Aftermarket scenario planning

Barnaby looks at the various trends influencing the development of the sector and asks what they might tell us about our future

By Barnaby Donohew | Published:  13 December, 2017

Definition of uncertainty:
a state of having limited knowledge where it is impossible to exactly describe the existing state, a future outcome, or more than one possible outcome.

I don’t know about you but I feel battered by the tsunami of reports describing the technological and social innovations flooding the automotive industry: Alternative fuelling, autonomy, connectivity, over-the-air, vehicle-as-a-device, ride-hailing, shared-ownership, pay-as-you-drive, stores (not dealerships), etc. The list is long. All of this against a backdrop of uncertainty regarding continued access to vehicle data or servicing and repair information.


Antidote to uncertainty
The sum effect is that our future is uncertain. That breeds anxiety. So, how do we get a grip of our situation, part the on-rushing waves, and move forward in our lives and businesses?

Well, whilst we cannot predict the future, if we identify the underlying factors driving the changes within the industry, we can extrapolate emergent trends. Then, from their combined effects, we can have a good stab at predicting our possible futures. This process is known as scenario planning (each possible future is called a scenario). If we describe each scenario in sufficient detail, we can see how our business model might need to evolve to adapt to it. Clearly, the success of the process depends on identifying appropriate industry drivers. From the opening paragraph, we see that there are at least a handful of underlying factors that are driving change: technological innovation, sales centralisation, vehicle ownershipn and vehicle data access solutions. Adaptation to technological innovation is nothing new to the aftermarket, so, in itself, it is not necessarily a threat. Although we could consider all of these factors, we’ll keep it simple and examine the two drivers that could have the greatest effect; vehicle ownership and data access.


Two sides to every story
When extrapolated to their limits, each of the two drivers can suggest trends that may or may not materialise in the future for data access solutions, these are open access to data, as would be available with an internal vehicle platform, or restricted access to data, as would be controlled within an extended vehicle platform. Similarly, for vehicle ownership, there is either the continuation of the status quo or a pivot away from individual ownership.
An internal vehicle platform is the ideal vehicle data solution for the aftermarket as it allows independent workshops to continue to compete against the franchised vehicle manufacturer dealerships, by delivering value to customers that are not necessarily segmented by the manufacturers of their vehicles.

An extended vehicle platform is the ideal solution for the vehicle manufacturers. Access to the vehicle data will likely come with strings attached and the associated cost structures and conditions might limit the vehicles that an aftermarket enterprise is able or authorised to service. In the extreme case, it might be only vehicles from a single manufacturer. A concurrent trend might be that the fate of servicing and repair information is tied up with that of vehicle data, as each is of relatively low value without the other.


Extreme case
Given that vehicle utilisation is low and the cost of ownership is increasing, it is not unreasonable to assume that vehicle ownership patterns might change; in the extreme case, all vehicles might end up being provided as a service by fleet-owning enterprises.
If we systematically combine each of the two trends for each of the two drivers of change, we can build four possible scenarios for the automotive aftermarket; each quadrant within the main figure lists business model changes that might need to be considered for each scenario. The scenarios themselves are described as follows:


A. Business as usual
Free, unmonitored, and open access to vehicle data remains available to the aftermarket, albeit via a secure interface and with new communication technologies. As such, aftermarket diagnostic tools and information sources also remain available. Consumers have rejected on-demand, pay-as-you-go, ride-sharing, and shared or other forms of ownership. Changing vehicle technology remains the main driver of emergent trends and business model evolution. By and large the structure of the aftermarket will be similar to that of today; however, there will be a continual culling of the smallest enterprises, as cost structures relentlessly increase, thereby continuously raising the threshold at which a minimum economy of scale can sustain them.


B. Authorised repairer
Vehicle manufacturers have locked down access to vehicle data. Now, a workshop’s business systems, processes and standards are expected to meet those specified by a vehicle manufacturer. The required investment in key assets and the ongoing cost structures will necessitate a shift to a vehicle-manufacturer-authorised service model. With the vehicle manufacturer’s ongoing rationalisation of dealerships, vehicle sales centralisation, and costs of constructing its own service network, a network of authorised workshops allows them to greatly increase their service capacity whilst simultaneously extending their control of valuable vehicle-related data. The model further helps the vehicle manufacturers to gain a larger market share of the parts supply chain.


C. General fleet maintenance
The increased costs of vehicle ownership relative to their combined utility and social value has reached a tipping point, after which consumers embraced ride-hailing, shared ownership, or pay-as-you-drive services. Vehicles now represent the key assets within the business models of fleet-owning enterprises. Many of these enterprises will seek to form key partnerships with fleet maintenance contractors to outsource their fleet maintenance activities, whereas others will bring the maintenance activities in-house. Open access to vehicle data ensures that independent enterprises are able to compete with both the in-house providers and the vehicle manufacturers for maintenance contracts. Opportunities will exist for these independent enterprises to scale; however, like the vehicle manufacturers, growth will bring increased cost structures, such as those associated with the recruitment and retention of talent. A healthy, but consolidated, aftermarket parts supply chain will exist to service the maintenance activities.


D. Authorised fleet maintenance
With the extended vehicle platform and the collapse of individual ownership, vehicle manufacturers gain tight control of vehicle data and fleet maintenance contracts (including the parts supply chain). Truly independent workshops are rare and serve only those with niche (e.g. classic) vehicles. After a period of consolidation, the fleet maintenance industry is reduced to a handful of enterprises each directly serving one or more vehicle manufacturers. Scandal after scandal ensues as the non-existent market forces and ineffectual regulatory frameworks see maintenance standards plummet. The government is powerless to challenge the might of the vehicle manufacturers, whom have become indistinguishable from the omnipotent tech oligarchy running the planet…
Okay, maybe the last scenario has taken it a step too far but, hopefully, you get the point.

