This is an adaptation of a speech presented by Tom Dattilo during the Frost & Sullivan Aftermarket Conference on July 21, 1998 in Chicago.

By Tom Dattilo
Vice President, Sealing Products and Distribution, Dana Corporation

LOOKING AT the U. S. economy, one could almost believe this is "as good as it gets." Others call this the Goldilocks economy - not too hot, not too cold, but just right. But even if this economy is "just right," will it last? And is it just right for most of us in the aftermarket?

I deal on a seemingly minute-by-minute basis with the aftermarket, and here's how I see it today. Let's take a look at the "big picture" first.

The economy is growing at about a 4.5 percent annual rate, consumer confidence and spending are high. We apparently have the first Federal budget surplus in 30 years, and many in Washington are talking about tax cuts!

The stock market is near its all-time high. Inflation is running under 2 percent, and gasoline costs less per gallon than bottled water.

300,000 new jobs were created in the most recent month reported (May), and unemployment is around 4.5 percent, the lowest in 28 years. "Overall, the U.S. economy has never performed as well," says the chief economist at Merrill Lynch.

Closer to our hearts, new vehicle sales are humming along at the highest rate since 1986. Despite the GM strike, overall industry sales in June jumped a robust 13 percent from last year's levels.

Tempering all this, of course, is the economic malaise sweeping Asia. This is a global economy, and sooner or later we will feel the effect here of what's happening there - some of us may already be feeling it.

But, despite the Asian distress, this is a booming economy! If this is true, if "This is as good as it gets" - we should all be basking on the beaches of Cancun, Waikiki or Tahiti.

The truth is, the automotive aftermarket is great for some, but not yet "as good as it gets" for everybody.

Sure, many manufacturers, distributors, jobbers, retailers and other players are doing just fine.

There are over 200 million vehicles on the road in this country, supporting an aftermarket with annual sales of $197 billion. What can those of us in this arena do so that we all feel just fine? What can we do to grow and prosper and truly share in this booming economy?

First, some basic facts about the changing nature of the aftermarket:

The lines between channels of distribution are blending together, or completely disappearing;

The various markets resemble one another more and more in important areas;

Brand name products can be found in all outlets;

Private label is readily available in jobber and jobber retailer locations - making prices more competitive;

Programmed WD group and retail chain "private brands" are becoming national brands -- NAPA, CARQUEST, Big A, Auto Value, Craftsman and Diehard, to name a few.

Buying habits of customers are rapidly changing, too:

Retail customers including DIFMers and DIYers are patronizing all the various retail outlets;

You're seeing more women shoppers;

Service customers, in particular, have many more options in addition to the local garage:

- Jobber retail chains with bays - like Champion Auto

- Auto parts chains with bays - like Pep Boys

- Discount chains with bays - like K-Mart and Walmart

- Department store chains with bays - like Sears

- OE new car dealers

- Specialty service chains - like Jiffy Lube, Pennzoil and Texaco Xpress.

Buying patterns at different levels of the aftermarket are also undergoing a revolution - for instance, we see much larger product purchases being made at headquarter locations. This is especially true of auto parts chains and programmed groups.

That's the "big" picture.

Other challenges

How can we respond to and overcome these and other challenges facing the aftermarket and turn these challenges into opportunities, remembering that the aftermarket swallows slow learners, and that only those companies that stay abreast of changes and adapt will prosper and survive?

Here's how I see the challenges, in no particular order.

Challenge No. 1: Growth of national retail chains and changing channels of distribution.

It's obvious that AutoZone, Pep Boys and other retail chains are trying to reshape the aftermarket. AutoZone now has well over 2000 stores in 43 states, more than double their count of three years ago. Most recently, they've plunged into the East and West Coast markets by buying Auto Palace and Chief Auto Parts, gaining 112 outlets in New England and 400 in California in two moves.

Pep Boys operates 715 stores in 35 states, is adding 40 more this year, and has over 6,200 service bays aimed at Do-It-For-Me business.

Western Auto and Advance Auto Parts, which recently merged, each have about 600 stores and are getting their shares of the $35 billion in automotive products and parts sold annually by the chains.

These big volume buyers are latching onto the do-it-yourself customer with clever marketing, strategically located outlets, and good prices. And these chains can do more than serve the average Joe who tinkers with his car. They also are beginning to sell aggressively directly to installers. This is tough new competition for traditional distribution.

They're smart operators. They saw change coming and capitalized on it. If they can adapt, so can other parts distributors and jobbers, so can suppliers like Dana, and so can you.

Actually, many suppliers are taking steps to give smaller parts jobbers many of the same competitive advantages the chains enjoy. Let me tell you, for example, what Dana has in store for you.

Dana is developing an advanced, comprehensive, and very customer-friendly ordering and product delivery system. This new global program will organize product ordering, order processing, and product delivery into one smooth, seamless operation and is intended to bring a dramatic new era of ease and simplicity to Dana customers in the United States and throughout the world.

When systems such as this are fully implemented, they will provide many benefits for users:

It will provide real-time, one-point order entry, eventually from any spot on the globe, regardless of market, customer, or product.

