"The threats and opportunities being driven by vehicle technology."
This is such a fascinating conversation for me as I think there is a real opportunity here.
In fact, most people in the alternative recycled parts industry probably see this as a threat but I want to show you the opportunity!
Why a threat?
Most sales in an automotive recycling business are from high value mechanical components. Things like engines, gear boxes and transmissions. These make up ~70% of the sales of an automotive recycling facility. It would be fair to argue that with the rise of the electric vehicle and the speed of change that is now in motion, the automotive recycler is in trouble. These electric vehicles don’t have engines or gear boxes in many cases, and for the hybrid vehicle, well the engines are worked far less than the traditional engine in normally aspirated vehicles, resulting in less wear and tear…
Many that are sticking their heads in the sand say that this is going to take a lifetime to change, that this change may occur in their children’s or grandchildren’s generation. Really? Volvo has gone public and made a commitment to only producing hybrid or electric vehicles as of 2019 and BMW has committed to 25% of its production being hybrid or electric by 2025!
So, is this really a threat? Well yes, if we choose to ignore it, that is. Of course, if we have less vehicles powered by engines then we will ultimately be selling less engines. The logical question is, what will replace these sales that make up a good majority of our top and bottom line?
High voltage batteries, sensors, electrical components, reversing cameras, dash header units, a myriad of computers and many more components that we have not yet seen introduced to the market.
Every one of these components has something in common – they are unbelievably expensive!
It seems simple then. We can just start selling these components and everything will be fine. Well it’s not as simple as that, but a great opportunity nonetheless.
We will need to change. We will need to do things differently. We will need to meet more stringent standards and regulations. BUT, there is a wonderful opportunity that will become clearer to those that choose to take a more professional and proactive approach.
See, the issue with selling these components is the fact that they all fit into the ‘safety component’ category or ‘hazardous goods’ category. So, how does the automotive recycler guarantee that the lane guidance sensor, the collision avoidance sensor or the computers controlling these sensors, are all in good working order when they remove them and sell them to the consumer? Or in the case of high voltage battery components, what systems, equipment and processes do we have in place to make sure that we handle, store and distribute these dangerous goods safely, and, how can we help with the disposal of end of life batteries that we are replacing?
Furthermore, many of these components are items whose demand will be driven through the collision repairers and the work providers - insurers. As an insurer though, authorizing the use of recycled safety components brings with it an element of risk. That is, if they authorize their use, they in fact advocate the use of the product and as a result take on, in the current model, the risk associated with anything going wrong or not working as it was designed to. As we can imagine, this is not a desirable outcome for insurers who want to mitigate risk as much as possible.
Now, all that said, insurers are at the same time in a sticky situation. Although collisions are expected to be of smaller severity at least in size, indicators are already pointing to a higher cost severity due to these expensive parts only being available from the OEM dealer network. And we all know what happens to prices when there is no competition.
I think we can all see the picture now.
We have recyclers that need to sell parts off vehicles to replace engine sales into the future, that currently are not widely used by insurers and their repairer networks.
We have insurers and repairers that will need to access these components as alternative to the new OEM dealer parts otherwise their average repair costs will rise or they will total loss more vehicles than they would like to.
Somehow, we need to find a happy medium, one which makes this product attractive and makes the insurer comfortable to advocate the use of it in the repair process.
This is also a good story for the consumer because if we are able to work together to find a path forward, the consumer will have access to safe, genuine recycled components at a fraction of the price of a new one – everyone’s a winner!
As we have discussed, there is a great opportunity to find many new sales off modern vehicles but we need to think laterally. It is not good enough to argue with the customer (repairer or insurer) that they should use these parts simply because they are genuine and have come off working vehicles.
We know that there is a market out there for these products whose current price point is extremely high in most cases.
Auto recyclers have started dismantling these vehicles and it is expected that this will be a growing trend. As a result, recyclers will have more and more access to these expensive components on the vehicles they dismantle.
We have the ingredients, demand and supply. But to bake this cake we now need to find the method. We need to bring the demand side and the supply side together and find a model that will enable the trade of these new product lines. If we can do this, these parts will generate great revenue for the automotive recycling industry and significant savings for the customer.
In my next blog post, I will discuss some ways that we may be able to achieve the desired result.
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