On the Fast Track

When Ford Motor Co. revealed earlier this year that it had plans to acquire auto dismantling companies throughout the U.S., the entire automotive recycling industry took notice.

Much more quietly, LKQ Corp., Chicago, Illinois, has already acquired several leading regional auto dismantling companies in its effort to build a nationwide, publicly-traded auto recycling business.

The company’s acquisition pace in 1998 and 1999 has been rapid, but LKQ Corp. president and CEO Joseph M. Holsten says that it has been carefully planned to bring together the best auto recycling practices into one corporate fold.

A KEY ACQUISITION IN AKRON

LKQ founder and chairman Donald Flynn asked Holsten to take over the reigns at LKQ about one year ago. Flynn’s plans for LKQ would require a rapid acquisition pace and the molding of family-owned and managed businesses and entrepreneurs into a strong operating team. He called upon Holsten because of his significant relevant experience as a Waste Management Inc. executive working for a company that was one of the leading consolidators in that industry’s history.

In 1998, Flynn had looked at a number of other industries that were related to the auto recycling business, including scrap metal, but Flynn became more intrigued by the auto recycling industry itself the more he learned about it.

In the course of Flynn’s and Holsten’s research, one of the companies they targeted from the outset was Triplett Automotive Recycling in Akron, Ohio. Triplett Automotive has been operating as a family business for close to 50 years from its Akron location on Triplett Boulevard. For much of that time, the company was led by Stuart P. Willen, who is now vice president of LKQ Corp.’s Midwest Region.

Holsten says the company was a natural first acquisition both because of its size and its innovative and sophisticated operational methods. It was a “flagship business,” says Holsten, that was targeted early and “took the leadership step to join.”

The company’s operations are far removed from the “pick and pull” salvage yards that are often associated with the business of automotive recycling and scrap yards. “Triplett pays immaculate attention to what they buy, to the procurement process,” notes Holsten.

The company buys exclusively late-model cars (usually no more than seven model years in age), and specifically seeks out cars that have been “totaled” for insurance purposes but that still contain an adequate amount of resaleable interior, exterior and engine parts.

This careful approach to what enters Triplett’s facilities has been a profitable strategy for the company, Willen notes. “Many of our competitors do not have a strong sense of discipline there,” he remarks.

Triplett’s approach has helped set it far apart from the “junk yard” image that still must often be overcome by auto dismantlers and recyclers. “This industry suffers from certain perceptions having to do with that junk yard label,” remarks Willen. “But some of us have taken the industry to another level. We’re working directly with the insurance companies to offer OEM, pre-owned parts.”

It is an approach that Holsten has also used when looking for other companies acquired by LKQ Corp., and he has worked closely with Willen in identifying subsequent acquisition targets.

“In our overall business strategy, phase one is to put together a national network,” says Holsten. “There really is no one else with that.” The first phase has proceeded on schedule, helped in part by Willen helping to identify the premier auto recycling companies in different regions of the country.

“We’re really focused on people right now,” comments Holsten. “When we look at candidates, management is the most important thing. I’d rather get a number three player in the market who will fit in than a number one who can’t work with us.”

The acquisition targets have been impressed by LKQ’s offers and strategy, with virtually every company LKQ has approached agreeing to be acquired. “We believe we’ll have our network built pretty much by the end of the year.”

STAYING INVOLVED

As it did with Stu Willen and his top managers, LKQ Corp. believes in maintaining the managerial talent in place at acquired companies. “This is not an exit strategy,” says Willen. “We’re asking plant managers to make a major commitment.”

That commitment comes in the form of time, energy and taking an equity position in LKQ Corp. “It’s pretty much a pre-requisite to accept stock as part of the acquisition,” notes Holsten. “It provides a real glue for the company. Everyone feels they can impact the business.”

  Willen and other former business owners help to provide the best practices that will be made standard at every LKQ facility. “These are not troubled companies that we are buying,” he notes. “There are the egos of successful business people involved, but we’re coming together.”

Holsten notes that the stable of business owners is “constantly looking for ways to be better and different. We’ve got some outrageously creative managers, and we want to make sure they have the freedom to explore new business relationships.”

A visitor to Triplett’s operations and office facility can see many of the industry’s highest standards in place.

Recently purchased automobiles are towed in and arrayed in a side lot to await dismantling. The vehicles are procured at the roughly 15 auctions per week attended by LKQ vehicle buyers. The model year and name of incoming vehicles are recorded and a cursory inspection is conducted immediately so the company’s parts sales representatives can begin marketing the parts even before the car is dismantled. “It’s an information-driven business,” says Willen. “It is an advantage for us if our salespeople can begin moving product even before it’s warehoused.”

The dismantling process takes place in a facility with a half-dozen automotive service bays. Here, some 20 vehicles per day are dismantled. “We take them apart completely to the bone,” says Willen. “And everything is warehoused.” All of the warehoused parts are also bar-coded and stored in a systematic fashion.

