North american auto aftermarket frost 0211

360 Degree Perspective of the North American Automotive Aftermarket

N90F-18 February 2011

Capitalizing on Anticipated Growth in Vehicle Maintenance and Repairs

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Disclaimer

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Certification

• We hereby certify that the views expressed in this research service accurately reflect our views based on primaryand secondary research with industry participants, industry experts, end users, regulatory organizations, financialand investment community, and other related sources.

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Table of Contents

Methodology 15

Introduction to the North American Automotive Aftermarket 17

Political & Regulatory Influences 30

Integrated Industries 34

Technology Trends 46

Consumer Trends 55

Competitive Analysis 72

Best Practices 84

Key Takeaways 96

About Frost & Sullivan 99

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List of Figures

Automotive Aftermarket: Service Centers by Type (United States), 2010 22

Automotive Aftermarket: Service Centers by Type (United States), 2005-2013 23

Automotive Aftermarket: Shift from Original Equipment to Aftermarket Manufacturers (North America), 2008-2017

28

Automotive Aftermarket: Manufacturer-level Replacement Parts Revenues by Category (North America), 2007-2017

29

Automotive Aftermarket: Key Legislative and Regulatory Areas (North America), 2010 32

Automotive Aftermarket: Major Legislative Topics (North America), 2010 33

Automotive Aftermarket: Technology Applications (North America), 2010 47

Automotive Aftermarket: Maintenance and Repair Opportunities in Hybrids and Electric Vehicles (North America), 2010

49

Automotive Aftermarket: Future Hybrid Offerings by Vehicle Manufacturer (North America), 2009-2015 50-52

Automotive Aftermarket: Forecast of Electric Vehicles by Manufacturer (North America), 2008-2015 53-54

Bike Sharing Market: Programs in Operation (North America), 2010 57

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List of Figures (Contd…)

Automotive Aftermarket: Top 10 Remanufactured Products (North America), 2010 74

Automotive Aftermarket: Unit Shipment and Revenues of Top Remanufactured Products (North America), 2010

75

Automotive Aftermarket: SWOT Assessment of the Warehouse Distribution and Jobber Channel (North America), 2010

77

Automotive Aftermarket: SWOT Assessment of Programmed Distribution Groups (North America), 2010 78

Automotive Aftermarket: SWOT Assessment of the Auto Retail Channel (North America), 2010 79

Automotive Aftermarket: SWOT Assessment of the Original Equipment Service Channel (North America), 2010

80

Automotive Aftermarket: Revenue Breakdown of Aftermarket Distribution Channels (North America), 2009 83

Automotive Aftermarket: Private Labeling and Profitability Case Study (North America), 2010 88

Automotive Aftermarket: Private-label Sales of Major Distributors (North America), 2010 89

Automotive Aftermarket: Private Label Strategies of Major Retailer Distributors (North America), 2009 90

Automotive Aftermarket: Comparison of OEM and Aftermarket Distribution Structures (North America), 2010 93

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List of Figures (Contd…)

Automotive Aftermarket: Analysis of OEM Profit Margins (North America), 2008 94

Automotive Aftermarket: Comparison of OEM and Aftermarket Profit Margins (North America), 2008 95

Automotive Aftermarket: SWOT Assessment (North America), 2010 98

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List of Charts

Automotive Aftermarket: Vehicles in Operation by Model Year (North America), 2006-2016 19

Automotive Aftermarket: Vehicles in Operation by Model Year (North America), 2010 19

Automotive Aftermarket: Percentage of Vehicles in Operation Under Warranty (North America), 2010 20

Automotive Aftermarket: Vehicles in Operation by Brand (North America), 2010 20

Automotive Aftermarket: Vehicles in Operation by Type (North America), 2006-2016 20

Automotive Aftermarket: Service Centers by Type (United States), 2005-2013 24

Automotive Aftermarket: Service Centers by Type (United States), 2010 24

Automotive Aftermarket: Service Technician Employment by Type (United States), 2010 25

Automotive Aftermarket: Top Trends (North America), 2010 31

Automotive Aftermarket: Manufacturer-level Tools & Equipment Revenues (North America), 2004-2014 36

Automotive Aftermarket: Manufacturer-level Tools & Equipment Revenues by Distribution Channel (North America), 2010

36

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List of Charts (Contd…)

Automotive Aftermarket: Manufacturer-level Tools & Equipment Revenues by Product Type (North America), 2008 and 2015

37

Automotive Aftermarket: Manufacturer-level Selected Diagnostic Equipment Revenues by Product Type (North America), 2005-2015

38

Class 4-8 Truck Aftermarket: Total Manufacturer-level Replacement Parts Revenues (North America), 2004-2014

43

Class 4-8 Truck Aftermarket: Manufacturer-level Replacement Parts Revenues by Distribution Channel (North America), 2010

43

Class 4-8 Truck Aftermarket: Distribution Structure (North America), 2009 44

Automotive Aftermarket: Hybrid and Electric Vehicles in Operation (North America), 2006-2016 48

Carsharing Market: Membership and Vehicle Forecasts (North America), 2009-2016 56

Automotive Aftermarket: Percentage of Engine Oil Changes Performed by Location Type (United States), (2010)

61

Automotive Aftermarket: Percentage of Owners Who Have Scheduled Maintenance at A Vehicle Dealership (United States), 2010

62

Automotive Aftermarket: Percentage of Vehicle Owners Choosing Dealership Service by Reason (United States), 2010

63

Automotive Aftermarket: Other Types of Maintenance Performed Within the Past 12 Months (United States), 2010

64

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Automotive Aftermarket: Reasons for Switching from Dealership for Minor Maintenance (United States), 2010 65

Automotive Aftermarket: Attitudes Towards Vehicle Maintenance (United States), 2010 66

Automotive Aftermarket: Changes of Vehicle Maintenance in Light of the Economic Recession(United States), 2010

67

Automotive Aftermarket: Frequency of Oil Change (United States), 2010 68

Automotive Aftermarket: Other Automotive Products Purchased During Last Oil Change (United States), 2010 69

Automotive Aftermarket: Likely Use of Public Transportation Structures (United States), 2010 70

Automotive Aftermarket: Aftermarket Roadmap (North America), 2005-2020 71

Automotive Aftermarket: Distribution Structure (North America), 2010 73

Automotive Aftermarket: Competitive Analysis of Remanufacturing Segment (North America), 2010 76

Automotive Aftermarket: Unit Shipments and Revenues for National Brand Parts by Distributor Type (North America), 2008

81

Automotive Aftermarket: Distributor-level Revenues by Type (North America), 2010 82

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Automotive Aftermarket: Private Labeling and Expansion (North America), 2008 86

Automotive Aftermarket: Private Labeling and Profitability (North America), 2009 87

Automotive Aftermarket: Private Label Product Global Sourcing Trends (North America), 2008 91

Automotive Aftermarket: Unit Shipments and Revenues for Private-label Brand Parts by Distributor Type (North America), 2008

92

Automotive Aftermarket: Revenue Distribution by Product Category (North America), 2017 97

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Introduction to the 360º View of the North American Aftermarket

• This strategic overview of North American automotive aftermarket industry is targeted atCEO and director-level executives in the industry.

• It outlines emerging trends, industry metrics, and transitional events that impact theaftermarket today and into the future. It highlights areas where growth opportunities existin this ever-evolving market.

• The 360 Degree perspective provides insight into a variety of topics beyond just parts andservice potential; it investigates the impact of social, regulatory, legislative, political, andtechnology changes that influence the vehicle mix, product mix, product and servicepricing, promotion, technician skill and training, repair information, service locations anddistribution and logistics.

• The intent is that each reader understands the direction of the industry on key issues,identifies his/her current company position and where that company should be moving tobest capitalize on the opportunities most relevant to that organization.

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The CEO’s Perspective of the Complex Business Universe

Source: Frost & Sullivan

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What is a 360º Analysis?

• Global – You must be able to identify geographic expansion opportunities, monitor the political andregulatory effects of doing business in another country; understand cultural implications andrequirements.

• Industry – You must maintain a solid grasp of your key industries and the industries that could have animpact on your business; identify factors that are causing new trends and changing buying behaviors;address industry convergence and integration; identify opportunities to expand within the market.

• Technology – You need to ensure a solid understanding of emerging technologies; affects andopportunities; plan for potentially disruptive technologies; leverage new products and/or applicationsfor growth.

• Economic – You must be able to identify current and future economic trends; identify growingcustomer segments; take advantage of emerging opportunities; adjust for currency changes.

• Competitive – You must know of any and all emerging competition; identifying alliance partners;benchmarking your growth against the industry; refining competitive strategy; monitoring marketperceptions, identifying changing processes, technologies, culture, etc.

• Customer – Do you know how to identify unmet needs; tailor products and services to market needs;manage brand equity; identify emerging customer segments; keep track of changing cultural trends.

• Best Practices – Can you maintain an effective Growth Plan for 3 - 5 years in the future; create anddevelop the Growth Team; ensure Growth Team members understand their functions and contributionsto growth; leverage industry Growth Thought Leaders and best practices.

A 360 Degree Perspective is an essential view of your decision-making universe and the basis from which Frost & Sullivan’s industry perspectives are based:


15

Methodology

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Research Methodology

• The information provided by market participants is qualifiedthrough: Verification interviews with up/downstream market

participants

Secondary research

Existing vehicle owner survey research on repair attitudes and behaviors

• Primary and secondary research data are combined withanalysis of the market to provide basis for the unit, revenueand pricing forecasts for each product category.

• Market valuation data are then compared to knownindustry information as a means of verifying and validatingmarket size. Known data include: Vehicles in Operation (VIO)

Replacement rates of products with similar exposure, life expectancies, and warranties

Growth trends, product and technology trends, pricing, application coverage

• Because the metrics analyzed in this research areredacted from multiple research studies, the base years,historical periods and forecast periods are not the same forall measurements.

• This research is a compilation of findings published byFrost & Sullivan’s automotive aftermarket team over the pastthree years.

• It includes primary research based on Frost & Sullivan’sbottom-up methodology as well as secondary data sources.

• Primary research requires analysts to conduct interviews withall major market participants (manufacturers and distributors)to capture each participant’s unit shipments and revenuemarket size at the component level. The analyst builds a baseyear market valuation for each component by summing theinputs of all participants.

• Analysts also garner information related to the impacts oflegislative changes, technological development, competitivesituations and distribution developments.

17

Introduction to the North American Aftermarket

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Major Aftermarket Trends

1. The closure of more than 3,000 auto dealerships since 2008 has created new parts and serviceopportunities for the independent aftermarket, while forcing automakers to re-evaluate their approach tovehicle maintenance and repairs.

2. The sharp decline of new car and light truck sales over the past two years has resulted in a higheraverage vehicle age, pushing more of them into the prime replacement period for expensive repairs.

3. Meanwhile, the sluggish economy has caused many motorists to postpone the purchase of routineservices such as oil and tire changes, creating pent-up demand over the short term.

4. The industry’s near-term focus on meeting strict fuel economy standards will force aftermarket parts andservice providers to adjust to marketplace demands for products that make vehicles lighter, more fuelefficient, safer, and compliant with all applicable regulations.

5. This includes the projected growth of hybrid and electric vehicles, which have some unique maintenancecharacteristics that service providers should understand.

6. Continuous market pressure to supply products and services at the lowest possible cost threatens theindustry’s ability to react to change and develop profitable solutions over the medium to long term.

