MOUNTAIN VIEW, Calif. (March 2, 2009)—Because of an increasingly commoditized North American brake components aftermarket, demand for higher-priced products, such as premium rotors and loaded calipers, is declining.
That has made it challenging for parts manufacturers to distinguish product types simply based on cost, according to an analysis by research firm Frost & Sullivan Inc. As a result, automotive repair shops have been trying to justify steep price differences by citing the offer of value-added features or improved service levels.
Frost & Sullivan reported that the North American selected brake components aftermarket generated revenues of more than $1.2 billion in 2007, and the company estimates that segment will reach $1.9 billion in sales in 2014.
Research analyst Ratika Garg said, “Through successful positioning and marketing efforts, vendors of rotors have built a brand name for their products to be able to command a high price for premium products. However, technicians and installers are now realizing that the value derived from a premium rotor is little compared to its price, thereby preferring to use an economy rotor.”
In the brake caliper market, he added, customers are shifting towards semi-loaded calipers from loaded calipers. Price again enters into the equation.
Mr. Garg said the main reasoning for this shift is because semi-loaded calipers are more economical and provide customers with the flexibility of selecting their own choice of friction material.
Competition, especially in the brake components segment, revolves around price, Frost & Sullivan said, because the market is flooded with low-cost products, especially from China, resulting in severe price competition between overseas and North American vendors. Because production costs remain high in North America vs. overseas markets, domestic manufacturers have felt the pinch of increased cost. Diminishing profit margins and the inability to invest undermine the rate of technological innovation in this marketplace, the com¬pany said.
In addition, the combination of high gas prices and increasing raw material costs restrain the demand for higher-priced products such as loaded calipers and premium rotors. Less usage prevents the wear and tear of brake components, thus affecting the replacement rate of these products.
The economic downslide, the firm said, is causing consumers to restrict spending on services and reduce the frequency of service. Besides, they are hesitant to spend on premium products unless superior value offers enhanced features or ratcheted-up service levels.
“Superior features and benefits will enable installers to up-sell to consumers, thereby driving overall revenue growth in the selected brake components aftermarket,” Mr. Garg said. “Also, enhanced quality will reduce comebacks, improve customer satisfaction levels and strengthen brand loy¬alty.”
Meanwhile, the report continued, heightened environmental awareness has shifted the focus to lighter cars, as heavier cars consume more fuel and produce more exhaust emissions. By producing lightweight replacement parts, manufacturers have the advantages of cost reduction and compliance with the fuel-efficiency standards imposed by the National Highway Transportation Safety Administration under its Corporate Average Fuel Economy regulations.
To compete effectively, Frost & Sullivan's analysis found that friction component manufacturers have to focus on penetrating installer networks and creating a loyal installer base. In addition, the ability to augment brand loyalty among the major influencers—such as technicians and installers—will be a critical factor driving growth.
It is imperative to identify the installer's day-to-day business needs, training programs and on-site visits, and propagate the value of manufacturer's brands to make all participants along the value chain more competitive, the report stated.
Meanwhile, an earlier analysis by Frost & Sullivan found that the use of ceramic friction material as standard equipment on many new vehicle models has driven growth in the marketplace.
Although manufacturers in the North American brake system parts aftermarket continue to launch product lines to capture that growth in the ceramic friction parts segment, last year's high gas prices restrained demand for those types of brake pads and shoes.
To maintain segment growth, manufacturers must promote higher-priced parts that increase profits at the manufacturer, distributor and installer levels, the company said. It noted that in the friction parts market sector, revenues hit $1.21 billion in 2007 and are estimated to reach $1.58 billion in 2014.
“With higher raw material costs and increased competition from foreign producers, manufacturers are looking for ways to improve the profit margins on brake pads and shoes,” Frost & Sullivan Senior Industry Analyst Stephen Spivey noted. “Moving customers in the low-priced product line into the mid-grade line and those in the mid-grade line into the premium line increases profits and allows manufacturers to invest in researching and developing the next generation of friction parts.”
Increasing sales of higher-priced parts will drive revenue growth in the friction parts aftermarket, he said, as manufacturers work to move customers from lower-priced product lines into higher-priced lines in an effort to support profitability across the value chain.
Friction parts that have less ceramic content, but are positioned as traditional ceramic pads, will drive revenue growth in the short to medium term, Frost & Sullivan said.
However, increasing gas prices act as a key restraint for the sale of friction parts, since mileage driven determines the service life of most brake pads and shoes. When gas prices are high, the company added, motorists drive less because they cannot afford gas—meaning they do not need to service their vehicles' brakes as often.
“High gas prices have an exacerbated effect on the friction parts aftermarket because demand is closely tied to how much gasoline people buy and use,” Mr. Spivey said. “Because of high gas prices, vehicle owners are also postponing servicing their vehicles, which further slows market growth.”
Given the challenging economic environment, manufacturers must emphasize product differentiation, customer service and profitability throughout the value chain, the report noted. These represent the main pathways for suppliers to add value to their product offerings, giving distributors an incentive to buy from one manufacturer instead of another.
Suppliers also should strive to offer full coverage of all vehicle makes and models, the company said, as well as carry complementary products such as rotors and calipers.