It will automatically place orders to all appropriate Dana supply locations, regardless of geography.

It will accommodate standard communications protocols, including EDI and the Internet.

It will build a responsive global electronic technology link between the customer and all aspects of Dana's development, manufacture and distribution structure.

It will provide an optional "Vendor Managed Inventory" to save additional time, energy and manpower at the customer level.

At Dana's cross docking centers, all the products ordered by a customer will be consolidated into one order, regardless of product, brand or geography, and shipped to the customer as one order in one shipment.

These cross docking order consolidation and shipping centers, operating in much the same way as shipment centers for global overnight delivery services, will be located throughout the United States and serviced by Dana's dedicated truck fleet.

The fleet, tied by satellite to central ordering and delivery computers, can redirect a truck at a moment's notice to handle changes in shipping requirements. This satellite connection is an integral part of the new ordering and product delivery system.

What we are really building here is a "virtual" distribution system that will feature:

Streamlined, one-point order entry;

Faster delivery - anywhere on earth;

Improved order fill rates and fewer backorders. This new system I've described is one of several major steps Dana and other suppliers are instituting to make it easier to do business in the aftermarket.

This is one-stop shopping at its best! Without exaggeration, we are taking global order delivery and virtual distribution into the 21st Century.

And this is only one of the keys to our - and your - future in the aftermarket.

Challenge No. 2: Vehicles, parts and warranties are lasting longer.

As we all know, vehicles and parts are now designed, engineered and manufactured to last much longer and require less maintenance. Cars routinely last 100,000 miles without major overhauls.

This increase in vehicle longevity has inevitably led to longer warranties, some as long as 10 years or 100,000 miles.

And that fact directly threatens the volume of business we are all doing in the aftermarket - at least, the amount we're doing today,

Looking on the brighter side, today's better-built cars can't last forever. Eventually, all these vehicles must re-enter the service cycle. Our forecasts tell us there will be a resurgence in service business after the turn of the century, peaking in the Year 2004 and staying high in subsequent years.

There's a huge service and parts business looming in the next century!

But we don't have to wait for that. Already we see sizeable increases building in brake service and automotive electronics. Those are two big reasons Dana bought Echlin - the largest manufacturer of brake products in North America and also a leader in ignition, fuel injection and emission controls - giving Dana years-ahead expertise in on-board diagnostics.

Another point I want to stress: We must all help get the message to owners that buying parts and service in the aftermarket does not void the new car warranty. It is imperative that we drive this point home!

Challenge No. 3: Accelerating changes in vehicle technology.

Increases in vehicle life that we've been talking about are naturally the result of changes in technology - and more changes are coming.

Today's vehicles already have more, and more complex, computer-controlled systems. Most wholesalers and jobbers are now selling sensors and control modules, whereas the big movers used to be points, plugs, rotors and condensers.

At a recent presentation by Hewlett-Packard automotive engineers in Chicago, they made two interesting observations. First, there are more dollars of electronics in a new vehicle than dollars of steel. And second, automotive engines are now being designed around software where previously the software was designed to accommodate the inefficiencies of the engine. In my opinion, this is a powerful trend. Within 10 years, 50 percent of the cost of a new car will be attributable to electronic content - compared with only 13 percent today!

While changes in materials are not as obvious as electronic changes, they are another powerful advancement.

Looking at the engine block, there is a definite trend away from cast iron and a trend toward more aluminum, across the board, in engine design - both in this country and abroad.

Historically, the trend toward materials in the last century has been away from a wood and iron vehicle to one that incorporates aluminum, plastics, and composites. Consider that there are currently 25,000 thermoplastic combinations and composites for vehicle applications today, and the possibilities for the future are almost limitless.

The proliferation of plastics has migrated under the hood, and while there are a myriad of advantages, the most significant one is weight reduction.

Take intake manifolds, for example. Complete systems are now being produced from a variety of both plastics and composite materials, such as Nylon 6/6.

An integrated air/fuel management system means one modular unit that replaces four separate components. The high temperature plastics allow manufacturers much greater design flexibility, reduction of suppliers, improved performance, and reduced costs.

Alternative powered vehicles

Now, let's look at the potential threats to the internal combustion engine: the electric, the hybrid and the fuel cell vehicles.

Actually, it is interesting to look back: Over 100 years ago, 38 percent of the automobiles on what roads we had were electric. But then, as now, lack of acceptable battery technology was a major limitation.

Today, every major vehicle manufacturer in the market is turning out some model of alternative fuel vehicle, and some are already moving into the second generation.

Stand alone electric vehicles, in the short term, are giving way to the hybrid/electric alternative, such as the Toyota Prius. It's a 1.5L, four-cylinder internal combustion engine that is tied to a generator and to an electric motor. The major new components are the electric motor, generator set, battery pack, and a power electronics bay - which is just a bigger, more complex "black box." The internal combustion engine gets smaller, and the electronic components become larger.

Let's move to an even further advancement in technology - fuel cells. The new developments are direct descendants from NASA, and they convert hydrogen and oxygen into vehicle-driving energy with zero pollution. Fuel cell programs are growing around the world.