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There are about 250 Million Light Vehicles Across the United States and Canada that Make Up the Aftermarket Demand for Automotive Parts and Service

Automotive Aftermarket: Vehicles in Operation by Model Year (North America), 2006-2016

Automotive Aftermarket: Vehicles in Operation by Model Year (North America), 2010

By looking at component life expectancy andconsumer replacement behaviors, analyzing thevehicle population by age provides insight intoaftermarket size and growth potential.

Vehicle age is a strong indicator of warrantystatus and a key indicator of repair opportunity.

Note: All figures are rounded; the base year is 2009. Source: Frost & Sullivan

0

50

100

150

200

250

300

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Vehi

cles

in O

pera

tion

(Mill

ion)

MY 2017MY 2016MY 2015MY 2014MY 2013MY 2012MY 2011MY 2010MY 2009MY 2008MY 2007MY 2006MY 2005Pre MY 2005

Vehi

cles

in O

pera

tion

(Milli

on)

MY 2006-200713%

MY 2008-20119%

Older4% MY 1986-1991

9%

MY 1992-199720%

MY 1998-200121%

MY 2002-200524%

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Vehicle Brand and Mix Becoming an Increasingly Important Element in Servicing the Repair Industry

Automotive Aftermarket: Percentage of Vehicles in Operation Under Warranty (North America), 2010

Automotive Aftermarket: Vehicles in Operation by Brand (North America), 2010

Chrysler-Dodge-Jeep

13%

Ford-Lincoln-Mercury

21%

General Motors29%

Honda-Acu ra7% Nissan-

Infiniti5%Toyota-

Lexus-Scion11%

Hyundai-Kia3%

BMW1% Daimler

1%Audi-VW

2%

Other7%

Automotive Aftermarket: Vehicles in Operation by Type (North America), 2006-2016

• The North American vehicle population is expected toshift toward foreign brands by up to 13% between 2009and 2016.

• Currently imports represent 35% and are forecast togrow at CAGR of 4.1%.

• The shift re-defines the “all makes/all models” definitionand directly impacts component sales based uponmanufacturers associations with vehicle manufacturers.

Source: Frost & Sullivan, Wards Automotive, Automotive News

0

50

100

150

200

250

300

Vehi

cles i

n Op

erat

ion (

Milli

on)

FSvan

Pickup

Minivan

SUVlux

SUVstd

SUVcomp

CarLux

Family

Specialty

Compact

VIO Out of Warranty

86% VIO in Warranty

14%

Veh

icle

s in

Ope

ratio

n (M

illio

n)

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• Long gone are the days of fixing a vehicle where it stands. The evolution of a number of factors created the need for a sophisticated delivery of repair delivery services. Factors include such elements as: A large vehicle populationRising vehicle complexityNeed for sophisticated

diagnostic equipment and specialized tools

Workplace safety legislation Labor laws Productivity demandsWorkmanship commitments

Shop Counts, Technician Counts, and Bays are the Key Metrics that Support the Repair Industry

• The three key elements that indicate the health and direction of the repair industry are:Number and type of repair

locationsNumber of available baysNumber and qualification

level/ skill level of repair technicians

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Service Centers by Type

Repair Location 2010

Locations2010

Avg. Bays2010

Technicians2010

Avg. Tech

Vehicle Dealers 16,800 9.4 199,920 11.9

General Repair 77,674 2.4 240,790 3.1

Specialty Repair 30,372 2.3 60,744 2.0

Gas Stations with Service 32,979 2.5 23,085 0.7

Oil Change/Lube Shops 8,330 2.3 24,157 2.9

Collision Repair 36,008 8.0 115,227 3.2

Auto Parts Stores Performing Service 5,190 8.3 16,090 3.1

Tire Shops/Dealers 18,440 5.9 105,106 5.7

Department Stores/Mass Merchandisers PerformingService 3,978 8.3 10,342 2.6

Towing & Vehicle Inspection Service 4,647 1.2 5,577 1.2

Truck Repair 23,158 2.7 64,841 2.8

Total Light Vehicle Repair Locations 257,576 4.1 867,888 3.4

Source: Frost & Sullivan, NAICS, Bureau of Labor Statistics, Company Websites

Automotive Aftermarket: Service Centers by Type (United States), 2010

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Location 2005 2006 2007 2008 2009 2010 2011 2012 2013

Dealer 21,495 21,200 21,139 21,022 17,130 16,800 16,716 16,718 16,719

IRF 76,614 77,228 77,364 77,442 77,519 77,674 77,597 77,364 77,364

Specialty Repair 32,087 30,835 29,850 29,889 30,221 30,372 30,463 30,494 30,494

Gas w/service 32,604 32,689 32,761 32,870 32,979 32,979 32,946 32,913 32,880

LOF 7,735 7,761 7,978 8,201 8,322 8,330 8,338 8,338 8,338

Collision 36,818 36,713 36,560 36,524 36,372 36,008 35,828 35,828 35,828

Auto Parts w/Service 5,175 5,180 5,194 5,191 5,185 5,190 5,195 5,201 5,206

Tire Dealer 18,188 18,188 18,250 18,286 18,348 18,440 18,532 18,624 18,718

Retailers 3,977 3,983 3,974 3,988 3,978 3,978 3,982 3,986 3,986

Towing 4,629 4,622 4,633 4,640 4,647 4,647 4,647 4,647 4,647

Truck Repair 23,316 23,316 23,286 23,251 23,274 23,158 23,111 23,111 23,157

Light Vehicle Repair Locations 262,637 261,715 260,989 261,302 257,975 257,576 257,355 257,224 257,337


Automotive Aftermarket: Service Centers by Type (United States), 2005-2013

Service Centers by Type (Contd…)

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LOF2.8%

Collision13.3%

Specialty Repair 7.0%

Tire Dealer12.1%

Retailers1.2%

Auto Parts w/Service

1.9%

Towing0.6% Truck Repair

7.5%

Gas w/service2.7%

IRF27.8%

Dealer23.1%

Mix of Locations Not Expected to Change Much Across the Forecast Period

0%10%20%30%40%50%60%70%80%90%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013

Perc

ent o

f Tot

al L

ocat

ions

Dealer IRF Specialty Repair Gas w/service LOF CollisionAuto Parts w/Service Tire Dealer RetailersTowing Truck Repair

Automotive Aftermarket: Service Centers by Type (United States), 2005-2013

Percent representation in the population changes little. Evenwith a CAGR of -5.5%, the decline in dealership numbersrepresented a loss of 0.1% share to the channel.

Location is only one measurement. As visible by the techemployment and bay numbers, closure of a dealershipsignificantly impacts industry and channel service capacity.

Automotive Aftermarket: Service Centers by Type (United States), 2010

Perc

ent o

f Tot

al L

ocat

ions


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Technicians are Concentrated in Auto Dealerships (Dealer), General Repair Facilities and Tire Stores (Tire Dealer)

Source: Frost & Sullivan, ASE, Bureau of Labor Statistics

Automotive Aftermarket: Service Technician Employment by Type (United States), 2010

• Recent shop closures have not impacted the number of technicians as yet because accreditation is not tied toemployment.

• Closures have impacted employment by channel. Numbers are expected to decrease further in 2011 as dealersadjust to lower volume. Because of the high ratio of employment to location in the dealer channel, a singleclosure has major impact on industry employment.

LOF2.8%

Collision13.3%

Specialty Repair 7.0%

Tire Dealer12.1%

Retailers1.2%

Auto Parts w/Service

1.9%

Towing0.6% Truck Repair

7.5%

Gas w/service2.7%

IRF27.8%

Dealer23.1%

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The OES channel, comprised of franchised auto dealerships, captures approximate 30% share of all aftermarket parts and service revenues.

The downfall of the economy has caused lower disposable incomes for consumers, and reduced new car sales.

Local brands have been losing market share to foreign brands of Asian and European origin.

GM & Chrysler shuts down dealerships.

(cost cutting efforts)

• The average U.S. auto dealership employs 12 service technicians and contains 18 service bays. If each terminateddealership closes, it would eliminate as many as 50,000 dealer service bays and displace more than 35,000 trainedservice technicians.

• It would also force many people who currently take their vehicles to dealerships for service to purchase parts andservices through the independent aftermarket.

• In addition to new vehicle maintenance, auto dealerships also derive significant revenues from collision repairservices.

• However, it tends to lose easy, profitable jobs such as brakes, oil/filter and tire replacement to lower-pricedindependent repair facilities.

The Original Equipment Service (OES) Channel is Used Mainly by Owners of Vehicles Less than 5 Years of Age


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Competitive Evaluation of the Service Industry

• The number of total service locations has remained stable over the past decade, although the mix andtype of outlets is changing.

• The closure of dealerships is significant not only because they have more technicians and service baysthan the average independent repair facility, but also because the skill level of its workforce is higher.

• Service outlets characterized as general repair facilities – and that offer a wide range of services ratherthan a specialized focus on brakes, tires, air-conditioning or oil changes, etc. – make up the largestprovider category.

• Mass merchants such as Walmart and Costco represent a relatively new type of service provider with thepower to alter the competitive landscape for minor maintenance and repairs.

• Service providers are the key influencers in the aftermarket for the brand choices made by vehicle owners,making them the main target of many parts manufacturers’ and distributors’ marketing and promotionalefforts.

• A key success factor for the service industry is ensuring the vehicle is repaired properly the first time sothat the owner does not return to the shop for additional work that reduces the profitability of the job.

• Shops that specialize in certain vehicle nameplates, or expensive repairs such as engine and transmissionwork, are typically more profitable than those offering a broader range of services.

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Shift from Original Equipment to Aftermarket Manufacturers

WhyThe North American automotive aftermarket is mature and will experience low growth over the 2011-2017 period. Total manufacturer-level revenues in the 2010 base year were approximately $83 billion and are forecasted to reach $98 billion by 2017.

WhoThe North American aftermarket draws competition from across the world. The main stakeholders are parts manufacturers, vehicle manufacturers, retail and wholesale distributors, and installers and other service providers. The steep downturn in auto sales in 2008-2009 also has many OE suppliers and private-equity firms looking at parts and maintenance as a potential growth opportunity.

IssuesThe aftermarket has rigid business requirements for production runs, inventories, parts coverage, pricing, logistics, sales, marketing, distribution and customer service. To succeed, market participants must excel in all of these areas, or create differentiation on one or more parameters, to set their company apart.

So what?The independent aftermarket is in direct competition with the OES channel, which sells original parts through auto dealer networks and employs highly trained service professionals as installers. Vehicle owners are searching for the proper balance of price, quality and convenience when choosing between the OES and IAM channels.

And?Vehicle manufacturers and their dealers have lost market share over the historical period to independent aftermarket parts and service providers. However, OEMs and their suppliers are demonstrating a renewed commitment to the maintenance and repair business, and they will have a measurable impact on the strategic direction of the aftermarket in the coming years.


Automotive Aftermarket: Shift from Original Equipment to Aftermarket Manufacturers (North America), 2008-2017

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Despite Challenges Aftermarket Parts Expected to Grow at CAGR of 2.1%, Driving Revenues to US$91.0B by 2015

Revenues (2007)

Revenues (2010)

Historical Growth

Revenues (2017)

CAGR (2010-2017)

Tires $16,300 M $17,400 M 2.2% $22,300 M 5.1%

Batteries $2,834 M $3,198 M 4.1% $3,339 M 0.6%

Brake Parts $2,686 M $2,938 M 3.0% $4,016 M 4.6%

Filters $1,228 M $1,282 M 1.4% $1,512 M 2.7%

Collision Body $3,430 M $3,854 M 4.0% $4,100 M 0.9%

Starters & Alternators $1,326 M $1,346 M 0.5% $1,268 M -0.8%

Lighting $1,104 M $1,047 M -1.8% $1,076 M 0.4%

Wheels $837 M $862 M 1.0% $908 M 0.7%

Exhaust Components $783 M $784 M 0.0% $1,086 M 4.8%

Spark Plugs $673 M $588 M -4.4% $664 M 1.7%

Others $47.5 Billion $49.7 Billion -0.5% $55.0 Billion 1.5%

Total $78.7 Billion $83.0 Billion 1.8% $97.6 Billion 2.3%

•The aftermarket continued togrow over the 2007-2010 periodin spite of the economicrecession.

