Motor Vehicle Parts and Accessories

SIC 3714

Industry report:

This industry includes establishments primarily engaged in manufacturing motor vehicle parts and accessories but not engaged in manufacturing complete motor vehicles or passenger car bodies. Establishments primarily engaged in manufacturing or assembling complete automobiles and trucks are classified in SIC 3711: Motor Vehicles and Passenger Car Bodies; those manufacturing tires and inner tubes are classified in SIC 3011: Tires and Inner Tubes; those manufacturing automobile stampings are classified in SIC 3465: Automotive Stampings; those manufacturing vehicular lighting equipment are classified in SIC 3647: Vehicular Lighting Equipment; those manufacturing ignition systems are classified in SIC 3694: Electrical Equipment for Internal Combustion Engines; those manufacturing storage batteries are classified in SIC 3691: Storage Batteries; and those manufacturing carburetors, pistons, piston rings, and engine intake and exhaust valves are classified in SIC 2592: Carburetors, Pistons, Piston Rings, and Valves.

Industry Snapshot

Entering the first decade of the 2000s after a decade of high production, the U.S. automobile industry began to falter, and automakers put intense price pressure on their part suppliers. This trend only worsened as the decade progressed. While operating on thin profit margins with reduced volumes, suppliers faced rising material costs and increased overseas competition. The banking and credit crisis of that began at the end of 2007 sent the U.S. auto industry spiraling downward. As production at U.S. auto plants ground to a halt in 2009, many auto parts manufacturers, faced with oversupply and growing debt concerns, filed for bankruptcy protection, and others were acquired by conglomerates, who were themselves struggling to show a profit.

According to a study by the Center of Automotive Research (CAR) for the Motor & Equipment Manufacturers Association (MEMA), at the beginning of the 2010s, motor vehicle parts suppliers formed the leading manufacturing sector in the United States, contributing an estimated 686,000 jobs directly and 3.29 million jobs indirectly nationwide. The industry is concentrated in the U.S. Great Lakes region. Twenty-five percent of all U.S. supplier facilities are located in Michigan, and another 36 percent of facilities are located in other Great Lakes states. Twenty-eight percent are found in southern states, and 11 percent are located in the remaining regions.

Organization and Structure

The auto parts industry is divided into two principle segments: original equipment (OE) suppliers and aftermarket suppliers.

Original Equipment Suppliers.
Original equipment suppliers sell parts and components directly to automobile manufacturers for the production of new vehicles. Consequently, sales in the OE market depend on the number, size, and complexity of new vehicles produced. Primary products include wheels, frames, axles, transmissions, transaxles, bearings, springs, bumpers, brake systems, fuel injectors, seats, seat belts, airbags, cushioning, and safety padding materials. For many large suppliers, OE parts provide the majority of sales, although most suppliers also produce parts for aftermarket sales. Companies that supply both OE and aftermarket parts can generally cover development and tooling costs on the OE sales volume and supply the aftermarket at higher volumes than pure aftermarket suppliers. The OE segment alone was worth $141.5 billion in 2010.

Furthermore, spreading research, development, and tool and die outlays over several contracts with different manufacturers provides OE suppliers a cost advantage over the in-house parts divisions of vehicle manufacturers. OE suppliers typically concentrate on a few components and systems requiring a high degree of technological skill and manufacturing efficiency. By supplying parts for new vehicles, OE manufacturers generally are on the leading edge of technology, and vehicle manufactures have started turning to suppliers for increased engineering and development responsibilities. Automakers also depend on leading suppliers for financing and services related to inventory management, logistics, and tooling.

Aftermarket Suppliers.
Aftermarket parts suppliers manufacture and sell replacement products for used vehicles. Primary products include spark plugs, shock absorbers, struts, springs, brakes and pads, rotors, filters, wiper blades, and exhaust systems. Aftermarket parts are distributed through a few major parts distributors and thousands of small jobbers and local firms. They are sold by auto dealers, service stations, repair shops, auto parts stores, tire stores, department stores, discount stores, and home and do-it-yourself stores. Aftermarket sales tend to be more stable than OE sales, particularly during recessions. As owners put off the purchase of new autos, they tend to extend the life of their current vehicles through increased maintenance and parts replacement.

