automotive fleet & leasing association white paper series • volume 19

OEM Parts Prices Increase as Parts

Availability Decreases

OEM Parts Prices Incrase as Parts Availability Decreases

By Mike Antich and Lauren Fletcher

Slow retail sales have prompted not only closure of assembly plants, but also component factories, which is delaying parts deliveries. OEMs are also hiking parts prices, with some experiencing double-digit percentage increases.

The good news is accident repair costs did not increase appreciably in calendar-year 2008. The bad news is that due to budgetary constraints many fleets are electing to forego some ac-cident repairs, that would have been performed in the past. “The trend is still cost containment as repair costs have become a priority for many fleets, especially service-oriented fleet operators less concerned with vehicle appearance,” said Bob Martines, president and CEO of Corpo-rate Claims Management (CCM). “Most fleet managers are still addressing cost, subrogation returns and safety; however, we have found the companies that have been impacted more severely by the economic conditions have actu-ally requested, many in writing, to ‘hold the line’ wherever posible on costs.” The dramatic slowdown for automo-tive sales has created a “financial crunch” for many parts manufacturers.

double-digit percentage increases. “We’ve done studies for customers showing the overall cost of replacement OEM (Original equipment manufacturer) parts has risen by as much as 16 per-cent on some of the most popular fleet vehicles,” said Brigidi. “At the same time, total repair dollars actually spent by many customers have decreased, as many fleets decide not to repair damages they would have otherwise repaired prior to the current economic conditions. One consequence with fleets spending less, because they are doing fewer low-dollar repairs, is that the

“In general, we are seeing second-tier parts manufacturers struggling or going out of business,” said Pam Walinski, vice president of PHH Vehicle Accident Services. “examples invlude companies that producce headlights, airbag modules, transmission cooler brackets, and various hoses on specific manufacturers’ vehicles.” Ohers also cite uncerainty about the economy as having a growing influence on accident repair costs for fleets. “The uncertainty in today’s economy is definitely a factor impacting fleet ac-cident management costs,” said Vincent Brigidi, director of commercial opera-tions for CEI. “The price and availability of parts, the uncertainty surrounding some major OEMs, and budget pres-sures on all fleets have made for a very trying time in our industry.” “Rising OEM parts prices have been a key concern for fleets, especially as some part prices have experienced

At a Glance

Fleet accident repair costs remained flat in calendar-year 2008, but there are upward pressures on current repair costs.

• OEMs have been raising parts prices. Plant closures are contributing to delays in getting critical parts, increasing replacement vehicle rental expenses by extending repair times.

• Repair facilities are including in repair estimates ancillary expenses previously con-sidered the “cost of doing business”

• More fleets are foregoing cosmetic repairs to damaged vehicles due to budgetary constraints.

• Vehicle electronic content and more on-board high-tech components are increasing repair costs.

• Proactive accident management programs are helping offset some of these cost increases

Percentage of Fleet Vehicles Involved in Accidents Per Year

15%

20%

25%

2006 2007 2008

20%

20.5%

19%

The average percentage of fleet vehicles involved in accidents from 2006-2008 has remained stable, between 19-20 percent.

average expenditure per repair is being skewed upwards.” Greg Neuman, supervisor, quality control for CEI, offers specific examples of OEM parts increases. “Depending on the part, we’ve seen OEM parts prices rise significatnly. For example, the price of a radiator support for a Chevrolet Impala in February 2008 was $287. This February, it was $447, up almost 56 percent. Over the same period, the price of a front fender went from $249 to $334, a 34 percent increase, and an airbag control modeule went up 21 percent, from $231 to $280,” said Neu-man. A growing number of industry ob-servers do not believe the current parts price increases are a temprary phenomenon. “There are reasons to be concerned that parts prices will continue to increase. Over the past few years, it had to do with higher costs of raw materials and fuel for parts delivery. Now, manufacturers are closing plants, reducing production, and consolidat-ing distribution centers. This may lead to a shrinking supply and delays in getting parts, both of which could result in higher prices to get the repair job done,” said John Wolford, senior manager of provider network services for CEI. Another impact of the soft economy is that repair facilities are now including ancillary costs in repair estimates, which they didn’t previously. “A rising trend we’re seeing with our network collision centers is that shops are now passing ancillary costs once considered the ‘cost of doing busi-ness.’ With each estimate, they are now referring to their procedure pages and material reference list to substantiate additional costs,” said Stuart Braun, supervising claims adjuster for Fleet Response. “With the changes in the economy, collision centers can’t afford to absorb these costs anymore because they need to minimize anything impact-

