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Turning Cool Into Cash

Niche vehicles and factory-approved accessories bring profits to automakers and suppliers.

GM is hoping the SSR will not only put some cash in the bank but also inject some spunk back into the Chevrolet brand.
Profitless prosperity has DCX, Ford, and GM aggressively seeking alternative profit zones to their core business of designing and manufacturing mid-and high-volume vehicles to prop up sagging earnings. Two of the profit zones receiving significant attention, staffing and capital resources today are low-volume niche vehicles and development of comprehensive factory- approved accessory programs.

Estimates of today’s market for unique components, modules and assemblies found on low volume niche vehicles and OEM approved accessories is approximately $1.5 billion (at manufacturers cost).This same figure is forecasted to grow at a compound average growth rate of over 60 percent, reaching $4 billion by 2005, according to a JS Chamberlain & Associates and Plante & Moran, PLLC estimate. Factory-approved accessories are projected to make up approximately $2.7 billion in sales, while unique components on niche vehicles make up the remaining $1.1 billion (at manufacturers cost).

What is propelling this growth in niche vehicle and factory-approved part sales? There are at least four factors including: 1) OEMs desire to achieve scale economics for platform and component set investments, 2) weak dealership profits, 3) car makers desire to translate and leverage brand equity into powerful cash flow streams and 4) desires by baby boomers and generation Y’s to drive highly personalized vehicles.

Big 3 profits in 2001 were non-existent (cumulative losses in excess of $5 billion). Profits in 2002 will improve, but will still be well below the better performers. Average Big 3 operating margins are projected to be approximately one quarter of the 2002 margins earned by stronger European and Asian OEMs (expressed as percent margin on continuing automotive operations). Profits on trucks, vans and SUV’s remain substantial (though they are presently eroding due to fierce competition from Asian and European OEMs), while each of the Big 3 have negative EVA (profits adjusted for capital costs) on their extensive car portfolios. Niche vehicles provide additional unit sales that contribute to scale economies for component sets such as powertrains, suspensions, braking systems and electrical systems. This incremental volume translates into lower per unit development and tooling costs. “Gotta have” vehicles such as the H2, T-Bird, Crossfire and SSR also provide higher overall margins resulting from their exclusivity and pricing dynamics due to supply and demand.

The hefty margins for performance and service parts is nothing new to the industry. But when core earnings begin to erode, smaller zones of profits from items such as factory authorized accessories become of greater interest. Wall Street’s insatiable thirst for ever larger profits makes the variable contribution margin from successful niche programs and factory accessories nearly irresistible to OEM executives today.

Profits expressed as a percentage of revenues looks quite similar for franchise dealers as for OEMs. The average $30 million revenue dealership earns approximately 2 percent pretax profit. Factory-approved parts programs properly merchandised and supported contribute high margin volume in their part sales department, and help counter the Automotive Industries 49 slipping profitability the average dealer is experiencing in its new car sales department. The large incremental margins on OEM approved accessories, traffic generating capability of halo vehicles, and niche vehicle margins contribute to the excitement by dealers for factory-approved accessories and niche vehicles.

Ford lists 21 accessories for the Ford Focus on the SVT web site — everything from floor mats to complete body kits — as well as the bra nad bike rack shown here.
A number of prestige import brands have demonstrated the enormous economic power of effectively managing and leveraging their brands into strong profit streams (think several German and Japanese premium brands).

This potential has grabbed the imagination of a number of Big 3 brand owners, and they are now actively using halo vehicles to build brand equity while delivering badly needed incremental cash flow and profits. As an example, T’Bird, Jaguar and GT-40 have provided Ford with a wonderful platform for polishing the entire Ford brand image.

Personalization has become a fundamental and powerful life style driver for both baby boomers and generation Ys. These two demographic cohorts want their individual perception of personal style to be reflected in their vehicle styling in a compelling and unique way.

Both of these clusters are willing to spend substantial discretionary money to translate their personal style into vehicle style. So what is the importance to part suppliers of the growth in niche vehicles and OEMapproved accessories? For suppliers struggling with both top line and bottom line growth, niche vehicle programs and factoryapproved accessories present badly needed revenue and margin opportunities. With over 40 specialty vehicle programs presently approved for production by 2005, and thousands of new factoryapproved accessories ready for release, there are profits to be mined by capable suppliers targeting these niche market segments.

Suppliers of components and assemblies for lowvolume niche vehicles will typically be quite different from suppliers of factory-approved accessories.

The accessories supplier has extensive experience designing, manufacturing and distributing product into the aftermarket. These suppliers provide cool, cutting edge, passion-filled products that reach deep into the soul of the car enthusiast. Innovative product concepts, cool styling and an ability to make money running low- and mid-volume parts are a few of the core competencies of these suppliers. The business case attracting the aftermarket part specialist centers around the Big 3 becoming an addition distribution channel with large volume (and profit) potential. Aftermarket suppliers typically think in terms of hundreds of units of volume per SKU, while OEMs talk thousands and tens of thousands.

There are hurdles to be jumped over by aftermarket suppliers choosing to enter the factory-approved accessories market. Quality systems and practices need to become substantially more robust, procedures need to be formalized and there are various OEM-mandated communications and planning systems to be followed.Decisions from customers come slowly, and there are typically multiple approval steps within OEM bureaucracies. The reward for patient suppliers choosing this path is a distribution channel with huge volume potential, up-market brand repositioning opportunity and increased brand awareness and recognition.

The profile for the niche vehicle supplier of components, assemblies and systems is quite different from the aftermarket supplier. These suppliers are already in the Big 3 supply chain, positioned anywhere from a tier one systems integrator to a third or fourth tier component manufacturer. Mature and capable systems already exist in most functions within the business including revenue acquisition management, quality systems, product planning and execution systems, and program management systems. Suppliers choosing this path will typically be supplying larger “chunks” of the vehicle, and have significant development and design responsibility. These suppliers will typically have significant dollar content per vehicle because they are providing many parts, a module or system.

Flawless program management is the ante into this card game. Timing is nearly always very tight on these programs, the rate of late engineering changes is colossal and the OEM and vehicle integrator (if different) typically are under resourced. Flawless program management is required to perform sufficiently well to be considered for successor programs.

The business objectives for suppliers pursuing low volume niche programs frequently include:

  • Capitalizing on the higher margins associated with programs requiring substantial engineering and development capability and capacity
  • Leveraging the operational flexibility and excellent productivity achieved by suppliers with extremely mature and lean manufacturing and engineering systems
  • Using low-volume programs as a demonstration and qualifications building platform to enable successful bidding on complex, higher volume programs
  • Leveraging existing investments in both human and equipment capital
Hyper competition brought on by excessive global assembly capacity has driven OEMs, new vehicle dealers and suppliers alike to seek additional niche markets to grow both volumes and unit margins. Two of the most promising segments being targeted and resourced by the Big 3 are niche vehicles and factory-approved accessory programs. Savvy incumbent aftermarket part suppliers and lower tier OEM-approved component and assembly suppliers are presently targeting these lucrative market segments as a means to convert “cool” into cash.

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Fri. January 27th, 2023

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