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 relentlessly to enhance the way such vehicles are marketed
and sold. However, with the average age of automobiles 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 collaborative usage and pay per use..

The market for services and parts has experienced 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.

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.

cognizant 20-20 insights | october 2016

Though these two businesses have been traditionally 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.

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

$400

$100

300

200
-100

100

-200

0
2006

2007

2008

2009

2010

2011

Figure 1

2012

2013

2014

2015

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

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 categorizes the major challenges faced by an OEMs spare
parts business.

The auto industry establishment is facing competition from various entities: smaller players, thirdparty 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 cartels, handing out record fines in some cases.2

Case

in point #1: The U.S. charged seven

Japanese executives with price-fixing in a longrunning 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

Challenges in Automotive
Spare Parts Market
INTERNAL

EXTERNAL

Complex Parts,
Supply Chain &
Reverse Logistics

Shorter Product
Lifecycle

Increasing No.
of SKUs

Branding
Requirements

Complex Vehicle
& Parts
Configuration

Gen-X
Perceptions
on Spare Parts

Inefficient Data
& Price
Management

Gray Market
Regulatory
Compliance

Lack of Efficient Third-Party

IT Application
Supplier Penetration
Figure
Figure 22 : Challenges in Automove Spare Parts Market

cognizant 20-20 insights

Case in point #2: The Competition Commission

of India (CCI) imposed a penalty of INR25 billion

on 14 car manufacturers for violating competition law. CCI demands that OEMs reveal
all facts in the public domain regarding price,
processes, alternatives, etc. of spare parts to
facilitate fair competition.

However, the larger picture here is that the entire

debate revolves around inhibition of customer
choice. Most warranty regulations advocate that
simply using an aftermarket or recycled part does
not void a vehicles warranty (see sidebar, next
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.
Like any other product, automotive goods are also
subject to the product lifecycle. Every stage in the
lifecycle has a specific marketing objective and a
specific strategy as well. In automotive parlance,
spare parts should not be any exception to this.
Different vehicles and models are at various places
in the automotive lifecycle; due to this, as well as
changing consumer behavior, it is imperative that
the industry reexamine its operating approach.

Quick Take

for different maintenance regimes, repairs and

spare parts, why should the pricing approach, and
hence marketing and selling, be identical for all?

Why Inhibit Customer Choice?

Splitting the Pocket

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.

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).

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 aftermarket 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.

Splitting the Pocket

Drives Car A,
a luxury sedan
on corporate
lease plan.

Owns Car
B, an
SUV, loves
off-roading.

John,
The
Executive

John,
The
Adventurer

7 8$
'"

If different customers or the same customer

under different situations have a different WTP

Figure 3

Why Go To A Service Station: Four Broad Categories

EXAMPLE

CATEGORY

LIKELY CUSTOMER
BEHAVIOR

1
DIY Category
Service

Small scratches on car.

Engine oil refill required.

2
Accidental,
Proprietary Items

The car has a mishap; part

replacement required.

Complex Design
and jobs

Customer fitted an
electrical accessory; requires
a change in wiring harness.

Aggregate Parts,
Safety items

Customer lost his 2nd car key;

wants to install a new set.

Parts are easily available. Customer can get the

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

alternatives. However, defects, if not arrested, are
progressive and consequential over time.

3
Customer prefers the OEM . Though it can be reworked on a
case-to-case basis, waiting time is generally high for customer.
Here again, customer seeks cheaper alternatives.

4
Figure 4

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Customer puts safety above everything else. Due to

security reasons and version complexity, job also sometimes mandates service at authorized facilities.

Based on an examination of consumer behavior,

customers visit service stations with different
expectations under various circumstances.
The jobs carried out differ in nature, and under
different circumstances customers have varied
WTPs (or reservation prices) for parts and labor.
Figure 5 plots the major jobs in automotive service
context into four quadrants. Our breakdown of
the individual quadrants reflects our suggested
action plan in line with the consumer behavior and
provides a mixed approach to spare parts strategy.
Bundling as a Pricing Strategy
For both traditional and newer businesses, marketers
have used bundling methods to effectively increase
profits (for complementary goods), to reduce selling
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)
classifies products and services that exhibit such
behavior. Rolling out calculated bundled prices
of parts and labor can yield fruitful results here.
The same argument can also be extended to the
replenish quadrant, as well.
The customer who buys a discounted bundle (i.e.,
service plus parts) doesnt care if either is discounted, as long as the total cost is lower. Furthermore,
bundling does not require knowledge of an individual consumers WTP, but only the distribution
of consumer choices on prices. (See sidebar for an
example from an entirely different industry sector.)

Quick Take
Bundling in Mobile
Phone Retail
Retailers frequently bundle the prices of
several products and services together for
their new customers. They offer the phone
itself with a package that also includes the
two-year phone plan, Internet access and
phone charger. This bundle benefits the
customers because it provides them with all
the tools they need for their phone all at once
and it benefits the mobile phone retailers
because they are selling the customer supplementary products and services other
than just a phone.
cognizant 20-20 insights

WTP Quadrant
WTP FOR OEM SPARE PARTS

WTP FOR OEM SERVICE (LABOR CHARGES)

The Strategy Quadrant

LOW

HIGH

PENETRATE
LOW

CROSS-SELL

MULTICHANNEL SALES:
E-commerce, brand promotion.
1. Lubricants, tires, batteries, gels, fuses.
2. Low-value trim items (carpets,
accessories, decals, seat covers, etc.).
3. Body parts: other (e.g. paint jobs,
bumpers, hoods, fenders, grilles,
wheels).

