Turning cool into cash: Niche vehicles and factory-approved accessories bring profits to automakers and suppliers

Automotive Industries, Feb, 2003 by Craig Fitzgerald

Profitless prosperity has DCX, Ford, and GM aggressively seeking alternative profit zones to their core business of designing and manufacturing mid-and high-volume vehicles to prop up sagging earnings. Two of the profit zones receiving significant attention, staffing and capital resources today are low-volume niche vehicles and development of comprehensive factory-approved accessory programs.

Estimates of today's market for unique components, modules and assemblies found on low volume niche vehicles and OEM approved accessories is approximately $1.5 billion Cat manufacturers cost). This same figure is forecasted to grow at a compound average growth rate of over 60 percent, reaching $4 billion by 2005, according to a JS Chamberlain & Associates and Plante & Moran, PLLC estimate. Factory-approved accessories are projected to make up approximately $2.7 billion in sales, while unique components on niche vehicles make up the remaining $1.1 billion Cat manufacturers cost).

What is propelling this growth in niche vehicle and factory-approved part sales? There are at least four factors including: 1) OEMs desire to achieve scale economics for platform and component set investments, 2) weak dealership profits, 3) car makers desire to translate and leverage brand equity into powerful cash flow streams and 4) desires by baby boomers and generation Y's to drive highly personalized vehicles.

Big 3 profits in 2001 were non-existent (cumulative losses in excess of $5 billion). Profits in 2002 will improve, but will still be well below the better performers. Average Big 3 operating margins are projected to be approximately one quarter of the 2002 margins earned by stronger European and Asian OEMs (expressed as percent margin on continuing automotive operations). Profits on trucks, vans and SUV's remain substantial (though they are presently eroding due to fierce competition from Asian and European OEMs), while each of the Big 3 have negative EVA (profits adjusted for capital costs) on their extensive car portfolios. Niche vehicles provide additional unit sales that contribute to scale economies for component sets such as powertrains, suspensions, braking systems and electrical systems. This incremental volume translates into lower per unit development and tooling costs. "Gotta have" vehicles such as the H2, T-Bird, Crossfire and SSR also provide higher overall margins resulting from their exclusivit y and pricing dynamics due to supply and demand.

The hefty margins for performance and service parts is nothing new to the industry. But when core earnings begin to erode, smaller zones of profits from items such as factory authorized accessories become of greater interest. Wall Street's insatiable thirst for ever larger profits makes the variable contribution margin from successful niche programs and factory accessories nearly irresistible to OEM executives today.

Profits expressed as a percentage of revenues looks quite similar for franchise dealers as for OEMs. The average $30 million revenue dealership earns approximately 2 percent pretax profit. Factory-approved parts programs properly merchandised and supported contribute high margin volume in their part sales department, and help counter the slipping profitability the average dealer is experiencing in its new car sales department The large incremental margins on OEM approved accessories, traffic generating capability of halo vehicles, and niche vehicle margins contribute to the excitement by dealers for factory-approved accessories and niche vehicles.

A number of prestige import brands have demonstrated the enormous economic power of effectively managing and leveraging their brands into strong profit streams (think several German and Japanese premium brands). This potential has grabbed the imagination of a number of Big3 brand owners, and they are now actively using halo vehicles to build brand equity while delivering badly needed incremental cash flow and profits. As an example, T'Bird, Jaguar and GT-40 have provided Ford with a wonderful platform for polishing the entire Ford brand image.

Personalization has become a fundamental and powerful life style driver for both baby boomers and generation Ys. These two demographic cohorts want their individual perception of personal style to be reflected in their vehicle styling in a compelling and unique way. Both of these clusters are willing to spend substantial discretionary money to translate their personal style into vehicle style.

So what is the importance to part suppliers of the growth in niche vehicles and OEM-approved accessories? For suppliers struggling with both top line and bottom line growth, niche vehicle programs and factory-approved accessories present badly needed revenue and margin opportunities. With over 40 specialty vehicle programs presently approved for production by 2005, and thousands of new factory-approved accessories ready for release, there are profits to be mined by capable suppliers targeting these niche market segments.