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Suppliers see promise in China's aftermarket

Aging vehicles mean need for replacement parts will increase

Generator parts are inspected at Robert Bosch's plant in Goettingen, Germany. The aftermarket accounts for more than 16 percent of Bosch's automotive revenue.

MUNICH -- The global replacement parts business likely will become even more appealing to automotive suppliers.

In emerging markets, and especially in China, many new vehicles sold in recent years now need replacement parts.

"The inventory continues to grow, and the high number of new vehicle registrations between 2006 and 2010 is generating a greater need for replacement and wear parts," said Eckhard Brandenberg of the consulting firm BBE Automotive.

But in developed markets such as Germany, the replacement parts business has been marked by increasingly tough competition.

Why? Because companies can still achieve "reasonably" good margins there, said Klaus Braunig, the managing director for the supplier sector at the VDA, the German auto industry association.

Higher margins

Gerd Heinemann, BBE Automotive's managing director, said "parts manufacturers are trying to offset the low margins in their original equipment business." But because of tougher competition, they are "increasingly under pressure."

When it comes to profit margins, suppliers are not inclined to show their cards. In response to inquiries, two major suppliers with multiple business lines, Robert Bosch GmbH and TRW Automotive, did not provide information about automotive margins.

Only Hella KGaA Hueck & Co., which makes lighting and electronics parts, cited figures. During the fiscal year that ended May 31, 2013, Hella's earnings before interest and taxes were 5.5 percent of revenues in the automotive segment and 6.8 percent of revenues in the aftermarket, according to Carsten Albrecht, the member of Hella's management board with responsibility for the aftermarket.

The results are affected by Hella's high level of investment in its original equipment business, Albrecht said.

Hella says the aftermarket accounts for about 22 percent of its automotive revenue. The figure is more than 16 percent at Bosch.

Hella and Bosch agree on the global trend in the aftermarket. Especially in China, the global inventory of vehicles is growing, along with the potential for repairs. The aging vehicle fleets, along with their lapsed warranties, are creating opportunities for makers of replacement parts, said Ben Smart of TRW's aftermarket division.

Older cars in Europe

In Europe, the VDA assumes that older vehicles mean sales growth for aftermarket parts. Braunig said, "Vehicle quality has significantly increased in the past 10 years. The average age in Germany's car inventory has, meanwhile, reached 8.8 years. With higher value retention, it pays to maintain and care for the vehicle over a longer period."

But Smart sees a shrinking replacement parts market in Western Europe. Given the higher vehicle quality today, he concludes that fewer replacement parts are needed.

The traditional business model is changing, he said. To be successful in a shrinking market, you have to "look over the horizon" and be on the lookout for new opportunities.

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