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Despite the miles – and oceans – separating them, collision repair markets around the world aren’t as unique as you might think. In fact, a developing market will likely experience the same growing pains and challenges as did its more developed counterparts on the other side of the world. Collision repair shop owners experience similar problems and share the same concerns – whether they’re operating in New Jersey or New Delhi.
Diagonal Reports (DR) reviews the global collision repair market from the perspective of the service providers, particularly the smaller-sized independents, which account for the majority of operations. Despite the miles – and oceans – often separating the countries that DR examines, collision repair markets aren’t as different as you might expect. They’re just at different levels of development.
A Complex Market
I’ll do my best to give you a global overview of collision repair, but keep in mind that in every market, the collision repair service industry is very complex; it’s large, diverse and extremely fragmented, and outlets vary in terms of size, skill levels, equipment, service menus and work mix.
The sector’s complexity explains why it’s difficult to get accurate information, even in the most developed – and much investigated – markets. Available data is often contradictory, particularly when it concerns estimates of market sizes in both volume and value terms, and also in terms of the number of outlets.
A global perspective is extremely difficult to establish because data from individual countries may not be directly comparable and because different markets are at different stages of development.
A Fragmented Market Structure
The structure of the collision repair market is complex, but broadly similar, in almost every country in the DR study. Across the world, a “cottage industry” coexists alongside factory-style operations.
The large outlets, with the lion’s share of sales, mainly repair newer cars and have contracts with the volume work providers (insurance companies, corporate fleets and in some countries, government fleets). The large outlets can offer an extensive service menu because they have the skilled staff and installed equipment. In contrast, smaller outlets mainly repair older cars and their service menu is limited, often to a single service.
Client and payee profiles are very different in the two market segments as well. In the larger outlets, up to 90 percent of collision repair work is insurer paid, while in small outlets, insurer payments are negligible and most clients are individual car owners. Globally, smaller outlets report that car owners use them either because they don’t want to lose their “no claims bonus” or because they want to avoid the paperwork involved in processing an insurance claim.
Developed Markets: An Overview
In the developed and consolidating collision repair sector in the United States, sales trends vary widely by shop type. Repair franchises sampled by Diagonal Reports grew sales by 10 percent in 2001-’02. Business in small independents was stagnant. The economy was a negative for all repairers. And, while DRPs grew sales for the larger players, they were a negative for independents. The latter find it difficult to comply with insurer requirements. Rising equipment costs also are a concern.
Skilled technicians are in short supply largely because the hourly rates for collision repair work is lower than any other auto repairs. For example, DR’s sample reported insurer rates for collision repair at $37 an hour but $46 for other work. In franchises, the collision repair rate was $32 an hour for body repair, but $65 for mechanical repair.
In Canada, the market is growing thanks to greater numbers of cars. The sector is consolidating, and the 10 percent of large-sized outlets have the lion’s share of the market because of the number of major jobs handled and DRPs. The small-sized shops handle minor repairs. Shops of all sizes face major problems recruiting and retaining skilled staff and trying to comply with more stringent regulations.
Although demand for collision parts grew in 2001, official data shows that the number of accidents in Canada fell. Industry experts argue that the discrepancy is the result of the recent introduction of mandatory reporting. Repairs costing more than $1,000 CND should be reported to the local police. Shops resent the paperwork involved and don’t report repairs.
In the less developed markets in Mexico and Argentina, the collision repair market is in crisis. The sample in both countries report that sales fell by more than 20 percent in the 2001-’02 period. In Mexico, insurers and dealerships have 70 percent of the total repair market and 100 percent of new car repair market. The thousands of small shops and “freelancers” have the remainder.
Freelancers mainly handle repairs that cost less than the no-claims bonus. Insurer involvement is regularizing the market and raising quality standards. For example, many now issue coupons that repairers exchange for parts in selected shops. This is to prevent the fitting of non-OE and even counterfeit parts.
In some countries, among them Mexico, organized crime is rumoured to be a significant supplier of replacement parts to repair shops. Repairers argue that they must handle stolen parts because if they refuse to install them, they’ll be driven out of business by less scrupulous competitors. In Argentina and Turkey, a recent increase in car theft may have been prompted by the greater willingness of collision repair operators to install stolen parts.
The sector in Argentina continues to contract, down from more than 6,000 operations in 1998 to 4,750 in ’01. The sales leaders are the large-sized operations, even though about 80 percent of outlets are small. Insurers account for about 40 percent of repair payments in the sector in general, but this rises to 70 percent in the larger players. Like in many other countries’ collision markets, insurers are driving down prices: DRPs set an hourly rate of 30 AR Pesos compared to the current rate of 50 AR Pesos in the sector.
In the developed market of Australia, the collision repair sector is contracting thanks to the decreasing number of accidents after the more stringent enforcement of driving regulations. Small operations are closing because of a mixture of factors, such as increasing insurer involvement, along with health, safety and tax compliance measures. For example, in Australia, recent changes in the tax reporting systems resulted in the closure of 18 percent of the collision repair sector that lacked the resources to comply.