•Growth rates will increase overthe forecast period as peoplekeep their vehicles longer,resulting in higher maintenance,repair and modification activity.

•Products in the maintenancecategories are expected to growat strong rates, including brakeparts, tires and filters.

• Increases in material andtransportation costs are expectedto drive component prices anddecrease margins for suppliers.

•New OEM technologies willreduce demand for someimportant replacement parts inthe starters/alternators andlighting categories.

Automotive Aftermarket: Manufacturer-level Replacement Parts Revenues by Category (North America), 2007-2017


30

Political and Regulatory Influences

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Top Trends

Impact

High

High

Low

Low Certainty

Social Trend of Going ‘Green’

Emission Legislations

Right to Repair Act

Economic Rebound

Slow Increase of VIO

Lower Cost Imports

Rising Fuel Prices

Introduction of EVs and HEVs

Shift in Vehicle Segment

Safety Legislation

MaterialCosts

Overall maintenance and repair activity will increase over the short to medium term as the economy recovers from recession. Over the medium to long term, participants must prepare for smaller vehicles, a more diversified population, new technologies and price competition.

Automotive Aftermarket: Top Trends (North America), 2010


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Key Legislative and Regulatory Areas

• Possible free trade agreements (South Korea, Columbia, Panama).

• Import duties.

• Impact of “Buy American” Legislation.

• Proposed Motor Vehicle Safety Act of 2010.

• New opportunities for replacement and aftermarket alternatives.

• Use of materials for manufacturing, etc.

• Use and handing of toxic materials.

• Waste management.

• Potential passage of Employee Free Choice Act.

• Lingering unfunded pension obligations.

• Quality control and testing.

• NHTSA oversight.

• CAFÉ.

• EPA exhaust regulations.


Automotive Aftermarket: Key Legislative and Regulatory Areas (North America), 2010

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Major Legislative Topics

TextingAuthorities across North America are passing laws banning the use of text messaging while operating a motor vehicle. The federal government has passed similar legislation covering drivers of all large commercial trucks and buses. The problems of distracted driving will likely drive additional legislation.

CAFECorporate Average Fuel Economy standards will increase incrementally from the current 27.5 mpg for cars and 23.1 mpg for light trucks to 39 mpg for cars and 30 mpg for light trucks by 2016. Automakers will use different materials, technologies and part designs to comply with the federal mandate.

Disabled Drivers &

Passengers

The need to accommodate the mobility needs of disabled drivers and passengers creates ongoing opportunities for up-fitters and coachbuilders for vehicle modification and product installation.

SafetyMotor Vehicle Safety Act of 2010 proposes increased standards for vehicle safety, including greater regulatory influence on vehicle part design and recall procedures, and fees for automakers. Most prominent are brake override controls and event data recorders installed on all new vehicles.

EmissionsEPA exhaust emissions regulations target NOx and particulate matter from large diesel trucks, but may have future implications for light cars and trucks. It also drives the use of new low-sulfur fuels, biofuels and advances in turbochargers, catalytic converters and other system components.

Right to Repair Act

Adoption would require automakers to share needed data with the aftermarket to repair and maintain their vehicles, giving consumers a choice of where to take them for service. The independent aftermarket fears being rendered unable to compete with the OES channel if vehicle repair information is made proprietary.

Automotive Aftermarket: Major Legislative Topics (North America), 2010


34

Integrated Industries

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Industries of Close Relation

Automotive Aftermarket

Tools & Equipment

Diagnostic Equipment

Paint, Body & Equipment

Logistics

HD AftermarketSource: Frost & Sullivan

36N90F-18

Tools & Equipment

• Mechanic hand tools include: Socket wrenches, cutters/pliers, flat wrenches, screw drivers, adjustable/pipe wrenches, torque wrenches, ballpeen hammers, pullers, hex wrenches and hand seamers.

• Non- mechanic hand tools include: Hand operated edge tools (such as chisels, axes, adzes, hatchets, planes and punches), dies and inter-changeable cutting tools, other hand and edge tools (such as levels, benders, trade's tool sets, drain snakes, closet augers), hand operatedsaws, saws, hacksaw blades, claw hammers, etc. (Excludes landscaping/lawn and garden tools).

• Accessories include: Drill bits, saw blades, abrasives, and miscellaneous accessories.• "Other" includes: Benchtop, powder actuated and engine power tools.• Tool storage total includes: Roll cabs/top chests, stationary cabinets, job-site boxes, stationary shelving & work benches, and truck boxes.• Equipment includes: Wheel balancers, mid-rise/scissors lifts, general purpose equipment, two-post and four-post lifts, alignment machines,

alignment lifts, tire changers, two-post lifts, brake lathes, air conditioning, collision repair, and fluid management equipment. (Excludes paintbooths and shop equipment "consumables").

22.1 24.1 25.8 27.1 28.4

0 5

10 15 20 25 30

2004 2007 2010 2012 2014

Reve

nues

($ B

illion

)

•It is important to note that most products in the tools category are sold through home centers, and a large shareof product applications are in the professional services, DIY, and home development – with automotive servicesholding a smaller share.

•Opportunities are present for automotive retail participants to target consumers outside automotive services.

Key Takeaway

Automotive Aftermarket: Manufacturer-level Tools & Equipment Revenues (North America), 2004-2014

Automotive Aftermarket: Manufacturer-level Tools & Equipment Revenues by Distribution Channel (North America), 2010

Rev

enue

s ($

Billi

on)

Hardware & Other Retail16%

e-Commerce / Internet

2% Direct Sales

17%

Wagon Jobbers8%

General & Specialty Distributors

25%

Mass Merchandisers12%

Home Centers 20%


37N90F-18

37.0%

18.9%13.3%

3.2%5.2%

22.4% 37.9%

19.7%

11.1%

2.4%

6.3%

22.6%Scan Tools

S/W

Exh. Gas Analyzers

Engine Analyzers

System Testers

Integrated Diagnostic Systems

Manufacturer-level Tools & Equipment Revenues by Product Type

• Participants in the service channel are equipped with scanners, system and multifunction testers, engine analyzers, andexhaust gas analyzers.

• This trend is not expected to change over the 2008-2015 period because scanners, system and multifunction testers arecrucial to vehicle maintenance and provide the best return on investment.

2008

2015

Automotive Aftermarket: Manufacturer-level Tools & Equipment Revenues by Product Type (North America), 2008 and 2015


38N90F-18


• All independent and franchise repair shops own a diagnostic scan tool. The poor economic environment of 2010 contributedto a general decline in service demand, which restrains the ability of many shops to update their equipment over the forecastperiod.



Rev

enue

s ($

Billi

on)

39N90F-18

Paint, Body, and Equipment

• Paint accounts for approximately $1.8 billion, or 85.7 percent oftotal revenues, while shop equipment and accessories make upthe remaining $0.3 billion, or 14.3 percent of revenues.

• Walk-in, or DIY, business represents approximately 7 percent ofsales, while professional painters and body shops account for 93percent of distributor sales.

• Increasing vehicle salvage values causes more vehicles to bewritten off as total losses by insurers. This increases theavailability of high quality OE replacement parts and challengesoverall part revenue generation for the industry.

• Rising repair costs, the improved safety features of modernvehicles, and aggressive pricing for new cars have alsocontributed to reduced accident rates and more total losses, whichkeeps vehicles out of the body shops.

• Body shop overcapacity squeezes margins for distributors.Industry estimates that there are 36,451 body shops in the UnitedStates alone, although industry demand can profitably sustain20,000 to 25,000 shops.

• There is a significant amount of consolidation taking place on thedistribution side of this industry. Large distributors such asFinishmaster, Sherwin Williams, and CARQUEST have beenacquiring smaller competitors to drive their growth.

Paint Manufacturers(e.g. DuPont, PPG, BASF)

Distributor/Jobber(e.g. Finishmaster, Sherwin Williams, Akzo Nobel)

Independent Body Shops(local businesses)

$2.1 billion(manufacturer level)

$2.8 billion

$3.5 billion

Paint and body shop equipment is sold through a two-step distribution process.

Market includes automotive paints, braces, masking paper, masking tape, body fillers,

sanding/grinder discs, and glues and adhesives.


40N90F-18

Logistics

• Increase delivery efficiency• Decrease overall logistics costs

Objectives of Logistics

The aftermarket is a competitive marketplace without patience. With a surplus of products and suppliers, customers have a multitude of options available to them.

A unique characteristic of the aftermarket auto industry is their 24 hour standard delivery guarantee. If it cannot be delivered in this time they risk lose the customer to a competitor as their reliability is called into question. Consequently a supplier must deliver the part (even at a loss) or face bankruptcy.

In a highly competitive market aftermarket suppliers have taken every precaution to ensure that they are able to make the delivery time. While the logistics of the aftermarket industry has been well established there are opportunities to improve the existing system and continue maintain the ability to make delivery deadlines while simultaneously reducing costs.


41N90F-18

Supplier Regional Distributor

Local Distributor Installer

Logistics and Regional Distributors

The fundamental function of the regional distribution center is to replenish inventory of local distribution centers.

Usage of Land, Air, and Sea Freight

Pull Order System

• Warehouse operations do not generate any revenue or profit. • Redistribution could be done in alternative methods so that the

supplier does not have to assume the exorbitant expense associated with operating a warehouse.

Are Regional Distributors Really Needed?


42N90F-18

3PL.. The Solution?

• A 3PL company has the existing infrastructure and is able to coordinate shipments from point of origin to final destination. Most importantly they are able to provide warehousing services at a much cheaper rate. Multiple clients and multiple sources of revenue under one warehouse gives this facility several sources of revenues. The objective of 3PL is to attract clients by presenting the infrastructure available to them. While a warehouse cannot inherently generate revenue, it can attract sources of revenue, such as ocean freight, air freight, trucking and sorting/inspection. For this reason, 3PLs are able to provide very competitive warehousing costs.

Why use 3PL?

Supplier 3PL Installer

• It is important to carefully evaluate current overall costs in owning a regional distribution center, frequency of delivery, and the cost of freight logistics.

• To be able to perform a direct comparison with 3PL partners to determine which best meets needs.• The usage of 3PL may allow a more frequent delivery timeline at smaller amounts, at a lower overall cost.

Key Takeaway


43N90F-18

The Heavy Duty (HD) Aftermarket

• HD or Commercial Vehicle (CV) market includes on-road class 4-8 vehicles.• HD Market is lucrative for aftermarket participants because HD systems and components are heavy and voluminous, so sourcing

them from China or offshore locations is not an attractive proposition. Gross margins average 25-30%. • Dealerships gaining market share: This trend will continue with increasing vertical integration in the OE market and with truck

makers increasing proprietary technology integration.• Increasing electronic content in heavy-trucks requires development of aftermarket parts and services that rely on electronic

technologies. There is a need for reinventing the HD aftermarket.• Engine related service and parts demand will increase with EPA regulation compliant engines gaining greater penetration among

VIO.• There is a need for parts and distribution structure that is similar to the light vehicle aftermarket.• Considerable consolidations happening across the HD aftermarket .• Continental infrastructure of retail and service facilities is a key demand in the HD market.• HD market is mature and stable, offers growth opportunities to suppliers of key engine parts, filters, tires, and also new

technologies such as APUs.

