increase HIGH 1. Complex chassis items, high
1. Aggregate parts (engine, gearbox).
2. Safety, security items: ECU
profits (for complementary goods), to reduce selling number of variants (e.g., wiring
harness).
programming, key change,
airbags.

costs and to deter market entry. History shows that

a bundling approach can yield great results when the
concerned products/services exhibit inverse WTP
among customers. Our cross-sell group (showing
high WTP for parts and low WTP for labor charges) Figure 5
classifies products and services that exhibit such
behavior. Rolling out calculated bundled prices Refurbished Parts as an Extended Market
of parts and labor can yield fruitful results here. For all practical purposes, refurbishing automotive
The same argument can also be extended to the parts is very much like assembling new parts - except
replenish quadrant, as well. that many of the components are taken from used
parts (cores). In reconditioning, the part is disassem-
The customer who buys a discounted bundle (i.e.,
bled, cleaned and examined for damage. Worn out,
service plus parts) doesnt care if either is discount-
missing or nonfunctioning components are replaced
ed, as long as the total cost is lower. Furthermore,
with new or rebuilt components. After all the work
bundling does not require knowledge of an indi-
is completed, the part is reassembled and tested
vidual consumers WTP, but only the distribution
for compliance with performance specifications.
of consumer choices on prices. (See sidebar for an
This means a separate supply chain mechanism is
example from an entirely different industry sector.)
required (e.g., reverse SCM) for the collection and
redistribution of used parts through a channel.

OEMs need to consider playing in this segment for

the following reasons:
Quick Take Waning margins: Changes in the legal envi-
Bundling in Mobile ronment will lead to a growing deregulation
Phone Retail of the after sales business. While the warranty
regulations will ensure more rights for inde-
Retailers frequently bundle the prices of pendent repairers, Insurance companies may
several products and services together for establish their own repair network and exert
their new customers. They offer the phone pressure on the prices charged by authorized
itself with a package that also includes the repair shops.
two-year phone plan, Internet access and
phone charger. This bundle benefits the Lengthening lifecycle: In most developed
customers because it provides them with all markets, the increasing cost of car ownership
the tools they need for their phone all at once and declining population means potential
and it benefits the mobile phone retailers private new car buyers will postpone buying a
because they are selling the customer sup- new car or wont buy one at all. Furthermore,
plementary products and services other given the industrys improved service quality,
than just a phone. car life has been prolonged.

cognizant 20-20 insights 4

Why Should OEMs Play this Game? parts retailing network and supplying indepen-
dent repair shops and service chains as well (see
Average of light vehicles an example in sidebar, below left).
Did you know? U.S. Five European Countries
While increasing product complexity will continue
12 years
1. Rebuilt ENGINES to squeeze the do-it yourself market, customer sat-
require only 50% of the isfaction will depend more and more on availability
energy and 67% of the 10 and brand visibility. Automotive e-commerce will
labor that is required to emerge as a retail channel for parts and services,
produce new engines enabling the sale of items. The penetrate
8
strategy quadrant represents such a scenario.
2. About 50% of an
originial Starter is 6 Since this customer has a weak WTP towards both
recivered in the parts and labor charges, it is better for the OEM to
refurbishing process proliferate through every channel possible.
4
IMAGINE the scale effects! 3-D Printing as a Fulfilment Option
2 With additive manufacturing the descriptive
phrase for 3-D printing - considerably lower organi-
0 zational effort is required for developing suppliers
2009 10 11 12 to maintain quality standards for complex and
Source: APRA.org Source:The Wall Street Journal critical parts. This is because designs shared
can be directly taken to mass production at any
Figure 6
location. From an aftermarket perspective, this
implies on-demand spare parts production at the
Hence, discounting spare parts or service
distribution leg, thus reducing service lead time.
offerings is more effective for OEMs as it expands
demand and, under most circumstances, delivers
scale benefits. Smaller competitors those that Final Thoughts
sell parts or service individually - do not have the The spare parts business should not be looked
same luxury. Even if these smaller competitors upon as a derivative of a product, but as a product
hold similar technical competencies, OEM market itself with its own 4P (price, product, promotion
clout typically wins out. For example, OEMs will and place) strategy and technology road map. The
always have an edge by offering service bundles average spare parts inventory for a U.S. dealership
that provide an economic advantage to car buyers. is nearly $330,000 SKUs.4 With frequent product
launches and facelifts, organizations often end
E-tailing as a Channel
up with stocks that have a very low potential to
OEMs understand the impact of digitization and be sold at normal price. As such, they incur a
its ability to increase market share and improve huge amount of revenue leakage through such
customer satisfaction. OEMs need to become distressed inventories.
independent of the demand for parts from
authorized workshops, which necessarily means OEMs and dealers are often led to believe that
entering the online market and expanding their new vehicles are bread winners and spare parts
are remainders in the top line. Hence, most after-
market initiatives are meted out and given stepson
treatment. As a result, the bottom line suffers. As
discussed throughout this white paper, the auto
Quick Take services market is fragmented, subject to changing
customer needs and evolving technologies. As a
E-Bay and Tata Motors result, a one-size-fits-all approach simply wont
Join Hands suffice. By viewing the market through our strategy
quadrant prism, carmakers can take a different and
Indian auto major Tata Motors teamed up with
more profitably textured approach.
e-commerce player eBay India to sell branded
merchandise of its sports utility vehicle Tata
Safari Storme online after the grand success of
their earlier Nano Brand Store on e-bay. Even with
e-bays early presence on the online platform in
spare parts, there is a wide scope ahead.

cognizant 20-20 insights 5

Footnotes
1 NADA data 2015 - Annual financial profile of Americas franchised new-car dealerships, NADA, 2016,
https://www.nada.org/nadadata/.
2 EU antitrust chief says more cartel fines on way for suppliers, Automotive News Europe, September 2014,
http://europe.autonews.com/article/20140919/ANE/140919813/eu-antitrust-chief-says-more-cartel-fines-
on-way-for-suppliers
3 US charges 7 Japanese auto executives with price-fixing, The Economic Times, September 2014,
http://economictimes.indiatimes.com/us-charges-7-japanese-auto-executives-with-price-fixing/article-
show/42907851.cms
4 NADA data 2015 - Annual financial profile of Americas franchised new-car dealerships, NADA, 2016
https://www.nada.org/nadadata/

About the Authors

Suresh Vickram is a Senior Manager of Consulting within Cognizant Business Consulting (CBC) and leads
the Automotive Consulting Practice. He has more than 12 years of experience in IT consulting, leading trans-
formational deals and driving strategic initiatives for automotive customers worldwide. Suresh has a strong
background in automotive demand planning and order management, working with leading OEMs across the
U.S. He specializes in dealer management, supply chain planning and execution. Suresh can be reached at
SureshVickram.Selvarajan@cognizant.com.

Somnath Chatterjee is a Senior Consultant within Cognizant Business Consulting (CBC), focused on the
automotive domain. He has more than eight years of combined experience in automotive and consulting
functions. Somnaths experience includes aftermarket operations, spare parts, channel development, manu-
facturing planning and quality management. He currently leads the consulting function for one of Cognizants
marquee clients. Somnath can be reached at Somnath.Chatterjee3@cognizant.com.

About Cognizant
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