TheSmartCEO Magazine October,1 2014 The Competition Commission of India (CCI) has recently come down heavily on a majority of car manufacturers in India for engaging in restrictive and anti-competitive trade practices. According to newspaper reports, CCI believes that these <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/industries/auto-and-auto-components/">auto companie</a>s or OEMs (Original Equipment Manufacturers) were blocking the growth of the spare parts and after-sales service market by  (a) ensuring independent (non-affiliated) repairers cannot access genuine spare parts/technology required;  (b) Imposing a blanket condition under which warranties are voided if the consumer avails the services of any independent repairer;  (c) Ensuring agreements with local original equipment suppliers (OES) that prevent or limit them from selling in the open market. They were also accused of selling spare parts with very high markups.   This is because when a customer buys a car, he is locked into buying only specific spares – creating a monopoly situation when others are not allowed to sell. This also enables car companies to price spares without the pressure of competition. Therefore, CCI believes that this restricts consumers’ access to spare parts and curtails their freedom of choice in service providers.  CCI, through its ruling, has insisted that the car companies put in place an effective system to make the spare parts and diagnostic tools easily available in the open market for customers and independent repairers. According to newspaper reports, SIAM (Society of Indian Automobile Manufacturers) reacted to the ruling, expressing concern that it does not consider: (a) customer safety, and (b) the protection of intellectual property rights and patents owned by the companies.  OEMs set up spares and services businesses to offer after-sales support for vehicles. A good after-sales service infrastructure has a direct impact on vehicle sales. So, one of the objectives of spares and services businesses is to offer service excellence, but another objective is to make substantial profits. At times, these two objectives are in conflict. If OEMs adhere to CCI recommendations, they are actually increasing the service network footprint for their vehicles, which is good for their overall vehicle sales. But, on the other hand, opening up the market to competition can lead to a drain of profits for the spares business. The best solution would be to find a way to balance both objectives, that is, to have their cake and eat it too.!  While car manufacturers may worry that their bottom lines or the car owner's safety will be affected negatively, the fact is that they need not.  The reasons are many a) Potential to develop the <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/research-and-publication/articles/the-new-aftermarket-highway/">aftermarket spares</a> business: The current practice is to lock car owners in with the warranty clause and concentrate on servicing customers in this period (usually two years) of the lifetime of the car. As the car leaves the warranty period, in a vast majority of cases, it also leaves the fold of the OEM. Once the vehicle gets out of the fold, the OEM loses out on the spares and services business. According to ACMA, while nearly 20% of the cars on the road are more than 15 years old, the typical age profile of cars reporting at dealerships is of less than seven years. This means that the older the car, the less likely that the car will visit the OEM service centre. Once the car changes hands, this is even less likely. But the irony is that the older the car gets, the more is the need for service and parts. Industry studies peg the current size of the components business in the Indian automotive after-market between ₹24,800–₹28,000 (of this 26% is accounted for by cars), whereas the service market is estimated at ₹8,000 crore. The combined value is projected crore to rise to ₹40,000 crore by 2015 and to ₹60,000 crore by 2020. The parts aftermarket is also expected to grow at 11% till 2015 to reach ₹37,000 crore. A recent ACMA study reveals coverage figures as low as 15%-20%, indicating that this market is addressed ineffectively by most OEMs.  b) Opportunity to curtail part and service leaks from dealerships and service centres: Many car manufacturers do not have complete reach either through their service centres or through their distributors to cater to a fast-expanding aftermarket. Even the suppliers of the OEMs, who have the freedom (there may be agreements restricting it) to supply to this market, very rarely have the capability to do an effective distribution. Since this means that parts of many of the car brands are not freely available in the market, the situation creates an unmet need in the market, opening an oft unacknowledged channel – a leak of parts from dealerships and service centers into the open market- even if this has been prohibited by the OEM with the safety of the customers in mind. It is also seen that many OEMs have targets for parts sales for their service centres. In these cases, too, it becomes in the best interest of the service centre to push some of their monthly targets into the open market. This will often be at a lower price since the attempt is to either clear inventory or sell in bulk. The best intentions of the OEM are thus defeated while simultaneously taking a hit to the bottom line. c) Opportunity to bring down counterfeiting: One of the prime reasons for significant counterfeit sales in spare parts is the poor availability of parts. Few other consumer product category has seen counterfeiting to this extent in the Indian market. ACMA assesses that 36% of the components in the aftermarket are fake. It is also thought to be growing 9%-11% annually. Since counterfeiting is usually of the OEM’s intellectual property, in addition to eating into the aftersales of the car manufacturer, it may also spoil the car and endanger the life of the owner.  