Background and Development

The automotive parts industry began with the development of the automobile at the turn of the twentieth century, and the growth in the parts industry followed that of the automotive industry. Automobiles were manufactured in long production runs through 1970, and the vehicle population consisted of a fairly homogenous group of cars. Automobiles were relatively easy to repair, and, with nearly all the 225,000 service stations in operation providing repair services, mechanics were abundant. Parts suppliers found it easy to predict the demand for a relatively narrow range of parts and profited from their manufacture.

Several trends that began in the 1970s in the U.S. automobile industry affected domestic parts producers. The number of vehicle models produced began to expand, buoyed mostly by the increased sales of Japanese automobiles in the U.S. market. The continued proliferation of models and the shortening of model lives increased the number of parts required for vehicle manufacture and repair while lowering the volume of individual part production. Lowered economies of scale began to dampen the profits of parts suppliers while growing product lines increased the number of niche suppliers.

During the 1980s, small trucks began to sell more rapidly than passenger cars, which required an increased production of parts for the truck population. During this time, the increasing market share gained by foreign vehicle manufacturers, whose OE and replacement parts were principally supplied by foreign parts producers, resulted in a decrease in the overall market for domestic parts.

Responding to this global competition, U.S. vehicle manufacturers placed a stronger emphasis on quality and reliability. However, more reliable new cars led to fewer repairs, slowing growth in aftermarket parts sales. In addition, the increased technical complexity of newer vehicles made performing repairs more difficult. Of the roughly 130,000 service stations in existence in 1990, only about 50 percent still performed repair services, while dealers and independent service facilities gained a share of repair services.

The increased cost of repairing more complex systems, the inability of do-it-yourselfers to perform their own repairs, and the decreased number of service stations performing routine checks led to an underperformance of maintenance and repair. To a limited extent, these effects were counteracted by the aging automobile population. While the number of cars less than three years old remained relatively constant between 1970 and 1991, the number of cars more than three years old increased significantly. Thus, the aging vehicle population provided a growing market for vehicle repair and parts replacement.

In the late 1980s and early 1990s, parts manufacturers were forced to respond to major changes in technological advances, relationships with vehicle manufacturers, and the impact of Japanese auto makers.

Technology.
Parts makers worked to meet the increased technological sophistication of new automobiles. Protective airbags were installed in 51 percent of 1992 model year cars compared to almost none in 1989. With regulations requiring the use of passive restraints, airbags had become standard equipment on almost all cars and light trucks by the end of the decade. Anti-lock braking systems were installed on 32 percent of new automobiles in the 1992 model year, and traction control systems and innovative suspensions gained popularity.

Additional developments were underway to increase the use of lighter-weight materials in new vehicles. While increasing research and development costs, the use of complex and expensive components and systems improved opportunities for revenue and profit increases for parts suppliers. Further opportunities were provided by new clean air regulations. More stringent regulations increased the complexity of engine control and emissions systems, and a required increase in inspection programs led to more repair and parts replacement opportunities for aftermarket suppliers.

Relationship with the Auto Makers.
With an influx of auto makers, the United States evolved into the most competitive automotive market in the world. To meet the demands of increased competition, the Big Three U.S. automakers--General Motors, Ford, and Chrysler--focused their efforts on quality improvement, cost reduction, and strategic sourcing, which reduced the number of primary suppliers but increased their responsibilities. These efforts had tremendous impact on parts manufacturers. Although OE parts formerly had been sold largely on annual contracts covering the model year, in a move to improve supplier relationships, vehicle manufacturers began to award contracts for the life of a vehicle model.

In addition, auto makers reduced the number of suppliers they dealt with directly, awarding primary suppliers more responsibility for the design and development of entire systems and sub-assemblies. Primary suppliers were expected to integrate and coordinate the purchase of parts from smaller secondary and tertiary suppliers, and suppliers of all levels were urged to raise their quality standards while reducing costs. Consequently, the number of vendors dealt with by many parts suppliers was reduced. Large parts suppliers who were able to increase the services they offered to vehicle manufacturers benefited most from these trends.

Each of the Big Three auto makers initiated programs for supplier management. Between 1980 and 1991, Ford reduced its worldwide supplier base by 50 percent and, in 1991, began a restructuring plan that included increased supplier reductions. The company also asked suppliers to cut costs 1 percent annually until 1997 and opened up its bidding system so outside suppliers competed evenly against Ford Automotive Components Group, which supplied about 50 percent of the company's parts in the early 1990s.