13.4 15.3

17.2 18.4

20.1

0

5

10

15

20

25

2004 2007 2010 2012 2014

Rev

enue

s ($

Bill

ion)

HD

Specialist26%

Truck Dealers

43%

Engine Distributors

7%

ISPs13%

Automotive Aftermarket

6%

Others5%

Class 4-8 Truck Aftermarket: Total Manufacturer-level Replacement Parts Revenues (North America), 2004-2014

Class 4-8 Truck Aftermarket: Manufacturer-level Replacement Parts Revenues by Distribution Channel (North America), 2010

Rev

enue

s ($

Billi

on)


44N90F-18

Distribution Structure

OESTruck Stops

Internet / Mail Order

OEMExporter

New Truck Dealer Parts Depts.

New Truck Dealer Service Depts.

Truck Stop Service Bays

Fleet & Owner Operators

Off-Shore Manufacturer

Engine/ Transmission Rebuilders

U.S. Parts Manufacturer Remanufacturer Salvage Yard

Body Shops

Collision Parts Distributors

Independent HD Installers

Jobbers/ Wagon Jobbers

Re-Distribution Jobber

HD WDs Fleet Repair Shops

Program Groups

WDs

DIYers


Class 4-8 Truck Aftermarket: Distribution Structure (North America), 2009

45N90F-18

HD Distribution Structure (Contd…)

• Major consolidations shaping the distribution landscape.

• HD distribution channels are stretched beyond their capacity.

• There is a need to accelerate the distribution flow to improve efficiency.

• Product costs are a tiny fraction (around 15%) of the total transaction cost; there is a need to reduce distributioncosts and improve value benefits of distributors. Distributors changing focus from products to services, mimickingthe light vehicle aftermarket distribution model.

• Skilled technician shortage aggravating service center operating woes.

• Low volumes, high part costs and high order cycle time are a constant challenge for HD aftermarket distributor.

• Forecast accuracy needs to be improved to reduce cycle time; this can be attained through utilization of point-of-sale data.

• Independent distributor shares are falling steadily, while dealerships and OES channels are experiencingcontinuous growth in revenue and market shares.

• Buying groups are becoming more prominent.

• Gross margins have remained fairly steady at around 25% to 30% in the distribution chain.

• Dealerships and independent distributors, in some cases, have been found to collaborate and exchangeservices and part.

• Research indicates that dealers and independent distributors sometimes purchase from each other whenneeded, but prefer to keep this fact unknown.

46

Technology Trends

47N90F-18

Technology Applications

• New inventory management processes maximize efficiency and reduce inventory costs.

• Use of RFID tags and Bluetooth technology for inventory management and upkeep.

• Lean manufacturing process.• New manufacturing

processes to maximize quality and

minimize costs.• Use of more

efficient machinery.

• Development of new offerings to match new OE parts and products.

• Increased adoption of electronics in vehicles supports demand for more high-tech products, maintenance, and repair solutions.

• Aftermarket products in the performance category require

heavy R&D processes for companies to develop better

product offering portfolios.

Automotive Aftermarket: Technology Applications (North America), 2010


48N90F-18

Hybrid and Electric Vehicles in Operation

0.0

0.0

0.1

1.0

10.0

100.0

1000.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Vehi

cles

in O

pera

tion

(Mill

ion)

Hybrids EV Total Hybrid/EV Total VIO

There will be an estimated 600,000 EVs on North American roads by 2016.

By 2016, approximately 2.8% of all U.S. and Canadian passenger vehicles will be hybrids or EVs.

CAGR 103.3%

CAGR 23.5%

• The percentage of vehicles that are hybrids or EVs will continue to increase over the longterm as gas-powered cars and trucks age and are replaced with modern automobiles.

• By 2016, hybrids and EVs will represent approximately 8-10% of new auto sales, up from2.4% in 2008-09.

Vehi

cles

in O

pera

tion

(Milli

on)

Hybrid and Electric Vehicles in Operation (North America), 2006-2016


49N90F-18

Maintenance and Repair Opportunities in Hybrids and Electric Vehicles

Replacement Rates Conventional Auto Hybrid Electric Vehicle

Engine Systems Decreasing Decreasing Decreasing

Transmission Systems Decreasing Increasing Increasing

Brakes Systems Decreasing Decreasing Decreasing

Steering and Safety Systems Decreasing Decreasing Decreasing

HVAC Systems Decreasing Increasing Increasing

• Replacement rates are in decline for many high-volume components, including engine oil, air filters andbrake pads.

• However, hybrids and EVs contain certain components parts not found on most gas-poweredautomobiles, including electrical A/C compressors, transmission coolant, and heater pumps, that willoffer new market opportunities to parts and service providers.


Automotive Aftermarket: Maintenance and Repair Opportunities in Hybrids and Electric Vehicles (North America), 2010

50N90F-18

Future Hybrid Offerings by Vehicle Manufacturer

Vehicle Manufacturer Type of HybridHybrid Vehicle Model Expected Year

X6 Active Hybrid Two-Mode 2009 (MY 2010)

7 Series Two-Mode 2009 (MY 2010)

Q7 Full after 2011

Q5 Full 2011

S400 Mild 2009 (MY 2010)

ML450 Two-Mode 2009 (MY 2010)

Fit Mild 2010

CR-Z ( now a concept) Mild 2010

Camry 3rd Gen Full 2012

Insight Mild 2009 (MY 2010)

E Class Mild 2010

C Class Mild 2011

Hyb

rid V

ehic

le S

yste

ms

–Fi

ndin

gs

Automotive Aftermarket: Future Hybrid Offerings by Vehicle Manufacturer (North America), 2009-2015

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51N90F-18


Ram 15 Hybrid Pickup Two-Mode 2010 (MY 2011)

FullFord Fusion 2009 (MY 2010)

MicroFocus

MicroFiesta

2011

2011

Lexus F-A (now a concept) Full 2010+

FullMercury Milan 2009 (MY 2010)

Lexus HS 250h Full 2009 (MY 2010)

Full Infiniti M 2009 (MY 2010)

Lexus HS 250h Full 2009 (MY 2010)

3rd-generation Prius Full 2009 (MY 2010)

Yaris Mild 2011


Future Hybrid Offerings by Vehicle Manufacturer (Contd…)H

ybrid

Veh

icle

Sys

tem

s –

Find

ings

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52N90F-18


Jetta Mild 2010

Passat Mild 2011

Touareg Full 2010

Full Sonata 2010

C30 Micro 2010

S40 Micro 2011

Cayenne S Full 2010

Panamera Micro 2010

V50 Micro 2011

Future Hybrid Offerings by Vehicle Manufacturer (Contd…)H

ybrid

Veh

icle

Sys

tem

s –

Find

ings



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53N90F-18

Forecast of Electric Vehicles by Manufacturer

Note: All figures are rounded; the base year is 2008; Source: Frost & Sullivan

Mar

ket O

utlo

ok a

nd F

orec

asts

Tier 1 OEM's \Year 2008 2009 2010 2011 2012 2013 2014 2015

BMW 0 0 0 1,000 5,000 10,000 25,000 40,000

Chrysler 2000 2000 3500 4,500 11,500 25,000 40,000 60,000

Daimler 0 0 500 1,500 6,000 15,000 30,000 45,000

Ford 0 0 1,000 2,000 7,000 16,000 30,000 50,000

Fuji Heavy 0 0 0 500 500 2,000 5,000 10,000

GM 0 0 1,000 5,000 11,000 25,000 40,000 70,000

Hyundai 0 0 0 0 0 1,000 5,000 10,000

Mazda 0 0 0 0 1,000 1,000 5,000 10,000

Mitsubishi 0 0 1,000 1,000 5,000 10,000 20,000 30,000

Nissan 0 0 1,000 1,000 6,000 12,000 31,000 65,000

BYD 0 0 0 0 1,000 1,000 10,000 20,000

Toyota 0 500 500 5,000 10,500 21,000 40,000 60,000

Total 2,000 2,500 8,500 21,500 64,500 139,000 281,000 470,000

Automotive Aftermarket: Forecast of Electric Vehicles by Manufacturer (North America), 2008-2015

54N90F-18

Small OEM's \ Year 2008 2009 2010 2011 2012 2013 2014 2015

Zenn 250 300 300 200 - - - -

ZAP 400 300 400 300 - - - -

Tesla 100 500 1,000 1,500 2,500 4,000 5,000 5,000

Fisker Automotive 0 100 500 1000 2,500 5,000 5,000 5,000

Miles 350 300 500 1000 1,000 500 - -

Other Tier-2 112.5 180 330 450 750 1,350 1,500 1,500

Total 1,213 1,680 3,030 4,450 6,750 10,850 11,500 11,500

Mar

ket O

utlo

ok a

nd F

orec

asts

Note: All figures are rounded; the base year is 2008; Source: Frost & Sullivan

Automotive Aftermarket: Forecast of Electric Vehicles by Manufacturer (North America), 2008-2015

Forecast of Electric Vehicles by Manufacturer (Contd…)

55

Consumer Trends

56N90F-18

United States• Started in 2001, much later than

Canada; fast growth. • Current average member-vehicle ratio is

estimated at 49:1.• 2001-2009 compound annual growth

rates (CAGR) were 71.3% for members and 52.4% for vehicles.

• High growth markets are residential neighborhoods and business users.

Canada• Started in Quebec in 1994.• Current average member-vehicle ratio is

estimated at 27:1.• 2001-2009 CAGR were 39.4% for

members and 31.9% for vehicles. • High growth markets are residential

neighborhoods and business users.

Carsharing Market: Membership and Vehicles Forecasts (North America), 2009-2016

Members453.7

thousand

Vehicles10.2

thousand

2009 Note: All figures are rounded; the base year is 2009. Source: Frost & Sullivan

Members4,413.1

thousand

Vehicles72.5

thousand

Membership and Vehicle Forecasts

U.S. Canada

2.0

8.2

55.1

398.5

7.8

64.7

291.5

4,121.6

2016

Members Vehicles

0

1,000

2,000

3,000

4,000

5,000

0

10

20

30

40

50

60

70

80

2009 2010 2011 2012 2013 2014 2015 2016

Mem

bers

(Tho

usan

d)

Vehi

cles

(Tho

usan

d)

57N90F-18

Programs in Operation

MONTREAL

BIXI

OTTAWA

BIXI

TORONTO

BIXI

Large Scale and Popular

Small ScaleWASHINGTON DC

SmartBike

MINNESOTA

NiceRide

DENVER

B-Cycle

BOSTON

Name NA*

* Name of the program is not available.

Programs launched at university campuses such as ZotWheels, California (25 bikes and 4 stations) not shown.

WASHINGTON DC/ VIRGINIA

Name NA*

GRAND CANYON

Bright Angel

Bicycles

FLORIDA

DecoBike


Bike Sharing Market: Programs in Operation (North America), 2010

58N90F-18

What are Consumers Doing in 2010?

Minor Maintenance

Of the minor maintenance behaviors surveyed, engine oil changes continue to be mostpopularly performed. Yet, all minor maintenance behaviors surveyed – except oil changes– are down significantly compared to previous years. Interestingly, while the performanceof minor maintenance is down, attitudes toward maintaining vehicles have remained fairlyconsistent with past results – in that most rely on their vehicle owner’s manual forscheduled maintenance. Thus, since attitudes have not changed but behaviors have, itappears that the economic recession within the past few years is likely the largestcontributor to the behavior changes. Specifically, U.S. Vehicle Owners are making smallchanges to save money and that seems to translate into longer periods of time or moremiles between minor maintenance performances.

