Used Car Parts Wholesaling in the US

Transcription

1 Used Car Parts Wholesaling in the US June Hit the brakes: As average mileage increases, industry demand will only moderately grow IBISWorld Industry Report Used Car Parts Wholesaling in the US June 2014 Zachary Harris 2 About this Industry 2 Industry Definition 2 Main Activities 2 Similar Industries 2 Additional Resources 3 Industry at a Glance 4 Industry Performance 4 Executive Summary 4 Key External Drivers 6 Current Performance 8 Industry Outlook 10 Industry Life Cycle 12 Products & Markets 12 Supply Chain 12 Products & Services 13 Demand Determinants 14 Major Markets 15 International Trade 16 Business Locations 18 Competitive Landscape 18 Market Share Concentration 18 Key Success Factors 19 Cost Structure Benchmarks 20 Basis of Competition 21 Barriers to Entry 21 Industry Globalization 22 Major Companies 22 LKQ Corporation Inc. 23 Schnitzer Steel Industries Inc. 25 Operating Conditions 25 Capital Intensity 26 Technology & Systems 26 Revenue Volatility 27 Regulation & Policy 27 Industry Assistance 28 Key Statistics 28 Industry Data 28 Annual Change 28 Key Ratios 29 Jargon & Glossary info@ibisworld.com

2 Used Car Parts Wholesaling in the US June About this Industry Industry Definition Companies in this industry wholesale used auto parts. Industry operators also dismantle vehicles for the purpose of selling used auto parts to individuals, car mechanics and other individuals. This industry excludes companies primarily engaged in selling scrap metal, tires and tubes as well as companies engaged in the refurbishing, rebuilding or remanufacturing of car parts. Main Activities The primary activities of this industry are Wholesaling of used motor vehicle starters, alternators, engines, transmissions and other used parts Dismantling of vehicles for the purpose of selling used parts The major products and services in this industry are General auto recycling Specialized motor vehicle dismantling and parts sales Similar Industries Automobile Wholesaling in the US This industry wholesales new and used motor vehicles Auto Parts Wholesaling in the US Auto parts wholesalers sell new, remanufactured and rebuilt motor vehicle parts to national retailers, mechanics and other parts purchasers Tire Wholesaling in the US This industry wholesales tires and tubes to retailers, mechanics and other purchasers Auto Parts Stores in the US This industry is composed of establishments that sell new and used automotive parts and accessories, repair automobiles and install automotive accessories. Additional Resources For additional information on this industry Automotive Recyclers Association LKQ Schnitzer Steel

3 Used Car Parts Wholesaling in the US June Industry at a Glance Used Car Parts Wholesaling in 2014 Key Statistics Snapshot Revenue $3.4bn Annual Growth % Annual Growth % Profit $111.1m Wages $581.0m Businesses 1,705 Market Share LKQ Corporation Inc. 16.5% Schnitzer Steel Industries Inc. 9.6% % change Revenue vs. employment growth % change Total vehicle miles Year Year Revenue Employment p. 22 Products and services segmentation (2014) SOURCE: Key External Drivers Total vehicle miles Average age of vehicle fleet External competition for the Used Car Parts Wholesaling industry Number of motor vehicle registrations Per capita disposable income New car sales 45% Specialized motor vehicle dismantling and parts sales 55% General auto recycling p. 4 SOURCE: SOURCE: Industry Structure Life Cycle Stage Mature Revenue Volatility Medium Capital Intensity Low Industry Assistance Low Concentration Level Low Regulation Level Technology Change Barriers to Entry Industry Globalization Competition Level Medium Low Low Low High FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE 28

4 Used Car Parts Wholesaling in the US June Industry Performance Executive Summary Key External Drivers Current Performance Industry Outlook Life Cycle Stage Executive Summary The Used Car Parts Wholesaling industry is primarily composed of small auto-recycling yards that dismantle old automobiles and derive revenue through the sale of the used parts they contain. The only exceptions to this rule are major companies LKQ and Schnitzer Steel, which both maintain larger used auto parts wholesaling operations across North America. Industry operators derive their revenue from sales to a variety of markets including operators in the Auto Mechanics industry (IBISWorld report 81111), Auto Parts Consumers will slightly increase their purchases of used auto parts as disposable income grows Manufacturing industry (IBISWorld report 33639) and individuals. Demand for industry products from these markets is affected by per capita income and car usage trends. The industry has experienced relatively stagnant growth in the past five years. Higher per capita disposable income among industry consumers has had mixed effects on demand for industry products over the five-year period. Higher incomes have increased some consumers demand for used auto parts; for example, less affluent car owners increased their purchases of used auto parts as their incomes rose. In addition, owners of vintage vehicles spent more on their vehicles, which often specifically require the use of used auto parts. Conversely, larger incomes encouraged many consumers to purchase rebuilt, remanufactured or new auto parts at the expense of used parts. Other consumers took advantage of growth in disposable income to buy new vehicles instead of using auto parts to conduct repairs. Overall, however, demand for industry products grew during this period. As a result, industry revenue is expected to grow at an annualized rate of 0.7% during the next five years, including growth of 1.1% to $3.4 billion in Industry revenue is expected to grow even more slowly in the next five years. Per capita disposable income growth will continue to encourage some consumers to buy used auto parts. However, consumers are expected to increasingly purchase higher-quality auto parts as their incomes grow. Additionally, the average age of a US vehicle is expected to decline at an annualized rate of 1.2% over the five-year period. As older vehicles require more frequent maintenance and, more often, specifically require used parts in their repair, the declining average vehicle age is expected to have a strong negative impact on industry demand. As a result, revenue is forecast to marginally grow an annualized 0.1% over the five years to 2019 to $3.4 billion. Key External Drivers Total vehicle miles The number of vehicle miles driven is a way to measure car and car part usage. Car parts incur wear with every mile driven and require replacement more often as usage increases. Cyclical use drives demand for new and used replacement car parts, bolstering demand for industry goods and services. Total vehicle miles are expected to increase during 2014, representing a potential opportunity for the industry. Average age of vehicle fleet Older cars are more likely to need parts replacement repairs than newer cars. Owners of older vehicles therefore purchase used car parts more often than owners of newer vehicles. As a result, domestic aggregate