d) New market segment opening up: A new segment of fleet operators and taxis that tend to be demanding in a) price, b) reliability, c) quality, and d) safety is evolving into a relevant segment. In recent years, this segment has grown substantially to over 5 lakh cars on the road. The larger among them even have their own service centres. In addition to price competitiveness, reliability in the availability of the required part at the right time and in the required place is of crucial interest to them! If there are long periods of waiting to source parts from the OEMs and their distributors, they will look for alternatives. When a fleet operator has to take a car out of service for lack of a part, it costs him! <figure class="image"><img style="aspect-ratio:4000/3244;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//auto-article-22-img-1-1735283858_1776934774.jpg" width="4000" height="3244"></figure><h5>What can be done? </h5>Simple, increase reach and range! This can be done in many ways: a) Aggressively distribute spare parts: While the OESs may wish to cater to the market that the OEMs are neglecting, they have their limitations. Distributing (vis-à-vis wholesaling) requires a different mindset (selling to many small entities in small quantities frequently) and is not their cup of tea for parts manufacturers as they are more organised to think B2B and big volumes. They look into the aftermarket only opportunistically, usually during downturns. When business picks up, they tend to neglect the aftermarket, with production capacity continuously getting diverted to the OEM’s production requirement. Moreover, if the original parts were reliably available, the customers would much rather buy a 'first fit'. Therefore, instead of prohibiting the suppliers, it’s more profitable for the OEM to develop the distribution network and let market forces do the necessary.  b) Develop a multi-tiered service centre system: Currently, the coverage of the service centres of most OEMs is limited and cannot reach out effectively to cars that leave the fold - especially the second-hand market. These cars, by force, are then dependent on garage owners. While it may not be feasible for OEMs to reach the nooks and corners of the country on their own, it will be feasible to look at a model wherein the OEM trains or associates with two kinds of multi-brand garage owners (franchisees) in addition to authorised service centres. The Tier 1 could constitute garage owners who would be located at places where the OEMs do not have an authorised service centre. They would be frequently trained/ certified and equipped for a fee to handle all minor and a few major repairs. The Tier-2 could be small garage owners who are trained/certified and managed by either the Tier 1 or the authorised service provider in the region. When either of these garages is unable to service the requirement of a customer, they can send the car to Tier 2 or authorised service centre based on the kind of repairs needed.  The company service centre will continue to offer premium service because of very good service delivery – the multi-brand car garages cannot ensure good parts availability due to the multiplicity of parts, but OEM service centres will have good parts availability, so car repair can be very fast. Moreover, 'first fit' will always attract a premium and address a different segment of the market- the less price-sensitive new car owners. Further, while franchisee service centres may offer lower prices, they cannot manage complex services, nor can they provide rapid resolution, but their presence in the channel will help OEMs give depth to the spares business and address currently unaddressed segments, increasing vehicle and spare parts sales.  c) Use ‘pull-based’ distribution: For either of the above to succeed, it will be necessary that the car manufacturer uses a ‘pull-based’ system of replenishment. If this distribution is attempted with the traditional push system, based on sales targets and dumping of inventory down the channel members, it will also bring with it the traditional problems of high inventory of the wrong parts at the wrong places and uselessly blocked working capital. This also will mean disgruntled channel partners who may eventually go bankrupt. The small garage owners, especially, will often be severely handicapped and not have enough money to invest in equipment, technology and training. Pull method of distribution, at the same time, ensures higher sales and better availability at considerably lower levels of inventory. But critical conditions to ensure success while executing the pull system of replenishment for distribution are:  – Moving wholesalers out of the network and replacing them with dedicated distributors with clear territory limitations. This will ensure deeper penetration of reach while preventing cross-country dumping. – Ensuring placement and continuous availability of the relevant range at maximum retail points. This will ensure availability without the retailer having to hoard any parts for fear of non-availability. – Dedicated effort by the distributor to collect orders and replenish frequently. – A central warehouse which acts as a dampener to parts requirement fluctuations. The greatest variability in parts demand will logically be at the point of sale and service and the least at the aggregate level. Therefore, using this power of aggregation, a central warehouse will be able to serve many different destinations in the <a target="_blank" rel="noopener noreferrer" href="https://new-stage.vectorconsulting.in/en/research-and-publication/blogs/first-among-equals-marketing-or-supply-chain/">supply chain</a> far more efficiently, whilst keeping the lowest possible overall stock in the system.  Higher sales and better availability at considerably lower inventory levels will enable distributors to achieve high ROI motivating them to invest in the required procedures for frequent retail servicing. OEMs can, therefore, happily comply with the CCI and augment revenues at the same time by claiming the vast untapped opportunity in the aftermarket.