“Other” MaintenanceSimilar to minor maintenance, performance of “other” maintenance behavioris down significantly from previous years. Yet, brake service/inspectionremains the most popularly performed “other” maintenance of thosesurveyed. Like minor maintenance attitudes, most U.S. Vehicles Ownershave positive attitudes toward “other” maintenance and believe it isimportant to be proactive. Thus, it seems likely that the economy isnegatively impacting “other” maintenance behavior despite positive attitudestoward vehicle maintenance.


59N90F-18

Consumer Behavior Trends by Category

Locations of Maintenance PerformanceOverall, the largest proportion of U.S. Vehicle Owners rely on their vehicle dealership to perform their maintenance – both minor and “other.” Yet, for oil changes and tire maintenance, specialty repair shops are competitive with dealers. Additionally, for “other”maintenance, independent or franchise repair shops also draw a fair share of customers and appear to be highly competitive with dealers.

Oil Change BehaviorsThe largest proportion of U.S. Vehicle Owners have their oil changed every 3,000 miles. Yet, compared to past results, more are extending the miles between oil changes. While some of this is explained by vehicle manufacturers’ recommendations and the use of premium or synthetic grades oils, a significant proportion report that the economy is the reason they have oil changes performed less often.

Fuel Purchase BehaviorsThe majority of U.S. Vehicle Owners use regular 87 octane fuel, as specified by their vehicle manufacturer. Few use alternative fuels and despite the “greener” attitudes that most Americans seem to be adopting, these attitudes do not seem to translate into potentially greener fuel purchase choices.

Purchase Behaviors of Performance ChemicalsMost do not purchase performance chemicals for their vehicles. Yet, among those who do, there is a good mix of vehicle owners purchasing performance chemicals.


60N90F-18

Consumer Behavior Trends by Category (Contd…)

Purchase Behaviors of Replacement PartsWhile the largest proportion of U.S. vehicle owners states that they select OE replacement parts for their vehicles, this appears to contradict the actual purchases made within the replacement parts market. Thus, it seems that U.S. vehicle owners like to think they are purchasing OE replacement parts, when it is more likely they are not.

Roadside AssistanceNearly seven out of ten U.S. vehicle owners have roadside assistance, with the majority of these using an aftermarket provider. The potential is likely to grow for aftermarket roadside assistance providers as roughly half of those using a vehicle manufacturer provider are likely to switch to an aftermarket provider once their contract expires.

Onboard Computer Scheduled MaintenanceOnly four out of ten report having an onboard computer for scheduled maintenance. However, of those few that have it, it does appear to do a good job at getting vehicle owners to perform their recommended maintenance as 48% perform the appropriate maintenance on time.


61N90F-18

Percentage of Engine Oil Changes Performed by Location Type


Q2: Where did you have your most recent engine oil change performed?

Perc

ent o

f Fre

quen

cies

Key Take Away: Overall, the Largest Proportion of Owners Depend On Dealerships to Perform Minor Maintenance, but Specialty Shops Also Receive Their Fair Share

Automotive Aftermarket: Percentage of Engine Oil Changes Performed by Location Type (United States), 2010

62N90F-18

Percentage of Owners Who Have Scheduled Maintenance at A Vehicle Dealership

Q3: From the time you acquired your vehicle, did you ever have minor scheduled maintenance performed at your vehicle dealership?

Key Take Away: Over Eight out of Ten New Vehicle Owners have had Minor Maintenance Performed at Dealerships, which is much lower for Used Vehicle Owners


Automotive Aftermarket: Percentage of Owners Who Have Scheduled Maintenance at A Vehicle Dealership (United States), 2010

Minor Maintenance Performed at Vehicle Dealer Since Purchase of Vehicle

63N90F-18

Percentage of Vehicle Owners Choosing Dealership Service by Reason

Q2A: Please indicate how influential each of the following is as to why you choose to have your vehicle serviced at your dealership.

Q2A1: How did you choose the dealership for your most recent minor scheduled maintenance?

Among Those Having Oil Changes Performed at Dealership

Note: Only top five displayed.

Automotive Aftermarket: Percentage of Vehicle Owners Choosing Dealership Service by Reason (United States), 2010


64N90F-18

Other Types of Maintenance Performed Within the Past 12 Months

Other Types of Maintenance Performed Within Past 12 Months

82%

48%

42%

34%

31%

35%

25%

49%

29%

23%

20%

17%

17%

15%

57%

45%

36%

36%

34%

29%

0% 20% 40% 60% 80% 100%

Brake Service orInspection

Transmission Maintenance

Engine Cooling SystemMaintenance

Air Conditioning SystemMaintenance

Fuel Injection Service

Suspension SystemMaintenance

Muffler and ExhaustService

2010 (N=688) 2009 (N=1085) 2006 (N=526)

No Data in 2006

Key Take Away: Overall, “Other” maintenance is up significantly compared to recent results

Q4: Thinking about other scheduled maintenance or mechanical repairs you have had performed on your vehicle, which of the following types of other scheduled maintenance or repairs were performed within the past 12 months?

Consumers show strong return to brake category repairs


Automotive Aftermarket: Other Types of Maintenance Performed Within the Past 12 Months (United States), 2010

65N90F-18

Reasons for Switching from Dealership for Minor Maintenance

Q3B: Thinking about why you no longer take your vehicle to your vehicle dealership for minor scheduled maintenance, please stateyour level of agreement with each of the following statements.

Note: Multiple mention question.

Key Take Away: Among the Various Reasons for Switching From Dealerships, Cost is the Primary Factor followed by dealer’s location.

Automotive Aftermarket: Reasons for Switching from Dealership for Minor Maintenance (United States), 2010


66N90F-18

Attitudes Towards Vehicle Maintenance

27%

36%

27%

1%

1%

8%

29%

41%

27%

2%

1%

38%

42%

19%

1%

0% 20% 40% 60%

I always get my vehicle serviced according to the manufacturer's r ecommended maintenance schedule

as provided in the owner's manualI mostly get my vehicle serviced according to the

manufacturer's r ecommended maintenance schedule as provided in the owner's manual

Aside from periodic oil changes, I usually don’t take my vehicle to be serviced unless there's something

wrong

I don’t take m y vehicle to be serviced unless there's something wrong

I very sel dom even think about the maintenance of my vehicle

I follow a schedule that is laid out by my service provider

Attitude Towards Vehicle Maintenance2010 (N=1220) 2009 (N=1085) 2006 (N=526)

No Data in 2009

No Data in 2006

No Data in 2006

Key Take Away: Even though the majority rely on their vehicle owner’s manual for scheduled maintenance, it has been on a decline compared to previous years.

Q7: Which of the following statements best describes your attitude towards the maintenance of your vehicle.

Since 2006, Frost & Sullivan’s research has tracked a decline in the percentage of owner’s who adhered to the vehicle manufacturer's recommended maintenance schedule.


Automotive Aftermarket: Attitudes Towards Vehicle Maintenance (United States), 2010

67N90F-18

Changes of Vehicle Maintenance in Light of the Economic Recession

Source: Frost & SullivanQ9: Please indicate your level of agreement about your vehicle maintenance behaviors during the past 2-3 years.

Changes of Vehicle Maintenance Behaviors in Light of the Economic Recession

22%

17%

15%

15%

11%

11%

10%

5%

6%

19%

16%

14%

18%

11%

14%

9%

5%

8%

8%

17%

14%

14%

18%

15%

14%

9%

7%

7%

11%

8%

8%

10%

9%

12%

11%

5%

8%

5%

10%

6%

12%

11%

8%

14%

11%

11%

17%

13%

19%

8%

18%

20%

11%

21%

19%

45%

48%

52%

33%

20%

15%

16%

21%

16%

20%

11%

10%

9%

15%

0% 20% 40% 60% 80% 100%

I am investing more in vehicle maintenance and repairbecause I intend to keep my vehicle for a longer period ofFluctuating gas prices and tight economy have made me

look for ways to cut down on other types of vehicle relatedI have reduced other activities, i.e. eating out, going to the

movies, concerts, etc.I increased the amount of attention I pay to my tire

pressure to improve fuel efficiencyFluctuating gas prices and tight economy have made me

look for ways to cut down on maintenance costsI conscientiously have reduced my speed when driving to

reduce fuel consumptionI have changed my work location or activities so I drive

lessAs a means of saving, I am more likely to buy maintenance

consumables like engine oil, filters, etc. in bulkI have used chemicals/additives to enhance engine

performanceAs a means of saving, I have increased the length of time

between maintenance intervals

Strongly Agree = 7 6 5 4 3 2 Strongly Disagree = 1

Note: Proportions less than five not shown in chart. Note: See Appendix C for expanded list of maintenance behaviors.

Key Take Away: Compared to Last Years Results, Attitudes Appear to have Changed from not Spending to Investing More in Vehicle Maintenance and Repairs.

Automotive Aftermarket: Changes of Vehicle Maintenance in Light of the Economic Recession (United States), 2010


68N90F-18

Frequency of Oil Change

Frequency of Oil Change

1%

36%

19%

25%

5%

5%

3%

45%

23%

19%

4%

5%

3%

56%

20%

15%

3%

2%

0% 20% 40% 60%

Every 2,000 Miles

Every 3,000 Miles

Every 4,000 Miles

Every 5,000 Miles

Every 6,000 Miles

More than every 6,000 Miles

2010 (N=1316) 2009 (N=1085) 2006 (N=526)

Key Take Away: Since 2006, it appears that vehicle owners are extending the miles between oil changes, although the largest proportion still get their oil changed every 3,000 miles

Q11: Typically, how frequently (in miles) do you change the engine oil in your vehicle?

Oil change intervals of greater than 3,000 miles continue to gain prominence rising from 40% in 2006 to 51% in 2009, to 54%, in 2010


Automotive Aftermarket: Frequency of Oil Change (United States), 2010

69N90F-18

Other Automotive Products Purchased During Last Oil Change

25%

17%

6%

5%

4%

1%

2%

1%

1%

2%

57%

25%

14%

4%

4%

3%

3%

2%

1%

1%

3%

59%

40%

20%

10%

8%

46%

0% 20% 40% 60%

Air Filters

Wipers

Flush Products

Tires

Cabin Air Filters

Performance Chemicals

Automotive Batteries

Fuses

Nitrogen Tire Filling

Other

None

Other Automotive Products Purchased During Last Oil Change2010 (N=1316) 2009 (N=1085) 2006 (N=526)

No 2006 data

No 2006 data

No 2006 data

No 2006 data

Note: Multiple response question.

No 2006 data

No 2006 data

Key Take Away: Compared to previous years’ results, more vehicle owners purchased other products during their last oil change – This may be due to the stabilizing economy.

Q14B: When you last had the oil changed in your vehicle, which of the following did you also purchase at the same service center/outlet? Select all that apply.

• Most products showed modest increases in “take rates” over 2010 but none matched the rates shown in 2006.

• The growth in 2010 was likely the result of two factors:

1. somewhat stabilization of the US economy gave consumers enough confidence to start buying once again.

2. product deferment of 2009 left products in such poor state that owners could no longer defer replacement prompting resurgence in “add-on” part sales.