5 Used Car Parts Wholesaling in the US June Industry Performance Key External Drivers continued demand for used auto parts increases as the average age of the US vehicle fleet increases. The average age of the US vehicle fleet is expected to increase during External competition for the Used Car Parts Wholesaling industry This industry competes with the Auto Parts Wholesaling industry, from which consumers may opt to purchase new or remanufactured automotive parts, which are superior substitutes to used parts. Consumers tend to be more price sensitive during economic downturns, and increasingly opt to repair their motor vehicles with used parts, which are relatively cheaper than new or remanufactured alternatives. External competition for the Used Car Parts Wholesaling industry is expected to decline in Number of motor vehicle registrations The number of motor vehicle registrations is a proxy for the number of vehicles in service. As the number of vehicle registrations increases, the total pool of vehicles that might need used car parts rises as well, boosting demand for industry goods and services. The number of motor vehicle registrations is expected to increase in Per capita disposable income Per capita disposable income levels have a mixed effect on industry demand. Growth in disposable income decreases industry demand as consumers are able to substitute their purchases of used parts with more expensive rebuilt, remanufactured or new parts. Conversely, higher disposable income enables others to purchase used auto parts that otherwise would not have been able to do so. In addition, higher levels of disposable income often results in vintage car collectors spending more on replacement used parts. Overall, however, higher levels of disposable income increases industry demand. Per capita disposable income is expected to rise during New car sales New car sales have two major, opposing effects on industry demand. Firstly, more new car sales result in a larger pool of vehicles that potentially require used car parts for repair, positively affecting industry demand. Conversely, new cars typically require fewer repairs than older vehicles. As new car sales are often accompanied by the scrapping of older vehicles, new car sales, in aggregate, reduce demand for used car parts. New cars sales are expected to increase during 2014, posing a potential threat to the industry. Total vehicle miles 3 2 Average age of vehicle fleet % change 1 0 Years Year Year SOURCE:

6 Used Car Parts Wholesaling in the US June Industry Performance Current Performance The performance of the Used Car Parts Wholesaling industry has been mixed over the past five years. The majority of operators in this industry are small auto-recycling yards that dismantle old automobiles and derive revenue from the sale of the used parts that they contain. These parts are sold to operators in the Auto Mechanics industry (IBISWorld report 81111) for use in repair work, Auto Parts Manufacturing industry (IBISWorld report 33639) for use as inputs in the manufacturing of rebuilt and remanufactured parts, individuals for personal car repair work, as well as wholesalers and retailers (IBISWorld reports and 44131) that subsequently sell these parts to other aforementioned downstream markets. Demand for used auto parts is heavily influenced by trends in national income levels and car usage, yet these trends affect demand from different % change Industry revenue Year downstream markets in different, often opposing ways. Overall, however, industry revenue has increased during the five years to 2014 at an annualized 0.7% to $3.4 billion. Industry revenue is projected to grow 1.1% to $3.4 billion in SOURCE: Changes in industry demand Fluctuations in per capita disposable income have had a conflicting influence on demand for used car parts over the past five years. Per capita disposable income fell in 2009, in line with overall negative economic trends during the recession, but has steadily grown in subsequent years. The initial dip in disposable income in 2009 led to a decline in demand for used car parts, causing industry revenue to fall 7.9% that year. With less disposable income available, fewer individuals were able to afford car repairs, and therefore, demanded fewer car parts of all kinds. As a result, demand for industry products fell in all of the industry s core markets. Positive income effects As disposable income levels have subsequently grown, however, demand for used auto parts has risen in some markets and fallen in others. As per capita disposable income has grown, less affluent individuals have increased their spending on used parts that they could not previously afford. Vintage car collectors have also increased their spending on used car parts during this period. Vintage car collection and maintenance is a hobby; consequently, spending by collectors is very much tied to disposable income. In addition, vintage cars usually require used parts for repair as new or remanufactured parts do not fit these cars specifications. Finally, growth in disposable income levels bolstered demand for remanufactured and rebuilt car parts, causing manufacturers of these products to purchase more used parts for use as inputs in their production.

