Stalled on the On Ramp? Digital Transformation and the North American Auto Aftermarket

Digital transformation is a hot topic in the aftermarket trade media. But how many companies are really doing it?

Part 1 of this series defined the differences between digitization and digital transformation.

Digitization, we said, occurs when companies use digital technologies to optimize their current business.

Digital transformation drives radical change. It occurs when a company uses digital technology to disrupt its own business or an industry.

A company may disrupt by developing new revenue sources, by redefining the competition, or by realigning relationships among players.

In this article, we’ll first consider what digital transformation means for the North American automotive aftermarket. Then we’ll explore the kinds of radical changes that are occurring.


Technology drives massive change

The automotive aftermarket is among the oldest and most established industries in North America. Until recently, it has faced less disruption than others.

But now disruption has arrived in full force. And it’s accelerating.

New automotive technologies are emerging at head-spinning rate. Companies in the aftermarket have plenty of change to assimilate: driverless vehicles, artificial intelligence, and electric cars.  

Many aftermarket suppliers can barely keep pace with changing customer expectations.

The automotive aftermarket goes online

The shift to ecommerce presents many opportunities for digital transformation. 

Ecommerce is the fastest-growing sales channel in the North American aftermarket. It outpaces the growth of brick-and-mortar retail by a factor of five.

Online sales of auto parts and accessories are still much smaller than sales through traditional channels. But they are big enough to be truly disruptive.

Online sales for new parts and accessories were about $8.9 Billion in 2017. This number excludes revenue from online auctions and used parts.

Sales are forecast to top $10 billion in 2018. That’s a growth rate of about 15% over 2017. In contrast, parts sales through brick-and-mortar stores will likely grow at just less than 3% through 2019.

Businesses are responsible for most of the surge in online buying of auto parts and accessories. Service providers buy more parts online than consumers do. About 70% of business buyers choose to buy online over other channels.

With better access to information, buyers can bypass brick-and-mortar stores. That’s the most obviously disruptive aspect of online shopping.

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Amazon sets its sights on auto parts

Amazon has been selling auto parts for years. They and eBay are the biggest online retailers of aftermarket parts. Amazon alone accounts for about half of the aftermarket’s online sales.

For about a decade, Amazon has had contracts to sell parts sourced from Bosch Automotive Aftermarket.

Then Amazon got more aggressive in 2017. They partnered with a broader range of the top parts distributors and manufacturers. Their new partners include Federal-Mogul, Dorman Products, and Cardone Industries.

Federal-Mogul Motor Parts previously sold its products on Amazon indirectly, through traditional distributors that resold to Amazon. Now the company sells directly to Amazon.

At first, industry analysts said Amazon would find limited success in auto parts. They thought Amazon would be at a disadvantage against local brick-and-mortar stores, which provide faster access to parts. But Amazon quickly advanced beyond that limitation.

Amazon now offers free two-day delivery to Amazon Prime customers and same-day delivery in about 40 U.S. cities.

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Big three parts retailers face a hard squeeze

With fast delivery, Amazon will take market share from parts retailers who sell to the do-it-yourself (DIY) segment of the market.

AutoZone. Advance Auto Parts, and O’Reilly appear to be directly in Amazon’s path of damage.

Autozone is most vulnerable, because about 75% to 80% of its revenue comes from the DIY market. For O’Reilly Automotive, DIY delivers about 50% of revenue. For Advance Auto Parts,  the number is about 40%. And for Genuine Parts, it’s about 15%.

When Amazon announced their deepened commitment to the auto aftermarket, stock prices dropped for Autozone, Advance Auto Parts, and O’Reilly.

But wait. It gets worse for the companies heavily invested in the status quo.

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Parts prices come down

Barron’s said in January 2017 it had found that Amazon’s average prices for auto parts were 22% lower than those  of the big retail chains.

But Federal-Mogul, for one, isn’t giving Amazon price breaks. That’s according to Dan Ninivaggi, CEO of Federal-Mogul Motor Parts, in early 2017.

Amazon has even paid a premium as high as 30% for the same parts manufacturers also sell to other retailers.

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Amazon plays the long game

Why would Amazon pay higher prices for parts at the same time they’re cutting prices to their customers?

They may have paid premium prices to get big-name parts suppliers to sell directly to them. With more volume from big-name suppliers, they can attract more customers. And they can reduce their purchase cost by cutting out profit that used to go to middlemen.

Amazon has shown they have deep pockets and plenty of patience.

For years, Jeff Bezos trained Wall Street not to expect the kind of quarterly profit growth they demand from other investments. 

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AWS fills Amazon’s war chest

Now Amazon has a fast-growing revenue and profit engine in its Amazon Web Services (AWS). The cloud business contributed more than $5.1 billion to revenue in Q4 2017, handily beating analysts’ expectations. So Wall Street is happy. 

Fueled by profits from Amazon Web Services, Amazon can be even more aggressive in ecommerce.

Now they can buy market share with low pricing and watch their competitors wilt.

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It’s about consumer data

Amazon collects and uses vast amounts of data to drive their recommendation engine. Auto parts sales appears to be their early step toward entering more segments of the auto industry. 

Industry analysts speculate that Amazon will expand to selling maintenance and repair services. From there, they sell vehicles online. Experiments are already underway.

With vast amounts of detailed data, they’d a big leg-up over competitors who have a more limited view of customer behavior.   

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Parts suppliers sell direct to end users online

Seeing both opportunity and risks of inaction, makers of parts and accessories have also moved online.

Goodyear now offers direct-to-consumer online tire sales, with fulfillment through more than 4,000 retail locations. 