Automotive Aftermarket: Other Automotive Products Purchased During Last Oil Change (United States), 2010


70N90F-18

Likely Use of Public Transportation Structures

Likely Use of Public Transportation Structures(N=1316)

24%

20%

20%

13%

11%

7%

6%

1%

0% 10% 20% 30%

Car Pooling or Car Sharing

City Subway or Light Rail

City Bus

Intercity Subway or LightRail

Bicycle Paths/lanes

Intercity Bus and Links toother Transportation

Free Parking for "GreenVehicles"

Bike Share Programs

Q40: If public transportation structures were expanded in your area, which of the following would you be most likely to use for daily commuting?

Key Take Away: If public transportation structures were expanded, car pooling or car sharing are the most likely methods respondents would choose. Following closely are City Subway or Light Rail and City Bus.

Although Carsharing and carpooling are not widespread across the US, considering North American’s love of the personal vehicle and private space, it is not surprising that respondents chose these as next-best alternatives to the personal vehicle.


Automotive Aftermarket: Likely Use of Public Transportation Structures (United States), 2010

71N90F-18

Aftermarket Roadmap

2005 2009 2015 2020

Stable

Revenue rate increase slowing

Revenues grow by 1.8% through recession.

Sub-Prime Mortgage Crisis

The

Afte

rmar

ket

Fuel

Pr

ices

The

Econ

omy

Vehi

cle

Sale

sVe

hicl

e U

se

Accelerating growth pace of 2.3% annually in economic recovery.

Revenues in minor maintenance , accessories restored to 2007 levels.

New opportunities in HEV and EV maintenance.

Increasing miles travelled

Fuel prices and slowing economy begin to drive vehicle usage downward.

Enhanced vehicle modification opportunities to drive future growth.

VIO increase with a CAGR of 1.4% VIO increasing at CAGR of 0.8% VIO expected to

increase slowly.

Hybrids to be an approximate 2.2% of VIO by 2015, driven mainly by fleet/government sales.

Heavy share to domestic brand vehicles.

Increasing share of import brand vehicles. Asian brands increasing popularity.

Sales have been steady yet decreasing

Sales drop - 16.5% in 2008 and 21.1% in 2009

Sales expected to pick-up and grow at a CAGR of 2.6%. 2016 represents recover to 2007 levels.

Domestic brand vehicles to face even greater competition.

Sudden crash - high levels of unemployment, reduced disposable income

Road to Recovery

Stable increase High Peak

Dropped to Stable Levels

Stable increase, with potentially dramatic fluctuations.

Threat of weakened dollar and inflation could drive prices higher and lead to prolonged

recession.


Automotive Aftermarket: Aftermarket Roadmap (North America), 2005-2020

72

Competitive Analysis

73N90F-18

OES Auto Retailers

Internet / Mail Order

OEMExporter

New Car Dealer Parts Depts

Parallel Importer

New Car Dealer Service Depts

Retailer Service Bays

Vehicle Owners

Offshore Manufacturer

Mass Merchandisers

Production Engine Rebuilders

U.S. Parts Manufacturer Remanufacturer Salvage Yard

Warehouse Clubs

Body Shops

Collision Parts Distributors

Independent Installers

Jobbers/ Wagon Jobbers

Re-Distribution Jobber

Service Chain Outlets

WD’s & PGsService Chain Dist. Centers

The On-Demand Nature of Repair Services Spawned a Complex Structure with a Variety of Service Outlet Opportunities

• 3 step structure continues to evolve toward 2 step as jobbers consolidate and grow into distributors

• 3 step exists when installers buy through jobbers, or OE Parts from Dealers

Step 1

Step

2

Step 3 when Jobber & Dealer

involved

Automotive Aftermarket: Distribution Structure (North America), 2010


74N90F-18

Engine Gasoline engine segment is declining at a faster rate (6.2%) than diesel (1.1%). Diesel is forecast to gain market share from gasoline in future because of an increase in diesel VIO and higher replacement rate.

Transmission

Top 10 Remanufactured Products

Starters andAlternators

CV Drive Axles

Rack and PinionSteering Gears

Fuel Injectors

ECUs

Compressors

Clutches

Water Pumps

The decline rate for transmissions aftermarket is lower than that of engines because of lower lifespan for transmissions and cost of transmission repair does not exceed the vehicle value but it does for engines.

Remanufactured units will continue to dominate the total North American starters and alternators aftermarket for the next 5 to 7 years. REMAN: NEW (2010) = 90 :10 and REMAN: NEW (2016) = 87:13.

Remanufactured CV drive axles are dramatically declining; demand for new CV drive axles is growing at an explosive rate and will take away revenue share of remanufactured CV drive axles.

Basic hydraulic power system (HPS) will continue to dominate but will lose share gradually to the sophisticated electronically powered hydraulic (EPHS) and electric power steering (EPS) systems.

High labor intensiveness reduces price difference between new and remanufactured injectors, making new injectors more attractive proposition. NEW: REMAN (2010) = 94 :6 and NEW: REMAN (2017) = 96:4.

Remanufactured ECUs are priced 60-70% lower than new. OEMs prefer remanufactured ECUs and sell into the OES channel to remain competitive in the aftermarket.

Increasing penetration of low-priced compressors from offshore is the biggest challenge for remanufacturers in North America. Because of this reason, New is taking over Reman steadily.

New segment is gradually gaining from reman because the price gap between new and reman is declining and does have the core liability associated with it as reman does.

The newer style water pumps are of aluminum instead of cast iron which is difficult to remanufacture and remachine. Therefore, new units have some performance and quality improvements over reman’ed units.

Automotive Aftermarket: Top 10 Remanufactured Products (North America), 2010

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75N90F-18

Unit Shipment and Revenues of Top Remanufactured Products

Trends by Product Category

ECUs

Fuel Injectors

Racks & Pinion Steering Gears

Starter & Alternator

Transmission(automatic + manual)

Engine (gasoline + diesel)

Compressors

Units (2010)

1.14 Million

2.10 Million

24.2 Million

0.42 Million

1.30 Million

1.96 Million

Revenues (2010)

USD 1.90 Billion

USD 2.14 Billion

USD 1.37 Billion

USD 16.1 Million

USD 150.9 Million

USD 110.94 Million

2017 (Forecast)

USD 1.70 Billion

USD 2.16 Billion

USD 1.22 Billion

USD 17.1 Million

USD 191.0 Million

USD 179 Million

(5.1)%

(2.1)%

(0.9)%

3.5%

0.6%

7.2%

Average Price (2010) CAGR

1.15 Million USD 136.4 Million USD 120 Million -2.5%USD 118.6

USD 1,435.89

USD 115.68

USD 35.8

USD 56.6

USD 1,015.05

USD 56.58

Automotive Aftermarket: Unit Shipment and Revenues of Top Remanufactured Products (North America), 2010


76N90F-18

Competitive Analysis of Remanufacturing Segment

The 'national remanufacturers' designate the largest and most prominent remanufacturing companies in the North American automotive aftermarket. Cardone Industries, Inc. and Fenwick Automotive Products (Fenco) are the only two national remanufacturers in North America currently.

The mid-level remanufacturers cater to a few market segments in which they specialize but supply across North America. Examples of these include Standard Motor Products, DENSO, Motorcar Parts of America (MPA), Remy International, Inc. and others.

The OES-focused remanufacturers include companies like Delphi Corporation, Visteon Corporation, Robert Bosch Corporation, and ZF Industries. These Tier 1 suppliers compete with national remanufacturers in the OES channel.

The regional remanufacturers supply to only selected regions within their geographical scope. Remanufactured segments such as engine, transmission, starter and alternator, and steering gear and steering pumps have many regional and local remanufacturers.

76

Automotive Aftermarket: Competitive Analysis of Remanufacturing Segment (North America), 2010


77N90F-18

RedOcean

BlueOcean

SWOT Assessment of the Warehouse Distribution and Jobber Channel

STRENGTHS

• Aftermarket Experience• Product Coverage• Product Delivery

THREATS

• Program Distributors• Auto Parts Retailers• Two-Step Distribution• Parts Proliferation• Increased Inventory Costs

OPPORTUNITIES

• Joining Program Groups• Improved Inventory Management Systems

WEAKNESSES (CHALLENGES)

• Large Inventories and Inefficiencies

• Lack of Resources• Decreasing Margins due to tight Competition

Mature, unstable with high

competition and new variables.

RESPONDCAPITALIZE

SEIZE PREPARE

Stable

Saturated

Highly UnstableAutomotive Aftermarket: SWOT Assessment of the Warehouse Distribution and Jobber Channel (North America), 2010


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SWOT Assessment of Programmed Distribution Groups

STRENGTHS• Superior Delivery• Broadest and Deepest Wide

Product Coverage• Improving Margin Management• Increasing Use of Technology• Private Label Brands• High Bargaining Power

THREATS• Auto Parts Retailers• Original Equipment Service (OES)• Parts Proliferation

OPPORTUNITIES• Private Labeling• Improved Inventory Management

Systems• New Marketing and Merchandising

Programs to Attract DIY Business• Retail Franchise Stores

WEAKNESSES (CHALLENGES)• Large Inventories and

Inefficiencies• Lack of Unity

RESPONDCAPITALIZE

SEIZE PREPARE

RedOcean

BlueOcean

Relatively stable, with new growth

opportunities Stable

Saturated

Highly Unstable

Automotive Aftermarket: SWOT Assessment of Programmed Distribution Groups (North America), 2010


79N90F-18

SWOT Assessment of the Auto Retail Channel

STRENGTHS

• Lower Purchasing Costs

• Lower Inventory Costs

• Lower Price Perception

THREATS

• Decreased DIY

• Parts Proliferation

• Stronger Competition

• Wholesalers with New Retail Business

OPPORTUNITIES

• Wholesale Business

• Increased Buying Power

• Expansion into New Product Categories

WEAKNESSES (CHALLENGES)

• Employee Experience

• Low SKU Count Limits Business

• Oversaturation

RESPONDCAPITALIZE

SEIZE PREPARE

RedOcean

BlueOcean

Saturated, Mature, and

High Competition.

Stable

Saturated

Highly UnstableAutomotive Aftermarket: SWOT Assessment of the Auto Retail Channel (North America), 2010


80N90F-18

SWOT Assessment of the Original Equipment Service Channel

STRENGTHS• Broadest Coverage for a Particular

Make• Highest Product Quality

Perception• Tools and Training• Guarantee Service• High Profit Margins

THREATS• Growing Aftermarket Participation

of OEMs

• Growing Competition for Service and Parts in the Aftermarket

• Dealership Closures

OPPORTUNITIES• Secondary Lines

• More Aggressive Pricing

• Further Development of Wholesale Programs

• Stand-Alone Repair Facilities

WEAKNESSES (CHALLENGES)• Inferior Delivery Schedules

• Highest Product Prices Perception

• Decreased Locations

• Decaying OES Loyalty with Increasing Vehicle Age

RESPONDCAPITALIZE

SEIZE PREPARE

RedOcean

BlueOcean

Stable

Saturated

Highly Unstable

Mature, Stable, with

high Competition

and new variables.

Automotive Aftermarket: SWOT Assessment of the Original Equipment Service Channel (North America), 2010


81N90F-18

Unit Shipments and Revenues for National Brand Parts by Distributor Type

• O’Reilly/CSK has a higher percentage of nationalbrand to private-label sales than AutoZone, making itthe market share leader in national brands last year.

• NAPA and CARQUEST do not sell national brands.

• Distributors heavily oriented to national brands willperform well among professional installers in theDIFM segment.

Retail Distributors captured 60.8% of total national brand unit sales, compared to 39.2% for programmed distribution groups.