7 Used Car Parts Wholesaling in the US June Industry Performance Negative income effects Nevertheless, disposable income growth has also reduced demand for used car parts from other markets. As incomes growth has taken a firm hold, some consumers that have been purchasing used car parts to repair their vehicles have instead begun to buy more expensive and higher-quality rebuilt, remanufactured and new car parts. While some of these consumers have bought used parts from the Used Car Parts Wholesaling industry, thereby increasing industry sales, the majority of manufacturers source parts themselves. Other consumers have taken advantage of increased disposable incomes to scrap old vehicles and purchase new ones, which require fewer repairs, thereby decreasing demand for used car parts. Car usage effects New car sales are expected to grow at a very high rate of 9.1% over the five years to While this trend normally indicates the de-ageing of the national vehicle fleet, the opposite is anticipated to have occurred. IBISWorld expects the average age of the US vehicle fleet to grow at an annualized rate of 2.4% of the five years to This trend is supported by the expected 0.8% annualized growth in the total number of vehicle miles over the same period. A larger and older US vehicle fleet has created a greater overall need for vehicle repairs. While many of these repairs have been carried out using rebuilt, remanufactured and new auto parts, this trend has also led to growth in the demand for used auto parts operators. Industry profit and enterprises Industry profit is expected to account for 3.3% of industry revenue in 2014, up from 2.6% in Profit margins were relatively low in 2009 primarily due to the fall in revenue that accompanied the recession. Industry operators that remained in business were forced to continue to pay rent, utilities, wages and other costs even as sales fell, leading profit to decline. Over the past five years, these costs have grown more slowly than revenue. For example, IBISWorld expects wages to have grown at a stagnant 0.0% over the five years to 2014 to about $581.0 million, thereby bolstering average industry profit margins. Industry profit has also benefited form the expansion of the industry s two major companies, LKQ and Schnitzer Steel. These companies have rapidly expanded their market share over the past five years, primarily through the In response to dwindling profit margins, industry consolidation is anticipated to increase acquisition of smaller operators. In addition, industry consolidation is expected to lead the number of enterprises to decline at an annualized rate of 1.1% to 1,705 over the five years to LKQ and Schnitzer operate much more efficiently than smaller companies due to the benefits of vertical integration with other business operations, such as scrap recycling and general auto parts, wholesaling and retail operations. These companies profit margins have also grown due to the cost advantages of economies of

8 Used Car Parts Wholesaling in the US June Industry Performance Industry profit and enterprises continued scale and secure contracts with car insurance companies (that fund the majority of car repair work). As these companies have increased their market share, industry profit margins as a whole have expanded as well. Industry Outlook The Used Car Parts Wholesaling industry is expected to remain relatively stagnant over the five years to Growth in per capita disposable income spurred growth in demand for industry products over the past five years. However, despite expected 2.2% annualized growth in per capita disposable income over the five years to 2019, demand for used auto parts is expected to grow much more slowly over the same period due to conflicts in the various ways that per capita income level growth affects industry demand. As a result, IBISWorld expects industry revenue to grow at an average annual rate of just 0.1% to $3.4 billion in the five years to Factors expected to increase demand Demand for used auto parts is expected to grow in certain markets. As disposable income continues to expand, more consumers will be able to afford used auto parts that previously were unaffordable. Demand for used auto parts from vintage car collectors, who usually buy used parts to repair the cars they already own, is expected to grow particularly rapidly due to increases in disposable income. This is because vintage car repair and maintenance is a relatively expensive and discretionary hobby that greatly depends on disposable income levels. Strong growth in disposable income is expected to convince more individuals to take up this hobby, boosting demand for industry products. Increased sales Disposable income growth will encourage more people to collect vintage cars, benefiting operators of remanufactured and rebuilt auto parts will increase auto part manufacturer demand for used auto parts. Finally, the number of motor vehicle registrations is expected to grow, indicating a larger US automobile fleet. With more cars on the road, demand for repair work is also expected to increase, some of which will involve the use of used parts purchased from industry operators. Factors expected to decrease demand Growth in disposable income will also have negative effects on the demand for industry products. As consumers become richer, they will increasingly opt to purchase higher quality rebuilt, remanufactured and new auto parts at the expense of used parts for use in auto repair work. This trend is expected to have a very large negative impact on the demand for used car parts. Additionally, the average age of the US vehicle fleet is expected to decline at an annualized rate of 1.2% over the five years to 2019 to 10.9 years. Older vehicles not only require more frequent repairs, but also more often need to be repaired specifically with unaltered used parts. As a result, the decline in

9 Used Car Parts Wholesaling in the US June Industry Performance Factors expected to decrease demand continued the number of older vehicles is expected to have a significant impact on the demand for industry products. Taken as a whole, demand for used auto parts is expected to remain relatively stable over the five years to Stable profit margins Like revenue, profit margins are expected to remain relatively stable over the five years to Profit margins for smaller industry operators are expected to decline over the next five years. As sales stagnate and increasing numbers of consumers opt to purchase rebuilt, remanufactured and new auto parts at the expense of used parts, industry operators are anticipated to lower the price of their products in order to retain customers. As a result, average industry profit margins are expected to decline. Conversely, several other factors are expected to positively influence industry profitability. Industry costs are expected to decline as smaller operators cut expenses to stay profitable. As a result, IBISWorld expects industry wage costs to decline at an annualized rate of 0.2% to $575.9 million over the five years to In addition, less efficient industry operators with lower profit margins are Large players will continue growing via acquisitions of smaller operators expected to continue exiting the industry. Consequently, IBISWorld anticipates that the number of industry enterprises will fall at an annualized rate of 1.2% to 1,602 over the five years to Much of this expected contraction in industry enterprises is also expected to come about as a result of industry consolidation. The industry s two major companies, LKQ and Schnitzer Steel, are expected to continue to grow via acquisition of smaller companies. Given that these larger operators maintain superior profit margins, their expansion as a share of industry revenue is expected to have a positive effect on industry profit margins.

