The Post-Covid Aftermarket … How Does This Mess End? Like a ‘Distribution Diogenes,’ I decided to call a bunch of guys who know more about the aftermarket than any single individual, company or consultant. Together, my telephone and email conferees represent over 810 years of participation in… and management of… nearly 30 of the most successful manufacturing, distribution and service providers in the light, medium and heavy-duty vehicle markets.
I Was Searching for the Truth… and Found It! There is really no sugar coating the situation. Jamie Dimon (head of JPMorgan and the unelected leader of Wall Street) summed it up with the well-considered view of a New Yorker: “We have a significant chance that the global economy experiences ‘a vicious spiral’… which is typical of recessions… creating weak final demand, weaker labor markets, falling profits, weak credits markets and low oil prices.” So there!
The reasons to listen to Jamie are two: 1) he knows more than most, and 2) he is very positive about the future (30% drops in the GDP be damned!). He is not being a cheerleader – he is as squinty-eyed a realist as they come. And he has historically been right. Check out his vision during the 2008 financial collapse…saw it, called it, diagnosed it and had a big part in fixing it.
I mention this because our ‘Dirty 30’ cast of smart guys were ready to do the same. In every discussion, I heard not a hint of dread nor fear. I can’t tell you how good it felt listening to one after another lay out the short-term problem, note who is ready to fix it (and who may not be), sense the new challenges and get enthused about getting to it!
Here Are Their Answers The point of this drill was not to pin anyone down, but to get an overall sense of conditions. I heard: > First quarter revenues ended up almost flat, the product of a great January (+5 to 10%), flat February and awful (-10 to 28%) March; light-duty numbers trail. > Planning for the next quarter showed consensus starting point of -50% in revenues. > Availability within the huge supply chain was holding up very (unexpectedly) well; shortages screwing things up were from sources in India, Mexico and the United States… not China! > Watch for a major parts shortage starting in July as field inventories are turned to cash as quickly as possible and not immediately replenished. > Distributors and groups will look to suppliers as a cash source, with additional price discount demands or further extension of terms… or both! > Disaster is already upon anyone with oil (especially shale and fracking) support operations, mainly in Eagle Ford, Permian, Devonian, Bakken and Marcellus (approx. 10 states).
> Since most Class 7 & 8 heavy-truck plants, as well as the majority of medium and light vehicle assembly (not trailers), had stopped, regional success for parts and service suppliers depended heavily on end-user vocations. On the plus side, reefers, cold chain and light/medium ‘last mile’ fleets. In addition to oil fields, major negative results include consumer (-35 to 50%), bus and municipal fleets… maybe no school bus refurbishment.
So, nothing so far looks like these important industrial segments are ready to put the V in recovery… it looks more like an X in execute! Pure survivalists represented by the down stroke, forward thinkers on the other stroke.
How to Frame the Future
This will not ‘blow over’ nor will the economy begin to rebound without two things:
1) A reliable system of test and trace (as in the cellphone-based system used in South Korea)
2) Some sort of ‘flu shot’ that will assure it doesn’t even threaten to reappear.
I read a lot of the same coronavirus stuff as everyone else. As to the ongoing drama in any distinct business or industry, the business press, the Internet and associations are doing a good job of keeping everyone up-to-date on this critical and fastest moving environment change.
Here, however, are some of the longer-range themes that came up in my discussions:
> The schism between the financial markets and the ‘real’ economy is obvious and permanent…and will affect transportation and distribution most directly as a virtual disappearance of trade credit. This will be due to a short-term explosion in risk aversion.
> Almost to a person, the top execs in these organizations feel confident in their teams’ ability to run things through the current whirlwind. None felt that they had to make every (even major) decision, as the belief that 1) Cash preservation and 2) Customer retention are front and center for all. Tactics will work…strategy is the question.
>The relationships within the supply chain will face ‘change on steroids.’ The last weeks have proven that everything we used to feel essential needs serious review. Personal, expensive use of field sales forces will be drastically cut, while various versions of mobile service will explode, including the dedicated onsite model.
> This experience will speed the deployment of robots and artificial intelligence (AI). This is crucial, as inventory (which has always been viewed by most as a Band-Aid) becomes too expensive and too slow to be competitive and blunt an expected rush by non-traditional entities. IoT and predictive analytics allow focus on ‘where the puck WILL be.’
> There was a lot of discussion of evolving channel maps. Clearly, there are multiple industry-defined alternatives coming into play… Berkshire eSupply, Amazon and customer direct 3PL combinations will redistribute order/ship/receive/bill functions.
This is a perfect application for Blockchain technology.
> There is a great deal of optimism about the review of many regulations from various levels of government that have been found ‘non-essential’ during the crisis…many that have been waived and have caused no deleterious safety, environmental or control/tax shortcomings.
> Many feel that there will be increased redeployment of leverage… whether through consolidation or aggressive expansion. Private equity partners survive by financing this type of change, and nobody understands the management and importance of CASH like they do. Several major consolidations have unserviceable debt levels. Without significant equity infusions, watch for a wave of chapter 7s, 11s and 13s.
> Entirely new workforces will be required. They will have to be created by drawing on assets including both PR (previously retired) and DN (digital natives). This will be a challenge. Companies will use the crisis as ‘cover’ for unsentimental personnel reviews.
> The emergence of new vehicle technologies will NOT be slowed substantially during the recovery. Renewable sources seem to have hit the tipping point vs. oil/coal generation. Popularity of electric vehicles, autonomous transport and advanced IoT (driven by onboard ‘sensor explosions’) will feed parts and service planning… primarily within ‘closed’ systems of distributors and service providers.
> TCO (total cost of ownership) and TFO (trouble free operation) will hugely affect today’s service providers. The loss, or severe depression, of the need for the Six Service Staples (oil, filters, brakes, cooling systems, exhausts, emissions) will result in the closing of satellite branches and expansion of AI-driven onsite management.
> Recruitment of good troubleshooting talent in EVs (or a massive retraining effort) is a certain near-term need, as is the maintenance of hundreds of sensors and onboard broadcast devices.
Jericho Trumpet
Many of the recipients of this will write these observations off as more of ‘Wade’s Sky-Is-Falling’ foolishness (especially seers like Marc Karon in Florida). Have there been predictions of major changes before? Of course! Have they happened without threatening speed? Of course, again!
My view is that, just as this pandemic caused changes never before experienced, so too will it magnify the redesign of major segments of American business. Remember - these are consensus thoughts from some of the very best and brightest in the business. Consider also that ‘short term,’ ‘long term,’ and ‘eventually’ are being redefined daily… but not universally.
“We will get around to that” is not an answer, it is a dangerous dodge of absolutely ‘novel’ circumstances. When I posed the thought that we could lose as many as 30% of all unique businesses in the vehicle parts and service market within the next 3 years, not one of the 30 correspondents disagreed… not one!
Much like the virus itself, this situation is nothing to screw around with… it is, in fact, life and death. You are the leaders… you are the CSOs (Chief Survival Officers). Some day we may laughingly look back and see that things snapped back and looked just like 2019… but it sure didn’t snap back that way the Monday after Pearl Harbor.
We have already found that our teams can competently weather this part of the storm… It is up to each of you to set a course once the clouds begin to part.
Let me know what you think… bill.wade@wade-partners.com
P.S. As famous American adventurer George Donner famously exclaimed (echoed by Alfred Packer) … “When the food runs out, we will still have each other.”