Michelin bought Blackcircles and Allopneus, the leading British and French online tire retailers. They did so, they said, to help consumers with different modes of online and offline searches and purchases.

With these and other moves, established players are redefining their roles and business models.

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Industry joins a barroom brawl

Many would say the slugfest is already well underway. 

Retailers threw an early punch by replacing branded parts with cheaper alternatives they source in Asia.

Manufacturers responded by developing their own relationships with the customers who retailers used to “own.”  

Established distribution hierarchies are flattening. Manufacturers moving into better position to capture revenue and profits they used to leave to middlemen.  

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Boundaries between customers and competitors are shifting

Enabled by digital technology, other big challenges are also reshaping traditional auto industry structures and relationships.

Soon cars will be smart enough to diagnose themselves and share the information wirelessly.

When cars can tell a service provider or part supplier what repair or maintenance parts to order, retailers will face a whole new set of challenges.

That’s among McKinsey’s takes on the disruption coming to the auto industry.

The industry hierarchy used to be neat, with clearly defined levels and boundaries. But now everyone seems ready to eat everyone else’s lunch.

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New competitors prepare to disrupt services

Competition in the services market will further increase as new business models emerge. Wirelessly connected cars will enable radically different ways to deliver parts and services.

A few suppliers are entering service businesses, and more are likely to follow.

With Federal-Mogul’s purchase of Pep Boys and Auto Plus, the company is now vertically integrated. It’s in the manufacturing, service and retailing businesses.

By shifting the former boundaries among industry players, these changes threaten the existing distribution of industry revenues and profits.

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Real-time, on-board diagnostics will change the game

Through a smart, networked supply chain, manufacturers will be able to collect data from on-board diagnostic systems.

Enabling technologies will include mobile, cloud, virtual assistants and native bots. Together, they will predict maintenance needs across delivery channels.

In other words, the data will enable artificial intelligence systems to suggest maintenance services before parts or systems fail.

Whoever controls the data streaming from cars will be in position to control the downstream delivery of parts and services.

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How much progress have aftermarket companies made in North America?

Most North American auto aftermarket suppliers recognize the need to digitize their operations. 

But they see big gaps between their needs and the results they’ve achieved so far.

This is a standout finding of two studies by the Automotive Aftermarket Suppliers Association (AASA), published in 2016 and 2017.

The first survey found that AASA members are aware of the coming disruption. Sixty-eight percent of respondents see new technology already affecting the aftermarket or doing so in three to five years. 

A year later, the second study found that most respondents felt their company wasn’t making enough progress toward digitization. They weren’t where they think they need to be. 

In some key areas, the gap between suppliers’ needs and capabilities had widened. 

Why? The reports don’t say.

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Digital transformation is hard

Relatively few companies have achieved successful transformations.

If you’re a senior executive overseeing a transformation, you must first achieve your company’s revenue and profit targets.

Next you must adopt new digital technologies to optimize operations.

At the same time, you must envision a radically different future where your company can win amid widespread disruption.

Finally, you must devise and implement a strategy to achieve your vision.

Digital transformation is not a path for the half-hearted.

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Internal barriers block the way

Most companies face internal resistance to any change. Despite the best efforts of visionaries, the majority of managers and employees are committed to the status quo.

Aside from lacking will or urgency, many companies don’t have enough money to invest in massive change. Nor can they commit enough resources to make it happen.

Many companies are so bogged down by their legacy IT environments that they can barely move forward.

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Inflexible software holds companies back

Until recently, it’s been hard to implement new business processes that require changes to information systems.

All but the most recently written software was created with technologies that make it inflexible.

Changes to such software require traditional methods to write code. It’s a slow and arduous process. It requires advanced skills that are in short supply. .

Custom code modifications have always been difficult and expensive to support.

Most enterprise software has been time-consuming and costly to reconfigure or modify.

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Tech executives say software hinders growth

About two-thirds of technology executives think their application software has slowed the growth of their company. That finding comes from a 2017 TrackVia survey of 500 chief technology officers and IT executives.

The executives cite a lack of options for customization and integration.

A full 82% of respondents said they’ve changed business operations to accommodate the way their software works.

Seventy-six percent have replaced application software that needed functional capabilities their vendor couldn’t provide.

And 65% said lack of mobile capabilities has made it hard to use their application software.

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Low-code software offers new speed and flexibility

A new generation of supply chain execution systems now offers much greater adaptability, thanks to new technology. 

Generix Group North America, formerly known as Sologlobe Logistique, launched a new low-code supply chain platform in 2016. It’s called the Generix Supply Chain Hub. 

With the Generix low-code technology, companies can shrink one barrier blocking the digital transformation of their supply chains.

Low-code software empowers new agility and flexibility by enabling rapid application development. Companies can reconfigure their supply chain processes without having to write extensive or elaborate new code.

This means they can readily add, adapt, adjust, and augment their software to meet and anticipate changing market needs. They can do so without the high cost and long delays typically associated with configuring supply chain execution systems.

With the arrival of new low-code software from Generix Group, one prior obstacle is now less formidable.

For companies that seek more flexible and agile supply chains, it’s worthwhile to explore the potential of low-code supply chain solutions.

The Generix Supply Chain Hub is a proven suite of low-code software that addresses execution processes across warehousing, manufacturing and transportation. It also provides extensive management and collaboration tools for managing orders, labor, inventories, and yard activities.

Download your free copy of a short document about disruption in the automotive aftermarket and how low-code supply chain software can help. 

This is the second in a series of articles about digital transformation in North America. Look for the third article soon.

Next up in the series: Why companies don’t make better progress. And what they can do to improve their strategic uses of digital technology.

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