10 Used Car Parts Wholesaling in the US June Industry Performance Life Cycle Stage Instead of producing new products, innovation focuses on improving existing sales channels and efficiency The market for replacement parts is saturated The industry is undergoing consolidation Industry value added growth is below GDP growth % Growth in share of economy Maturity Company consolidation; level of economic importance stable Quality Growth High growth in economic importance; weaker companies close down; developed technology and markets Key Features of a Mature Industry Revenue grows at same pace as economy Company numbers stabilize; M&A stage Established technology & processes Total market acceptance of product & brand Rationalization of low margin products & brands 10 5 Auto Parts Manufacturing Quantity Growth Many new companies; minor growth in economic importance; substantial technology change 0 Chemical Product Manufacturing Auto Parts Wholesaling Automobile Wholesaling Used Car Dealers Used Car Parts Wholesaling -5 Decline Shrinking economic importance % Growth in number of establishments SOURCE:

11 Used Car Parts Wholesaling in the US June Industry Performance Industry Life Cycle This industry is Mature The Used Car Parts Wholesaling industry is in the mature stage of its life cycle. Industry value added (IVA), which measures an industry s contribution to the US economy, is expected to grow at an annualized rate of 0.4% over the five years to This is a substantially lower rate than that of US GDP, which is expected to grow at an annualized rate of 2.7% over the same period. IVA growth substantially slower than GDP growth typically designates an industry in decline. This is also supported by the long term decline in the number of industry operators, which IBISWorld expects to fall at an annualized rate of 1.2% over the ten years to The industry is also relatively unaffected by technological change, with its products undergoing relatively little development and business operations conducted primarily by hand. Other factors however, indicate that this industry is in fact mature and not in decline. Firstly, despite relatively stagnant long-term industry growth, there is still widespread demand for used auto parts for use as inexpensive substitutes to new parts, as inputs in the production of growing remanufactured parts manufacturing operations and as necessary tools in the repair of vintage cars. Secondly, the industry is undergoing consolidation as LKQ and Schnitzer Steel rapidly gain market share. Through substantial acquisition activity, these companies combined market share is expected to rise from 13.7% to 26.1% of industry revenue from 2009 to Such conditions indicate an industry that is mature.

12 Used Car Parts Wholesaling in the US June Products & Markets Supply Chain Products & Services Demand Determinants Major Markets International Trade Business Locations Supply Chain KEY BUYING INDUSTRIES Auto Parts Manufacturing in the US Auto parts manufacturers purchase used car parts from industry operators to be used as inputs in the production of remanufactured and rebuilt parts Used Car Dealers in the US Service centers at used car dealerships sometimes service older cars for which OEM or remanufactured replacement parts are no longer available. Those repairs require used parts Auto Parts Stores in the US Auto parts stores sell used car parts to do-it-yourself consumers Auto Mechanics in the US Car repair chains and mechanics buy used parts and then incorporate them into their repair work Consumers in the US Consumers come to do-it-yourself establishments to purchase used car parts for personal car repairs. KEY SELLING INDUSTRIES Chemical Product Manufacturing in the US This industry supplies cleaning chemicals which are used in the car dismantling process Power Tools & Other General Purpose Machinery Manufacturing in the US This industry supplies tools and equipment used in the auto dismantling process Insurance Brokers & Agencies in the US This industry supplies auto wrecks to used motor vehicle wholesalers for their dismantling and the sale of their parts. Products & Services Products and services segmentation (2014) 45% Specialized motor vehicle dismantling and parts sales 55% General auto recycling Total $3.4bn General auto recycling Recycling yards and other used car parts wholesalers supply used parts to the automotive aftermarket either SOURCE: directly or through used part dealers. Recycling yards receive donated, wrecked and otherwise unusable cars, which are then dismantled. Usable

13 Used Car Parts Wholesaling in the US June Products & Markets Products & Services continued parts recovered during dismantling are sold to either be directly installed in another vehicle or to be remanufactured or rebuilt into new parts. General auto recycling yards supply all types of parts for many car models. As such, general auto recycling yards is expected to account for 55.0% of revenue in In addition, while auto recyclers also often scrap steel and other metal harvested from these vehicles, revenue earned from this activity is not registered in this report. This report also does not include the sale of tires collected during the vehicle dismantling process. These activities are included within the Recyclable Material Wholesaling (IBISWorld report 42393) and Tire Wholesaling (IBISWorld report 42313) industries. Specialized parts There are an increasing number of specialized wrecking yards that dismantle and supply parts for particular makes of cars, or narrow automotive segments, such as vintage cars. Import cars strong sales performance since the early 1990s means that there is ample demand for used import car parts. There are often few to no available new, remanufactured or rebuilt parts for many vintage cars. As a result, vintage cars must usually be repaired using very specific used parts. This product segment has grown as a share of industry revenue as growing national levels of disposable income has allowed increasing numbers of car enthusiasts to spend money maintaining and repairing their vintage cars. Demand Determinants Demand for used car parts is derived from a number of factors including the age of the existing vehicle fleet, motor vehicle usage, reliability of existing auto parts and warranty conditions. Also, demand for wholesale parts correlates highly with the distribution of household income. The age of the existing vehicle fleet is an important factor in determining demand for used parts because older cars suffer more catastrophic mechanical failures than newer cars. For example, engine, transmission, starter and alternator failure can be common among older cars. These failures increase the demand for used parts. However, a failed mechanism is not the only time a car may necessitate a new part. Generally, motor vehicle parts wear out with as time goes on. A rise in the average miles traveled per year increases the rate at which vehicle parts age, making them less reliable or less efficient. As existing parts wear with higher use, demand for used parts increases. While many Original Equipment Manufacturers (OEMs) and auto repair shops offer rebuilt, remanufactured and new parts, many consumers opt to purchase used parts for car maintenance and repair work due to price concerns. In addition, for many vintage cars, repair work is only available through the use of used parts. Nonetheless, a greater availability of rebuilt, remanufactured and new parts has an adverse effect on the demand for used parts. Increasingly durable new, remanufactured and rebuilt auto parts reduces the demand for used parts in two ways. Firstly, by lasting longer, more durable car parts reduce the need to purchase car parts of any type. Secondly, lower income consumers may choose to purchase new, remanufactured or rebuilt parts instead of less expensive used parts if those new parts are particularly durable as doing so saves money in the long run. Generally, less affluent households purchase the largest share of used car parts for cost reasons.

