Dismantling a Way of Life?

Automotive recycling is a lucrative industry, with an estimated $8.2 billion in gross annual revenues in 1997, and 4.7 million vehicles acquired for dismantling and recycling, according to the Automotive Recyclers Association (ARA), Fairfax, Va. A sizable industry (some auto recyclers claim it ranks in the top 10 industries in the U.S. in dollar volume), the business of auto recycling has typically been a somewhat fragmented industry—but that may be changing.

The world of the small, family owned automotive recycler could be heading toward a more streamlined corporate and networked industry. The automotive recycling industry has traditionally been known for small, individually affiliated businesses—there are about 10,000 small family owned operations out there today. But there are aggressive consolidators in the market, and at least one of them (Ford Motor Co.) may have extremely deep pockets.

Consolidation and increased competition could help further bury the stereotypical image of “junk yards.” Many yards have changed from what was once known as a “pick and pull” operation to a sophisticated bar-coded system of recovering and marketing parts.

At many facilities, vehicles are scouted out by sales teams who are looking for certain characteristics in the cars they purchase—perhaps from certain model years, or in a state that is not damaged enough so that certain parts are not retrievable. These vehicles are purchased and brought to facilities and dismantled with as many saleable items as possible stripped from the vehicle—including seats, bumpers and stereos. The products are then inventoried and cataloged upon entering the facility. Entire businesses are controlled by inventories that are computerized, making a search for a particular part fast, accurate and profitable.

TRYING TO GO COAST TO COAST

Bill Steinkuller, executive vice president of the Automotive Recyclers Association, says consolidation will have an affect on the auto recycling industry, but where consolidation will take the industry is yet to be seen. “A number of companies acting as consolidators changed the face of what has been an almost exclusive domain of the independent business owner,” says Steinkuller. “I think it is going to have quite an impact on the industry. Some are positive and other aspects threaten the independent business.”

The question of where the industry is headed is also asked by Maurice Leiser, vice president of Ridge Road Auto Parts, Cleveland. “It seems to be there are trends in business, but I don’t know if it’s a good thing or a bad thing,” he says. “In our industry there is a great need for the business to be sensitive to the needs of the consumer, and I don’t know how sensitive we’ll stay if we become a large entity.”

Consolidation can be considered a trend in business in general, not just the automotive recycling industry, Leiser says. If consolidation is the current trend, then it will stay around until the market is pushed another direction. It will take some time before the success or failure of consolidation can be seen in the auto recycling industry.

Consolidation could be beneficial from a business standpoint because of the different needs of regions around the country. If a recycler in the northeastern section of the country is linked to another recycler in the Southwest, those two businesses can trade resources because of the different demands of their customers. What may be in demand in one area may not be needed in another that is flooded with that part, making a partnership valuable to each business.

But detractors in the industry wonder if consolidation will create entities that are too large to meet the needs of the customers. “I don’t know how quickly needs can be responded to on a national level rather than a regional level,” says Leiser.  

With all of this consolidation occurring in the industry, smaller family-owned businesses may need to make some changes to keep pace with the larger conglomerates. The smaller businesses could have some hurdles when it comes to meeting some of the standards that have been set by large consolidated companies, says Steinkuller.

One way that some smaller businesses have been fighting back against the larger consolidators is grouping themselves together as confederated small businesses to try to stay competitive, Leiser says.

AN EYE ON OPERATIONS

A desire to upgrade the images of auto recyclers is one of the motivations behind LKQ Corp., Chicago, and its consolidation plans. The company began to acquire recyclers last year and is now streamlining business operations.

“It is an industry that is migrating to that [consolidation], and our motive is partially to upgrade the industry image,” says Laurie Garcia, director of marketing and sales for LKQ Corp. “It’s hard to break the image if all the individual dismantling plants have their own systems. We bring some commonality to the industry.”

LKQ Corp. has spent the last year acquiring regional automotive recyclers to create a national automotive recycler. Selling mainly to insurance companies, the corporation seeks out vehicles that are totaled, yet still contain many resellable parts and dismantles the autos. The parts are then sold at rates considerably lower than the rate of purchasing a new part.