Some 20 percent of outlets have closed since 2000, and we predict the sector will shrink to 3,500 shops by 2006. The remaining shops will be large-sized (with some 45 bays, 60 workers and the resources to invest in equipment to comply with regulations).
Australian repairers complain that insurer-set prices are “unrealistically low,” and rumours abound about how some shops cut corners to the point where, says one Australian repairer, “cars are actually unsafe and will lead to deaths.”
The sector greatly resents the recent introduction of the “comparative quote” system by some insurers because it forces outlets to compete against each other and further drives down prices. Other complaints include delays (of up to three days) in parts’ delivery and major problems installing non-OE parts.
In the developed markets in Europe, repair business is, at best, stagnant, mainly because of the enforcement of regulations. This is reducing the number of accidents and older cars in circulation. Further, small-sized shops lack the resources to meet more stringent regulations, which require the installation of environmentally friendly equipment.
The main concern of the many independents is that continuing downward pressure on prices by insurers will drive independents out of business. Independents complain that insurer pricing structures mean they lose out. For example, insurers may only allow fours hours for a job that actually takes 10.
In Belgium, repairers’ organizations are taking legal action to change this pricing structure. (We’re still awaiting the outcome.) The Belgium collision repair market is stagnant, despite that fact that the lower prices attract customers from neighbouring countries. The competitive leaders in Belgium are the outlets affiliated to Eurogarant – an industry guarantee fund. These outlets offer a two-year guarantee on the work done and the parts installed. Only shops with the right facility, equipment and skills (repair and administrative) can join, and they adhere to standards set by the car maker. They’re also certified and meet legal requirements. The program (a “scheme” as some call it) has members in Germany (number unknown) and in Belgium (90).
In Germany the collision repair sector is continuing to contract in a stagnating market. The typical shop employs less than seven people, and small shops are pessimistic about their future. Many are losing personnel to the larger shops, where wages are higher.
Insurers, which now account for 70 percent of repair payments, argue that they’re making the sector more transparent by eliminating “false bills” that have inflated prices. Repairers argue that insurers want to drive down repair prices. Currently, the sector charges insurers Û62 (Euro currency) an hour in the West but Û40 in the East.
In France, the competitive leaders are the 7,500 large, registered garages, but about 17,000 auto aftermarket outlets handle some collision repair. The large shops benefit from performing fewer repairs that are of higher value than in the past.
In Italy, the market is stagnant in all but the largest shops, where sales grew 10 percent in 2001-’02. Some two-thirds of repairers have less than 700 square meters and seven employees. This compares with the very largest shops, which have 1,500 m2, 30 on staff and handle 1,000 repairs a year.
In Italy, there’s a long-standing agreement between ANIA (a national association of auto insurers) and organizations representing 15,000 body shops. It allows car owners to select the shop themselves. Not surprisingly, insurers argue that the DRP system in Italy is “lagging way behind other countries – by at least 50 years.” Repairers in Italy argue that repair prices set by DRPs have fallen to such unrealistically low levels that “no one could stay in business if they really did the work at those prices.”
In the sample shops where insurers account for 70 percent of payments, only about 30 percent are direct payments to the shop while the remainder is paid to the client. Repairers oppose insurers lobbying for the introduction of mandatory collision repair. They suspect insurers would use the regulations to further increase their power.
In France, Italy and Germany, repairers also are very concerned about the insurers turn to digital cameras to assess damage. They argue that the practice will further erode their control over the work done. They also resent the reduction in status from that of a skilled technician whose opinions are valued to an operative who’s virtually determined by “a computer in an office.”
In Spain where the repair market is stagnant, small operations continue to be hard hit by the enforcement of ecological regulations and government-supported car renewal campaigns. They’re also being hit hard by new vehicle technologies, which can wipe out entire market segments that many operations were set up to cater to. For example, in Spain, the many small specialist panel beaters and mechanical repair specialists are disappearing because these parts are being replaced and not repaired.
Insurers in Spain can account for more than 90 percent of payments in DRP contracted outlets, but this falls to 50 percent in the sector in general. Repairers report that insurers now process paperwork in less than a week, compared to the three-month period typical a few years ago. This is partly because assessors visit the shops, whereas before, shops had to send in an invoice and wait for an assessment.
Wage rates vary widely in the sector, but labour generally accounts for 50 percent of prices. Collision repair rates are Û27 to 30 an hour in small shops and franchises, and Û30 to 50 in dealerships. The typical small shop in Spain has 800 m2 with five on staff, who handle 10 cars per week.
Developing Markets: An Overview
The term “developing market” is used to describe a mixture of markets across the world, among them Turkey, India, Malaysia, China, Indonesia and the Philippines. Shared characteristics of the market in these countries include an ever-increasing number of young people and inexperienced drivers, rising rates of car insurance, bad roads and lax enforcement of safety measures. Most operations are very small, and the main business is labour-intensive repair that relies on manual tools. There’s also a large, but unquantifiable, “gray” market. However, a quality segment is rapidly taking shape – and this segment of shops has more in common with its counterparts in more developed markets than with the roadside freelancers down the street.
