I’ve been going through some data, and I noticed that the auto parts sector and the German automobile sector seem to be struggling this October, especially compared to other sectors in the market.
I created a fear-greed index for some of the biggest auto parts companies, where 0 represents the level of fear seen during the COVID crash and 100 means extreme enthusiasm: https://ibb.co/5rypgSQ
Why is this happening to the auto parts sector? Companies like Advance Auto Parts are restructuring, but the whole sector seems to have taken a hit.
I think part of the problem is that cars have gotten more complex, which means people rely more on dealerships for maintenance. Also, there seems to be more focus on encouraging new car purchases rather than maintaining older vehicles. Just my two cents, but I’m not entirely sure.
Amazon also started selling auto parts online, which could be a factor. I’m also wondering if people are figuring out how to get around new car regulations for repairs.
The thing is, online doesn’t work well for a lot of auto parts. Companies like O’Reilly and AutoZone succeed because they keep a local inventory of parts for repair shops. You could order online, but it’s easier to get the part from a store and have it delivered in 20 minutes or so, especially for heavier, less common parts. RockAuto does okay, but they can’t cater to repair shops, which need quick turnover. Paying a bit more to keep your shop moving is worth it.
I think the lingering effects of COVID are still playing a big role. During the pandemic, there were supply chain issues (especially with semiconductors), and new car sales were way down. People were holding onto their cars longer and making repairs, which helped the auto parts sector.
Now that things are stabilizing and new cars are more available, people are opting to replace their cars rather than repair them, especially if they’re in a better financial position. Plus, many of these new cars come with warranties, which means fewer aftermarket repairs. I wouldn’t be surprised if the auto parts market stays slow for a while.
Also, for companies like VW, their brand image might still be suffering, especially in the U.S.
It’s probably a combination of logistics issues and raw material shortages. Also, cars are evolving quickly, and auto parts manufacturers haven’t scaled up production for the next generation of vehicles yet.
In short, it’s a sector going through a lot of changes.
I’ve been working in the auto parts industry for five years and witnessed the changes before, during, and after COVID.
Before the pandemic, everything was smooth. Parts were readily available, and any out-of-stock items could be sourced overnight.
During COVID, parts became harder to find. Essential items were delayed by days, weeks, or even months. We even had trouble getting basic tools. Despite that, business was booming because people had disposable income and were maintaining their vehicles more.
Post-COVID, we’ve seen a major decline in non-essential repairs. People are opting to buy new cars when faced with expensive repairs, and cheap leasing options make it easier. Those leased vehicles won’t hit repair shops until their warranties expire in 3-4 years, so it’s hurting the aftermarket sector right now. Inflation and higher wages also mean repair costs have gone up, leading customers to only handle the most urgent repairs.
TL;DR: Before COVID, parts were easy to find. During the pandemic, parts were delayed but business was good. After COVID, rising costs and more leasing have reduced repairs, and customers are only handling essential maintenance.
It’s similar to what’s happening in other sectors: revenue goes up, but profits go down. Competition and globalization keep prices low, while more money goes to CEOs and shareholders. It’s getting harder to make a good product with quality materials and still turn a profit.
Look at the numbers:
2020: $10 billion revenue, $850 million profit (8.5% profit margin)
2023: $11.25 billion revenue, $45 million profit (0.4% profit margin)
That 8% isn’t going to the workers or customers. It’s going to asset owners and CEOs.
There are two main factors here: first, there’s overall bearishness on new car sales, especially with the slow adoption of electric vehicles (EVs).
Second, there’s been a shift toward simpler supply chains and streamlined manufacturing, which is hitting auto parts companies that rely on complex supply networks.
On top of that, protectionist trade policies worldwide are hurting complex supply chains.
The push for EVs has played a big role. Auto companies went all-in on electric vehicles a few years ago, focusing most new models on EVs and cutting back on internal combustion engines (ICE). But the sales didn’t live up to expectations. Some people bought EVs, but the general public wasn’t ready. Now automakers are switching to hybrid and plug-in hybrid models, but it’ll take years to get those out. In the meantime, auto parts manufacturers have had to scale back, leading to layoffs and reduced production. Companies like Magna and Flex-n-Gate have been hit hard by this shift, and it’ll take a few years for them to recover.
Have you noticed how few new cars are at dealerships these days? Around here, there are maybe two or three new cars on the lot, and the rest are used. I’ve been trying to look at a new Toyota Sequoia for over a year, but there are never any available. Most dealerships are in a similar situation. Good luck finding what you want.