National brand sales represented 65.6% of retail unit sales, but just 26.1% of programmed distribution sales.

AutoZone, 13.6%

Advance Auto Parts, 15.7%

Automotive Distribution

Network, 8.7%

O'Reilly/CSK , 16.8%

NAPA, 1.4%CARQUEST,

0.0%

Pep Boys, 8.2%The

Alliance, 7.5%

Federated Auto Parts,

13.6%

Canadian Tire, 6.5%

National PRONTO

Association, 8.0%

Revenues

Programmed Distribution,

39.2%Retail, 60.8%

Units

0%

20%

40%

60%

80%

100%

Retail Programmed Distribution

65.6%

26.1%

34.4%

73.9%

National Brand Other

(Retail)

Automotive Aftermarket: Unit Shipments and Revenues for National Brand Parts by Distributor Type (North America), 2008

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82N90F-18

Distributor-level Revenues by Type

Total Aftermarket Revenues$64.7 Billion

Mfg. LevelSales

OES$16.2 Billion

WD & Jobbers$17.5 Billion

Program Group$20.1 Billion

Retail & Others$11.0 Billion

Installers$34.5 Billion

Installers$38.3 Billion

Dealer List$26.5 Billion

Dealer Net$18.1 Billion

Retail Sales$20.4 Billion

Program Group$27.4 Billion

WD & Jobbers$24.6 Billion

Consumer Aftermarket Value$119.6 Billion

NOTE: The above revenues are excluding tires, wheels and chemical products to follow common aftermarket practice.

Automotive Aftermarket: Distributor-level Revenues by Type (North America), 2010


83N90F-18

Revenue Breakdown of Aftermarket Distribution Channels

1st Level of Distribution

Reman20%

Manufacturers & Importers 80%

Others5%

Retailers12%

OES25%

Program Groups

31%

WD & Jobbers27%

General Repair

46%

Specialty Repair

6%

Lube Shops 10%

Dealer Service

Bays23%

Body Shops 15%

2nd Level of Distribution

Installer Channels

KeyExpected Decrease

Expected Increase

With the average age of vehicles increasing, more consumers are expected to turn to the aftermarket for maintenance and repair.With dealerships closing down, more demand rises for the independent aftermarket.Due to cost issues and profit margins, more WDs are expected to join program groups and turn to 2-step distribution.Revenue share of retailers are expected to increase on account of their increased wholesale activities.


Automotive Aftermarket: Revenue Breakdown of Aftermarket Distribution Channels (North America), 2009

84

Best Practices

85N90F-18

Aftermarket Participant Expansion and Growing Private Label Practices are Closely Linked (North America), 2010

Profit

Expansion and M&A

Opportunities.Larger

Customer Base

Private Labeling

• Amongst the aftermarket retail and programgroup participants today, the practice of privatelabeling has become popular to improve profitmargins.

• The practice of private labeling has becomeincreasingly important amongst participants tomaximize profits and accelerate growth.

• Expansion and mergers leads to an increasedcustomer base, which in turn allowsopportunities for greater private labelpenetration.

• Private label product sales generate a betterprofit margin percentage than commercialbrand product sales.

• Private label products generate profitabilitythat drives expansion.


86N90F-18

0%

20%

40%

60%

80%

100%

120%

0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000

Sale

s Sh

are

of P

LP

Number of StoresCARQUEST Advance Auto Canadian Tire NAPA AutoZone Pep Boys O'Reilly Automotive

Private Labeling and Expansion

Private Label Product Sales % vs. Number of Stores.

A clear relation is visible between the number of stores and the sales share of private label product brands.Analysis shows that participants with higher private label sales shares are capable of expanding theiroperations with higher revenues (size of bubble).

Program Groups Retail Participants

Automotive Aftermarket: Private Labeling and Expansion (North America), 2008


87N90F-18

Private Labeling and Profitability

Average Margins for Manufacturer Brands

End-customer (DIY and Installer) price index = 100%

Average Margins for Private Label Products

3%

0

10

20

30

40

50

60

70

80

90

100

- End-customer price index split in % -

Other Costs

Operating Costs

Commercial margin

BulkDiscount to Installer

Manufacturer

48% Distributor/ Retailer

0

10

20

30

40

50

60

70

80

90

100

- End-customer price index split in % -

37%

4%

Other Costs

Operating Costs

Commercial Margin

BulkDiscount to Installer

Manufacturer

23%

34%

2%

Distributor/ Retailer

Profit Margins Profit Margins

37%

4%8%

Price (

%)

Price (

%)


Automotive Aftermarket: Private Labeling and Profitability (North America), 2009

88N90F-18

Private Labeling and Profitability Case Study

Assumption: 3 hypothetical companies, A, B, and C each generate $1 Billion in annual revenues. Company A has a private label program which consists of 5% of its annual sales shares, while Company B and C have 25% and 90% respectively. All companies have identical operating expenses of $0.3 Billion.IMPORTANT NOTE: The below companies do not represent any specific company in the North American Aftermarket and are examples for the purpose of comparison hypothetical private label profitability only.

Company A (5% PvL) Company B (25% PvL) Company C (90% PvL)Percent (%) $ (Billion) Percent (%) $ (Billion) Percent (%) $ (Billion)

Sales 100 $1.0 100 $1.0 100 $1.0

% of Sales

Private Label 5 0.05 25 0.25 90 0.9

Manufacturers Brand 95 0.95 75 0.75 10 0.1

Gross Margins Total 0.368 Total 0.398 Total 0.495

GM- Private Label 51 0.026 51 0.128 51 0.459

GM- Manufacturers Brand 36 0.342 36 0.27 36 0.036

Operating Expenses 30 (0.3) 30 (0.3) 30 (0.3)

Operating Profit 6.8 $0.068B 9.8 $0.098B 19.5 $0.195B

Analysis shows that the profitability of a company is directly related to the annual private label sales share of the company. A companywith a heavy private label sales percentage allows the company to collect more than 3 times the profit than a company with a light privatelabel sales share. This trend can be seen in today’s automotive aftermarket when benchmarking different companies in the Retail,Wholesale, Program Group, and Quick Lube industry segments.


Automotive Aftermarket: Private Labeling and Profitability Case Study (North America), 2010

89N90F-18

Private-label Sales of Major Distributors

Identity Program Group

Program Group Retailer Retailer Retailer Retailer Retailer

Retail Sales 20% 20% 85% 50% 95% 70% 60%

Wholesale 80% 80% 15% 50% 5% 30% 40%

Private Label Sales 90% 90% 50% 25%

(Estimated) 27% 25% 25%

Private Label Brands

NAPA CARQUESTDuralast,

Valucraft & Others

O’Reilly, Brake Best &

Others

Prostart, Futura & Others

Advance Auto,

Wearever Gold/Silver &

Others

Motomaster

Geographical Coverage

North America

North America U.S. U.S. U.S. U.S. Canada

Automotive Aftermarket: Private-label Sales of Major Distributors (North America), 2010


90N90F-18

Private Label Strategies of Major Retailer Distributors

Advance Auto Parts currently has over 30 private label brands covering their private label product categories. Most product categories have their own brand.

Advance Auto Parts AutoZone

• Retail participants in the aftermarket generally follow the multi-brand strategy, with the exception of AutoZone, which follows the Multi-Tier privatelabeling brand strategy, and Canadian Tire, which follows the single-brand strategy under the private label Motomaster. AutoZone has the mostefficient private label branding strategy among aftermarket retailers.

• The multi-brand strategy has been proven to be ideal for retailers for offering low-cost goods to the consumer with a wide product selection.• As private label products have become more sophisticated, with the introduction of premium private label, the multi-brand strategy was incapable of

creating a relation between the retailer and the product, thus raising marketing costs and jeopardizing customer loyalty.• Many retailers have experienced disadvantages due to their wide variety of private label brands. Many are now in the process of consolidating various

related private labeled products under one private label brand.

Advance Auto Parts

Brand ‘A’ for

product A

Brand ‘B’ for

product B

Brand ‘C’ for

product C

Brand ‘D’ for

product D

Canadian Tire

Pep Boys O’Reilly Auto Parts

AutoZone

Valucraft Brand

Duralast Brand

Tier 1 Sub-Label

(Duralast Gold)

Canadian Tire

Motomaster Brand for Automotive

Products

No-Name, Brown-Box

Automotive Products

Private Label Sales

20%

PL Sales50% PL Sales

25%

PL Sales25%

(Estimated)

PL Sales27%

Pep Boys

Brand A

Sub-Brands

‘Pro-’ Brand Line

Tier 2 Brand‘Valuegrade’

O’Reilly Auto Parts

Brand ‘A’ for

product A

Brand ‘B’ for

product B

Brand ‘C’ for

product C

Brand ‘D’ for

product D

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Automotive Aftermarket: Private Label Strategies of Major Retailer Distributors (North America), 2009

http://www.autozone.com/N,4294965561/shopping/brandSelect.htm�

http://www.autozone.ro/N,4294896891+14401233/shopping/partTypeResultSet.htm�

http://www.autozone.ro/N,4294966716+14401233/Ntt,Valucraft/shopping/partTypeResultSet.htm�

91N90F-18

Private Label Product Global Sourcing Trends

Countries with Low-Cost Product Exports

Countries with Medium to High Cost Premium or OE Quality Product Exports

• Global sourcing from low-cost labor countries(RED) continues to increase.

• By 2015, parts sourcing from (RED) countries willincrease to an approximate 70 percent of overallprivate label brand products.

• Many participants have set-up purchasing officesin low-cost countries to facilitate transactions.

• Quality checks are done rigorously by the buyerto ensure the supply of worthy products.

• Research indicates that the quality level of low-cost country sourced parts and products hasrisen exponentially during the past 5 years. Thisis mostly because of the increased OEexperience among parts manufacturers in sourcecountries.

• Logistics costs are rising due to the globalincrease of oil prices.

9%36%

32%

23%

3%28%

41%

28%

Automotive Aftermarket: Private Label Product Global Sourcing Trends (North America), 2008


92N90F-18

Advance Auto Parts1.9%

O'Reilly/CSK 2.7%

NAPA48.6%CARQUEST

22.1%

The Alliance

3.3%

Federated Auto Parts

1.1%

Canadian Tire1.0%

National PRONTO

Association2.2%

Automotive Distribution Network

5.5%

AutoZone11.5%


• NAPA and CARQUEST sell almost all of theirproducts under a private label, but the otherprogrammed distribution groups resemble theirretail competitors with a more balanced brand mix.

• This dramatically reduces the market share fornational brands and weakens the bargainingpower of the manufacturers that produce them.

Programmed distribution groups captured 79.0% of total private-label brand unit sales, compared to 21.0% for retail distributors.

Do-it-yourself sales represented 73.5% of retail unit sales, but just 29.7% of programmed distribution sales.

Revenues

Programmed Distribution

79.0%

Retail21.0%

Units

0%

20%

40%

60%

80%

100%

Retail Programmed Distribution

29.8%

69.6%

70.2%

30.4%

Private-label Brand Other

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93N90F-18

Pure OEM Only OEM and Aftermarket Aftermarket Only

Automotive Aftermarket: Comparison of OEM and Aftermarket Distribution Structures (North America), 2010

Parts and component manufacturers that cater to vehicle manufacturers are limited to vehicle design and strict terms.Profit margins range from 20 to 40 percent and are further limited by annual discounts pending on the duration of the production line and supply terms.An increasing number of vehicle manufacturers are adopting the practice of global sourcing which drives down prices.