The company generates some scrap metal in the dismantling process, and sub-contracts out the flattening of its auto hulks that will eventually be sold as scrap.

Some 20 sales representatives in northeast and central Ohio market the parts being acquired by Triplett (now part of LKQ Corp.’s Midwest Region), working with body shops, repair shops and insurance companies.

The success of the company’s methods is hard to dispute: 1998 marked the seventh consecutive year of 20% or higher revenue growth for the Triplett Automotive.

COMPLETING THE PICTURE

There is little doubt that LKQ Corp. consists of several successful companies brought together in one corporate fold. But what else needs to be done to make sure the whole works as well as the various parts?

“The first priority is to bring more best practices and more sophistication to our plant managers in their yards,” says Holsten.

“Another area where we see opportunity is in the quality area, such as the cleanliness and reliability of parts delivered,” Holsten continues. “A technician repairing a car in a bay needs the parts there promptly and accurately.”

Ensuring the top quality of shipments to end-use customers can make or break the reputation not only of a company in a given metropolitan market, but can also affect the way the entire industry is perceived in that market.

The market for recycled auto parts varies greatly from state to state and city to city. There are several factors that can cause the market to vary, but one of the crucial factors is the quality of the auto recycling firms in a given region and the likelihood that they will be able to satisfy customers. 

LKQ Corp. has targeted not only specific firms for acquisition, but has also examined the market for recycled auto parts in the metropolitan areas where those firms are located. According to Willens, on a nationwide basis recycled auto parts make up about 8% of the auto parts market, while in some regions the figure is as low as 2% or 3%. But in the metro areas served by LKQ Corp., the percentage of recycled parts used is as high as 25%.

“The next focus of the company is to leverage our asset base more effectively,” says Holsten. “That means in part figuring out the best ways to conduct our business relationships with the insurance industry.”

For LKQ Corp., “the real goal here is to increase the amount of used parts that come into play with the insurance business,” Holsten comments. “Good quality will increasingly convince the insurance industry that recycled parts are a viable option.”

Adds Willlen, “one of the products we sell is reliability, along with quality and timeliness.” In almost every instance, he notes, auto recyclers can save customers money, but the savings are meaningless if the parts are not adequate and don’t meet the customers’ expectations.

Stu Willen joined forces with Holsten and LKQ Corp. more than one year ago, in July of 1998. He remains convinced that the company’s strategy is on target.

“I’ve talked to a lot of people since the acquisition—including other acquisition candidates and my sons—and I tell them all that I’m amazed at how well it has gone,” comments Willen. “Sure I was scared, but I can tell you I’ve been amazed at the moral quality and the character of the people at LKQ. It’s been some time since I had a boss, but Joe is a pleasure to work with and for,” he adds.

Although Holsten had originally projected acquiring some 50 companies to fill out LKQ Corp., Willen has helped convince him that most of the nation’s major markets can be covered with fewer acquisitions.

With fewer overall targets to acquire, LKQ Corp. has stayed ahead of its acquisition timetable. “We’re probably a little ahead of where we thought we would be,” says Holsten. “I didn’t think we’d necessarily get this network together by the end of 1999.”

Holsten notes that by the end of the year, LKQ Corp. will have built up a $200 million dollar in revenues business base.

Willen has been in the automotive recycling industry for more than three decades, and is an advocate of automotive parts recycling. “It’s the purest form of recycling, we’re reusing it as it is,” he comments.

He says that the industry is currently much more sophisticated than most industry outsiders would guess, but that there will be room the types of improvements that LKQ Corp. can make.

“A key will be the free-flowing of inventory from one part of the country to another without the middle man mark-up,” says Willen. “Having internal quality standards will also ensure that the part that goes overnight from, say, Akron to Milwaukee, will be accepted by the customer. The effort to ship quality parts between plants is definitely important.”

A nationwide inventory system and the ability to ship nationwide efficiently and reliably will be a key to LKQ Corp.’s success. “At the end of the day, the key is saying ‘yes’ to customers when they ask for a certain part,” says Holsten.

“If we can demonstrate the ability to maintain a wide availability of parts—and of the right quality of parts because of our internal discipline and systems—then we will become a tough competitor in every market,” Holsten states.

Auto recycling business owners throughout North America will almost certainly be watching to see if the LKQ Corp. strategy changes the nature of competition in their markets.  

The author is editor of Recycling Today.

Sidebar

LKQ: What’s In a Name?

Those outside the automotive parts business might guess that the name LKQ Corp. is a set of initials of financial partners, or perhaps the result of a study to determine what letter combinations are pleasant and memorable.

But those in the business recognize LKQ as an acronym meaning “like kind and quality.” The phrase is attached to parts that are marketed as “like new” replacement parts to collision and repair shops.

The designation’s attachment to LKQ Corp. is an important one for the company, which has as one of its goals corporate-wide quality standards that will position it as a reliable supplier of quality recycled automotive parts.