Key Takeaways

To prevent loss of revenue, OEMs try to dissuade vehicle owners from going to the aftermarket. But this approach does more harm than good. Developing their own aftermarket distribution would help them earn more revenue from this.

Spare parts strategy for OEMs in the automobile sector

TheSmartCEO Magazine October,1 2014 The Competition Commission of India (CCI) has recently come down heavily on a majority of car manufacturers in India for engaging in restrictive and anti-competitive trade practices. According to newspaper reports, CCI believes that these <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/industries/auto-and-auto-components/">auto companies</a> or OEMs (Original Equipment Manufacturers) were blocking the growth of the spare parts and after-sales service market by  (a) ensuring independent (non-affiliated) repairers cannot access genuine spare parts/technology required;  (b) Imposing a blanket condition under which warranties are voided if the consumer avails the services of any independent repairer;  (c) Ensuring agreements with local original equipment suppliers (OES) that prevent or limit them from selling in the open market. They were also accused of selling spare parts with very high markups.   This is because when a customer buys a car, he is locked into buying only specific spares – creating a monopoly situation when others are not allowed to sell. This also enables car companies to price spares without the pressure of competition. Therefore, CCI believes that this restricts consumers’ access to spare parts and curtails their freedom of choice in service providers.  CCI, through its ruling, has insisted that the car companies put in place an effective system to make the spare parts and diagnostic tools easily available in the open market for customers and independent repairers. According to newspaper reports, SIAM (Society of Indian Automobile Manufacturers) reacted to the ruling, expressing concern that it does not consider: (a) customer safety, and (b) the protection of intellectual property rights and patents owned by the companies.  <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/our-work/case-studies/ashok-leyland-spares-parts-division/">OEMs</a> set up spares and services businesses to offer after-sales support for vehicles. A good after-sales service infrastructure has a direct impact on vehicle sales. So, one of the objectives of spares and services businesses is to offer service excellence, but another objective is to make substantial profits. At times, these two objectives are in conflict. If OEMs adhere to CCI recommendations, they are actually increasing the service network footprint for their vehicles, which is good for their overall vehicle sales. But, on the other hand, opening up the market to competition can lead to a drain of profits for the spares business. The best solution would be to find a way to balance both objectives, that is, to have their cake and eat it too.!  While car manufacturers may worry that their bottom lines or the car owner's safety will be affected negatively, the fact is that they need not.  The reasons are many a) Potential to develop the aftermarket spares business: The current practice is to lock car owners in with the warranty clause and concentrate on servicing customers in this period (usually two years) of the lifetime of the car. As the car leaves the warranty period, in a vast majority of cases, it also leaves the fold of the OEM. Once the vehicle gets out of the fold, the OEM loses out on the spares and services business. According to ACMA, while nearly 20% of the cars on the road are more than 15 years old, the typical age profile of cars reporting at dealerships is of less than seven years. This means that the older the car, the less likely that the car will visit the OEM service centre. Once the car changes hands, this is even less likely. But the irony is that the older the car gets, the more is the need for service and parts. Industry studies peg the current size of the components business in the Indian automotive after-market between ₹24,800–₹28,000 (of this 26% is accounted for by cars), whereas the service market is estimated at ₹8,000 crore. The combined value is projected crore to rise to ₹40,000 crore by 2015 and to ₹60,000 crore by 2020. The parts <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/research-and-publication/articles/the-new-aftermarket-highway/">aftermarket</a> is also expected to grow at 11% till 2015 to reach ₹37,000 crore. A recent ACMA study reveals coverage figures as low as 15%-20%, indicating that this market is addressed ineffectively by most OEMs.  b) Opportunity to curtail part and service leaks from dealerships and service centres: Many car manufacturers do not have complete reach either through their service centres or through their distributors to cater to a fast-expanding aftermarket. Even the suppliers of the OEMs, who have the freedom (there may be agreements restricting it) to supply to this market, very rarely have the capability to do an effective distribution. Since this means that parts of many of the car brands are not freely available in the market, the situation creates an unmet need in the market, opening an oft unacknowledged channel – a leak of parts from dealerships and service centers into the open market- even if this has been prohibited by the OEM with the safety of the customers in mind. It is also seen that many OEMs have targets for parts sales for their service centres. In these cases, too, it becomes in the best interest of the service centre to push some of their monthly targets into the open market. This will often be at a lower price since the attempt is to either clear inventory or sell in bulk. The best intentions of the OEM are thus defeated while simultaneously taking a hit to the bottom line. c) Opportunity to bring down counterfeiting: One of the prime reasons for significant counterfeit sales in spare parts is the poor availability of parts. Few other consumer product category has seen counterfeiting to this extent in the Indian market. ACMA assesses that 36% of the components in the aftermarket are fake. It is also thought to be growing 9%-11% annually. Since counterfeiting is usually of the OEM’s intellectual property, in addition to eating into the aftersales of the car manufacturer, it may also spoil the car and endanger the life of the owner.  