ing their bottom lines.” Another factor putting upward pres-sure on accident repair costs has been the increased frequency of OEM price hikes. “Material costs go up every year, but the latest trend is the vehicle manufac-turers are increasing their prices more often,” said Braun of Fleet Response. “It used to be once or twice a year we’d see parts increase. But now we’re see-ing it with much more frequency. This, combined with stagnant labor rates, is making it difficult for non-national collision centers to remain competitive, make a profit, and stay in business.” There are also concerns about how long component manufacturing plants will be closed and the impact of these closures on fleet accident repair costs. “CCM and most of the other fleet ser-vice providers have policies and proce-dures in place to address cost contain-ment. The only real impact on costs in external — parts costs and availability. If parts prices increase dramatically, that cost goes right to the client in the repair process. If parts are not available and a vehicle is not drivable, then the client must endure additional replace-

ment rental costs while the vendor waits for parts to be available. The most recent concerns with the manufacturers facing their most severe test on survival will create havoc in the industry. Any lengthy plant closures will add enor-mous time delays,” said Martines of CCM. The ongoing OEM trend to increase vehicle electronics content and onboard high-tech components is adding to ac-cident costs and repair complexity. “Advances in the automotive industry, which provide a greater focus on safety (i.e., airbags, traction control, etc.), and the increase in hybrid vehicles tend to drive up repair costs and repair titme. Repair complexities and parts have had an impact on the costs, too,” said Wal-inski of PHH Vehicle Accident Services. “Environmental issues have also driven prices up. For instance, material costs are rising due to the expanded require-ment for water-borne paint solvents. The hybrid vehicle population is also increasing, along with the cost of both labor and parts to repair those unique and technologically advanced cars.”

Top 5 Accident DescriptionsPercentage

Damage while parked/other party.........................................19%Rear-ended by other party....................................................11%Parking/Backing....................................................................11%Employee rear-ends other party..............................................8%other party failed to yeild........................................................7%

Driving Purpose During AccidentPercentage

Business................................................................................66%Personal.................................................................................20%To/From Work..........................................................................8%Other, N/A................................................................................6%

Source: PHH

The majority of fleet-related accidents occurred while parked (19 percent). The majority of accidents oc-curred while driving for business purposes.

Year-Over-YearComparison

For the most part, fleet accident repair costs remained flat for calendar- year 2008. “The costs of accident repairs have not moved dramatically in either direc-tion from 2007 figures. We surveyed approximately 30 accounts and found 58 percent actually experienced de-creases in costs from 2008 compared to 2007,” said Martines of CCM. “While I believe we can take some credit for containing costs, I also believe due to the economic climate, many clients focused more on repair costs than in

cident Services.

Cost Reduction Strategies

One byproduct to the recent wave of corporate staff reductions has been the increased availability of surplus vehicles. “One moneysaving practice we’re seeing more of is the use of surplus fleet vehicles to substitute for a dam-aged vehihcle. As companies have re-duced their fleet sizes, they have more surplus vehicles on hand. Substituting vehicles enables them to postpone re-pairs they would otherwise have to pay to fix today,” said Wolford of CEI. One way fleets are electing to reduce costs is to repair accident-damaged vehicles that previously would not have been taken out of fleet service and replaced. “We’re seeing a change in the factors used in deciding to repair a vehicle versus salvaging it. Repairs once considered too costly are now being considered to keep the vehicle in fleet longer,” said Braun of Fleet Response. “Althogh this will increase repair dol-lars in the short therm, the long-term savings can be substantial. Conversely, clients are not repairing smaller cosmet-ic repairs and concentrating on safety-related items only.” More fleets are also using paintless dent removal (PDR) to reduce accident repair costs. “We continue to see a trend toward creative approaches to repair that hold down expenses, including PDR and the usage of less expensive alternative parts, including LKQ (used, or Like Kind and Quality) and aftermarket parts,” said Brigidi of CEI. Another key reason for the flat-to-marginal accident repair increases was due to the offset cost reductions from ongoing fleet safety programs. “Total repair expenditures have

the past. A concentrated joint effort by our team and clients has helped reduce the costs.” Others report seeing a small uptick in repair costs, primarily due to the increased repair of high-tech compo-nents. “We saw a 2- percent increase in repair costs from 2007 to 2008. The majority of the increase was related to technological advancements and systems insalled in vehicles to increase safety and fuel economy. In addition, we have seen a slight increase in clients choosing to repair more vehicles, rather than replacing, to extend the service life,” said Walinski of PHH Vehicle Ac-

0

3

6

9

12

15%

2006 2007 2008

13.31%12.34%

14.28%

Supplemental Analysis% of repairs with a supplement*

0

1

2

3

4

5

6

2006 2007 2008

Vehicle Total Loss Percentages% of reported claims deemed a total loss

4.58%

5.38%5.85%

The total percent of repairs with a supplement increased by 1.92 percentage points in 2008 over 2007 numbers.*Supplements: Repair dollars spent after the final authorization was provided to repair facility.

