Developing regions of Eastern Europe to drive EU aftermarket growth

In France, a major distribution group collects data to support a planned expansion in Poland and neighboring countries.

In Belgium, an established Tier-one supplier of mechanical engine parts explores the potential launch of electrical components to customers in southern Europe.

Meanwhile, a major automaker commissions a study to analyze pricing and recommended inventory levels for spare parts in the former Russian territories.

These are just a few examples that exemplify how in 2013, interest in the European automotive aftermarket was significantly higher than recent years, based on inquiries for Frost & Sullivan research. The questions came not only from OEMs and parts suppliers, but also from investors looking for new business opportunities.

The European automotive aftermarket is a €100 billion industry for parts suppliers from Ireland to Russia, according to Frost & Sullivan’s latest research, with total revenue increasing by approximately 2.4 percent annually. It has fully recovered from its dip in 2009-2010, when economic recession caused motorists to defer normal vehicle maintenance.

In the coming years, growth across the region will be driven by expanding vehicle ownership in Eastern Europe – led by Russia and Poland – with increased maintenance and life-of-vehicle repairs for aging automobiles supporting opportunities in Western Europe.

Growth for routine maintenance parts such as tires and lighting will outpace the market as a whole. For electronic parts, including position and pressure sensors, year-over-year growth will be as high as 10 percent. There is also a growing demand for remanufactured products, as successful cross-border core collection programs pave the way for lower priced starters/alternators and clutch parts, among others.

Growth projections for the region are based on two key metrics – vehicles in operation and average vehicle age.

There are approximately 290 million passenger cars and light trucks across Europe that will need ongoing parts and service to remain operational. The average age of these vehicles is 8.2 years – with those in Western Europe tending to be a little bit older due to higher new car sales in Russia and Poland.

The mature Western European markets – the United Kingdom, Germany, France, Italy and Spain – are home to the highest share of these vehicles (about 166 million). However, vehicles in operation are only increasing in those countries by 1 percent annually. Low economic growth has suppressed new vehicle sales, resulting in fewer cars and light trucks added to the car parc.

In Eastern Europe, growth rates are significantly higher. Frost & Sullivan forecasts Russia’s vehicles in operation to increase more than three times faster (3.3 percent) than the rest of Europe. In Poland, new vehicle sales grew 6.4 percent for 2013 – the highest in three years – boosting the automobile population there. Overall, Eastern Europe’s car parc will grow by 2.6 percent annually – more than twice as fast as the rest of the continent.

Europe also has the most diverse mix of vehicle brands in the world – a potential challenge for suppliers trying to meet the aftermarket’s all-makes-and-models benchmark – and the shares of various OEMs can change dramatically from country to country.

For example, Volkswagen brands represent 20 percent to 21 percent of all passenger vehicles in Western Europe, but just 12 percent to 13 percent in Eastern Europe. Renault-Nissan dominates Eastern Europe with about 28 percent of registered vehicles, but holds only about 11 percent in the west.

North American brands Ford and GM-Opel make up 15 percent to 20 percent of registered vehicles in operation across the continent, but Asian OEMs are growing the fastest.

About 40 percent of vehicles are older than nine years of age, putting them in the prime replacement age for expensive repairs. New vehicle sales will take several years to recover to pre-recession levels in the large Western European countries, increasing the likelihood that their owners will pay for the repairs instead of trading in the car.

However, product selection and distribution channels also vary significantly from country to country – presenting another potential obstacle to growth in the region.

For example, the United Kingdom features a wider range of discount brands, private labels, and service chains competing against dealer parts and service – making it the most similar to North America’s aftermarket. The OES channel accounts for about 25 percent of all parts revenue at the manufacturer level.

There is a completely different service culture in Germany, where technicians spend years in apprenticeship learning their trade. Home to premium OEMs and parts manufacturers BMW, Mercedes-Benz, Bosch and Hella, among others, loyalty to dealer parts and service remains high and discount brands are still shunned. Here, the OES channel still represents about half of all parts revenue.

Most other Western European countries fall somewhere between the United Kingdom and Germany in regards to their loyalty to the OEMs. Nonetheless, the overall trend is in favor of lower-priced parts and service, with the same Asian supply chains that have driven down margins in North America also gaining share with European parts distributors.

Internet retailers are expected to enjoy the highest growth, with tire companies leading the migration to online sales. Sales through major online marketplaces such as Amazon.com and eBay, as well as more specialized e-retailers Rakuten and Oscaro, will more than quadruple over the next decade – accounting for more than 10 percent of industry revenue.

On the whole, the European automotive aftermarket has been opening up to outside competition since 2002, when the initial “Block Exemption” regulation allowed vehicle owners to use aftermarket parts and service without voiding their warranty for the first time. Since then, “Right-to-Repair” type legislation requiring automakers to share electronic data, allowing independent repairers to identify part numbers by make and model, has fueled the growth of “fast-fit” centers, mass merchants and retailers carrying parts that were typically available to vehicle owners only through dealerships.

The OES channel has been losing approximately 1 market share point annually since these regulations took effect.

Going forward, increased liberalization of the European automotive aftermarket will create opportunities for independent parts and service providers to grow. Traditional distribution channels are somewhat more insulated from the pricing and margin pressures of North America’s industry because of the presence of so many international borders. Despite the political and economic union of European countries, there are too many differences between them for a mega-distributor, such as NAPA or AutoZone, to consolidate buying power throughout the region.

However, this also requires manufacturers, distributors and service providers to develop a more targeted approach to this part of the world. Europe remains the world’s largest aftermarket, and suppliers that can overcome its geographical challenges may be able to use their operations there to enter other high-growth countries such as Turkey, China and India.

Stephen Spivey is the Program Manager for Frost & Sullivan’s Automotive and Transportation Aftermarket research practice. He focuses on monitoring and analyzing emerging trends, technologies, and market behavior in the global automotive aftermarket. For more information on Frost & Sullivan’s Automotive and Transportation research, contact Jeannette Garcia, Corporate Communications, at [email protected].

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