OEM products are usually sold at a ‘premium’. The margins range from 30 to 40 percent depending on the purchasing volume and the bargaining power of the customer.Overall volumes may be lower than catering to vehicle manufacturers, but new development costs are non-existent, and returns are considerably faster in the aftermarket.

There are 3 general types of aftermarket companies. Premium aftermarket brands, and low-cost aftermarket brands, or ones that offer both.Low-cost brands are supplied with a profit margin of an approximate 35 to 40 percent.Premium brands have a profit margin of ~30%, but have a higher product cost and the overall profit dollars are considerably higher.

Parts Manufacturer

Vehicle Manufacturers

Dealer Channel

Vehicle Dealer Service Bays

Typically a 20~40 percent profit margin with annual discounts pending on duration of the production line.

Parts Manufacturer

Vehicle Manufacturer

Dealer Channel

Vehicle Dealer

Service Bays

WDs and Program Groups

InstallersRetailer

Bay/ Installer

Retail

Profit margins range from 50 to 70 percent, pending on the purchasing volume and bargaining power of the customer group.

Parts Manufacturer

WDs and Program Groups

Retail

Installer Retail Bay/ Installer

Profit margins range from 30 to 35%, depending on the brand, purchasing volume and bargaining power of the customer group.


94N90F-18

Year 1 Year 2 Year 3 Year 4 Year 5 Total

Sales Price OEM A 0.95*A 0.903A 0.857A 0.815A

Revenues from Vehicle Production Line

AB 0.95AB 0.903AB 0.857AB 0.815AB 4.525AB

Revenues from OES (Typically 25% Rev. Share)

Vehicle# * Sales Price * Replacement Rate * OES Revenue Share

0 0.0356AB 0.0677AB 0.0964AB 0.1222AB 0.322AB

Total Revenues OEM AB 0.9856AB 0.9707AB 0.9534AB 0.9372AB 4.8469AB

Cost OEMCost * (Vehicle Production+(15% of VIO*OES Revenue Share))

0.75AB 0.778AB 0.806AB 0.834AB 0.863AB 4.031AB

Profit 0.25AB 0.2076AB 0.1647AB 0.1194AB 0.0742AB 0.8159AB

Profit % 25.0% 21.1% 17.0% 12.5% 7.9% 16.8%

Analysis of OEM Profit Margins

Pure OEM Only

Parts and component manufacturers that cater to vehicle manufacturers are only limited to vehicle design and strict terms.Profit margins vary from 20 to 40 percent and are further limited to annual discounts pending on the duration of the production line and supply terms.An increasing number of vehicle manufacturers are in the process of reducing costs through global sourcing.

Parts Manufacturer

Vehicle Manufacturers

Dealer Channel

Vehicle Dealer Service Bays

Assumption: Company A supplies Part A to a vehicle manufacturer. The production line is expected to last 5 years with B vehicles produced annually.Sales Price is $A/Unit with a 5% annual discount.Avg. Production Cost over the 5 year period is $0.75A/UnitCost includes R&D, Sales & Marketing, Manufacturing, Fault & Defects, Raw Materials, & Others.Annual replacement rate of Part A is 15%.There are no replacements in the 1st year.All vehicles produced are sold and the survival rate is 100% during the 5 years.OES has 25% Revenue `Market Share


Automotive Aftermarket: Analysis of OEM Profit Margins (North America), 2008

95N90F-18

Comparison of OEM and Aftermarket Profit Margins

Assumption (OEM): Same as Previous SlideAssumption (IAM):Cost: $0.6A – Excludes R&D (R&D cost already in the OEM cost), Sales Price remains constant. $1.65A for Retailers, and $1.5A for WDs and Jobbers. Replacement Rate and Sales rate to OES stays constant during the sales period.

Year 1 Year 2 Year 3 Year 4 Year 5 Total Sales Price OEM A 0.95*A 0.903A 0.857A 0.815ARev from Vehicle Production Line AB 0.95AB 0.903AB 0.857AB 0.815AB 4.525AB

Rev from OES (Typically 25% Market Share) Vehicle# * Sales Price * Replacement Rate * OES Revenue Share0.0356AB 0.0677AB 0.0964AB 0.1222AB 0.322AB

Total Rev. OEM AB 0.9856AB 0.9707AB 0.9534AB 0.9372AB 4.8469AB

Cost OEM Cost * (Vehicle Production+(15% of VIO*OES Rev. Share))0.75AB 0.778AB 0.806AB 0.834AB 0.863AB 4.031AB

Profit OE 0.25AB 0.2076AB 0.1647AB 0.1194AB 0.0742AB 0.8159ABProfit % OE 25.0% 21.1% 17.0% 12.5% 7.9% 16.8%Sales Price to WD & Jobbers 1.5A 1.5A 1.5A 1.5A 1.5ARev from WD & Program Groups (Typically 58% Rev. Share. Assume 30% Market Share for Company)

Price * (15% of VIO*WD/Program Group Rev. Share*Company Market Share))

0 0.03915AB 0.0783AB 0.11745AB 0.1566AB 0.3915AB

Sales Price Retail 1.65A 1.65A 1.65A 1.65A 1.65ARev from Retail (Typically 12% Rev. Share. Assume 30% Market Share for Company)

Price * (15% of VIO*Retail Rev. Share*Company Market Share))0 0.00891AB 0.01782AB 0.02673AB 0.03564AB 0.0891AB

Total Cost IAM Cost * (15% of VIO*(Retail Rev Share+WD/PG Rev. Share)*Company Market Share)0 0.0189AB 0.0378AB 0.0567AB 0.0756AB 0.189AB

Total Rev. IAM 0 0.04806AB 0.09612AB 0.14418AB 0.19224AB 0.4806AB

Profit IAM - 0.02916AB 0.05832AB 0.08748AB 0.11664AB 0.2916AB

Profit % IAM 0 60.7% 60.7% 60.7% 60.7% 60.7%Total Rev AB 1.03366AB 1.06682AB 1.09758AB 1.12944AB 5.3275ABTotal Cost 0.75AB 0.7969AB 0.8438AB 0.8907AB 0.9386AB 4.22ABTotal Profit $ 0.25AB 0.23676AB 0.22302AB 0.20688AB 0.19084AB 1.1075ABTotal Profit % 25.0% 22.9% 20.9% 18.8% 16.9% 20.8%

Automotive Aftermarket: Comparison of OEM and Aftermarket Profit Margins (North America), 2008

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Key Takeaways

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Revenue Distribution by Product Category

What is expected in 2017?Tires and Wheels

26%

Others58%

Lighting1%

Exhaust1%

Starters and Alternators

1%

Brake Parts4%

Filters2%

Batteries3%

Collision and Glass

4%

Tires will outpace aftermarket growth, in part because of increased demand for TPMS sensors.

Note: Others include Steering System Hard Parts, Reman'd Engine & Transmission, CV Driveaxle & Boot Kit, Reman'd Rack & Pinion Steering Gear, HVAC & Engine Cooling Components of Commercial Vehicles, Class 6-8 Truck Powertrain Systems & Components, Class 6-8 Truck Chassis Systems & Components, Tire Pressure Monitoring Systems, Light Vehicle Exhaust Emission Control Systems, Fuel Delivery Systems, Engine Control Units, Ignition Parts, Automotive Sensors, Ignition Wire Sets, Class 6-8 Engine Components, Reman. Engines and transmissions, Selected Fractional Horsepower Motors, Fuel Injectors, Fuel Pumps, Selected Automotive Reman'd Pumps, Sports Compact Underhood components, Belt, Hoses, Gaskets and Seals, Battery, Carburetor, Gauge, Internal Engine Hard Parts.

Revenues increased by 1.4% in 2010 despite the economic recession. Some large retail chains reported double-digit same-store sales growth as vehicle owners increased purchases of basic care care products such as floor mats and air fresherners, because they are keeping their vehicles longer. Over the next few years, these consumers will purchase more expensive parts and service.

Enhanced vehicle safety reduces collisions, but technology increases cost of OEM crash parts.

Brakes offer strong growth and make up as much as 25% of revenues for some distributors.

Lighting components will be impacted by the increased adoption of LEDs.

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Automotive Aftermarket: Revenue Distribution by Product Category (North America), 2017


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Automotive Aftermarket: SWOT Assessment (North America), 2010

STRENGTHS• Most developed in the world.• Coverage of all makes, all models.• Stable distribution structure.• Constant demand for maintenance products.• North American automotive culture demands for

aftermarket products (e.g. vehicle modification).• Large VIO.• Platform for growth into overseas markets.• Large and diverse supplier base.• Efficient reverse-engineering.• R&D capabilities.

THREATS• Constant new entrants.• Lower cost imports.• Declining quality-control standards.• Declining average annual vehicle use.• Increased adoption of electronics in vehicle

manufacturing.• Increased popularity of vehicle leasing.• Keeping up with changes in vehicle technology.• Attracting and retaining high-quality service and

counter personnel.• Required investments in training, equipment.

OPPORTUNITIES• Economic rebound expected to boost sales for

accessories and minor maintenance products.• Increased replacement of high-cost electronic

integrated products will drive revenues.• Steady, consistent growth of maintenance products.• Growth of vehicle modification activity.• Increased average vehicle age demands ‘major’

maintenance products and services.• Increased profits with Private Labeling and Wholesale.

WEAKNESSES (CHALLENGES)• Heavy fragmentation.• Highly competitive.• Risk of commoditization.• Overseas, low-cost suppliers.• Constant introduction of new vehicle technologies.• Difficulties in repairing new vehicle electronics and

applications.• Not enough skilled service technicians.• Increasing logistics costs.• Parts proliferation.

Mature, Stable, but

with constant

new variables.

RESPONDCAPITALIZE

SEIZE PREPARE

Current State

Market Forces

Stable

Saturated

Highly Unstable

KEY TAKEAWAY: Market should outperform historical growth rates as economy rebounds.


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About Frost & Sullivan

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Who is Frost & Sullivan

The Growth Consulting Company • Founded in 1961, Frost & Sullivan has over 45 years of assisting clients with their decision-making

and growth issues

• Over 1,700 Growth Consultants and Industry Analysts across 32 global locations

• Over 10,000 clients worldwide - emerging companies, the global 1000 and the investment community

• Developers of the Growth Excellence Matrix – industry leading growth positioning tool for corporateexecutives

• Developers of T.E.A.M. Methodology, proprietary process to ensure that clients receive a 360operspective of technology, markets and growth opportunities

• Three core services: Growth Partnership Services, Growth Consulting and Career Best Practices

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What Makes Us Unique

Exclusively Focused on Growth

Global thought leader exclusively focused onaddressing client growth strategies and plans –Team actively engaged in researching anddeveloping of growth models that enable clientsto achieve aggressive growth objectives.

Industry Breadth

Cover the broad spectrum of industries andtechnologies to provide clients with the ability tolook outside the box and discover new andinnovative ideas.

Global Perspective

32 global offices ensure that clients receive aglobal coverage/perspective based on regionalexpertise.

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Proprietary T.E.A.M.TM Methodology integrates all6 critical research methodologies to significantlyenhance the accuracy of decision making andlower the risk of implementing growth strategies.

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Trusted Partner

Working closely with client Growth Teams –helping them generate new growth initiatives andleverage all of Frost & Sullivan assets toaccelerate their growth.

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T.E.A.M. Methodology

Frost & Sullivan’s proprietary T.E.A.M. methodology, ensures that clients have complete “360 DegreePerspective” from which to drive decision-making. Technical, Econometric, Application, and Market informationensures that clients have a comprehensive view of industries, markets and technology.

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