Chrysler implemented its Supplier Cost-Reduction Effort (SCORE) program, urging suppliers to come up with ideas for improvements and cost savings in manufacturing, scheduling, inventory, and shipping. Chrysler attempted to establish long-term relationships with suppliers by naming suppliers for specific commodities. The company had fewer than 2,500 suppliers in 1992, down from more than 3,000 in the late 1980s, with the goal to eventually reduce the number of suppliers to 750. The company's 1993 LH model used 170 suppliers, compared to 600 to 800 suppliers for cars of earlier model years.

General Motors initiated the industry's most controversial supplier management plan with its Purchased Input Concept Optimization with Suppliers (PICOS) program, which demanded significant price reductions from suppliers given long-term contracts. Under the program, GM sent teams of engineers, designers, and purchasing cost accountants to meet with parts suppliers at their plants to investigate production inefficiencies and propose solutions leading to cost reductions. The program also allowed GM to accept unsolicited bids from worldwide suppliers for contracts it had already negotiated for future models, and it stripped away advantages to GM's Automotive Components Group. In addition, the company offered suppliers both labor and the opportunity to lease factory space in GM plants.

In 1992 the Big Three announced plans to develop a standardized quality assessment program for suppliers. Such a move would reduce the time and paperwork required in undergoing several quality audits by different auto makers and was expected to eventually save suppliers $160 million annually. A first step toward a common standard was taken by eliminating a major source of redundancy in quality auditing.

Previously, first-tier suppliers were required to audit second- and third-tier suppliers from whom they purchased parts. However, because many companies acting as second- and third-tier suppliers also sold parts directly to one of the Big Three, they already were required to be audited under either the Ford Q101, Chrysler Supplier Quality Assessment, or GM Target for Excellence quality program. With the new arrangement, suppliers that already were qualified through one of the Big Three no longer had to be audited by a primary supplier. The agreement was expected to save the supplier industry $500,000 a year.

The Impact of Japanese Auto Makers.
Increased sales of Japanese automobiles affected the operations of both OE and aftermarket parts manufacturers. Because most Japanese aftermarket parts were furnished by Japanese OE suppliers, the volumes of replacement parts for domestic parts suppliers dropped as Japanese vehicles increased their market share in the United States. Domestic parts suppliers started to increase their offerings of replacement parts for Japanese vehicles, but, at the same time, Japanese suppliers began to seek higher profit margins through the supply of aftermarket parts for U.S. vehicles.

While Japanese manufacturers increased their production of cars within the United States, the move had not significantly improved the opportunities for domestic parts manufacturers. Foreign vehicles manufactured in the United States had significantly fewer domestic suppliers than Big Three cars. Domestic OE suppliers argued that the Japanese plants in the United States continued to purchase parts from suppliers based in Japan and the growing number of Japanese suppliers operating in the United States. Furthermore, with the increased capacity of many U.S. factories manufacturing Japanese cars, Japanese suppliers started competing for OE contracts with the Big Three. Some suppliers believed that their industry could be permanently suppressed by these developments.

Some domestic parts suppliers claimed they were hampered by the Japanese keiretsu system, which is the close relationship between auto makers and their suppliers, arguing that the system impinged on their ability to supply parts to Japanese vehicle manufacturers in North America and Japan. At the request of U.S. suppliers, the Federal Trade Commission (FTC) began an investigation of alleged antitrust violations by Japanese auto producers in the United States.

Japanese producers argued that they purchased from suppliers meeting their needs and the FTC concluded that there was no clear evidence of collusion among Japanese companies. During President George H. W. Bush's 1992 trade mission to Japan, Japanese auto makers pledged to purchase $19 billion worth of U.S. auto parts annually by 1995. During 1992 and 1993, Japanese purchases of U.S. auto parts began to increase. The rising value of the yen relative to the dollar made shipments of parts from Japan more expensive, encouraging Japanese transplant manufacturers to purchase more U.S. parts.