The consolidation plans of LKQ have been carefully planned and executed, with companies being specifically targeted because of certain qualities and characteristics they possessed. One of the first companies LKQ targeted from the start was Triplett Auto Recyclers in Akron, Ohio, because of its size, innovation and operational methods.

One of LKQ’s first steps in its consolidation plan was identifying what it considered to be the leaders in the industry in several regions of the country. In researching potential companies for acquisition, not only was the company looked at, but also the market that the business is located in. As markets and demand for parts vary across the nation, LKQ officers say they took that into account.

Using this strategy, LKQ is creating a nationwide inventory with the ability to ship parts nationwide thought that network. LKQ’s latest acquisition was Hunt’s Point Auto Parts, Bronx, N.Y., in early September. Hunt’s Point is LKQ’s fifth acquisition since June and raises their number to 35 auto recycling facilities. LKQ has purchased companies in Portland, Maine; Savannah, Ga.; Omaha, Neb.; Raleigh, N.C. and Portland, Ore. 

Another major player entering the auto recycling field is auto manufacturer Ford Motor Co., Dearborn, Mich. The company has purchased Copher Brothers Auto Parts, Tampa, Fla., and plans to expand their venture more in the future. The Tampa facility will serve in part as a location to gather parts for recycling generated at Ford plants. The parts will be available to body shops and insurance companies for resale.

Ford says it is entering into the auto recycling sector because of the growing business venture the automotive recycling industry offers. Another reason Ford cites for entering the business is a desire to be more involved with customers after the initial sale of the vehicle, according to a Ford press release.

Ford has declined to comment further on future acquisitions, citing competitiveness in the industry as reason not to comment. 

However, some have feared that Ford’s auto recycling venture would create end-of-life relationships with car dealers and dismantling operations, which would have a major effect on auto recyclers.

BANDING TOGETHER

In response to the consolidation occurring in the industry, a number of smaller auto recycling companies have formed the United Recyclers Group (URG), a confederation formed to provide smaller businesses with resources to compete in the changing industry, says Sharon Kellum, business manager of URG, Denver, Colo.

The group was formed when some businesses were having trouble with finding options for industry software programs. The group’s first goal was to provide computer management programs to compete with the one program that was dominant in the industry.

URG also provides the businesses a chance to network and create alliances within the industry. Many businesses are creating regional alliances comprised of several smaller auto recyclers, Kellum says. “They have formed their own sort of consolidation in order to compete with other consolidators,” she says. “Previously they had competed against each other.”

Kellum says she sees others coming into the consolidation field, other than LKQ Corp. and Ford Motor Co. “I definitely think it is going to continue and we’ll see how it works with the insurance companies and the smaller recyclers, whether they are going to lose business or increase it,” she says.

So far, there do not seem to be any negative effects from the mergers, Kellum says. In fact, some of the consolidations could help the smaller regional businesses, because while the consolidator may be entering a particular market, they may not be targeting the same audiences as the regional recycler. The larger company could possibly increase a regional operator’s business by conceding a share of the market that is not part of its business plan.

WHAT THE FUTURE HOLDS

The used auto parts industry has been growing and appears to be positioned to continue that growth. “I would expect with the increased visibility of the quality and the price advantage of recycled original automobile parts, that there is a very bright future,” Steinkuller says.

Competitiveness in the industry has made all companies, but especially the smaller companies, pay more attention to how their business is run, says LKQ’s Garcia. “I think they are going to have to take a better look at how they are processing parts and the quality of the parts they are seeing,” says Garcia. “The days of hoping a part doesn’t come back are gone. They are going to have to raise the bar on their own business to make sure that the quality is there.” 

Uncertainty about where the industry is headed seems to be shared by most participants the auto recycling industry. “I’m really unsure because I realize that this is a trend in all businesses,” Leiser says. “It’s hard to argue when someone offers you big money, but I don’t know what this means to the consumer. My gut feeling is that you are going to have the great availability of merchandise, but I think that a large company can not respond to the needs of the consumers as well as a smaller company.”

The author is the assistant editor of Recycling Today.