[European Atlas] “Distributers have to optimize their organization”

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Zepros : How did the market perform in 2018?
Stéphane Gendron: It contracted slightly between 2% and 3% in volume on the products we distribute. As far as business based around engines is concerned, we saw a bigger contraction for two main reasons. First of all, we felt the first effects of the launch of vehicles with more durable OE parts in the early 2000s. This will continue in the long term on regularly replaced wear and tear components. On the other hand, there is no perceivable change on broken parts yet. Second, we are entering a soft patch. There was widespread replacement of vehicles between 2007-2010, we have not yet seen new models coming along to replace these in workshops. At SKF, we hope that the years 2020-2023 will be better. So clearly, European markets have not been growth accelerators this year.
No outlook for IAM growth in Europe then?S.G.: There is, but we must also focus on Asian markets and especially China. This country is building its independent spare parts sector. The presence of leading western parts manufacturers has increased this year. SKF, for example, set up its IAM team China a few months ago. In a few years, the weight of IAM turnover will be huge and will exceed the European business. We will also need to take account of Asian parts manufacturers, little known in Europe but very strong.
Being both an OE and aftermarket supplier, does it make it easier to absorb these market slowdowns?S.G.: Yes, the OE market is buoyant. We now have new markets with manufacturers who were not historical partners, but who had to expand their supplier base to supply their factories with additional parts volume. Innovation is also an excellent lever to win a new OE contract. A dual OE / IAM presence means we can absorb product cycles, working on other components and so widening their scope.
Does a move to a dual presence also explain the concentration of parts?S.G.: I’m not so sure, when it comes to agreements such as we have seen with ZF-TRW or Tenneco absorbing Federal Mogul. On the other hand, acquisitions of complementary expertise through acquisitions by specialists (in electronics, connectivity, etc.) will become more widespread. I think that there will be another upsurge of such high-level acquisitions, but it will come from Asian suppliers wishing to have a presence in Europe and which are already sufficiently big to acquire large players. For the moment, our European legislation is not yet "open door”, but a multilateral approach could change this.
… and what about the distribution networks?S.G.: If we are still talking about external growth, the large groups that have concentrated a lot in recent years are now entering a phase of aggregation. They are structured to optimize their performance in terms of sales. This is especially true for LKQ.

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We hear a lot about the “price corridor”. Fantasy or reality?S.G.: With market concentration, the large groups are indeed looking for coherent price structures. This trend is accelerating as these groups enter a phase of consolidation of their organizations with centralized, worldwide purchasing hubs. This obviously impacts the business of suppliers. Twenty years ago, supplier-manufacturer relationships changed as OEMs began delivering complete systems. We are seeing a similar phenomenon in replacement parts. The move to concentration among distributors and suppliers has altered the amount of crossover. The rules are changing: we have come out of tariff-only conflicts and now see joint offers being marketed. These reduce the number of suppliers but are developed in a spirit of partnership. So, two strategies are emerging among suppliers: those who remain specialists in one product line but are investing to become the best at a particular function and become the obvious choice in OE and IAM; and others that add extra components to their traditional product offer. This is our case at SKF. In addition to our bearings and engine solution businesses we are now also a chassis solution provider.
At Automechanika, original parts manufacturers very clearly put their brands front and centre, targeting repair workshops in particular. Is this a message to the distribution networks?S.G.: It is essential that the expertise of an OEM supplier of solutions and products for after-sales via distribution networks remains attached to its brand name. We need to defend the brand’s innovation and expertise that is also value-creating for aftermarket players. We do not want to experience the Decathlon syndrome. Twenty years ago, in France, the brand made a name for itself by selling only major brands, today its stores sell almost nothing but its private label. The European market still follows the great tradition of loyalty to OEM brands, but it is becoming like the American market where 90% of spare parts are sold under private labels. This presents questions for suppliers. These two offers are not necessarily in conflict. OEMs like us can support private labels, but we must also defend the value of our brands.
In terms of the flow of vehicle data, are two neutral platforms are bit too much?S.G.: Whether it be Caruso or Carmunication, both solutions are very interesting. But it is clearly in the interest of the sector to have a single solution. It requires a common base with a standardized data language, to then allow everyone to rewrite and resell data by following the strategies of each client. Because nothing can stop the European giants developing their own platform one day.Caroline Ridet