14 Used Car Parts Wholesaling in the US June Products & Markets Demand Determinants continued As new parts become less expensive however, demand for used parts from the lower end of the income bracket is expected to decline. Warranty and insurance conditions often dictate what types of car parts can be used in maintenance and repair work. Traditionally, many warranties only allow the use of new or remanufactured parts in car repair work. This is because these higher quality parts have a lower chance of malfunctioning and causing serious damage to a vehicle. Conversely, insurance companies tend to prefer the use of used car parts for repair work that they are paying for due to their lower cost. Therefore, the types of warranties and insurance plans in use in the United States have an influential impact on the demand for used car parts. Major Markets Major market segmentation (2014) 9.9% Auto parts retailers 11.9% Do-it-yourself customers 7.5% Auto parts rebuilders and remanufacturers 30.3% General auto parts wholesalers Total $3.4bn 13% Other 27.4% Automotive mechanics and repair shops SOURCE: General auto parts wholesalers The largest market for the Used Car Parts Wholesaling industry are general auto parts wholesalers. These wholesalers purchase used car parts from industry operators (usually recycling yards) and sell them downstream to retailers. Wholesalers of this type include the wholesaling operations of well-known companies such as Autozone, NAPA auto parts, Pep Boys and Advance Auto Parts, all of which also operate as car part retailers. These wholesalers are not included in the Used Car Parts Wholesaling industry itself because sales of used car parts make up relatively very small portions of their overall revenue streams. As large auto part wholesalers have grown over the past five years, this market has grown as a source of industry revenue. Automotive mechanics This market segment includes mechanics affiliated with car dealers and gas stations, as well as independent auto mechanics. This group primarily demands new auto parts; however, they will source used parts if availability, cost and the demands of insurance companies are issues. Increasing competition among automotive mechanics has caused increased use of used parts over the past five years in order to keep prices low and still maintain positive profit margins. This market has grown as a source of industry revenue as increasing levels of disposable income have boosted business for auto mechanics.

15 Used Car Parts Wholesaling in the US June Products & Markets Major Markets continued Do-it-yourselfers This market segment describes customers who purchase used parts directly from auto recycling yards for use in their own minor repair and maintenance work. This market segment s primary concern is cost. Accordingly, do-it-yourselfers generally prefer used parts to new parts. This market segment also includes consumers who restore older vehicles, vintage cars and collector cars. Generally, new parts for these types of vehicles are no longer manufactured, so do-it-yourselfers must purchase used or remanufactured parts for their older, vintage and collector cars. This market segment increased its share of industry revenue in 2009 as more consumers chose to handle repair and maintenance themselves to save money amid stagnant personal income and rising unemployment during the recession. However, this market is expected to have shrunk as a source of industry revenue over the five years to 2014 as rising incomes lead vintage and non-vintage car owners to increasingly pay auto mechanics to conduct car repair and maintenance work. Auto parts retailers Auto parts retailers, which include both chains and independent dealers, stock used auto parts primarily as a cheaper alternative to new, remanufactured and rebuilt auto parts. Many of the auto parts retailers in this market segment, such as AutoZone and Advance Auto Parts, also operate wholesaling operations that also purchase used car parts from the Used Car Parts Wholesaling industry. While large auto parts retail chains have grown at the expense of smaller retailers, this market has stayed relatively stable as a percentage of industry revenue over the past five years. Auto parts rebuilders and remanufacturerers and other markets Auto parts rebuilders and remanufacturers purchase used parts from the Used Car Parts Wholesaling industry to be used as inputs in their manufacturing operations. Many of these manufacturers source the majority of their used auto parts inputs from their own recycling yards. Many also grant their customers a discount if they donate their failed used parts when purchasing rebuilt or remanufactured parts, thereby securing a stable source of used part inputs. Nonetheless, a large number of parts remanufacturers andrebuilders purchase used part inputs from operators in the Used Car Parts Wholesaling industry. Auto parts rebuilders and remanufacturers have grown as a share of industry revenue over the past five years as demand for their products has grown. Other customers of the Used Car Parts Wholesaling industry purchase used car parts for a variety of miscellaneous purposes. For example, businesses and local and state governments sometimes purchase used car parts in order to repair the vehicles that they use. Overall, these miscellaneous markets are expected to have fallen as a source of industry revenue over the five years to 2014 at the expense of other growing markets. International Trade The vast majority of industry activity takes place at a regional or local level. However, there is some level of international trade in used car parts. For example, some auto parts retail stores import used auto parts from Japan in order to serve the repair needs of imported Japanese cars. However, the value of such export and import flows is negligible relative to industry revenue as a whole. As a result, international trade is not accounted for in this report.