We can see that scenarios make the abstract (the future of the automotive aftermarket) tangible and, by providing specific detail, help to inform business model evolution. Note: in practice, any scenarios must be described with far more detail (including indications of timescales) and consideration than I have given here.


Hedges and bets
When evaluating each of the scenarios, we have to consider the likelihood and extent that each trend will arise. As such, scenario planning does not necessarily eliminate uncertainty, instead it helps businesses to better understand what changes they might need to make to their business models.

Within the scenarios presented above, it is possible for an independent workshop to make investment decisions that generate a win-win return across several scenarios. For example, we might feel that it is unlikely that the status quo (“A. Business as usual”) will continue and that any one of the other scenarios could be equally likely; in which case a business might hedge its bets by investing in vehicle manufacturer tools, training and service registration (including on-line diagnostics, technical information systems and security portals etc.), as well as seeking opportunities to grow fleet maintenance work. These investments can provide a return in all of the scenarios, whilst at the same time mitigating against the risks of not making the investments.

In summary, scenario planning can be a useful tool to counter the challenges faced within the rapidly changing automotive industry. Whilst it cannot eliminate uncertainty, it can certainly help an enterprise to identify worthwhile business model adaptations that will allow it to survive or thrive in the future.


Automotive Analytics
Find out more at: http://automotiveanalytics.net.



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    Life is always changing and as we all get older we start to remember our younger days and reminisce about how ‘things ain’t what they used to be.’
        
    For example, a century ago, horses were still an everyday mode of transport and every village had a blacksmith to re-shoe them. As time moved on, getting to work was done on foot, by bus or by bike – which if you were lucky, may have had an engine. To service these two wheeled modes of transport, every village had a cycle shop who often covered both pedal and motorcycle versions.
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    Evolution
    For the last four or five decades, although the aftermarket has evolved, the basic business models have not fundamentally changed. People and businesses acquire vehicles and these vehicles get serviced and maintained by the main dealer or the independent workshop. Competitive choices exist for locations, labour rates and the spare parts. As vehicles have become more sophisticated with the introduction of electronically controlled systems, the ability to access the technical information needed to diagnose, service or repair the vehicle has become ever-more critical and legislation has been needed to ensure that competitive choices can still be offered.
        
    To be able to repair today’s vehicles has therefore been about the appropriate training and equipment, supported by local marketing to attract vehicle owners into your workshop. This is relatively straightforward and more of an education process than a revolution of the basic business model – but this is starting to change.
        
    The future is being seen as ‘mobility’ and ‘mobility services’ and the way that this is developing will fundamentally impact the Aftermarket as we know it today.
        
    There are a number of key reasons why the future will impose a change to today’s business models. The types of motive power are already evolving and this rate of change will increase. This in itself will change the type and volume of work that traditionally has been provided to vehicle owners. Vehicles may still have an internal combustion engine, but this will be part of a hybrid system, which is more likely to be petrol than diesel – but it will include some form of electric motor – either as a direct drive unit, or as a 48 volt ‘mild hybrid’, but in both cases with energy recovery functions that reduce the amount of braking and consequently the replacement of brake system components. This situation is further increased if the vehicle is fully electric, when there are far fewer service and maintenance requirements. However, these vehicle types will only create an evolution of today’s business models.

    Revolution
    The revolution comes when you consider the change of vehicle ownership that is increasingly happening and the rate of which it will increase. The ‘good old days’ of aspiring to own a vehicle is no longer the case for the younger generation and a whole new range of ‘mobility services’ are being developed – especially as fully autonomous vehicles are introduced in volume. In many cases this means that the vehicle owner changes from being an individual to become a corporate organisation or even remains the vehicle manufacturer themselves.
        
    This fundamentally changes the way that servicing and repairing the vehicle will take place. Firstly, the corporate owner of the vehicle will want to decide where and for how much their vehicles are being serviced and maintained. However, this may rapidly expand into a demand for lower hourly rates, together with a further demand of what parts are used. At best this creates a direct negative impact on your profitability, but it may go further.

    Further requirements
    There may be a further requirement for specific levels of both technical and management competence, which may require specific standards and management processes to be verified and maintained – increasing costs whilst margins are squeezed. Corporate organisations may also expect a national contact and administration function, which as an individual independent workshop it will be impossible to provide, so now you may need to consider how to be part of a coordinated national group with centralised facilities to be able to be ‘part of the game’. However, on the plus side, as part of a larger group you may also be in a stronger position to negotiate with the larger vehicle operator organisations, so it may not be all bad news.
        
    If the vehicle manufacturer remains the owner of the vehicle, then they may also require that you handle warranty work – at the lower warranty hourly rates, together with the specific contracts that the vehicle manufacturer will also expect to ensure that their ‘standards’ are maintained. Ultimately, as vehicle ownership models change and ‘mobility services’ become the norm, each element of your business is likely to be managed by the requirements of the corporate organisations. This is not a legislative issue, but a direct consequence of changes in mobility service models and their commercial impact.

    Significant impact
    The good news is that independent garages will still be needed, but the most significant impact will be the squeeze on your hourly rates and spare parts margins, in much the same way as insurance companies have controlled accident repair centres. Ultimately, this may also impact your ‘modus operandi’ by imposing technical, management and reporting requirements. This creates the simple question – you may still be the legal owner of your business, but in reality, who controls your actual day to day business – you or the mobility services vehicle owner?
        
    Now may be the time to start thinking about joining forces with other independent workshops – probably as part of a national soft franchise or an association – otherwise it may be a case of united we stand or divided we fall.                  

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