The automobile industry continued to buy an increasing number of automotive parts from outside suppliers through the 1990s because it reduced costs, provided more flexibility, and allowed greater specialization of technology. During the mid-1990s, the U.S. automotive parts industry comprised about 5,000 firms, including about 500 Japanese, European, and Canadian manufacturers, that supplied the original equipment (OE) market, the replacement parts market, or both. Industry production hit an all-time high in 1994, reaching $134 billion. The following year, output fell slightly to $131 billion, mirroring the slight decline in motor vehicle production. However, the motor vehicle parts industry represented 25 percent growth since 1992.

The U.S. industry was dominated by 50 large manufacturers that accounted for the majority of sales. From 1992 to 1995, North American sales by these top 50 suppliers increased almost 50 percent, growing from $68 billion to $101 billion. The United States was home to the world's sales leader, Delphi Automotive Systems, with 1995 global sales of more than $26 billion, $10 billion more than its nearest foreign competitor.

In the mid-1990s, the fight was on among automotive parts manufacturers to dominate the growing Smart Car parts market. With the establishment of the Partnership for a New Generation of Vehicles (PNGV) by President Bill Clinton in 1993, auto manufacturers competed to produce new generation concept cars. The ripple effect from this affected the automotive parts industry. For example, high-tech console gadgetry was being produced by most large auto manufacturers. Competition for this market was global. Smart car products already available and in the works included satellite navigation and mayday systems, radar intelligent cruise control, and night vision.

With the restructuring of the automotive parts industry, the U.S. automotive industry was expected to be challenged by foreign competition and customer demands for continued cost cuts and quality improvements. The global automotive parts market had been expected to reach about $519 billion by 2000. Growth in major markets was expected to average less than 2 percent annually, so the biggest opportunities for U.S. exporters were the fast-growing Asian and Latin American markets.

In the late 1990s, automakers put great pressure on their parts suppliers to reduce costs. Suppliers initiated programs to increase productivity and improve efficiency. As the manufacturers tried to streamline assembly plants, they turned to parts suppliers to provide the systems that would reduce the number of parts assembled at the plant. Acquiring a company meant adding parts to the systems and modules. Consolidations and mergers were taking place in the industry, enabling suppliers to continue offering savings to automobile manufacturers. Mergers and acquisitions were the means used to provide more modules and systems to automakers.

According to Automotive News, the top 150 OEM suppliers increased annual revenue $15.8 billion during 2002, with the group reporting total North American sales of $182.1 billion, up from $166.4 billion in 2001. The top 10 industry leaders accounted for $78.5 billion, or 43.1 percent, of the industry's sales.

Although the big names in the OE business, including Delphi and Visteon, were expected to weather any downturns in the North American auto industry based on their diversified interests and substantial overseas investments, many auto parts manufacturers faced any slowdown with trepidation. North American automakers focused on cost-cutting to align with their low auto prices. Because approximately one-half of a car's cost is attributed to parts suppliers, the automakers have put increasing pressure on OE suppliers to reduce prices. With the cost of materials on the rise, OE suppliers came under tremendous pressure.

In the aftermarket parts sector, big box discounters like AutoZone continued to exert price pressure on the industry. Discounters, who use volume buying to lower costs and prices, were expected to continue to draw business away from department stores, hardware stores, service stations, and other small-volume dealers.

The character of the aftermarket industry was changing as vehicles depended more heavily on complex systems and electrical components that are out of the comfort zone for the do-it-yourselfers (DIYers). The do-it-for-me segment holds 76 percent of all auto maintenance and repair. The aftermarket parts industry has attempted to entice DIYers with free loans of necessary tools and offering free oil recycling services.

During the first half of the first decade of the 2000s, the auto parts industry suffered from rising material costs, intense downward price pressure, and reduced production totals. In 2003 shipment values fell to $200.5 billion, down from $204.6 billion in 2002. By the middle of the first decade of the 2000s, several top firms were under Chapter 11 bankruptcy protection. In 2006 annual shipment values remained around the $200 billion mark.

Although poor domestic car sales haunted parts suppliers, there were some positive developments in 2007. Five automotive suppliers, representing around $45 billion in combined global sales, representing nearly a quarter of industry revenue, emerged or were close to emerging from Chapter 11 that year: Federal-Mogul Corporation, Tower Automotive Inc., Delphi Corporation, Dura Automotive Systems Inc., and Dana Corporation. They joined EaglePicher Holdings Inc., and Meridian Automotive Systems Inc., which had emerged from Chapter 11 bankruptcy protection in 2006.