16 Used Car Parts Wholesaling in the US June Products & Markets Business Locations 2014 West AK 0.0 New England West CA 12.4 WA 1.6 MT 0.4 OR 1.1 NV 0.4 Rocky Mountains ID 0.3 UT 0.9 AZ 1.7 WY 0.2 CO 1.1 NM 0.3 ND Plains NE 0.9 MN WI SD 0.5 KS 1.8 Southwest TX 7.6 OK 1.5 IA OH IL IN VA WV KY 1.3 MO 2.2 Great Lakes 1.8 MI 3.0 PA 5.6 AR 1.9 MS 1.0 LA 1.0 TN 2.1 Southeast AL 1.8 Mid- Atlantic GA 1.9 NY NC 2.9 SC 1.9 FL ME West HI 0.1 Additional States (as marked on map) 1VT 2 NH 3MA 4 RI CT 6 NJ 7DE MD DC Establishments (%) Less than 3% 3% to less than 10% 10% to less than 20% 20% or more SOURCE:

17 Used Car Parts Wholesaling in the US June Products & Markets Business Locations The Used Car Parts Wholesaling industry is spread across the country generally along population lines. The Southeast, Mid-Atlantic and West, the US regions with the largest share of industry establishments, have relatively equivalent share of the US population. Businesses in this industry tend to locate in rural areas close to population centers, or in low income urban areas. This geographic spread is in line with the proportionally high number of rural and less affluent urban customers that this industry serves. Furthermore, the majority of businesses in this industry are auto recycling yards that dismantle as well as sell used car parts. Such operations require significant space to process and then store the cars from which they harvest used parts. Auto recycling yard operators find that rural land, or urban land in economically distressed areas, are cost-effective locations in which to operate that also often offer cheap expansion % Distribution of establishments vs. population West Great Lakes Establishments Population Mid-Atlantic New England Plains Rocky Mountains Southeast Southwest SOURCE: possibilities. Operating in low income rural or urban areas also places the business close to potential do-ityourself customers.

18 Used Car Parts Wholesaling in the US June Competitive Landscape Market Share Concentration Key Success Factors Cost Structure Benchmarks Basis of Competition Barriers to Entry Industry Globalization Market Share Concentration Level Concentration in this industry is Low The Used Car Parts Wholesaling industry has a low level of market share concentration. The industry s two largest players, Schnitzer Steel and LKQ, operate across the country and together are estimated to control 26.1% of the market. However, the rest of the industry is primarily composed of very small auto recycling yards that serve local or regional markets. The majority of industry operators cater to local parts demand, source cars from local donors and local wrecks, sell to local customers and invest heavily in maintaining those relationships. In an effort to expand market share, some recycling yards maintain websites that allow users anywhere to search for available parts. However, certain used car parts are heavy and difficult to transport, which creates an incentive to do business locally and avoid incurring potentially high freight costs. As a result, even those auto recyclers that maintain such websites Companies by employment size Employees Percentage of total (%) SOURCE: US CENSUS BUREAU typically are only able to expand their market share within the region that they operate. Finally, IBISWorld estimates that 92.0% of industry operators employ fewer than 20 workers, further highlighting this industry s fragmentation. Despite this low level of market share concentration however, market share concentration is expected to increase due to the rapid growth of this industry s two major players as well as their aggressive acquisition activity. Key Success Factors IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are: Ability to attract local support Most companies in this industry generate their business from local or regional customers. Successful companies cultivate strong relationships with these customers and then reap steady return business. Having good automotive and engineering knowledge Industry operators must be able to disassemble automobiles and salvage their parts as well as determine the usability and value of such parts. Having links with suppliers Auto-recycling yards receive the majority of their cars from insurance companies. Maintaining strong relationships with these suppliers ensures a steady flow of cars with harvestable used parts. Ability to control stock on hand Used car parts wholesalers stock a huge range of diverse parts for many car makes, models and years. Successful companies monitor their stock constantly and efficiently assist customers in finding specific parts.

19 Used Car Parts Wholesaling in the US June Competitive Landscape Cost Structure Benchmarks The cost structure of companies in this industry can vary greatly from company to company depending on proximity to consumers and suppliers and whether a business operates vehicle dismantling operations or is engaged in used parts wholesale alone. The following discussion describes the cost structure of the average operator in the Used Car Parts Wholesaling industry. Profit Profit is expected to account for 3.3% of industry revenue in 2014, up from 2.6% in Profit margins were relatively low in 2009 due to the drop in business activity that year that accompanied the recession. Auto recyclers that stayed in business that year were forced to pay rent, utilities, wages and other costs while simultaneously generating fewer sales, leading to lower profit margins. With sales growing over the past five years however, profit margins have grown as well. Profit is expected to decline however over the five years to Anticipated growth in national levels of disposable income over this period is expected to encourage consumers to purchase greater quantities of rebuilt, remanufactured and new parts at the expense of used parts. Greater competition from superior auto parts is expected to force industry operators to lower prices to stay competitive, lowering industry profit margins. Purchases Purchases are typically the largest cost to the average industry operator, accounting for an expected 66.4% of industry revenue in Vehicles acquired from insurance companies, individuals, charities, towing companies or via municipal contracts account for the vast majority of industry purchases Sector vs. Industry Costs Percentage of revenue Average Costs of all Industries in sector (2014) Industry Costs (2014) P r o fi t Wages Purchases Depreciation Marketing Rent & Utilities Other SOURCE:

20 Used Car Parts Wholesaling in the US June Competitive Landscape Cost Structure Benchmarks continued costs. These purchases costs include the price paid for a car, which is partially dependent on the number of usable parts the car may contain, and the cost of transporting an inoperable vehicle to the recycler s facilities. Purchases costs have remained largely steady over the past five years. Wages Activities in the Used Car Parts Wholesaling industry are highly labor intensive. Harvesting, identifying, cleaning, cataloging and storing serviceable used parts is done almost entirely by hand. As a result, wages represent the second largest industry cost, and are expected to account for 17.3% of industry revenue in A large number of employees working in the Used Car Parts Wholesaling industry were laid off in 2009 as failing industry operators struggled to cut costs in response to declining sales. As sales have grown since then however, the number of industry employees has grown at a slower rate. As a result, wages costs have fallen as a share of industry revenue since 2009, when they were estimated to account for 17.9% of industry revenue. Other costs Other costs include rent, utilities, depreciation, marketing, waste disposal, insurance costs and other miscellaneous costs. While rent and utilities cost have stayed relatively stable in absolute terms over the past five years, they have declined as a share of industry revenue as sales have grown. Marketing expenses have conversely grown marginally over this period as industry operators have more capital available to advertise their businesses. Given that this industry is highly labor intensive, depreciation costs are low and have remained relatively stable. Increased environmental regulation in many states has caused waste disposal costs to increase as a percentage of revenue. As a whole, these other costs are expected to account for 6.8% of industry revenue in Basis of Competition Level & Trend Competition in this industry is High and the trend is Increasing Internal competition Auto recyclers compete intensely on price, parts availability and service. Used car parts customers are highly price sensitive given that in most cases their primary appeal is low price (relative to remanufactured, rebuilt or new parts). In addition, parts availability is important to customers who own particularly old or rare cars. As a result, successful auto recyclers must provide a wider variety of parts than their competitors. Finally, used parts providers often provide a warranty on the used parts they sell. Companies that quickly and easily honor these warranties in case of parts failure benefit from return business and a solid reputation. Major industry players Schnitzer Steel and LKQ compete through brand recognition, store location convenience and price. External competition The Used Car Parts Wholesaling industry faces strong competition from wholesalers and retailers of new, remanufactured and rebuilt auto parts in the automotive aftermarket. Against these parts, used parts compete on price and product range. Depending on the specific component, a used part can be 30.0% to 70.0% cheaper than a new or remanufactured part. Given the general lower quality of used parts in comparison to new and remanufactured parts, low product price is this industry s biggest competitive advantage. However, decreasing auto part production costs are steadily reducing this competitive advantage, leading to gradually intensifying external competition for the Used Car Parts Wholesaling industry.

21 Used Car Parts Wholesaling in the US June Competitive Landscape Barriers to Entry Level & Trend Barriers to Entry in this industry are Low and Steady Barriers to entry for the Used Car Parts Wholesaling industry are low. Start-up costs for automobile recyclers are very low, and typically only require a piece of open land on which to store vehicles and basic tools for vehicle dismantling. Automobile recyclers must find and hire skilled auto mechanics in order to operate, yet such workers are not particularly difficult to find. State environmental regulations pertaining to hazardous material disposal may act as a barrier to entry. In addition, zoning laws regarding car parts storage limit the number of suitable sites on which a Barriers to Entry checklist Competition Concentration Life Cycle Stage Capital Intensity Technology Change Regulation & Policy Industry Assistance Level High Low Mature Low Low Medium Low SOURCE: potential entrant may choose to operate. Overall however, such barriers to entry are relatively minimal. Industry Globalization Level & Trend Globalization in this industry is Low and the trend is Steady The Used Car Parts Wholesaling industry has a very low level of globalization. There are no major foreign owned companies that operate in this industry, and the vast majority of industry revenue is generated through local or intraregional sales. While there is some international trade in used auto parts, such trade accounts for a negligible percentage of industry revenue. Conversely, an estimated 7.5% of industry revenue is generated via sales of used parts to be used as inputs in the manufacturing of rebuilt and remanufactured parts, many of which are exported abroad. Overall however, the Used Car Parts Wholesaling industry is largely local and regional in its scope.

22 Used Car Parts Wholesaling in the US June Major Companies LKQ Corporation Inc. Schnitzer Steel Industries Inc. Other Companies Major players (Market share) Schnitzer Steel Industries Inc. 9.6% 73.9% Other LKQ Corporation Inc. 16.5% SOURCE: Player Performance LKQ Corporation Inc. Market share: 16.5% Industry Brand Names Delco Remy Remy World Wide Automotive Founded in 1998 and headquartered in Chicago, LKQ Corporation (LKQ) is the country s largest wholesaler of replacement vehicle parts. The company sells a variety of truck and light-vehicle parts as well as entire used trucks. LKQ sells five different types of automobile parts: new parts manufactured by OEMs, new parts manufactured by outside companies, rebuilt parts, remanufactured parts and recycled (used) parts. In addition, LKQ generates a smaller portion of its revenue through sales of scrap to metal recyclers. The company employs 23,800 individuals across 570 locations worldwide. The majority of LKQ s business activity is centered in the United States, although the company is rapidly growing in the United Kingdom and also has operations in Mexico, Central America, Canada and continental Europe. LKQ was initially founded through the merger of several used auto parts businesses in Florida, Michigan, Ohio and Wisconsin, and the company s used auto parts wholesaling operations still account for a substantial percentage of its overall revenue. LKQ procures the used parts that it sells primarily by purchasing vehicles severely damaged by collisions at auctions and dismantling these vehicles for their parts. LKQ sells the majority of the used auto parts it collects to auto shops for use in repair work. Financial performance LKQ s used auto parts wholesaling operations have done well over the past five years. Industry-specific revenue has grown primarily through numerous acquisitions of other used parts wholesaling operations. LKQ acquired 10 North American wholesaling operations in 2013 alone. However, the company has also been able to grow through establishing close relations with insurance companies, which pay for the LKQ Corporation (industry-specific revenue) financial performance* Year Revenue ($ million) (% change) Operating Income ($ million) (% change) N/C 39.3 N/C *Estimates SOURCE: ANNUAL REPORT AND IBISWORLD

