Back in February, Australia’s second-biggest car insurer, Suncorp, quietly wound down its joint venture with US second-hand car parts giant LKQ.
While the announcement was predictably big news in Australasian Paint & Panel magazine, it didn’t rate a mention in the mainstream press. This is a little surprising because the ACM Parts joint venture was announced with some fanfare in 2013.
Anyone who thinks efforts to make Australia’s $7 billion-plus car repairs industry more efficient aren’t a potentially price-sensitive matter should go back and look at what happened to the share price of IAG when its NRMA Insurance tried to introduce an online auction for repairers back in 2007.
At the time, broadcaster Alan Jones threw his support behind the thousands of repairers who refused to take part, causing an outcry among NRMA customers. IAG’s share price was hammered, and the proposal was withdrawn. But the inefficiencies remain.
The cost of car repair differs state by state, and even within states. It might come as a surprise that, all else being equal, Tasmania is one of the cheapest places in the country to get your car repaired, while Sydney’s western suburbs can be among the most expensive.
Genuine car parts sourced locally can cost up to 700 per cent more than the cost to their manufacturer. The combined retail parts of a car that costs $21,000 might set you back more than $110,000.
As a big insurer, Suncorp has to pay for the repair of about 500,000 cars each year. It spends about $500 million on car parts a year, up 9 per cent over the past 18 months.
Suncorp says it remains committed to restructuring what it sees as a lazy and inefficient part of its supply chain after the break-up with LKQ. It still aims to extract $100 million of benefits by 2018-19 through its restructuring efforts.
Australia uses the highest proportion of genuine manufacturer parts of any country in the OECD. The dream is to lift the proportion of non-genuine parts used in Australian repairs from single-digit levels to closer to 40 per cent, as is the case in the US or Europe.
Basically Suncorp wants to use more recycled parts, more made by third parties and more genuine parts imported through non-traditional channels, which together can all come under the non‑genuine banner.
Suncorp has even bought a couple of wrecking yards to source parts and is likely to buy more. It is using these non-genuine parts to supply its 26 SMART shops around the country, giant repair shops that can process 150 cars a week.
Little wonder that single-outlet repair shops are feeling the impact of increased competition. Ongoing consolidation in the industry is likely to shrink the number of stand-alone repair shops from today’s about 3500 to as low as 1500 if overseas experience is any guide. As a comparison, about five years ago it’s likely that there were about 6000 repair shops in Australia.
Another listed player, AMA Group (much smaller than Suncorp), is growing its panel repair business by leading the consolidation of Australia’s still fragmented car repair industry.
While private equity has played a role in consolidating some developed markets overseas, such as the US, Australia remains one of the last to be substantially consolidated. AMA has bought six businesses in the past 18 months and increased its shop network from four to 70.
So far AMA is encountering comparatively little competition for its roll-up strategy, which is one reason the stock is trading at a price-earnings multiple of close to 20 times 2017-18 earnings. The share price has more than tripled in the past two years.
AMA might pay about four times earnings before interest, tax, depreciation and amortisation to buy a traditional shop network but after the extraction of synergies that number could fall to below three times EBITDA. AMA Group says it wants to be the ethical and transparent consolidator of choice in the industry.
Some analysts expect it to almost triple its shop network from 70 to 200 by 2014, through a combination of further acquisitions and greenfield development of higher-volume, rapid-repair shops.