Nevertheless, the industry outlook remained mixed, at best, for the remainder of the decade. On the plus side, rising fuel prices and political pressure for higher fuel economy standards generated opportunities for those auto suppliers manufacturing power train components and emissions-control equipment that help produce cleaner, more fuel-efficient vehicles. However, poor car sales in the United States helped leading European suppliers capture global sales leadership over their North American-based counterparts. By 2008 the OE industry segment generated approximately $132 billion in sales.

Current Conditions

In 2009 the rug was pulled out from under the automotive part suppliers industry. The U.S. economy spiraled into a recession, and a banking and credit crisis led to a near-shut down of new car purchases. According to statistics gathered by the International Trade Administration, over 50 suppliers filed for bankruptcy and up to 200 others closed their doors in 2009. The U.S OE parts market declined nearly 15 percent, from $185.8 billion to $158.2 billion between 2008 and 2009. The industry then plummeted another 35 percent in value in 2009 to $103.7 billion. The parts industry was in such dire straits that in 2009, $5 billion was made available to the struggling industry from the Trouble Assets Relief Program as part of the federal government's attempt to bail out the auto industry--particularly, the "Big Three" U.S. auto makers General Motors, Chrysler, and Ford Motor Co.

As the U.S. economy began to stabilize during 2010, the automotive parts supply industry picked up steam once again as auto production increased and manufacturers restocked their bare inventories. As a result, the industry's value grew by 36.5 percent to $141.5 billion. Although an improvement over 2009's dismal figures, the industry was far from healthy. According to the Original Equipment Suppliers Association, the auto supply industry operated at roughly 55 percent of its capacity during 2010, which was up from 45 percent in 2009 but far from the 80 percent goal for profitability.

According to analysis by the International Trade Commission, the major consolidation that the industry experienced between 2000 and 2010 would continue into the early 2010s, with at least another 500 of the remaining 5,000 suppliers failing in the next several years. The number of suppliers was cut in half between 2000 and 2010, and during 2010 alone, 300 mergers and acquisitions took place. Price pressures from customers, increased costs for raw materials, and increased competition from foreign suppliers who were beginning to make serious inroads into the U.S. auto market were expected to force weak players to sell, shutter their doors, or retool for another market, such as the aerospace industry.

Workforce

Vehicle manufacturers generally have higher labor costs than parts suppliers, who are able to employ more non-union workers. Suppliers had been located near traditional auto manufacturing areas, especially in the Midwest. According to MEMA, 61 percent of the auto supply parts industry's jobs are located in the Great Lakes Region. Parts suppliers followed or built operations nearby. Michigan accounts for 25 percent of the industry's employment. Most employment growth in recent years has occurred in the South as foreign auto makers have moved their auto parts suppliers into the regions near their production facilities. States that have benefited from these employment opportunities include Kentucky, Tennessee, Alabama, Mississippi and South Carolina. However, due to the downturn in the auto industry at the end of the first decade of the 2000s, employment figures fell as firms attempted to rein in costs. MEMA estimated that the parts industry directly employed 686,000 and was indirectly responsible for 3.2 million U.S. jobs.

According to the U.S. Bureau of Labor Statistics, the number of jobs in the automotive parts industry declined significantly between 2000 and 2010. In 2000 employment was reported at 921,300, dropping to 462,300 by 2010.

America and the World

U.S. parts manufacturers have been forced to match the growth in global operations of domestic auto makers to maintain their primary supply relationships. Additionally, international growth has been spurred by the desire to gain supply contracts with overseas vehicle manufacturers. Most leading domestic producers have established manufacturing facilities in the principle auto producing regions of the world, including Canada, Europe, and Mexico. The global integration of the auto industry has led many suppliers to develop joint ventures with foreign parts producers.

The industry also faces increasing threats from overseas outsourcing. In 2010 the industry imported approximately $90.9 billion in material and exported about $58.1 billion in products. China, which by the early 2010s had become the world's largest car manufacturer, also was increasingly present in the auto parts sector. According to a 2011 report by Automotive News,Over 70 percent of the world's top-100 auto parts makers have production lines in China." In 2010 there were over 20,000 auto parts manufacturers in China, and although the industry was in its infancy, the sector was expected to grow quickly in the near future.

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