d) New market segment opening up: A new segment of fleet operators and taxis that tend to be demanding in a) price, b) reliability, c) quality, and d) safety is evolving into a relevant segment. In recent years, this segment has grown substantially to over 5 lakh cars on the road. The larger among them even have their own service centres. In addition to price competitiveness, reliability in the availability of the required part at the right time and in the required place is of crucial interest to them! If there are long periods of waiting to source parts from the OEMs and their distributors, they will look for alternatives. When a fleet operator has to take a car out of service for lack of a part, it costs him! <figure class="image"><img style="aspect-ratio:4000/3244;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//auto-article-22-img-1-1735283858_1776934750.jpg" width="4000" height="3244"></figure><h5>What can be done? </h5>Simple, increase reach and range! This can be done in many ways: a) Aggressively distribute spare parts: While the OESs may wish to cater to the market that the OEMs are neglecting, they have their limitations. Distributing (vis-à-vis wholesaling) requires a different mindset (selling to many small entities in small quantities frequently) and is not their cup of tea for parts manufacturers as they are more organised to think B2B and big volumes. They look into the aftermarket only opportunistically, usually during downturns. When business picks up, they tend to neglect the aftermarket, with production capacity continuously getting diverted to the OEM’s production requirement. Moreover, if the original parts were reliably available, the customers would much rather buy a 'first fit'. Therefore, instead of prohibiting the suppliers, it’s more profitable for the OEM to develop the distribution network and let market forces do the necessary.  b) Develop a multi-tiered service centre system: Currently, the coverage of the service centres of most OEMs is limited and cannot reach out effectively to cars that leave the fold - especially the second-hand market. These cars, by force, are then dependent on garage owners. While it may not be feasible for OEMs to reach the nooks and corners of the country on their own, it will be feasible to look at a model wherein the OEM trains or associates with two kinds of multi-brand garage owners (franchisees) in addition to authorised service centres. The Tier 1 could constitute garage owners who would be located at places where the OEMs do not have an authorised service centre. They would be frequently trained/ certified and equipped for a fee to handle all minor and a few major repairs. The Tier-2 could be small garage owners who are trained/certified and managed by either the Tier 1 or the authorised service provider in the region. When either of these garages is unable to service the requirement of a customer, they can send the car to Tier 2 or authorised service centre based on the kind of repairs needed.  The company service centre will continue to offer premium service because of very good service delivery – the multi-brand car garages cannot ensure good parts availability due to the multiplicity of parts, but OEM service centres will have good parts availability, so car repair can be very fast. Moreover, 'first fit' will always attract a premium and address a different segment of the market- the less price-sensitive new car owners. Further, while franchisee service centres may offer lower prices, they cannot manage complex services, nor can they provide rapid resolution, but their presence in the channel will help OEMs give depth to the spares business and address currently unaddressed segments, increasing vehicle and spare parts sales.  c) Use ‘pull-based’ distribution: For either of the above to succeed, it will be necessary that the car manufacturer uses a ‘pull-based’ system of replenishment. If this distribution is attempted with the traditional push system, based on sales targets and dumping of inventory down the channel members, it will also bring with it the traditional problems of high inventory of the wrong parts at the wrong places and uselessly blocked working capital. This also will mean disgruntled channel partners who may eventually go bankrupt. The small garage owners, especially, will often be severely handicapped and not have enough money to invest in equipment, technology and training. Pull method of distribution, at the same time, ensures higher sales and better availability at considerably lower levels of inventory. But critical conditions to ensure success while executing the pull system of replenishment for distribution are:  – Moving wholesalers out of the network and replacing them with dedicated distributors with clear territory limitations. This will ensure deeper penetration of reach while preventing cross-country dumping. – Ensuring placement and continuous availability of the relevant range at maximum retail points. This will ensure availability without the retailer having to hoard any parts for fear of non-availability. – Dedicated effort by the distributor to collect orders and replenish frequently. – A central warehouse which acts as a dampener to parts requirement fluctuations. The greatest variability in parts demand will logically be at the point of sale and service and the least at the aggregate level. Therefore, using this power of aggregation, a central warehouse will be able to serve many different destinations in the <a target="_blank" rel="noopener noreferrer" href="https://new-stage.vectorconsulting.in/en/research-and-publication/blogs/first-among-equals-marketing-or-supply-chain/">supply chain</a> far more efficiently, whilst keeping the lowest possible overall stock in the system.  Higher sales and better availability at considerably lower inventory levels will enable distributors to achieve high ROI motivating them to invest in the required procedures for frequent retail servicing. OEMs can, therefore, happily comply with the CCI and augment revenues at the same time by claiming the vast untapped opportunity in the aftermarket.

<h4>Spare parts strategy for OEMs in the automobile sector </h4>

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<h4>Spare parts strategy for OEMs in the automobile sector </h4>

Explore effective spare parts strategies for OEMs in the automobile sector to enhance service networks and profitability while complying with regulatory requirements.