CROSS-SELL, PROMOTION:
Bundled offers, AMCs.
1. Lubricants, tires, batteries,
gels, fuses.
2. Low-value trim items (carpets,
accessories, decals, seat covers,
etc.).
3. Body parts: other (e.g. paint jobs,
bumpers, hoods, fenders, grilles,
wheels).

REPLENISH

HIGH

CROSS-SELL,
FASTER REPLENISHMENT:
3-D printing, dealer Incentives,
bundled offers.
1. Complex chassis items, high
number of variants (e.g., wiring
harness).

EXTEND
INCREASE LIFECYCLE, LONGER
OWNERSHIP: Refurbished parts,
dealer incentives, AMCs.
1. Aggregate parts (engine, gearbox).
2. Safety, security items: ECU
programming, key change,
airbags.

Figure 5

Refurbished Parts as an Extended Market

For all practical purposes, refurbishing automotive
parts is very much like assembling new parts - except
that many of the components are taken from used
parts (cores). In reconditioning, the part is disassembled, cleaned and examined for damage. Worn out,
missing or nonfunctioning components are replaced
with new or rebuilt components. After all the work
is completed, the part is reassembled and tested
for compliance with performance specifications.
This means a separate supply chain mechanism is
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:
Waning margins: Changes in the legal environment will lead to a growing deregulation
of the after sales business. While the warranty
regulations will ensure more rights for independent repairers, Insurance companies may
establish their own repair network and exert
pressure on the prices charged by authorized
repair shops.
Lengthening lifecycle: In most developed
markets, the increasing cost of car ownership
and declining population means potential
private new car buyers will postpone buying a
new car or wont buy one at all. Furthermore,
given the industrys improved service quality,
car life has been prolonged.

Why Should OEMs Play this Game?

Did you know?

1. Rebuilt ENGINES
require only 50% of the
energy and 67% of the
labor that is required to
produce new engines
2. About 50% of an
originial Starter is
recivered in the
refurbishing process

Average of light vehicles

U.S.
12 years

Five European Countries

10
8
6
4

While increasing product complexity will continue

to squeeze the do-it yourself market, customer satisfaction will depend more and more on availability
and brand visibility. Automotive e-commerce will
emerge as a retail channel for parts and services,
enabling the sale of items. The penetrate
strategy quadrant represents such a scenario.
Since this customer has a weak WTP towards both
parts and labor charges, it is better for the OEM to
proliferate through every channel possible.
3-D Printing as a Fulfilment Option

IMAGINE the scale effects!

2
0
Source: APRA.org

parts retailing network and supplying independent repair shops and service chains as well (see
an example in sidebar, below left).

2009

10

11

12

Source:The Wall Street Journal

Figure 6

Hence, discounting spare parts or service

offerings is more effective for OEMs as it expands
demand and, under most circumstances, delivers
scale benefits. Smaller competitors those that
sell parts or service individually - do not have the
same luxury. Even if these smaller competitors
hold similar technical competencies, OEM market
clout typically wins out. For example, OEMs will
always have an edge by offering service bundles
that provide an economic advantage to car buyers.
E-tailing as a Channel
OEMs understand the impact of digitization and
its ability to increase market share and improve
customer satisfaction. OEMs need to become
independent of the demand for parts from
authorized workshops, which necessarily means
entering the online market and expanding their

Quick Take
E-Bay and Tata Motors
Join Hands
Indian auto major Tata Motors teamed up with
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

With additive manufacturing the descriptive

phrase for 3-D printing - considerably lower organizational effort is required for developing suppliers
to maintain quality standards for complex and
critical parts. This is because designs shared
can be directly taken to mass production at any
location. From an aftermarket perspective, this
implies on-demand spare parts production at the
distribution leg, thus reducing service lead time.

Final Thoughts
The spare parts business should not be looked
upon as a derivative of a product, but as a product
itself with its own 4P (price, product, promotion
and place) strategy and technology road map. The
average spare parts inventory for a U.S. dealership
is nearly $330,000 SKUs.4 With frequent product
launches and facelifts, organizations often end
up with stocks that have a very low potential to
be sold at normal price. As such, they incur a
huge amount of revenue leakage through such
distressed inventories.
OEMs and dealers are often led to believe that
new vehicles are bread winners and spare parts
are remainders in the top line. Hence, most aftermarket initiatives are meted out and given stepson
treatment. As a result, the bottom line suffers. As
discussed throughout this white paper, the auto
services market is fragmented, subject to changing
customer needs and evolving technologies. As a
result, a one-size-fits-all approach simply wont
suffice. By viewing the market through our strategy
quadrant prism, carmakers can take a different and
more profitably textured approach.

Footnotes
1

NADA data 2015 - Annual financial profile of Americas franchised new-car dealerships, NADA, 2016,
https://www.nada.org/nadadata/.

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-fineson-way-for-suppliers

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/articleshow/42907851.cms

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 transformational 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, manufacturing 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
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business
process services, dedicated to helping the worlds leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies
the future of work. With over 100 development and delivery centers worldwide and approximately 255,800
employees as of September 30, 2016, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes
Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies
in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.

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