More technological changes are coming in the next few years, you can be sure. And if history is any indicator, they will arrive with increasing rapidity.

What can we do to be ready? That' s my next challenge

Challenge No. 4: Technical knowledge and training, and access to On Board-Diagnostics information.

Whatever directions this ongoing technological change follows, it will demand increased emphasis on training and transmission of knowledge to the people who stock and sell parts and service the vehicles. The need is obvious and on-going -- as vehicles become more computerized and more advanced, distributors and service personnel all must make it a top priority to stay technologically informed.

Part and parcel to the electronic revolution are issues regarding vehicle repair. The on-board diagnostics controversy and where that issue is headed are very important to us. This trend is not only technology-based; it is also being driven by legislation. The real issue is whether the installers will have the opportunity to diagnose the code and the algorithm of the OEMs' "black boxes" so that they can repair the vehicles and give consumers a choice. With the multi-tasking of the engine, you can't fix a recent model car without knowledge of the electronics and the computer management of the system.

In some states, this is a political "hot potato" right now, and they are trying to sort out the rights of access in the courts. This will demand more advanced training for installers, and that will ultimately fall to big organizations like NAPA and CARQUEST, and to your best suppliers.

Certainly, support legislation or other initiatives, either on a local or national level, that would provide the independent service community access to this vital information. We have to do everything possible to prevent the servicing of electronics becoming the exclusive province of new car dealers.

Internet usage now and in the future

Speaking of information, most of you know of the astounding growth of the Internet as a place to get and disseminate information of virtually any form. In 1997, 28 percent of jobbers report using the Internet and 71 percent of jobbers could potentially use it.

Of those already using the Internet, 39 percent use it for auto repair information, 53 percent for other automotive aftermarket research, 20 percent for technical and management training information, and 72 percent for e-mail. Finally, 20 percent of jobbers who use the Internet report they have made at least one purchase via the Internet. If you aren't on-line and using the net, maybe it's time to plug in.

Challenge No. 5: Industrywide consolidation.

In every business, everybody is buying somebody, both domestically and globally. For many of us, this is the key to survival and prosperity.

Example: Dana has merged with Echlin, after acquiring Reinz gaskets, Sealed Power, and Eaton heavy axles and brakes in recent years. We feel this makes us a better, more responsive - and bigger - organization, better equipped to serve the total industry.

This trend toward consolidation obviously means there will be fewer companies out there supplying components.

Surviving companies are larger, giving them greater efficiency and more clout.

And obviously it isn't just suppliers who are merging.

Jobbers are being gobbled up. There were 31,000 jobbers in the early '8Os - there will probably be fewer than 20,000 by the Year 2000. Consequently, wholesalers have fewer - but usually larger - jobbers to sell to. So, in a quest for new customers, wholesalers are buying other wholesalers or jobbers or both.

Challenge No. 6: New car dealers aggressively seeking parts service business.

As if you didn't have enough competition, new car dealers are aggressively pursuing service and parts business and they're getting it. They're after not only their "captive" customers - many will gladly service any make they can entice into their shops.

Some dealers have set up repair facilities that are completely separate from their new car operations. And they're advertising heavily to get new customers.

Another challenge from new car dealers results from the astounding increase in leased vehicles. Fully 30 percent of new vehicles are leased, compared with almost none 10 years ago. Naturally, new car dealers try to tie the lease to the dealership for service. And with second leasing, or releasing, becoming a trend, dealers are attempting to hang onto the service business for additional years.

The glut of cars coming off-lease - about three million in 1998 - does offer a huge potential for deferred maintenance and service.

Challenge No. 7: Increasing influence of women customers.

It may or may not come as a surprise to you that fully 60 percenty of women car owners shop for parts.

Not only do they shop for parts, they know what to do with their purchases - it's estimated that 10 million women consumers do some of their own maintenance.

Interestingly, 28 percent of women who shopped for parts handle installation themselves, compared with 25 percent who get help.

Obviously, women represent a powerful and knowledgeable buying influence.

Are you doing all you can to make your place of business inviting to women? You should, if you want more of their business!

Depending on your geographical location, it is also important to make an extra effort to attract minorities, whether this means Hispanics, Blacks, or Asians. Each of these ethnic groups is growing in numbers and disposable income. They might as well dispose of more of that income in your place of business.

What should we be doing to make sure we are prospering in 2004 when all those cars turn up needing all kinds of service?

We have to become the cleanest, most appealing, best lit, easiest to deal with, convenient, technically proficient parts and service avenue available.

We must be squeaky clean. We must run operations that do not make our customers feel greasy just by walking in the door.

We must have flowers growing outside, attractive signage, and smiles on our faces.

And oh yes, our prices must be competitive, our specials appealing, our customer service as important as our automotive service.

We must, in short, make ourselves highly attractive to all the motorists who need parts or need to have their cars fixed.

And I emphasize - we must!

Should be a piece of cake, right?

I've touched on some of the challenges facing the aftermarket. We and you all know that challenges mean opportunities. I hope that all of you will be able to increase your share of aftermarket business in the exciting years ahead - and that we'll all get a chance to relax on our favorite beach.

Nobody ever said it would be easy. But we and you can do it!

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