23 Used Car Parts Wholesaling in the US June Major Companies Player Performance continued majority of auto repair work. By setting up contracts with insurers, LKQ has been able to guarantee its role as a major supplier of used car parts to auto repair shops, bolstering industry-specific revenue. As a result, IBISWorld expects LKQ s industry-specific operations to have grown at an impressive annualized rate of 12.1% to $554.9 million in the five years to Player Performance Schnitzer Steel Industries Inc. Market share: 9.6% Industry Brand Names Quality-Built Talon Xtreme Founded in 1906 and headquartered in Portland, OR, Schnitzer Steel Corporation (Schnitzer) is a major recycler of scrap metal, manufacturer of steel products and wholesale distributor of used auto parts. These three functions comprise the company s segments, and are highly interconnected. Schnitzer purchases large amounts of scrap metal, some of which is in the form of automobiles. While the company recycles the scrap metal from these automobiles, the parts inside are harvested and sold across the country. Recycled metal not sold in commodity form is used to manufacture a variety of steel products such as wire rods, reinforcing bars and other specialty products. Schnitzer employs 3,643 people in 138 locations across the United States, Puerto Rico, Alberta and British Columbia. Schnitzer operates in the Used Car Parts Wholesaling industry via its Auto Parts Business (APB) segment. Schnitzer purchases automobiles from individuals, charities, towing companies, auctions and through contracts with municipalities. It maintains 61 selfservice auto parts stores across the United States and Western Canada. In these stores, customers pay an entrance fee and are able to inspect the store s car lot for parts. A customer may remove any part they desire and purchase it for its listed price. Financial performance Schnitzer s APB segment has performed exceedingly well over the past five years. While segment revenue fell substantially in 2009, in line with a drop in demand for used auto parts during the recession, APB s sales of used auto parts have grown each subsequent year. Much of this has occurred as a result of a large amount of used auto parts businesses acquisitions in recent years. In 2013, Schnitzer bought Ralph s Auto Supply Schnitzer Steel Industries Inc. (industry-specific revenue) financial performance* Year Revenue ($ million) (% change) Operating Income ($ million) (% change) N/C -3.8 N/C N/C *Estimates SOURCE: ANNUAL REPORT AND IBISWORLD

24 Used Car Parts Wholesaling in the US June Major Companies Player Performance continued (British Columbia), U-Pick-It, Inc (Kansas City) and several other small auto parts companies. As a result, IBISWorld estimates that Schnitzer s industry-specific revenue will grow at a very strong annualized rate of 19.4% to $324.6 million over the five years to Other Companies With the exception of Schnitzer Steel and LKQ, the Used Car Parts Wholesaling industry is comprised of highly fragmented operations. The vast majority of industry operators are small, independent wrecking yards that operate out of one or two locations and serve small local markets. These companies individually account for a negligible share of overall industry revenue.

25 Used Car Parts Wholesaling in the US June Operating Conditions Capital Intensity Technology & Systems Revenue Volatility Regulation & Policy Industry Assistance Capital Intensity Level The level of capital intensity is Low The Used Car Parts Wholesaling industry has a very low level of capital intensity, with IBISWorld expecting that the average industry operator will spend $0.05 on capital for every $1.00 spent on labor. Auto recycling work, which includes the harvesting, cleaning and cataloging of usable parts, is mostly done by hand. Some tools or machinery, such as an engine lift, is required to ensure that disassembly is done safely and properly without damage to the vehicle core or any parts. In addition, industry operators that also offer pick up services for totaled vehicles require investment in tow trucks in order to carry out their operations. However, relative to most industries, such capital investment is very low. Capital intensity has remained relatively constant over the past five years Capital intensity Capital units per labor unit Economy Wholesale Trade Used Car Parts Wholesaling Dotted line shows a high level of capital intensity SOURCE: and is expected to remain so in the future as the industry is subject to very little process or technological change and innovation. Tools of the Trade: Growth Strategies for Success New Age Economy Recreation, Personal Services, Health and Education. Firms benefit from personal wealth so stable macroeconomic conditions are imperative. Brand awareness and niche labor skills are key to product differentiation. Investment Economy Information, Communications, Mining, Finance and Real Estate. To increase revenue firms need superior debt management, a stable macroeconomic environment and a sound investment plan. Labor Intensive Auto Parts Wholesaling Traditional Service Economy Wholesale and Retail. Reliant on labor rather than capital to sell goods. Functions cannot be outsourced therefore firms must use new technology or improve staff training to increase revenue growth. Chemical Product Manufacturing Used Car Parts Wholesaling Automobile Wholesaling Auto Parts Manufacturing Used Car Dealers Capital Intensive Old Economy Agriculture and Manufacturing. Traded goods can be produced using cheap labor abroad. To expand firms must merge or acquire others to exploit economies of scale, or specialize in niche, high-value products. Change in Share of the Economy SOURCE: