North Hollywood Auto Repair benefits from location ... - Parts & People

Growing trend of extended terms poses ‘significant threat’ to industry
by Rob Merwin
Las Vegas—At a media briefing prior to
AAPEX, Motor & Equipment
Manufacturers Association (MEMA)
Executive Vice President and COO Steve
Handschuh said extended terms present a
“significant threat” to the entire industry
and all channel players have a
responsibility to promote practices that are
in the best long-term interests of the market
and the players within it.
As an advocate on behalf of the supplier
community, Handschuh said the
Automotive Aftermarket Suppliers
Association (AASA) hired KPMG, a
global accounting and advisory firm, to
study the impact of extended terms in the
aftermarket.
“We feel it is a serious situation. We
wanted experts to confirm it for us and to
provide this information to our members so
they can have discussions on terms and
conditions. We wanted to raise a flag,” he
said.
Handschuh explained that extended
terms are a relatively new and unique
practice in the industry, and it has sharply
escalated in the last two years. Its
preponderance means the aftermarket
industry is more sensitive to credit
availability. And, he warned, credit cycles,
similar to economic cycles, are inevitable
and hard to predict.
“This risk exposure is a sea change for
the historically stable aftermarket,”
Handschuh said. “The aftermarket
traditionally has been one of the most
resilient industry sectors, highly resistant to
changes in external business conditions.
However, this evolving business model
makes that less true for everyone.”
The KPMG study concluded that no
other industries have terms similar to those
in the aftermarket. “It’s unparalleled,”
Handschuh said.
He added that a significant rise in
interest rates, combined with a lack of
credit availability, would require the
industry to reverse extended terms — or
come up with capital to fund this “unusual
business model.”
“There are serious concerns down the
road, and extended terms could have a
catastrophic impact on this industry. If
credit availability were to become tighter
— and we’re beginning to see signs of it
already — and rates were to escalate, it
could move billions of dollars out of
factoring programs’ balance sheets and
devastate a significant portion of the
supplier community.”
Handschuh said there was a renewed
appreciation for the importance of the
supply base during the OE crisis when
Ford Motor Company, which didn’t need a
bailout, advocated for GM and Chrysler to
get federal funds assistance because they
all shared suppliers.
“If one or two of them were to go down,
it would take the entire supply chain with
it,” he said. “There is a community
responsibility to pursue practices that are in
the long-term best interests of this industry
and not just in the interests of one party or
another.”
Handschuh also explained extended
terms have exacerbated the long-standing
industry risk of excess inventory in the
aftermarket.
“When there is no incentive to increase
inventory terms and no incentive to limit
inventory investments — when for all
intents and purposes it’s ‘free’ for those that
place the orders — it will continue to
propagate inventory issues,” he said.
“Inventory terms for major channel
partners have continued to decline over
the past five to 10 years. In regard to
extended terms and those who carry
financial responsibility for inventory, it
will just make the situation worse.”
He added that by working together, the
industry has a positive future, but it will
take co-operation, collaboration, mutual
respect, and commitment to what is in the
best long-term interest of all channel
partners to make it possible.
“We’re not through with this issue, and
the association can play a role by bringing
attention to KPMG’s data. There is reason
for serious reflection before we pursue
even longer terms such as those beyond
360 days,” he said. n
Parts & People December 2012 Page 5