In Turkey, an economic recession is causing a stagnant market. Thousands of small independents specialize in collision repair. Small shops have under 100 m2 and three on staff; large shops can have 3,000 m2, with 22 bays and 48 on staff. In the few hundred large dealerships, collision repair is very profitable – it only accounts for, on average, 16 percent of business volume but 42 percent of sales. Collision repair is profitable because labour accounts for 35 percent of costs, and there’s a 30 percent net profit on parts. Says one repairer: “One major collision repair job gives the same profit as 20 mechanical repair jobs.” OE parts account for 40 percent of parts installed by independents.
Insurance coverage rates are low: 10 percent across Turkey, rising to 20 percent in Istanbul and falling to 1 percent in the East. However, insurers are increasingly important players in the market. They mainly work with large dealerships, which complain – bitterly – about long delays (“many months instead of 15 days”) in processing DRP payments.
In China, the market is large and growing. More than 300,000 operations offer collision repair but few are specialists. Official data reports more than 600,000 collisions a year. And the non-reporting of turnover to avoid tax in many countries in Asia could mean that the value of the market is significantly underestimated.
The sample in China reported that paint work (repainting scratches) is the top repair business. Based on our sample in China, insurers pay up to 95 percent of the bills on average. The largest insurers are state-owned companies.
Staffing levels in shops are extremely high. Shops with 40 service bays can have anywhere from 150 to 250 on staff (this figure includes mechanics, apprentices, cleaners and tea makers).
In India, rapid growth of the car parc doubled the number of accidents between 1996 and 2001, reaching 850,000 accidents, according to official data. Roadside operators have anything from 30 to 50 percent of the market; outlets that operate in the formal economy account for the remainder. Our sample reported that collision repair work in India is highly profitable – in part because our research reveals an ingenious array of practices to increase profit margins. In India, for example, “false billing” is rumoured to be widespread. This is when outlets install a non-OE part but charge for an OE part.
But the market in India is changing. Multi-national insurers are taking share from the traditional insurers, and reducing what they describe as “irregular” practices. They also refuse to handle “false” bills.
Problems for the sector are a shortage of skilled staff, and long delays with purchasing and delivery of equipment and with processing of insurer payments, along with the more stringent enforcement of regulations. There’s also increasing resentment that roadside operations hold down prices in the rest of the market, largely because of their continued evasion of regulations.
The most common complaint about insurers in Asia is very long delays in processing claims. In India, for example, shops say that clients aren’t prepared to wait for insurers and take their business elsewhere. (Worst-case scenario: The wait can be up to three months.)
In Indonesia, the market is very positive. The best performers hope to grow sales by 20 percent in 2003. Competition is increasing as consumers cut back on repair spending in the recession. Quality standards are low because it’s an industry practice to allow clients to select the part to be fitted. Most choose lower priced, non-OE parts.
Insurers account for less than 40 percent of payments in general in the collision repair sector, but this rises to 80 percent in larger outlets. The low level of insurer payments reflects the low level of insurance coverage. Further, shops can be reluctant to handle insurance work because of pre-set prices.
Large outlets often have 1,300 m2 with 50 service bays and 50 workers, while small shops have 300 m2 with 10 bays and 10 workers.
In Malaysia, young drivers make for a very positive market and can account for 80 percent of repairers’ clients. Another positive are the high accident rates for the large number of commercial vehicles. Of the collisions in Malaysia, 25 percent involve buses, 12 percent taxis and 8 percent trucks.
The collision repair sector in Malaysia is less consolidated than in other countries. The few large outlets (1,000 m2, with six bays and 25 on staff) have a 30 percent market share, and insurers account for less than 35 percent of payments based on our sample. Repairers note that car owners are extremely reluctant to lose their “no claims bonus.”
As in other developing markets, repair work can be very profitable – but this is largely due to “irregular” practices. The most common of which is to charge for an OE part (though 80 percent of parts used are non-OE) and to “split the profit 70:30” with insurance assessors.
Most parts fitted are scrapped parts imported from Japan. Says one repairer: “We install as many of these parts as possible so we can make high profit from the repair.” Port Klang (the largest port in Malaysia) is the most important centre for the sale and distribution of scrapped auto parts.
In the Philippines, as in Indonesia and Malaysia, insurer payments are low. They account for less than 20 percent of payments in the sample. Both repairers and car owners are reluctant to work with insurers. The former due to low prices, and the latter due to long delays processing payments.
The auto insurer sector is very fragmented, with 1,000 companies specializing in minimum coverage. However, as in China, government vehicle fleets are an important source of business and can account for up to one-third of business in shops that have “good connections.”
It’s a Small World
After overcoming the challenges of researching and analyzing collision repair markets across the world -Êmarkets that, by their very nature, are fragmented and complex – we’ve learned that it really is a small world after all. From labour shortages to insurers using their market power to drive down prices, repair providers around the globe share similar concerns and suffer from similar problems. The distinctions occur when comparing markets that are at different stages of development. But even then, history shows us that a developing market like Malaysia will evolve much in the same way and suffer nearly identical growing pains as did its counterparts in now-developed markets.