The 2008 percentage of reported claims deemed a total loss (5.65 percent) increased over both 2007 and 2006 numbers.

SOURCE: CEI CLAIMS LINK

been reduced for many fleets through benefits gained from their compre-hensive safety programs. They have documented fewer and less severe accidents, which have reduced the total dollars they spend on repairs, not to mention the dollars spend on replace-ment rentals, liability, Workers’ Comp, and other expenses associated with fleet accidents,” said Brigidi.

Proactive Accident Management

One trend cited by all of the fleet accident management companies is a

few years. Many senior managers have finally embraced the concept of the true cost of an accident and the re-sidual damages. They realize how much additional income is required to offset the true costs, therefore, if they could avoid the accident entirely, their finan-cial bottom line will (or has) improve dramatically,” added Martines. Walinski said proactice management of accident costs is the key to reduc-ing costs. “For instance, in the area of subrogation, companies are success-fully recovering for diminished value. In cases where diminished value is applicable, PHH recovers about 40 per-cent of those respective claims. In our experience, we have more success with some states than others, but in states where we have been successful, the average recovery for diminished value is about $375,” said Walinski. “Another area where proactive management helps companies reduce costs is in rental vehicles while the damaged vehicle is being repaired. It requires an excellent process and focus, both on the repair process and on the minimization of rental days.” Some fleet services providers report seeing an increarsed use of telemat-ics by fleets to decrease preventable accidents. “For our service customers, telemat-ics is a developing trend, and the ability to incorporate data provided by telem-

movement by fleets to proactive acci-dent managemnt. “We’ve noticed three key trends in proactive fleet management: the use of telematics, more aggressive driver accountability, and effective driver communications,” said Walinski of PHH Vehicle Accident Services. Martines similarly cites a growing emphasis by corporate management to adopt proactive fleet safety programs. “The most obvious proactive trend in fleet and risk management is safety management. The emphasis on accident avoidance and contatining liability ex-posure, as well as keeping drivers safe, is more prevalent today than in the past

Average Authorized Amount

1st Pary Physical Damage

2006 I 2007 I 2008

Includes Tax$1,195 $1985 $2045

The average authorized amount for accident repairs has increased steadily from 2006-2008.

Accidents by Time of Day

Drivers’ Company Tenure Before First Incident

SOURCE: FLEET RESPONSE

Sales

Service

0

2

4

6

8

10

12

6-7

a.m.

7-8

a.m.

8-9

a.m.

9-10

a.m.

10-1

1 a.m

.

11-1

2 a.m

.

12-1

p.m.

1-2

p.m.

2-3

p.m.

3-4

p.m.

4-6

p.m.

6-8

p.m.

Crashes experienced by service drivers peaked between 2-3 p.m., while crashes experienced by sales vehicle drivers peaked between 3-4 p.m. in 2008

0

10

20

30

40

50

Sales

Service

12.51%

28.69%

46.29%

35.5%

41.20%35.81%

Less than 1 year 1-5 years Over 5 years

The highest percentage of accidents within sales fleets are drivers with one to five years on the job (46.29 percent).

atics could be a critical feature of any rishk manaegment solution in the near future. For our sales fleets, the manage-ment of the authorization process and ongoing performance of the authorized household members of the emploees (spouses, domestic partners, etc.) is a developing trend,” said Brigidi of CEI. Walinski also cited the use of telemat-ics by fleets as a risk management tool. “Fleets have become more focused on driver safety over the past few years. Specifically, they’re very interested in preventing accidents and identifying high-risk drivers. Our clients who use telematics have found the technology has a positive impact on enabling them to achieve this goal, as it can virtually eliminate speeding and other types of inappropriate driver behaviors when policies are enforced,” said Walinski. There is also a fleet trend toward greater accountability of company driv-ers. “Companies are managing driver performance more aggressively. For instance, there’s more focus on drivers with MVR violations or accidents, espe-cially on drivers with multiple occurrenc-es. Several clients have also instituted financial penalities, charging drivers for avoidable accidents as reinforcement for defensive driving,” said Martines. Another fleet trend is to quantify repair savings in a way that is auditable. “Customers are now looking to quantify the dollars saved and to understand ex-actly how the savings were generated,” said Brigidi of CEI.