Parts in the Equation

As I speak to collision repair industry groups throughout North America, I am often asked to forecast repairable average severity trends for the upcoming year. I tend to focus on parts, perhaps because I began my career selling parts at a dealership and have spent a great deal of time analyzing their usage. However, looking at past estimate severity increases to forecast changes involves more than just parts. As you’ll see, although this category plays a large role, we must carefully look at all of the various areas that make up an estimate – parts, labour, paint and materials.

Interestingly enough, the most influential area is also the most volatile – parts. In today’s repairable estimates, parts make up approximately 44% of the cost of the repairable estimate. Labour comes in at approximately 43%, with paint and materials rounding out the total.

Why are parts so volatile?

The fact is, labour rates change more slowly in the course of a year than parts prices, and labour charges are more influenced by your local competition than parts would be. Paint and materials costs can increase at a more rapid pace, but they make up a smaller part of the estimate. Additionally, labour and paint and materials charges on the average estimate are also linked to the collision-estimating guide. In other words, a large component of the average charge for labour and paint is determined by the hourly allowance supplied by the information provider’s guide. By contrast, parts are virtually 100% driven by price, so a change of 10% in collision parts prices will hit the bottom line harder than a 10% increase in hourly labor.

This year, more than most, quite a few external factors are influencing collision parts prices. Canadian dollar exchange rates to major currencies, instability in the Middle East and the tragic events in Japan all will play major roles in the prices we pay for our collision replacement parts.

The Canadian dollar has gained significantly against the U.S. dollar over the past five to seven years. As a result, U.S. carmakers are seeing pressures on margins for U.S.-sourced parts sold to Canadian OE distributors. This is a complex pricing arrangement (we usually don’t see a direct price increase in Canadian parts for North American nameplates every time there is an exchange rate difference), but there has been a slight bump in popular parts to ease deteriorating margins.

Watching the loonie exchange rate against the euro, yen and yuan will help forecast potential in European, Japanese and aftermarket parts respectively. One difficulty with relying solely on a currency analysis is that so many collision parts for high-volume European and Japanese parts will come from NAFTA zones rather than overseas, diluting the influence of the loonie to euro and yen exchange rate. However, the impact of the exchange rate remains elevated for aftermarket parts because of the direct link between aftermarket parts and prices set in Taiwan.

The World We Live In

Before dismissing the importance of the yen-to-loonie exchange rate, we need to examine the impact of the earthquake, tsunami and consequent damage to nuclear reactors in Japan. Right now, Japanese auto makers and sub-suppliers are struggling to get back into production, thus reducing the volume of car parts coming out of Japan. This will have a greater impact on less popular and luxury models, since they are more likely to have been manufactured in Japan. Simply reading the first character of your vehicle’s 17-digit VIN number can be a good indicator of potential parts shortages. If it starts with the letter “J,” your vehicle was produced in Japan. And if it starts with a number – 1, 3, 4, etc. – you have a vehicle produced in a NAFTA country.

Most Japanese carmakers indicated recently that their plants are partially re-opened (or they will be re-opened in the coming weeks). But the underlying problem relates to the production of electricity: Japan’s many crippled nuclear plants not only caused an immediate health risk from radiation, but will also affect manufacturing operations this year. Recently, the Japanese government requested all businesses based in Japan to reduce their electric energy consumption by 25%. Before the crisis, Japan was already an extremely energy efficient country; so a 25% reduction in an already-efficient infrastructure means severe cuts will have to be made. Additionally, peak reductions are set to happen in the sweltering summer, when private use of energy to power air conditioning in homes will be at its height. Rolling brown outs and black outs are difficult to deal with in the manufacturing process, making the elimination of production shifts or reduction of assembly line times necessary to maintain a safe work environment.

Lastly, let’s look at another trouble spot, the unrest in the Middle East. Reduction in oil production from volatile areas has increased the price of a barrel of crude oil. As we pass $1.27 per litre of gas, delivery costs for collision parts will be as affected as they were during the gas price spike roughly three years ago.

By the Numbers

Armed with this information, you can likely see the future of automobile collision repair costs for the year. They’re bound to rise. By how much? That’s where the art of forecasting comes in. In rough numbers, 44% of approximately $3,000 average severity means that parts dollars are around $1,320 of an estimate. Now we need to apply an inflation factor; 10% is not out of reason. Taking inflation into account could mean a $132 increase in average severity.

Will it happen? Now comes the best part of “forecasting.” The answer is, that depends on so many factors.